Ratnakar Bank
An Alpha Ideas Presentation
Dec 21, 2012
The History
• Established in 1943 by local businessmen in
Kolhapur
• Sleepy regional bank with local network
• Corrupt practices by directors-lending to own
kin, forging dividend warrants etc
• Very small in size with a deposit base of only
1585 Crores
The Change
• Vish Ahuja joins Ratnakar Bank in 2010
• He is the former CEO of Bank of America in
India
• He got laid off in 2009 when Bank of America
merged with Merrill Lynch
The New Team
• Ahuja ropes in some of the best banking talent in
India to join Ratnakar Bank
– Joginder Singh Rana, a Citibanker for 22 years, is the
chief operations officer.
– R Gurumurthy, head of corporate & institutional
banking, from Standard Chartered Bank
– Tajinder Kumar , Head of HR from Deutsche Bank
Singapore.
The New Team (Cont’d)
• Rajeev Ahuja (formerly head-fixed income, Citi)
• Nitin Chopra (CEO, Bharti AXA Life)
• Sunil Gulati (Group president, Yes Bank)
• Suhas Sahakari (Head SMEs, Axis Bank)
• Shanta Vallury (Head liabilities ICICI Bank)
• Padmanabhan Kumar (Head Operations at
HDFC Bank and Yes Bank)
• Naresh Karia (Country controller, Citi).
Why are they joining Ratnakar
Bank?
• These senior bankers want to replicate the
success of Aditya Puri
• Aditya Puri quit as Head Citi Malaysia to start
HDFC bank in 1994
• Since then, via stock options, he and his core
team have amassed a fortune of 1000+ Crores
The Stock Options Aspect
• Employees got 88.42 L options in 2010-11 and
48.23L options in 2011-12
• The exercise price of these options were
Rs.46.50
• This is a very bullish sign that the company will
go public in the next 5 years
The Salary Aspect
• Vishy Ahuja , despite experience of 30 years, is
getting a salary of 74 Lakhs only (His peers get
around 2.5 C -4 C)
• Other senior management’s salaries are in the
same range
• Its clear that the name of the game for these
honchos is capital appreciation via stock options
What’s happening now?
• Revamped board with superb and honest people
• Raised 720 Crores capital from top class
investors like HDFC , Becon,NorWest, TVS
Capital etc in 2011 at 67 Rs/share
• Tripled employee strength from 565 to 1328
• Set up 21 additional branches and 82 ATMS
• Implementing Finacle to automate operations
Why are investors investing?
• The banking sector grows by 2-2.5 Times the
GDP growth rate
• "The underpenetration of banking services in
rural India, high potential growth rates, a
conservative regulator and high entry barriers for
new entrants make these small banks a
compelling investment case," says Munish
Dayal, partner, financial services, at Baring
Private Equity Partners.
The Financials (In Lakhs)
Company grew fast under new
team
Decline is due to payments of
pensions and arrears
Concerns
• Market rumor is that they have lent to
Deccan Chargers so they may have to
suffer losses
• Company is private…so difficult to get out
of this stock immediately
• Company’s original staff is unionised. Can
create problems like Dhanlaxmi Bank
Valuations-Peer Comparison
• Banks are typically valued on book value
Bank Name
Price to Book Value
Axis Bank
2.04
City Union Bank
1.75
DCB
1.24
Dhanlaxmi Bank
0.68
Federal Bank
1.37
HDFC Bank
4.57
ICICI Bank
2
Indusind Bank
3.77
Yes Bank
2.92
What’s next?
• The CEO is confident that bank can grow by
20%-30% year on year for the next couple of
years
• Another round of funding expected around 102
Rs/share
• IPO planned in 2014
• At an average Price to Book Multiple of 2, the
price then should be around 180 Rs-200 Rs.
Summary
• The illiquidity aspect of this stock makes it a
stock for medium investment horizons (2
Years+)
• Since the bank is very small, there is
tremendous room for growth
• If the management executes well and doesn’t
dilute equity, this stock can be the next Yes
Bank