Tamilnad Mercantile Bank's IPO Opens Next Week. Key Things to Know

The past couple of weeks must have made traders and investors in the stock market to rethink their strategies.

Market volatility went up ahead of the important announcement by Powell at the Jackson Hole symposium. Luckily, the bulls took charge today and recovered the heavy losses suffered in the previous few sessions.

As market volatility eases, companies are back with their preliminary papers and have filed for their initial public offers (IPO). In August 2022, two firms successfully raised funds. And both received strong response from retail investors.

Now, a 100-year old bank, Tamilnad Mercantile Bank, is set to launch its IPO next week.

Let's take a look at the IPO details, strengths, weakness, and more about Tamilnad Mercantile Bank.

Issue period: 5 September 2022 to 7 September 2022

IPO Size: Rs 8.3 bn - Fresh issue worth 15.8 m shares.

75% of this offer has been reserved for qualified institutional buyers (QIBs), 15% for non-institutional investors, and the remaining 10% for retail investors.

Price band: Rs 500 to Rs 525 per equity share

Bid lot: 28 shares and in multiples thereof. Retail investors can apply for a maximum of 13 lots (364 shares) which will amount to Rs 191,100.

Face value: Rs 10 per equity share

Object of the issue: Improve tier-1 capital base for future capital requirements.

Axis Capital, Motilal Oswal, and SBI Capital Markets are book running lead managers to the issue.

A bit of history...

Incorporated in 1921, Tamilnad Mercantile Bank (TMB) is one of the oldest private sector banks in India.

It offers an array of banking and financial services to retail customers, micro, small, and medium enterprises (MSMEs), and more.

TMB has a strong portfolio of advances and deposits from a diversified customer base including retail customers, agricultural customers, and MSMEs.

As of 31 March 2022, the bank has a strong branch network of 509 branches and a total customer base of 5.1 m. A significant market presence is in the state of Tamil Nadu, backed with 369 branches. It is also present in 15 other states and 4 union territories of India.

Factors in favor of the bank

#1 Century of existence

How often do you come across a company that has stayed in the business for over a century? Even many companies in the Sensex since inception do not possess this trait.

With over 100 years of existence, the bank has established itself as a scheduled commercial bank having a strong network of branches, ATMs and, CRMs across several states of South India.

Tamil Nadu being the home state, the bank's presence is also strong in Maharashtra, Gujarat, Karnataka, and Andhra Pradesh.

As of March 2022, the bank had 5.08 m customers, respectively. Many from these have been associated with them for more than five years.

This shows that a strong legacy can go a long way.

#2 Growing deposit base

Building relationships goes a long way. Tamilnad Mercantile Bank made sure it lives up to the statement.

The bank's financials for the last three financial years show that their overall deposit base increased from Rs 368,250 m in year 2019-20 to Rs 409,704 m in financial year 2020-21 to Rs 449,331 m in financial year 2021-22.

This was a result of increase in both term deposits and CASA deposits. Recently, the bank started to witness stability in renewal rates of term deposits despite low interest rates.

Risk factors

#1 Negative Cash Flows

While the financials and low NPAs might present a rosy picture, delve deeper, and you'll find that the bank has a history of having negative cash flows.

Take a look at this table.

Year	Mar-20	Mar-21	Mar-22
Operating activities	5,674	-6,704	13,250
Investing activities	-202	-371	-1,068
Financing activities	2,690	-3,240	-713
Free cash flow	-404	-13,067	5,131

Data source: Ace Equity

The RHP states that negative cash flows in the short term may materially impact the bank's ability to operate business and implement any growth plans.

And finally, the financials

Over the years, the bank has consistently delivered on the financials front. Reducing costs has been the key factor improving the bank's financials.

NPAs have also come down.

Asset Quality

Year	Mar-20	Mar-21	Mar-22
Gross NPA	3.62%	3.44%	1.69%
Net NPA	1.80%	1.98%	0.95%
PCR Ratio	80.75%	79.53%	87.92%

Data Source: RHP

Total income increased at a CAGR of 8% from Rs 39,925.29 m in 2020 to Rs 46,564 m in financial year 2021-22.

Profit for the recent year increased to Rs 8,212 m from Rs 4,077 m in 2019-20.

According to the company's draft red herring prospectus (DRHP), the bank had the second highest net profit for financial year 2021-22 among its peers.

ROA at 1.7% was also higher compared to a median 0.8% for peers. Return on equity (ROE) of 16.6% is much higher than a median of 8.3%.

Financial & Operating Performance

Rs m, standalone	Mar-18	Mar-19	Mar-20	Mar-21	Mar-22
Interest Earned	32,505	32,245	34,661	36,091	38,339
Operating Profit	2,219	2,586	4,077	7,984	11,246
PAT	2,219	2,586	4,077	6,033	8,219
Net Worth	34,048	36,183	39,796	45,800	53,357
Deposits	324,283	351,362	368,250	409,704	449,331
Advances	237,687	264,879	277,158	310,696	334,915
Yield on Advances(%)	13.7	12.2	12.5	11.6	11.4
Yield on Investments(%)	9.0	8.5	8.2	7.7	6.8
ROCE(%)	6.5	8.1	10.4	18.4	22.8
RONW(%)	6.7	7.4	10.7	14.1	16.6
Adjusted EPS	15.6	18.1	28.6	42.3	57.7
Equity Dividend (%)	28.9	24.1	38.6	0.0	100.0

Data Source: Ace Equity

Key growth strategies going forward...

After successfully raising funds, the bank plans to improve on the asset quality front by focusing on secured advances, high loan to value ratio, diversification across loan book tenures, and more stringent audit procedures.

Also, as fintech gains attention, the old age bank is planning to transform through technology to improve customer experience.

How does Tamilnad Mercantile compare against listed peers?

After getting listed, Tamilnad Mercantile will join listed industry peers - City Union Bank, Federal Bank, Karur Vyasa Bank, and RBL Bank, among others.

Company	Revenues	PAT	Gross NPA	Net NPA
Tamilnad Mercantile	46,544	8,219	1.69%	0.95%
City Union Bank	48,639	7,602	4.70%	2.95%
Federal Bank	165,025	18,898	2.80%	0.96%
Karur Vyasa Bank	63,567	6,733	5.96%	2.28%
RBL Bank	107,964	(747)	4.40%	1.34%
CSB Bank	22,851	4,585	1.91%	0.68%
Karnataka Bank	71,755	5,086	3.90%	2.42%

Data Source: RHP
Figures as of March 2022 and in Rs m

Final words

The IPO market is starting to heat up.

Last week, Syrma SGS Technologies soared 34% on debut. A strong debut despite a sharp selloff in the broader markets.

This week, another company is scheduled to list - DreamFolks Services. The company's IPO concluded on Friday last week. At present, the shares are commanding a premium of Rs 110-115 per share in the unofficial market.

Extremely good performance in grey markets is also a factor which retail investors consider as some only opt to an IPO for listing gains.

Now, Tamilnad Mercantile Bank IPO is opening next week.

All this just shows that we are in for an action-packed September as mega IPOs wait on the sidelines. If you wish to invest in any of the upcoming IPOs, be very clear about your strategy and expectations.

In a bull market, you can invest with the expectation of a listing gain and exit on the listing day. Of course, this strategy is quite risky as even in a bullish market, not all IPOs give a listing return.

The other more traditional strategy is to come in for the long term after studying the company, management, governance, financial, comparison with listed peers etc.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...