The remarkable aspect about the stock market, as in politics, is that there are no permanent friends or foes. Yesterday’s darling can be today’s pariah and today’s pariah can be tomorrow’s darling.
DCB Bank, which was basking in the sun, after being labeled a potential 100-bagger in Motilal Oswal’s prestigious 19th Wealth Creation Study, suddenly found itself on the frying pan after its aggressive expansion plans did not meet with the approval of the cognoscenti.
Kotak Securities led the crusade against DCB Bank. It tore the mid-cap Bank apart by labeling its expansion strategy “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”.
Such an aggressive attack is normally unusual in the rarified and genteel world of merchant bankers. However, it did set the tone and forced the hands of the other brokerages, all of whom hastily downgraded the beleaguered bank to sell status. Even Motilal Oswal, perhaps reluctantly, downgraded DCB Bank to sell.
Fortunately, DCB Bank’s management, under the dynamic leadership of Narsee Munjee and Murali M Natrajan, had the good sense to launch damage control measures. They announced a roll-back of some measures and a softening of some others. This soothed the frayed sentiments of the cognoscenti to some extent. The duo also got down to improving the operating parameters of the Bank.
These pro-active measures are bearing fruit because analysts are again warming up to DCB Bank and giving it pride of place in their list of recommended stocks.
Kotak Securities is again at the forefront. It upgraded DCB Bank to “add” from “sell” on the basis that the bank would deliver 15-16 percent return on equity in the long-term.
Understandably, the stock surged 8% as everyone rushed to congratulate it over its changed fortunes.
Motilal Oswal also heaved a sigh of relief. “Post management strategy change for franchise expansion the stock has moved in-line with our expectation (corrected sharply) and valuations have now become comfortable. We upgrade earnings by 3-5 % for FY16-18E to account for better than expected PPP performance. We expect ROA and ROEs to be ∼1 % and ∼11 % over FY16-18E. Based on Residual income model, we value DCBB at 1.4x FY18 PBV and revise rating to Buy” it said.
ILFS has also recommended a buy on the basis that the performance is “healthy” and valuations are “comforting”.
With this, the beleaguered investors of DCB Bank can rest easy that not only is their capital safe and sound but they are also assured of pocketing a reasonable return therefrom. In fact, if the Bank’s top brass continues with their salutary attitude of caring about investors’ sentiments, the day is not far when the Bank may truly attain the coveted status of a 100-Bagger!