Tamilnad Mercantile Bank IPO

Published by Sharekhan Education | September 5, 2022

Amit Pathak | Sharekhan Education 

Tamilnad Mercantile Bank IPO

About the Issue:

Issue size: Rs. 792-832 Cr

Price Band: Rs. 500-525

The issue opens on: Monday, 5th Sep’2022

The issue closes on: Wednesday, 7th Sep’2022

Tamilnad Mercantile Bank Company Overview:

Tamilnad Mercantile Bank (TMB) is one of the oldest private sector banks in India. The bank offers a wide range of banking services primarily to micro, small & medium enterprises, agricultural and retail customers. As of March 31, 2022, its overall customer base is approximately 5 million, and 79.8% of its customers have been associated with the bank for a period of more than five years. TMB reported deposits of ₹ 44,930 crore and advances of ₹ 33,490 crores as of March 31, 2022. TMB has a strong presence in the state of Tamil Nadu, with 369 branches and 949 ATMs.

Objects of Issue: 

The proceeds from the IPO will be utilized towards augmenting Tier–I capital base to meet its future capital requirements. The company expects that the listing of the equity shares will enhance its visibility and brand image and also provide a public market for its equity shares in India. Minimum application is to be made for 28 shares and in multiples thereafter. Post allotment, shares will be listed on both BSE and NSE.

Industry Overview:

The domestic bank credit-to-private sector as % of GDP stood at 55% as of 2020. The Indian banking sector is significantly under-penetrated, which provides immense opportunities for well-run banks. Financial inclusion has been one of the key priorities of the govt. The banking sector enjoyed a healthy deposit CAGR of ~10% between fiscals 2016-22. CRISIL expects bank credit to grow 10-11% during FY23, driven by the retail and agriculture segments and supported by a recovery in services and industrial credit. It expects the asset quality to improve further to 5.40- 5.60% in FY23, primarily on account of lower slippages and expectations of recoveries.

Competitive Strengths: 

TMB leverages its presence in semi-urban and rural regions to attract more customers in the RAM (Retail, Agriculture, and MSME) segment. They have a sticky customer base as it is a well-established bank amongst the trading and small business community of Tamil Nadu. Its focus is on secured granular loan products, strong underwriting, and a risk management framework to maintain its asset quality at satisfactory levels. TMB focuses on selective lending and limits its exposure to certain risky sectors. They have a comprehensive training program for employees which helps them improve the quality of customer service and retention of customers.

Key Concerns: 

TMB faces concentration risk with 76% of loans constituting Tamil Nadu. Any adverse change in the economic, political, or geographical condition of Tamil Nadu can have a significant negative impact. TMB faces legal proceedings initiated by various regulatory authorities, including the RBI & Directorate of Enforcement. Any adverse developments in these proceedings could result in the imposition of penalties and have a material impact on TMB’s reputation and business.

Financials:

During FY 2020-22, TMB’s deposits increased at a healthy CAGR of 10.4% (compared with peer median: 7.9%), while its advances increased at a CAGR of 9.9% (compared with peer median: 8%). TMB’s net profits increased at a CAGR of 41.9% in the same period. In FY22 TMB reported RoA of 1.6% and RoE of 16.5% respectively. The issue is being offered at 1.3x FY22 BV which is at a slight discount to peer banks having similar financials. We are having a neutral view of the stock mainly on account of pending legal issues.

Source: SEBI Red Herring Prospectus

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