Dena Bank - 10% Upside in 3 months

Posted by admin

June 27, 2009

Investment rationale

Branch distribution in rich belts helps CASA accumulation

For FY09, CASA for the bank stood at 36%. This is still one of the best in the small PSU banking universe. The major reason for such a consistently high CASA ratio is that majority of its branches are located in the western region especially in Gujarat and Maharashtra with a tally of 480 and 242 branches, respectively. Out of 1184 branches in FY09, these branches are CASA rich by nature.

Value buy even after recent run up

Let us consider a stress case scenario where all the GNPA for the bank turns bad. Assuming the GNPA to be at 2.6% for FY10E and 2.2% for FY11E at Rs 890 crore and Rs 953 crore, respectively, the adjusted net worth of the bank stands at Rs 2521 crore for FY11E, resulting in ABV of Rs 65 per share after considering a dilution in FY10E. We believe the stock can command 0.9x ABV (stress case) of Rs 65. We value the stock at Rs 58.5 per share.

Business momentum to stay steady, recapitalization expected in FY10E

The total business for the bank crossed Rs 72000 crore for FY09. The bank expects total business of around Rs 125,000 crore, by FY12E owing to its branch expansion plans and by enhancing efficiencies in its existing network. However, we feel the economic slowdown will delay the plans by a couple of years. We expect the total business to cross Rs 100000 crore in FY11E. We have considered recapitalization of Rs 500 crore from the GoI, which currently
owns 51% in the bank. This will lead to future balance sheet growth in FY10E.

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