Tamilnad Mercantile Bank IPO: All you need to know

Tamilnad Mercantile Bank Limited is tapping the capital markets with its fresh issue of 1,58,40,000 equity shares in a price band of Rs 500-525. The issue would raise Rs 792- 831.6 crores at the price band. The issue opens on Monday the 5th of September and closes on Wednesday the 7th of September. On Friday, the company completed allocation to anchor investors of 71,28,000 shares at Rs 510. In the last couple of years, one doesn't recall that the anchor book or allocation has been made at a price lower than the top end. The top two allottees, namely Bajaj Allianz Life Insurance and Max Life Insurance Limited have been allotted 19,60,812 or 27.51 per cent of the anchor book each. This means that 55.02 per cent of the anchor book was allotted to two institutions. While there are 21 entities who were allotted shares, there are as many as 12 entities from the Max group. This concentrated allocation and at a price which is not the normal top end of the price band is a cause for concern.

On the flip side, the bank cross sells insurance products of Bajaj and Max and this would help cement their relationships further. However, the fact that other funds have not participated is a cause for concern and also the fact that the allotment was not at the top end of the price band.

Coming to the bank's performance, it is a 100-year-old private bank dominant in the state of Tamil Nadu. In terms of business as much as 75 per cent comes from the state of Tamil Nadu. The next chunk of business comes from the states of Maharashtra, Andhra Pradesh, Karnataka and Gujarat which contribute about 16 per cent. Going forward, with branch expansion largely through the digital format there could be some improvement in the share of non-TN business.

The company has a concentration in RAM business which comprises retail, agriculture and MSME. As much as 88 per cent of the bank's portfolio consists of this segment. The bank is strong in this segment and it enjoys healthy margins as well.

The bank has grown very significantly during the covid-19 pandemic. Its EPS has doubled from 2019-20 to 2021-22 from Rs 28.61 to Rs 42.34 and finally to Rs 57.67. It has a decent asset quality as well. Its gross NPAs were at 1.69 per cent while net NPAs were at 0.95 per cent for the year ended March 2022.

The shares which are being offered at a price band of Rs 500-525 have a PE multiple of 8.67-9.10 times its FY22 earnings. In terms of book value, the same is at Rs 374.41, which makes the issue at 1.4 times price to book.

There is a legal issue with the bank and RBI. Roughly 37 per cent of the bank's shares have an issue of ownership and they are not good for transfer as RBI has prohibited the same. While this does not affect the bank in any manner there is a positive spin-off where more than 1/3rd of the bank's shares is not transferable or tradeable even after the customary lock in period of 6 months expires. This ensures that there will never be a heavy floating stock weighing down on the bank.

Looking at the allotment of anchors, it becomes clear that effectively the new price band is now Rs 500-510 and shares would be allotted at Rs 510. Readers may apply for the shares of the bank considering its fundamentals and pedigree, considering it's a 100-year-old bank. There may be limited upside on listing and investors should apply only for the medium term. Considering its peer group, the bank is adequately priced.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)