Prospects Appear Bright - Bank of Maharashtra

Some of the readers of Dalal Street Investment Journal might get surprised to see back to back banking sector recommendations as our low price scrip. But if investors could recollect, we are quite bullish on the banking sector and also carried a cover story on the same. Now taking cue from the same we are recommending Bank of Maharashtra (BOML) as our Low Priced Scrip.

The very first factor is the better expected performance from the banking sector. Apart from being from government stable the other compelling factors include better financial performance in June 2010 quarter, improving asset quality, better business growth, improving net interest margins and last but not the least consistent dividend payment with current dividend yield of 2.85x. On the valuation front also the scrip is trading at just 1.24x of its adjusted book value. Further with market trading at higher level, recommending a safe bet will be the prudent strategy.

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There are particular reasons why we are recommending BOML. First is the strong performance by the bank in June 2010 quarter. The business growth has been strong in the quarter and same is vindicated from the fact that the total business has increased in June 2010 to `101729 crore from `85964 crore as in 30 June 2009 as, registering a Y-o-Y growth of `15765 crore.Its total deposits increased to `59594 crore from `51385 crore as on 30.06.2009, registering a growth of `8209 crore (15.97 per cent) on YoY basis. The best part is, during the same period, the low cost CASA deposits have increased to 23844 crore from `17985 crore. This resulted in a higher CASA ratio of 40.01 per cent which increased from 36.91 per cent in March 2010.With the higher CASA deposits the cost of deposits has declined to just 5.24 per cent from the earlier levels of 6.36 per cent in June 2009. As a result, the net interest margin improved significantly to 2.38 per cent. We feel going ahead the bank is expected to sustain such margins.

The gross advances have increased from `34579 crore as on 30.06.2009 to  42135 crore as on 30.06.2010, registering a growth of `7556 crore (21.85 per cent) on YoY basis. The gross advances as on 31.03.2010 were `40926 crore. So there has been growth on Q-o-Q basis also.Asset quality has also improved and the gross NPAs declined to 3.46 per cent from the levels of more than four per cent in June 2009. With the higher provisioning the net NPAs declined to just 2.02 per cent. We feel the asset quality is expected to improve further, with bank taking strong initiatives for recovery.

As regards the financial performance, operating performance has been good. Further, in June 2010, the bank posted a bottomline of `118.43 crore as compared to `101.79 crore in June 2009. On the valuation front, the scrip is trading at 6.7x of its trailing four quarter earnings. But the adjusted price to book stands at just 1.24x. This is much lower than the peer banks. Hence we recommend the investors to buy the scrip at current levels with a target price of `90 in next one year.