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As Investors, wealth creation is our priority in the long run.
Investing in equity-related instruments can be done through the secondary market or initial public offerings.
Last year, 2021 was a Bonanza year for equity investors with 63 IPOs – the highest ever.
Halfway through this year 2022, we are already through with 19 IPOs so far.
Are you interested in investing through IPOs? And curious to know about the upcoming Tamilnad Mercantile Bank IPO?
Let us weigh up the TMB IPO in terms of its business, financials & valuation.
Table of Contents:
1.) About Tamilnad Mercantile Bank (TMB)?
2.) Business overview of Tamilnad Mercantile Bank (TMB)
3.) Financial Performance of Tamilnad Mercantile Bank (TMB)
4.) Valuation of Tamilnad Mercantile Bank (TMB) IPO
5.) Timeline & Issue details of Tamilnad Mercantile Bank (TMB) IPO
6.) Strengths of Tamilnad Mercantile Bank – IPO
7.)Weakness of Tamilnad Mercantile Bank – IPO
About Tamilnad Mercantile Bank (TMB)?
Currently, there are 12 Public sector banks & 22 Private sector banks in India.
One of the oldest private sector banks is Tamilnad Mercantile Bank (TMB) which was started in the year 1921. This century-old, bank is headquartered in Thoothukudi, Tamil Nadu at the present.
It was initially named ‘Nadar bank’ and then its name was changed to Tamilnad Mercantile Bank in the year 1962. At present, this bank has 12 Regional offices & 509 Branches throughout the country.
369 branches of the TMB bank are located in Tamil Nadu & the rest is spread in 15 other states & 4 Union territories. On 7th June 2022, TMB received approval from SEBI for its IPO.
Business overview of Tamilnad Mercantile Bank (TMB):
Tamilnad Mercantile Bank has a historic track record of successfully running for more than 100 years. They offer a wide range of banking & financial services. TMB also has a strong market presence in Tamil Nadu & focuses on expanding its footprints in the other regions of India.
However, The Reserve Bank of India has imposed some curbs (4 bans) on TMB in the year 2019. In March 2021, RBI revoked only three of the bans imposed on TMB.
The ban on opening TMB’s new branch is yet to be revoked. Tamilnad Mercantile Bank’s Top management hopes that the restriction will be lifted soon after its public listing.
They have a wider customer base covering retail customers;
- Medium
- Small
- Micro Enterprises (MSME) & Agriculturalist.
The overall customer base of TMB is 5 million. The total business of the bank rose by 8.86% for FY 2022 at Rs. 78,424.6 crores as compared to its Rs. 72,040 crores for the previous year.
Out of 509 branches, 106 are in rural & 247 are in Semi-urban areas. This allows them to focus on the disbursement of loans for the MSME & Agriculture sector.
Financial Performance of Tamilnad Mercantile Bank (TMB):
On Tamilnad Mercantile Bank’s financial performance, there is a steady growth when compared to its previous year’s figures.
During the last financial year, the bank’s total deposits increased by 9.67% to Rs. 44,933.12 crores from Rs. 40,970.42 crores. Similarly, its advances increased by 7.8% to Rs. 33,491.54 crores, as compared to Rs. 31,069.60 crores a year ago. The following table will give you a glimpse of its various metrics.
| Parameter | 2022 | 2021 | 2020 |
| Total Revenue (₹ Crores) | 4,656.44 | 4,253.40 | 3,992.53 |
| Total Expense (₹ Crores) | 3,834.50 | 3,650.10 | 3,584.80 |
| Net profit (₹ Crores) | 901.9 | 654.04 | 464.89 |
| Profit after tax (₹ Crores) | 821.91 | 603.33 | 407.69 |
| GNPA (%) | 1.69 | 3.44 | 3.62 |
| NNPA (%) | 0.95 | 1.98 | 1.8 |
| Equity (₹ Crores) | 5335.71 | 4579.98 | 3979.65 |
| Book Value per Share (₹) | 374.41 | 321.38 | 279.25 |
| ROE | 16.56% | 14.10% | 10.73% |
| EPS | 57.67 | 42.34 | 28.61 |
For Easy understanding:
GNPA – Gross Non-Performing Asset
NNPA – Net Non-Performing Asset
ROE – Return on Equity
EPS – Earnings per Share
Net interest income was up about 18% YOY at ₹1,815 crores in FY22 (₹1,538 crores in the Financial year 2021).
