Renewable Lending And Branch Expansion Will Support Resilient Long Term Performance

Catalysts

About Bank of Maharashtra

Bank of Maharashtra is a public sector bank with a nationwide branch network that offers retail, agriculture, MSME, corporate banking and treasury services.

What are the underlying business or industry changes driving this perspective?

• Sustained focus on high quality RAM lending across retail, agriculture and MSME, with tighter underwriting filters and a larger share of secured, higher rated borrowers, can support more resilient loan growth and help protect net margins and credit costs, which flows through to earnings.
• Deepening exposure to sectors such as green and clean energy, renewables, infrastructure and data centers, which receive policy support from the Government of India, positions the corporate book to benefit from long term investment spending and can lift loan yields and interest income.
• Expansion of the physical franchise through a planned 1,000 new branches, including 321 branches in the current phase selected down to the pin code level, can steadily lift low cost CASA deposits and fee-generating customer relationships, which is supportive for revenue and NIM.
• Scaling up the GIFT City International Banking Unit, including participation in global syndications and plans to add retail products, can diversify the loan book beyond domestic markets and add higher margin foreign currency business, which can support both net interest income and overall profitability.
• Ongoing recovery efforts from a large written off portfolio, including recent annual recoveries above the internal INR 1,200 crores to INR 1,500 crores band, together with new provisions created for geopolitical risks, can provide an additional earnings cushion and help sustain a high provision coverage ratio and stable net NPA levels.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Bank of Maharashtra compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Bank of Maharashtra's revenue will grow by 31.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 53.4% today to 31.4% in 3 years time.
• The bullish analysts expect earnings to reach ₹99.7 billion (and earnings per share of ₹13.16) by about July 2029, up from ₹75.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹85.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2029 earnings, up from 8.6x today. This future PE is lower than the current PE for the IN Banks industry at 12.3x.
• The bullish analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.85%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Prolonged West Asia geopolitical tensions, including the Iran, Israel and U.S. conflict and elevated Brent crude prices above $100, could pressure inflation, currency and funding conditions in India, which may eventually feed through to stress in corporate and MSME borrowers and weigh on revenue and earnings.
• The bank is building exposure to sectors such as green and clean energy, renewables, infrastructure, data centers and overseas syndications through the GIFT City unit, and any long term policy, execution or global credit cycle issues in these capital intensive areas could test asset quality and put pressure on net margins and earnings.
• The plan to grow rapidly in core lending across retail, agriculture, MSME and corporate segments, while adding around 1,000 branches and scaling fee income, depends on consistently tight underwriting and execution, and any dilution in credit standards or slower ramp up of new branches could lead to higher credit costs, weaker CASA mix and softer net interest margins.
• Reliance on recoveries from a large written off book of roughly ₹20,000 crores to ₹21,000 crores and on internally created buffers such as the ₹200 crores global geopolitical uncertainties provision may not be sustainable if resolution cycles lengthen or recovery rates fall, which would reduce the cushion supporting provision coverage and could weigh on net profit.
• Tax benefits from past unabsorbed losses and deductions have kept the effective tax rate around 10% to 14% of operating profit, and as these benefits fade and the bank operates fully in the normal tax regime near statutory levels, a higher tax burden could dampen profit growth even if pre tax profitability and revenue remain healthy.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Bank of Maharashtra is ₹96.0, which represents up to two standard deviations above the consensus price target of ₹84.67. This valuation is based on what can be assumed as the expectations of Bank of Maharashtra's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹96.0, and the most bearish reporting a price target of just ₹68.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be ₹317.1 billion, earnings will come to ₹99.7 billion, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹84.25, the analyst price target of ₹96.0 is 12.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.