It is astonishing how quickly fortunes can change in the stock market. Till yesterday, DCB Bank was the toast of all savvy investors and each was vying with the other to project lofty targets for the mid-cap bank.
Motilal Oswal was at the forefront. It anointed DCB Bank with the coveted title of “potential 100-bagger” in its 19th Wealth Creation Report. It later issued a detailed initiating coverage report in which it explained all the nuts and bolts of the stock and why it was destined to be a 100-bagger.
Saurabh Mukherjea of Ambit Capital, who is well regarded for his conservative and grounded views, was also charmed by DCB Bank. In a televised interview, he grilled Naseer Munjee, DCB’s top brass about the fundamental aspects of the Bank and also waxed eloquent about its prospects.
Yesterday, DCB Bank announced Q2FY16 results which were so-so. However, what shocked everyone was the ultra-ambitious targets of branch expansion that the Bank vowed to implement. It plans to double the number of branches to 300 from 150, to increase headcount to 5400-5800 from 3700 and to invest heavily in customer facing, frontline enabling technologies. The Bank also sent a grim warning that this aggressive expansion would affect the ROA and the profitability.
Kotak Securities was quick to pounce on DCB Bank and go for the jugular. It minced no words and called the expansion measure “a very dangerous, unexpected and disappointing shift in their strategy of steady improvement in cost ratios, focusing on risk and improving return ratios“. It also expressed “disappointment on the change in the investment hypothesis, which earlier rested on steady loan growth, healthy capital structure, cost control and management execution leading to better return ratios”.
Kotak had all the facts and figures ready to show how the expansion plans would spell doom for DCB Bank.
Within seconds of Kotak’s report hitting the stands, the stock plunged 20% and tripped the lower circuit. It lost another big chunk of its value today.
Kotak’s aggressive action forced the hand of the other brokerages. DCB Bank suddenly became a hot potato and everyone was eager to dump it into the garbage bin. There were a flurry of downgrade reports from Anand Rathi, ICICI-Sec and others recommending a sell of the stock.
Even Motilal Oswal, which was waiting in the sidelines for clarity and hoping to salvage the “100-bagger” tag, was forced to act. It issued a report tersely stating that the “sudden and significant shift in strategy” will lead to a “sharp earning cut” and that the stock is downgraded to “sell”.
With this, DCB Bank’s dreams of becoming a “100-bagger” in the foreseeable future have come crashing down.
Now, all eyes will have to focus on the remaining six stocks which are proclaimed as potential “100-baggers”. All six stocks, namely, Tata Elxsi, Aarti Drugs, Granules India, Suven Lifescienes, Shilpa Medicare and Atul Auto are doing well and are on their way to achieving the glorious targets set for them.
We can only hope that these stocks don’t do anything foolish to shoot themselves in the foot the way DCB Bank has done!