Provisions and contingencies have increased about 18% to ₹705 crores (₹599 crores in the Financial year 2021).
To commemorate Tamilnad Mercantile Bank’s 100 years, in their last annual general meeting, the bank declared a special dividend of Rs.4 per equity share over & above the final dividend of Rs.6 per share.
Valuation of Tamilnad Mercantile Bank (TMB) IPO:
The IPO Price band is ₹500 – ₹525 per share. We can consider both the upper & lower band for calculating its Price/Earnings ratio (P/E).
The Earnings Per Share (EPS) for the last fiscal is ₹57.67. So, the PE ratio works out in the range of 8.67x – 9.10x.
If we consider the average EPS for the last three fiscals, which is 42.87, then the PE works out in the range of 11.66x – 12.24x.
Finally, for the price band of ₹500 – ₹525, the PE would be in the range of 9x – 11x. Other competitors, for example, Dhanlaxmi bank is trading at P/E 109.5x (Highest) and Karnataka bank at P/E 4.5x (lowest), and the industry average is at 25.72x. Hence, you can easily ascertain that the IPO of TMB is fairly priced.
Let us look at the PE Ratio of other Private Sector banks (as of 1st September 2022):
| No. | Company | P/E |
| 1 | Dhanlaxmi Bank | 109.55 |
| 2 | Bandhan Bank | 70.84 |
| 3 | Kotak Mahindra | 42.07 |
| 4 | AU Small Finance | 36.17 |
| 5 | Yes Bank | 35.28 |
| 6 | IDFC First Bank | 24.55 |
| 7 | ICICI Bank | 24.02 |
| 8 | HDFC Bank | 21.46 |
| 9 | South Ind Bk | 19.37 |
| 10 | IndusInd Bank | 16.56 |
| 11 | City Union Bank | 16.39 |
| 12 | Axis Bank | 15.45 |
| 13 | RBL Bank | 12.51 |
| 14 | Federal Bank | 11.71 |
| 15 | DCB Bank | 8.44 |
| 16 | CSB Bank | 7.25 |
| 17 | Karur Vysya | 7.03 |
| 18 | JK Bank | 5.53 |
| 19 | Karnataka Bank | 4.51 |
Note: The lower the PE ratio, it would be better for business & potential investors.
The Gray Market Premium (GMP) which is tracked by various resources is somewhere around Rs.20- Rs.50 per share.
Timeline & Issue details of Tamilnad Mercantile Bank (TMB) IPO:
TMB is coming out with a maiden IPO of 1,58,40,000 equity shares of Rs. 10 each via book building route to mobilize its Rs. 831.60 cr. at the upper cap.
The joint Book Running Lead Managers (BRLMs) to this issue are;
- Axis Capital Ltd.
- Motilal Oswal Investment Advisors Ltd.
- SBI Capital Markets Ltd.
while Link Intime India Pvt. Ltd. is the registrar of the issue.
Let us look at TMB’s IPO details at the glance below:
| Tamilnad Mercantile Bank IPO Size: | Approx ₹831.60 Crores |
| Face Value: | ₹10 Per Equity Share |
| IPO Price Band: | ₹500 to ₹525 Per Share |
| Retail Quota: | 10% |
| QIB Quota: | 75% |
| NII Quota: | 15% |
| Minimum Lot Size: | Minimum 28 Shares for 1 lot |
| Minimum Amount: | ₹14,700 for 1 lot |
| Maximum Lot Size: | Maximum 364 Shares for 13 lot |
| Maximum Amount: | ₹191,100 for 13 lot |
| Price Band Announcement: | 01-09-2022 |
| Anchor Investors Allotment: | 02-09-2022 |
| Offer Open | 05-09-2022 |
| Offer close | 07-09-2022 |
| Finalization of Allotment | 12-09-2022 |
| Initiation of Refunds | 13-09-2022 |
| Credit to Demat Account | 14-09-2022 |
| IPO Shares Listing Date | 15-09-2022 |
Strengths of Tamilnad Mercantile Bank – IPO:
- TMB is one of the oldest private banks, which offers a wide range of services. It is spread across 16 states and 4 union territories and has a strong customer base consisting of 5 million customers.
