Tamiln͏ad Mercantile Bank is HDFC Securities' Top Pick with 20% Upside Target

Mumbai, 2 December 2025: ͏HDF͏C Securities has selected Tamiln͏ad Mercantile Bank Ltd (TMB) as its ‘Pick of the Week’, with a ‘Buy’ rating and a base fair value volume of ₹͏565 per share. The projection means a potential upside of more than 20% from the last closing, while the bull case target is ₹610. The call is on account of the banks unique positioning in the fastest growing state economy in India, for its pristine balance sheet and an compelling valuation in case of a market rerating.

A Century-Old Bank Set for Expansion following Tamil Nadu’s 9.69% Economic Growth

With a history of more than 100 years, Tamiln͏ad Mercantile Bank is a reputed private sector bank whose fortunes have always been tightly interwoven with the strong economy of its home state. Tamil Nadu recorded a real GDP growth rate of 9.69% in FY25, the highest in India, powered by a 14.7% expansion in manufacturing. Since as much as 75% of TMB’s branches are situated within the state, the bank is perfectly poised to translate this economic vigour into sustained credit growth, more so in the MSME and retail sectors.

Q2 Results Indicate Robust Business Growth and Impeccab͏le ͏1.01% GNPA

The bank’s recent quarterly result highlights its operational strengths within a competitive landscape. TMB posted a 4.7% year-on-year rise in net profit to ₹318 crore in Q2FY26. Net interest income recorded tepid growth, but the bank reported strong business growth with deposits increasing 12.3% YoY and advances by 10.3% YoY. In a decade, asset quality also hit the highest point, 1.01% gross NPAs and mere 0.26% net NPAs, making it one of the best in the industry.

Geographic Diversification and a 2͏50 Crore Provision Buffer 

HDFC Securities has identified several ͏catalysts for TMB’s growth. To ͏counter geographic concentration risk, the bank is aggressively moving out of Tamil Nadu, having opened 22 new branches in H1FY͏26 and with a plan to increase the share of non-Tamil Nadu branches from 25% to 35% in the next three years. Additionally, the bank has a substantial 250 crore in contingency provisions, which management confirms is adequate to absorb the impact of ͏the RBI’s impending Expected ͏Credit Loss (ECL) norms without affecting profitability.

Valuation at 0.65x Forward ABV Presents a͏ Compelling Re-Rating Opportunity 

The investment thesis for the stock revolves around valuation. HDFC Securities notes that despite strong fundamentals and clear growth runway, TMB is trading at a significant discount, at ~0.65x its estimated adjusted book value (ABV) for H1FY28. The brokerage believes that this discount is unwarranted. Its base case fair value of ₹565 is based on a 0.75x multiple on FY27E ABV with the bull case of ₹610 representing 0.8x Sep’27E ABV, envisaging a rerating over the next 2-3 quarters.

Management Confidence Fuelled by 17%+ Growth in Profit Forecast

The bank’s leadership has given a clear and confident roadmap for the coming years. Key guidance includes: a cost-to-income ratio under 45%, normalised credit costs, and profit growth above 17% in FY27. Coupled with an increased technology investment of ₹250 crore for FY26 to modernise operations, ͏this disciplined strategy aims at raising productivity and support ͏national expansion ambitions.

Tamilnad Mercantile Bank Ltd. represents a unique proposition: a century-old institution with the asset quality of a modern, conservative lender and the growth potential of a regional champion. Its fortunes are inextricably linked to the strong economy of Tamil Nadu, while its strategic investments in technology and geographic diversification are laying the platform for the next phase of growth. Trading at an attractive valuation and with clear triggers for a re-rating, TMB is well-positioned to deliver consistent returns.

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