Consolidation game

Dhanlaxmi Bank (DB) which was in the news for all the wrong reasons over the last year or so is now in the limelight over the last few days, probably for the right reasons. I had written about this in April ’12 too when it had collapsed below 60 and again rose nearly 25% in no time on the hope that it will be acquired by a bigger bank and RBI may favor the move considering that it found issues with the bank’s books during its inspection. However that did not happen at that time. Now the bank is quoting @67 quite a way below its book value of about 80, a very unreasonable discount compared to its peers who are quoting upwards of 2 times the BV.  They plan to raise Rs 150-200 crore equity capital thru a QIP. It remains to be seen how the response to this is and the price at which it is done.

The bank underwent a management change in February, 2012 after Amitabh Chaturvedi, the former MD & CEO, quit following disagreement with the board on several issues ranging from profitability, high salary to union related problems. P. G. Jayakumar, the then serving ED, was made the new MD of the bank. The current buzz should certainly take the share to new high in the coming period. Even though it has run up nearly 18% already from the lows of 57 it made some time back in mid-Nov after reporting a fourth consecutive quarterly loss, considering its valuation, it should still give returns in the days ahead. However it must be remembered that the bank is not out of the woods yet as far as its financials go. And this may weigh on the minds of the likely predators interested in it.

Another bank which is buzzing on the street is Karnataka Bank (KB). In the last month or 2, it has run up nearly 80% from below 100 to around 172 no in just about 2 months. And even if there is no merit in the speculation, the bank's strong earnings performance in the September quarter may be comforting to investors. The bank could come into play from 2 quarters:

1. from players keen to enter the banking space, notwithstanding the issue of banking licenses by RBI which could take more than 6 months and involve a string of compliance requirements, L&T Finance being a contender.
2. from players mandated by RBI to reduce the promoter stake in the current structure, IndusInd Bank being a case in point.

All these smaller south-based players are likely to be acquired at some point, if not now, then some point in the future once the economic situation improves. So it may make a good case to start nibbling at them now rather than wait for the actual news to come in when they will not be available at all. From the valuation perspective, DB could be a good candidate for these reasons, its financials notwithstanding. After all, they won’t remain so forever, more so with a conservative management at the helm now. Even KB is quoting at a P/BV of just 1.25 with good results to boot, its recent spurt notwithstanding Some amount of risk always pays in the long run.