- Currently, it is highly concentrated (70%) in the state of Tamil Nadu but it has plans to open new branches all over the country in the future.
- Tamilnad Mercantile Bank’s current and savings account ratio (CASA) of total deposits stood at 30.5% at the end of March.
- During the financial year 2021-22, their net profit increased by 36% to Rs. 822 crores as compared to Rs. 603 crores during the financial year 2020-21.
- Non – performing Assets both Gross & Net are decreasing year on year. GNPA in 2021-22 was seen at 1.69% as against 3.44% in 2020-21. On the other hand, the bank’s NNPA was at 0.95% as compared to 1.98% in 2020-21.
- They were able to keep their NPA low as they focus on small & medium enterprises.
Weakness of Tamilnad Mercantile Bank – IPO:
- Tamilnad Mercantile Bank cannot open further branches until they get permission from the RBI.
- As per the bank’s & Top management’s disclosure, 37.73% of its paid-up equity share capital or 53.59 million equity shares are subject to outstanding legal proceedings pending at various forums.
- They have a regional concentration in Southern India. Any political, geographical & economic risk associated with the southern states will affect the operation & performance of the bank.
- The bank has received multiple anonymous Whistleblowers so far & this may continue in the future.
- A written petition filed by one of the former Directors to prevent the IPO is still pending at the Madras High court.
- Any adverse development in the small-scale & Agriculture Industry might increase their NPA.
Banking Sector Outlook:
The development of any country mainly depends upon the banking system. The Indian banking system has traversed a long journey to come to this phase.
The banking system is now subject to the highest level of accounting standards, stringent regulation, and disclosure norms. The following are the challenges that lie ahead in the banking sector which you need to understand before investing in any banking stock.
- Due to the advent of new technology & globalisation, the banking sector is constantly evolving. With the onset of the pandemic, banks were forced to strengthen their digital banking. In order to retain the customers, they needed to shift their focus from transaction-based service to value-driven service. This transformation has changed the way traditional banks have approached the business.
- One of the main threats to the banking industry is a new age of Fin-tech companies. Corporate scandals & the lack of transparency in the banking industry have plagued its growth & given space to Fin-tech companies.
- Banks are in the business of lending (loans, which forms the primary asset) through the deposits accepted from their customers. The difference between the interest on the money lent & the interest paid to the depositors is the profit available for the business.
- In the lending business, not all the loans are paid off. The unpaid loans are called Non-Performing Assets. It is to be written off.
- The rise in NPA due to discretionary decisions is a risk to the Bank.
Final Verdict:
From the business analysis, it is clear that there is an opportunity for TMB to widen its roots. The financial analysis also depicts consistent growth in all aspects.
The valuation done on the above represents that TMB’s IPO is reasonably priced.
If you are considering the strong fundamentals, the past track record, future opportunities to expand the business & current valuation of TMB, it all seems to be positive.
But the pending legal proceedings & Ban may hold us back from considering TMB’s IPO. It is important to note that if you are a Medium to Long-term investor, you can consider TMB IPO as it is a beneficial option.
Investing in banking stocks will have its own hurdles which you need to keep in mind. In case, your current portfolio already has an allocation to banking stock, then buying the TMB stock may not add any advantage to your portfolio but only act as a repetition.
Instead, you could invest in mutual funds, as it will be a better option. Here, the fund manager would prudently pick stocks under your portfolio. Your team will analyse the performance of the stock according to the market trend.
The mutual fund manager will give a considerable allocation to TMB stock based on its performance and an investment strategy followed by the particular fund.
You can choose what would be comfortable for you based on your risk appetite and your asset allocation requirement.
If you need help in taking an investment decision that would benefit your financial goals in the long run, then you can consult a financial advisor who as a professional might be able to assist you better.
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