RBL Bank shares more expensive than HDFC Bank, Axis Bank, Kotak Mahindra
Valuations of RBL Bank Ltd have raced ahead of fundamentals and its shares are now more expensive than those of many top banks, Ambit Capital said in a report.
In a 4 July report, the research firm said RBL Bank’s FY18 price to equity (PE) ratio stands at 39.1, higher than HDFC Bank Ltd (26.2), Kotak Mahindra Bank Ltd (31), Axis Bank Ltd (21.8), IndusInd Bank Ltd (28), Yes Bank Ltd (15.8), IDFC Bank Ltd (16.4) and DCB Bank Ltd (24.8.)
Whether compared with small or large private sector banks, RBL’s premium valuations are not justified given its return-on-equity (ROE) or earnings per share (EPS) growth profile, said the report authored by research analysts Ravi Singh, Pankaj Agarwal and Rahil Shah.
The report noted the “structural constraints on the bank’s underlying profitability and the continued need to raise capital which further lowers EPS growth.”
It added: “Even a strong long-term growth outlook leads to an absolute target valuation 1.8 times one-year forward book value due to low ROE.”
Ambit Capital added that despite decent long-term expected EPS compound annual growth rate (CAGR) of 20%, entry PE multiple of 36 times forward EPS restricts return expectations of RBL, compared with IndusInd Bank and HDFC Bank.
Ambit has a “sell” rating on RBL with a view that its shares are trading at a sharp premium, despite no improvement in growth or ROE and its valuations are running ahead of fundamentals.
Listed in August 2016 at a premium of 33% to its issue price, the stock had seen a sharp re-rating. “Pre-IPO capital raisings took place at an average 1.7 times valuation. Against this, the stock is trading at a sharp premium of 150%,” Ambit Capital said. However, the research firm believes trends of loan growth and profitability have been stable and do not justify the sharp re-rating. “In recent quarters, risks in the bank’s rural book and corporate banking have come to the fore, which do not justify high premium to historical valuations,” it said.
Ambit said the bank lacks a profitable and sizable retail niche and resultant sticky costs would limit return on assets (ROA) expansion which may undermine the bank’s FY20 target of 1.5% while continued high capital needs in such a scenario may hit EPS growth.
According to Bloomberg data, most analysts are positive on RBL Bank with six ‘buy’, four ‘hold’ and three ‘sell’ ratings.