IPO Analysis : Tamilnad Mercantile Bank

The price band of the IPO issue has been fixed at Rs 500 to Rs 525 per equity share.

IPO Rating: Invest with limited exposure 

About the issue: 

Tamilnad Mercantile bank, which is one of the oldest private sector banks in India engaged into banking and financial services to retail customers, micro, small and medium enterprises (MSMEs) is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 10 per equity share. The price band of the issue has been fixed at Rs 500 to Rs 525 per equity share. The issue size is Rs 831.60 crore at upper price band.  

The IPO opening date is September 5, 2022, and it will be closing on September 7, 2022. The issue is likely to be listed on the exchange on September 15, 2022. The IPO market lot size is 28 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (364 shares or Rs 191,100) at upper price band. 

The company proposes to utilize the net proceeds from the fresh issue towards funding the future capital requirement for augmenting tier-1 capital base. 

About the company: 

Tamilnad Mercantile Bank Ltd (TMBL) is one of the oldest and leading old private sector banks in India with a history of almost 100 years. It offers a wide range of banking and financial services primarily to micro, small and medium enterprises ("MSME"), agricultural and retail customers ("RAM"). As of March 31, 2022, it had 509 branches, of which 106 branches are in rural, 247 in semi-urban, 80 in urban, and 76 in metropolitan centres. TMBL's overall customer base is approximately 5.08 million as of March 31, 2022, and 4.05 million or 79.78 per cent of customers have been associated with it for a period of more than five years and have contributed to Rs 35014.24 crore or 77.93 per cent to its deposits and Rs 21902.26 crore or 64.90 per cent to its advances portfolios as of March 2022.  

Product Offerings 

The products and services offered to their customers can be divided into 2 categories - Asset Products (i.e. advances) and Deposit Products. 

Asset Products 
Bank’s advances portfolio primarily consists of lending to Retail customers, Agricultural customers, MSMEs and corporate customers. In FY22 37 per cent of advances were made to MSMEs, followed by 30 per cent to Agri, 20 per cent to retail and 13 per cent to corporate. 

Deposit Products 
Bank’s deposits portfolio consists of term deposits, recurring deposits, savings banks, and current bank accounts among others. Total deposits of the Bank have increased at a CAGR of 10.46 per cent from Rs 36,825.03 crore in Fiscal 2020 to Rs 44,933.11 crore in Fiscal 2022. 

Key Ratios – FY22 
GNPA – 1.69 per cent 
NPA – 0.95 per cent 
PCR Ratio – 87.95 per cent 
Slippage Ratio – 1.5 per cent 
Credit Cost – 1.2 per cent 

TMB has built a strong and trusted network of customers in the State of Tamil Nadu. As of FY22 their deposits and advances in the state of Tamil Nadu contributed 75.06 per cent, of their total business. As of March 31, 2022, they had 0.432 crore customers, 85.03 per cent of their overall customer base, contributing to their deposits and advances portfolios in the State of Tamil Nadu. 

As per the RHP, the company forms its listed peer group with 9 banks. These are City Union bank, CSB Bank, DCB Bank, Federal Bank, Karur Vyasa Bank, Karnataka Bank, RBL Bank and South Indian Bank. 

Financial  

The Bank’s revenue is increasing at a CAGR of 6 per cent. For FY22, the revenue was at Rs 3834 crore. There is 36 per cent increase in the net profit of the bank in FY22 at Rs 822 crore. 

The CASA ratio is in increasing trend from FY20. The CASA ratio for FY20, FY21 and FY22 were 25.85 per cent, 28.52 per cent and 30.50 per cent. The deposits increased at a CAGR of 10.46 per cent from FY2020-22 also the advances increased at a CAGR of 9.93 per cent from FY 2020-22. The advance to deposit ratio stands at 74.5 per cent which is good with its peer group. The bank in its peer group has highest profit margin of 17.65 per cent.  

The gross NPA and net NPA of the bank are low at 1.69 per cent and 0.95 per cent for FY22. The Earning per share is Rs 57.67. 

*Standalone Basis 

Valuation and Outlook 

At the upper price band of Rs 525 and EPS of 57.67 for the period ended March 31, 2022 and considering the expanded equity the PE multiple is 10.10x. The average industry PE stands at 11.85x. The IPO in terms of price to book is priced at of 1.3 times again considering the expanded equity capital at higher price band. This is slight discount to other listed peers.  

The financial of the company looks good compared to its peer group. CASA ratio, net interest margins, provision coverage ratio are showing an increasing trend. Also, the capital adequacy ratio has increased from 18.9 per cent to 22.1 per cent in last one year ending FY22.  

However, some cause of concerns in the financial numbers of the bank are that the contingent liabilities are more than the net worth of the company. As on March 2022, the contingent liability amounts to Rs 8797.6 crore whereas the net worth of the company is Rs 5335.7 crore. The other cause of concern is that 37.73 per cent of paid-up equity capital are subject to outstanding legal proceedings which are pending at various forums. 

Looking at all these factors, we advise readers to invest with limited exposure.