Should you buy Tamilnad Mercantile Bank IPO?

Should I subscribe to Tamilnad Mercantile Bank's IPO?

Vishal Reddy, Medak

Tamilnad Mercantile Bank Limited was initially known as Nadar Bank. The bank was established to help serve the budding entrepreneurs in the Nadar community. In 1962, The Nadar Bank changed its name to Tamilnad Mercantile Bank Limited (TMBL). The impending IPO may change the fortunes of the century-old Tamilnad Mercantile Bank, which was entangled in controversies. The shareholders with unlisted shares in the bank hope to see the light at the end of the tunnel. Over the last three decades, the bank was pummeled by controversies, and the bank's contentious promoters were neck-deep in various legal problems too.

Until 1947, the Thoothukudi-based Nadar Bank had only four branches situated in Tuticorin, Sivakasi, Madurai, and Virudhunagar. Tamilnad Mercantile Bank's first branch outside the country was established in 1937 in Colombo. The bank also spread to other states, and its branch in Bangalore in 1976, the first branch outside Tamil Nadu. However, it closed its branches in Srilanka by 1944. The 100-year-old Tamilnad Mercantile Bank currently has 509 full branches, 1151 Automated Teller Machines (ATM) throughout India, 262 Cash Recycler Machines, twelve Regional offices, two link offices, four Currency Chests, 48 eLobby centres and six central processing centres. The bank is applying for new branch licences to expand its footprint all over India and targeting increasing branches to 650 by the next fiscal year.

With four branches, the Tamilnad Mercantile Bank first posted a net profit of Rs 6900 in 1921. The net profit increased to Rs 5.5 lakh by 1971. IPO-bound Tamilnad Mercantile Bank's net profit increased from Rs 603 crore in FY 2020-21 to Rs 822 crore in FY 2021-22, which is up 36 percent. The bank logged a net profit of Rs 407.6 crore for FY 2019-20. In FY 201-22, TMB's total business rose by 8.86 percent. The total business increased to Rs 78,424.65 crore in FY 2021-22 from Rs 72,040 crore to Rs 78,424 crore. The bank's total business for FY 2020-21 stood at Rs 72,511 crore, up from Rs 65,061 crore in FY 2019-20.

TMB's total deposits in 2021-22 increased by 9.67 per cent to Rs. 44,933 crore from Rs. 40,970 crore in FY21. Deposits were Rs 36,825 crore in FY20. The bank's total advances increased by 7.8 per cent to Rs 33,490 crore in FY22 as compared to Rs 31,070 crore in FY 2020-21. The total advances Rs 28,236 crore were reported in FY20. The bank has posted a 6.2 per cent growth in interest earnings from Rs 3,609 crore in FY21 to Rs 3,834 crore for FY22. TMB's total income surged by 9.5 per cent in FY22. The total income rose from Rs 4,253 crore to Rs 4,656 crore in FY22. Accordingly, EPS (Earnings Per Share) increased from Rs 42.5 to Rs 57.5 and book value surged from Rs 321.5 to Rs 374.5.

Tamilnad Mercantile Bank's gross non-performing assets (NPAs) and net non-performing assets declined. The gross non-performing assets as a percentage of total advances decreased to 1.69 percent from 3.44 per cent. Net non-performing assets decreased from 1.98 per cent to 0.95 percent. Tamilnad Mercantile Bank has built a robust share of secured loans, which is a plus point for the bank and investors hence, the decline in the NPAs. In fact, the bank's asset quality is superior to TMB's peers, including RBL Bank, DCB Bank, City Union Bank, and Karur Vysya Bank. This factor would have affected TMB's valuations based on FY22 financials.

In September 2021, the Tuticorin-based private sector lender filed for an Initial Public Offering of up to 15,840,000 equity shares with the face value of Rs. 10 each. The proposed offer includes a fresh issue of 15,840,000 shares. Tamilnad Mercantile Bank's Book Building Issue IPO will open for public subscription on 5 September 2022 and closes on 7 September 2022. The bank has fixed the price band at Rs 500-525 per share for its Rs 832-crore initial share offer. The bank witnessed many twists and turns in its 100-year business history. The bank's ownership imbroglio and uncertain future impacted its business and growth over the last three decades.

Until March 2022, the directors of the Tamilnad Mercantile Bank were fined up to Rs. 16 crores on two occasions in the previous year. The fine was for authorising and facilitating the transfer of shares to foreign entities without RBI's consent and approval. The bank was involved in ownership battles, litigations, and corporate governance issues. Also, the bank may face a leadership problem as the bank is expected to get a new chief executive officer and MD. The bank is going through a significant change of the guard at the crucial time of IPO. The bank's regional concentration may work against it in the short run. Investors may not gather confidence to put their hard-earned money in an IPO whose promoters are unidentifiable. Except for the ownership disputes and boardroom battles, the bank's performance and valuation look promising.

How many retail investors are willing to ignore the troubled past and bet on the promising future of the bank will only be known post listing.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)