Tamilnad Mercantile Bank IPO Review: Should You Invest in It?

Tamilnad Mercantile Bank Limited IPO opens for subscription on 5th September. The company is looking to raise up to Rs 832 crore through the public issue. Here are the details:

Tamilnad Mercantile Bank IPO Details

Tamilnad Mercantile Bank IPO Date: 5 September - 7 September 2022

Tamilnad Mercantile Bank IPO Price band: Rs 500 - Rs 525

Tamilnad Mercantile Bank IPO Issue Size: Rs 831.60 crore (Fresh Issue of 15,840,000 Equity Shares)

Reservation: QIB 75%, Retail - 10%, NII 15%

Minimum Investment: Rs 14,700

Post Issue Implied Market Cap: Rs 7,918 crore - Rs 8,314 crore

Bid lot: 28 shares, and in multiples of 28 shares

Apply for IPOs through INDmoney

Tamilnad Mercantile Bank IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the below purposes:

• Meet offer issue expenses.
• To augment the tier-I capital base to meet future capital requirements.
• To receive the benefits of listing the shares on the stock exchanges.

Tamilnad Mercantile Bank IPO: About Tamilnad Mercantile Bank

• Tamilnad Mercantile Bank (TMB) was incorporated in 1921, and it is one of the oldest private banks in India.
• It offers multiple financial and banking services to micro, small, and medium enterprises (MSMEs) and retail customers.
• The bank has a strong portfolio of deposits and advances from a diversified customer base, including retail customers, agricultural customers, and MSMEs.
• TMB has a strong branch network of 509 branches and more than 50 lakh customer base at the end of FY22.
• The bank has a significant presence in the state of Tamil Nadu (369 branches). It also has a presence in 15 other states and 4 Union Territories in India.

TMB Bank IPO: Tamilnad Mercantile Bank's Portfolio

TMB has a strong portfolio of deposits and advances across its base. Their Advance portfolio consists of:

• MSMEs: The bank primarily offers various loan products to their MSME customers operating in the manufacturing, trading, and services sector. 
• Agricultural customers: TMB primarily offers loan products to individual farmers, groups of farmers, and agricultural corporates. 
• Retail customers: TMB primarily offer home loans, personal loans, auto loans, educational loans as well as security-backed loans of various types to their retail customers.

Tamilnad Mercantile Bank IPO: Industry Outlook

• In FY21, growth for public banks stood at 5%, while private banks were able to grow 8% due to better capital buffers and increased focus on the retail segment.
• MSMEs credit to grow at a healthy rate of 11-13% during FY23.
• Gold loans credit growth to normalize in FY23 at 12-14%.
• TMB mainly operates in Tamil Nadu, and the state has the highest per capita GDP at current prices among industrialized states.

Tamilnad Mercantile Bank IPO: Listed Peers

TMB has many listed peers and hence will face competition from them once it gets listed on exchanges. Below are its listed peers and comparison:

• TMB's listed peers include City Union Bank, CSB Bank, DCB Bank, Federal Bank, Karur Vysya Bank, Karnataka Bank, RBL Bank, and South Indian Bank.
• In terms of revenue, the largest among listed peers is Federal Bank, followed by RBL Bank. TMB falls towards the bottom of the revenue list.
• However, if we look at Earning Per Share (EPS), TMB tops the list with an EPS of 57.67, followed by CSB Bank with an EPS of 26.43.
• The bank is quoting a P/E of 9.11, which is lower than some of the listed peers like City Union Bank and Federal Bank. Hence, at the listing price, TMB looks attractive.
• For Return on Equity ratio, the company outperformed peers at 16.58% in FY22, while its peers reported a median of 8.30%.
• The bank’s return on assets (RoA) was at 1.66% compared with peers that have a median RoA of 0.80%
• Return on Net Worth (RoNW) is second for TMB (15.40%), below CSB Bank, which has a RoNW of 17.29%.

Tamilnad Mercantile Bank Limited IPO: Key Financial Details

Below are the key financials of TMB bank:

• Tamilnad Mercantile Bank's net worth has increased from Rs 3979.65 crore in FY20 to Rs 5335.71 crore in FY22. It has grown at a CAGR of 15.78%.
• The Interest Earned by the bank was Rs 3466.11 crore, Rs 3609.05 crore, and Rs 3833.86 crore for FY20, FY21, and FY22, respectively.
• The EBITDA for the same period was Rs 1030.10 crore, Rs 1251.62 crore, and Rs 1566.74 crore, respectively. EBITDA has grown at a CAGR of 23.30% in the same period.
• Net Profit for FY20, FY21, and FY22 was Rs 407.69 crore, Rs 603.33 crore, and Rs 821.91 crore, respectively. The net profit has more than doubled in the last two financial years.
• TMB’s deposits increased at a healthy CAGR of 10.46%, falling in top-5 amongst its peers, while its advances increased at a CAGR of 9.93%.
• For the last three financial years, the bank has reported an average EPS of Rs. 47.72 and an average RoNW of 13.80%.

