IPO Size: Rs. 832 cr 

• Entirely fresh issue to augment capital

Price band: Rs. 500-525 per share

M cap: Rs. 8,313 cr, implying 10% dilution

• Although profitable, retail allocation is 10% (and not 35%, as bank’s monetary assets exceed 50% of net tangible assets) implying mere 2.5% retail float for next 6 months, till lock-in expires of pre-IPO shareholders.

IPO Date: Mon 5^th Sep to Wed 7^th Sep 2022, Listing Thu 15^th Sep 2022

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Tamil Nadu Based Private Lender

Tamilnad Mercantile Bank (TMB) is a 101 year old bank from Tamil Nadu, with nearly 75% of 509 branches in the home state. 3/4^th branches are also spread in semi-urban and rural (SURU) areas. Unlike Kerala based banks like Federal and CSB Bank, TMB is not dependent on NRI inflows for deposits, which may be sharply fluctuating. TMB’s deposits have grown at 9% CAGR in past 3 years, to Rs. 44,933 cr (31.3.22), with CASA deposits growing faster, at 17% CAGR, despite declining interest rates and RBI embargo on opening new branches. Thus, bank’s CASA has strengthened to 30.5% (31.3.22) from 24.6% (31.3.19) in 3 years.

Healthier than Private Peers

While total advances grew at 8% CAGR between FY19-22, to Rs. 33,748 cr, the focused non-corporate book of Retail, Agriculture and MSME loans (RAM) grew in double digit (11%). Similar to City Union Bank, 99% of TMB’s lending is secured, but net NPAs (31.3.22) is much lower at 0.95% over City Union’s 2.9%, Karur Vysya’s 2.3% and Federal’s 0.98%. TMB’s RoA of 1.66% is higher than peers 1.35%, 0.86%, 0.91% respectively and so is its net interest margin (NIM) of 4.1% (4.0%, 3.5%, 3.2% for City Union, Karur, Federal respectively). The superior NIMs can be maintained going forward, even when interest rates are hiked, as most loans are priced on floating rate basis.

Old Pending Cases

TMB does not have any identifiable promoter, while 37.7% of the equity is under dispute at various forums such as RBI, ED etc. for the past 15 years. Also, other legal cases as also currently pending, including Directorate of Enforcement’s issue of show cause notice for imposing of penalties on bank and its directors. These are old cases mostly cover past equity share issuances, and different from bank’s current business performance and its present management, which has been quite impressive.

Priced at a Discount to Peers

EPS for FY22 stood at Rs. 58 with book value (as of 31.3.22) of Rs. 374 per share. Book value is expected to rise to Rs. 441 per share by 31.3.23, which leads to PBV multiple of 1.2x, lower than City Union’s 1.8x, as well as CSB Bank’s 1.3x. Federal Bank, with RoA of just 0.9% and 3.2% NIM is ruling at PBV multiple of 1.2, making TMB’s pricing attractive.