RBL Bank More Expensive Than IndusInd Bank And HDFC Bank, Says Ambit
Ambit Capital initiates coverage on RBL Bank with a “Sell” rating and target price of Rs 375.
The lack of a profitable and sizable retail niche and high capital needs will weigh on RBL Bank Ltd.'s performance, according to Ambit Capital.
The brokerage initiated coverage on the private sector lender with a “Sell” rating and a target price of Rs 375 per share, implying a 28 percent downside from Monday’s closing price. The consensus one-year target for RBL Bank is Rs 493 per share, according to 13 analysts tracked by Bloomberg. 46 percent of the analysts have a “Buy” rating on the stock.
Muted Return Ratios
Sticky cost-to-income ratio and higher credit costs will limit RBL Bank’s return on assets to 1.2 percent versus the management’s target of 1.5 percent, Ambit Capital analysts wrote in a note to clients.
The brokerage also flagged off equity dilution as a significant risk for the stock. RBL Bank will require nearly Rs 4,300 crore of equity infusion over the financial year 2018-20 period, according to Ambit Capital’s calculations. This would mean that the earnings per share growth will underperform loan book growth in the same period.
Valuation Worries
RBL Bank’s valuations are running ahead of fundamentals, the brokerage added. The bank trades at 39 times current year earnings per share vis-a-vis 20 times for its peers like IndusInd Bank Ltd. and HDFC Bank Ltd.
Compared to its predecessor new-gen banks that generated 25-30 percent long-term share price return, a high entry valuation multiple constrains long-term return expectations.Ambit Capital’s Note To Clients
Risk To “Sell” Stance
The key risk according to Ambit Capital for its "Sell" rating is faster-than-expected normalisation of growth and credit costs in the rural retail book. Normalization of growth and credit cost trend could allow capital raising at favourable valutions, the brokerage added.