Dhanlakshmi Bank-At an EPS of Rs 1.9 and PE of 40 this is the most over-valued PVT Sector Bank

Dhanlakshmi Bank-Neither Dhan Nor Lakshmi, Stock may become attractive at Rs 50

Just three months after making a QIP priced at Rs 180 per share, the Bank one of the smallest private sector banks in the country has reported abysmal profits. EPS in the 9 months to December 2010 was a mere Rs 1.90 per share. This came as a surprisingly large Rs 18 crore was written off as contingencies and provisions in the Q3 FY11. Whether it is a one time cleaning up of books is unclear, but the fact that the corporate is doubling it's Authorised capital to Rs 200 crore or 20 crore shares of Rs 10 each gives an indication that there is more to come.

Another Rs 5.50 crore shares or roughly 25 per cent of the increased Authorised Capital are expected to be placed with QIPs in FY12 which means either more NPAs need to be written off or the Bank virtually has no further leg room to grow. At 40-45 times Dhanlakshmi Bank is as badly placed as it's smaller competitors Lakshmi Vilas Bank and DCB. Investors while reflecting on concerns given under-neath are also expected re-evaluate whether they should stay with this Bank or switch to a larger more safer Bank, which offers better growth opportunities.

Delay in Execution of Ambitious Expansion Plans

Any delay in the implementation of the ambitious expansion plans can impact the earnings of the bank adversely.

Attrition at Senior Management Level

Any major attrition or reshuffling at the top management level can increase the execution risk and upset the successful implemention of growth plans.

Higher than Estimated Slippages in Asset Quality

Higher than estimated slippages in the bank's restructured asset portfolio and other standard loans, is a key risk to our investment call.

Equity Dilution on Account of Fund Raising

In order achieve its aggressive growth plans, the bank plans to mobilize capital worth Rs 40bn in the next 4 years, of which Rs 10bn is expected to be raised in FY12E, which will result in equity dilution. However, if the bank is able to show good earnings growth as a result of funds raised then it won't harm investor interests.

Competition from Other Banks

Competition from other private and PSU banks in key metro/urban locations could act as a hindrance in deposit mobilization, which will make it difficult for the bank to attract new customers without increasing the deposit rates. Hence CASA may come under pressure due to competition.