Tamilnad Mercantile Bank IPO: Unique Selling Propositions

Strong legacy and loyal customer base: The bank has almost 100 years of history and has established a strong network of branches, ATMs, and CRMs across several states of South India. The bank focuses on increasing its existing customer base, and for that, they have introduced alternate banking channels.

Strong presence in Tamil Nadu: They have built a strong and trusted network of customers in Tamil Nadu. Tamil Nadu is under-penetrated which presents an opportunity for further growth in GDP funded by bank loans. 

Focus on MSME, agricultural and retail segments: The bank has traditionally focused on small ticket size loan products to MSME customers and agricultural and retail customers for growth. Their focus is on understanding the needs and expectations of their customers, particularly in the RAM space, and adopting strategies to target these customer segments for growth. 

Consistently growing deposit base: TMB has adopted a customer-first approach with an emphasis on customer relationships. During the last three Fiscals, the overall deposits base has increased from Rs 36,825.03 crore in FY20 to Rs 40970.41 crore in FY21 to Rs 44,933.11 crore in FY22, owing to an increase in both term deposits and CASA deposits.

Tamilnad Mercantile Bank Limited IPO: Growth Potential

Strengthen product portfolios: The bank continuously focuses on exploring and introducing new and customized fee-based products in connection with the centenary anniversary and strategies like TMB win-back campaign in addition to existing products.

Transformation through technology: They invest in technology for improving their customers’ experience, offering them a range of products tailored to their financial needs and making it easier for them to interact with the bank.

Continue to improve asset quality: They aim to continuously monitor and improve asset quality by focusing on secured advances, high loan-to-value ratio, diversification across loan book tenures, low concentration across branches, and more stringent audit procedures for sanction of the loans, specifically focusing on higher value loans.

Tamilnad Mercantile Bank IPO: Risks

Legal Matters: They are involved in several ongoing legal proceedings following disputes among or concerning their shareholders, primarily arising out of a transfer of Equity Shares. There is no assurance that these matters will be resolved on time or at all. Any adverse developments in such proceedings could result in the imposition of injunctions or penalties for the bank.

Whistleblower complaints: They have received and may receive multiple anonymous whistleblower complaints in the future. If it happens, it may adversely affect the bank's reputation and could consequently adversely impact their business.

Contingent liabilities exceed net worth: Bank's contingent liabilities exceed their net worth, which, if they materialize, may adversely affect the bank's results of operations and financial condition.

Tamilnad Mercantile Bank IPO Review

• Robust rise in core income: Tamilnad Mercantile Bank has reported a robust 17% CAGR rise in its Net Interest Income between FY20- 22, baked by an improvement in margins. 
• Healthy increase in deposits: Total deposits of the Bank have increased at a CAGR of 10.46% to Rs 44,933 crore in FY22. With over 100 years of history, TMB has established itself as a well-recognized scheduled commercial bank having a strong network of branches, leading to a good rise in deposits. 
• Solid rise in net profit: The bank’s profit has risen to Rs 822 crore from Rs 408 crore in FY20, implying a CAGR of 42%. 
• Healthy margins: The net interest margins have improved to 4.1% from 3.64% in FY20. 
• Superior asset quality: Tamilnad Mercantile Bank’s asset quality has seen a significant improvement over the year. The Net NPA dropped to 0.95% from 1.8% in FY20. The gross NPA has also declined from 3.62% to 1.69%. 
• Superior return ratios as compared to peers: According to a CRISIL Report, TMB had the second highest Net Profit for Fiscal 2022 amongst Peers, and the Return on Assets was also higher at 1.66% compared to a median of 0.80% for its Peers for Fiscal 2022.
• Reasonable valuations: At the higher end of the price band, Tamilnad Mercantile Bank IPO is priced at about 1.4 times FY22 Book Value (Post issue) which is at discount to peers having a similar return ratio profile.
• Tamilnad Mercantile Bank IPO Final Recommendation: Given factors such as a strong deposit franchise, superior return profile as compared to peers, strong asset quality, healthy margins and a reasonable valuation, analysts have given a ‘positive’ rating on the company’s long-term prospects.