Tamilnad Mercantile Bank IPO review (Apply)

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Review By Dilip Davda on August 30, 2022

•    TMBL is the most popular bank from the southern region planning PAN India network.
•    It has posted steady growth in its working year on year and is poised for better prospects post expansion of its network.
•    It is having just a 10% retail quota despite being a profit-making and dividend-paying bank. 
•    Pending legal matter may impact its IPO proceeding if the verdict goes against it. 
•    Reasonably priced issue may be considered for medium to long-term prospects. 

PREFACE:
IPO from this most popular bank from the southern region was eagerly awaited for the last 2-3 years or so. However, it filed its DRHP in September 2021 and got the SEBI nod. It was to get listed before December 31, 2021, as per RBI directions, but due to unavoidable circumstances, it got delayed and now finally it is hitting the capital market. It's a 100 years old bank with profit records since inception. It has a good financial track record and a hefty book value. Due to RBI's direction for listing, its branch expansion plan was on hold, but once it gets listed, it will expand its network.  Being a publicly held bank, though it is diluting just 10% of post IPO equity base, it will not require further dilution post listing and the existing stakeholders will have a lock-in period of six months from the date of allotment of IPO shares. Though as per DRHP, TMBL planned a combo offer of fresh equity issue as well as OFS, the OFS part is totally scrapped in order to meet the issue deadline and the bank has already followed the legal formalities in this regard and the matter is pending with the Bombay High Court. Any adverse order, if any, passed by the concerned authorities at any subsequent hearings may affect IPO proceedings. 

ABOUT 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 (Source: CRISIL Report). 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% of customers have been associated with it for a period of more than five years and have contributed to Rs. 35014.24 cr. or 77.93% to its deposits and Rs.  21902.26 cr. or 64.90% to its advances portfolios as of March 2022. 

As per the CRISIL Report, TMBL had the second highest Net Profit for Fiscal 2022 amongst Peers, and Return on Assets was also higher at 1.66% compared to a median of 0.80% for Peers for Fiscal 2022. It was incorporated as 'Nadar Bank Limited' in 1921 and the name was changed to 'Tamilnad Mercantile Bank Limited' in the year 1962. It received a license to carry on banking business from the Reserve Bank of India (the "RBI") in 1962. Since its incorporation, having head quartered at Thoothukudi, Tamil Nadu, India, it has built a strong presence in the state of Tamil Nadu, with 369 branches and 949 automated teller machines ("ATMs") and 255 cash recycler machines ("CRMs") as of March 31, 2022. Thus bank is staying tuned with the latest technologies to serve customers with a better experience.

Tamil Nadu, the fourth largest state of India, is one of the fastest growing states, with a continued focus on MSME and textile industry. Tamil Nadu's gross state value added ("GSVA") at current prices grew at a compounded annual growth rate ("CAGR") of 11% between Fiscal 2017 and 2022 against the countrywide growth of 9% (Source: CRISIL Report). As per the CRISIL Report, Tamil Nadu ranked second in terms of state-wise contribution to GDP and has also grown at a faster rate as compared to the national GDP growth rate.

As of March 31, 2022, TMBL had 4,419 employees on payroll and 38 others engaged by the Bank on a contract basis.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its need for augmenting its Tier-I capital base to meet its future capital requirements, TMBL is coming out with a maiden IPO of 15840000 equity shares of Rs. 10 each via book building route to mobilize Rs. 831.60 cr. at the upper cap. The company has announced a price band of Rs. 500 to Rs. 525 per share. The issue opens for subscription on September 05, 2022, and will close on September 07, 2022. Minimum application is to be made for 28 shares and in multiples thereon, thereafter. Post allotment shares will be listed on BSE and NSE. The issue constitutes 10% of the post-issue paid-up capital of the company. 

Following the SEBI guidelines, the bank has allocated 75% for QIBs, 15% for HNIs, and 10% for Retail investors despite being a profit-making and dividend-paying entity. 

The joint Book Running Lead Managers (BRLMs) to this issue are Axis Capital Ltd., Motilal Oswal Investment Advisors Ltd., and SBI Capital Markets Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue. 

The bank has issued its entire equity capital at par so far. It has also issued bonus shares in the ratio of 500 for 1 in May 2016. 

Post-IPO, TMBL's current paid-up equity capital of Rs. 142.51 cr. will stand enhanced to Rs. 158.35 cr.  At the upper cap of the IPO price, TMBL is looking for a market cap of Rs. 8313.45 cr. 

FINANCIAL PERFORMANCE: 
On the financial performance front, for the last three fiscals, TMBL has posted total income/net profits of Rs. 3992.53 cr. / Rs. 464.89 cr. (FY20), Rs. 4253.40 cr. / Rs. 654.04 cr. (FY21) and Rs. 4656.44 cr. / Rs. 901.90 cr. (FY22). Thus, it has posted steady growth in its income and profits for all these years. 

For the last three fiscals, the bank has reported an average EPS of Rs. 47.72 and an average RoNW of 13.80%. The issue is priced at a P/BV of 1.40 based on its NAV of Rs. 374.41 per share as of March 31, 2022, and at a P/BV of 1.35 based on its post-IPO NAV of Rs. 389.47 per share. As of March 312, 2022, TMBL's GNPA and NNPA stood at 1.69% and 0.95% against all peer banks' GNPAs and NNPAs ranging between 1.81% to 5.96% and 0.68% to 2.97% respectively.  

If we attribute FY22 earnings on post IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 9.22 (at the upper cap).

COMPARISON WITH LISTED PEERS:
As per the offer documents, TMBL has shown City Union Bank, CSB Bank, DCB Bank, Federal Bank, Karnataka Bank, RBL Bank, and South Indian Bank as its listed peers. They are currently trading at a P/E of 16.31, 6.99, 8.35, 11.22, 4.5, 12.58, and 11.33 (as of August xx, 2022). However, they are not truly comparable on an apple-to-apple basis. 

DIVIDEND POLICY:
TMBL is a dividend-paying company. It paid a dividend of 32% (FY20), NIL (FY21), 50% (FY22) and 100% (FY23 - till August 26, 2022). Post listing it will continue its prudent dividend policy based on its financial performance and future prospects. 

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with this issue have handled 48 public issues in the past three fiscals, out of which 20 issues closed below the offer price on the listing date. 

SPECIAL NOTE:
My family is holding already 400 shares of TMBL which is meant for long-term holding.

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