Ko­tak Mahin­dra Bank

(BSE Code: 500247) (CMP: Rs.1015.60) (FV: Rs.5) By Amit Ku­mar Gupta

Money Times - - Best Bet -

Ko­tak Mahin­dra Bank op­er­ates through the fol­low­ing seg­ments - Trea­sury, Bal­ance Sheet Man­age­ment Unit (BMU) and Cor­po­rate Cen­tre, which in­cludes deal­ing in debt, eq­uity, money mar­ket, forex mar­ket, de­riv­a­tives and in­vest­ments and pri­mary deal­er­ship of Gov­ern­ment Se­cu­ri­ties; Re­tail Bank­ing, which in­cludes lend­ing and credit cards; Cor­po­rate/Whole­sale Bank­ing, which in­cludes whole­sale bor­row­ings and lend­ing; other re­lated ser­vices like Ve­hi­cle Fi­nanc­ing, which in­cludes re­tail ve­hi­cle fi­nance and whole­sale trade fi­nance; Other Lend­ing Ac­tiv­i­ties, which in­cludes fi­nanc­ing against se­cu­ri­ties and other loans; Broking, which is en­gaged in mar­ket trans­ac­tions done on be­half of clients; Ad­vi­sory and Trans­ac­tional Ser­vices, which pro­vide fi­nan­cial ad­vi­sory and trans­ac­tional ser­vices; As­set Man­age­ment, which man­ages in­vest­ments on be­half of clients and funds; and In­surance, which pro­vides life in­surance and gen­eral in­surance. The Bank re­ported a healthy per­for­mance in Q2FY18 as both stand­alone and con­sol­i­dated net profit recorded a healthy growth. Stand­alone PAT grew 22.3% YoY and 8.9% QoQ to Rs.9.9 bn on the back of healthy growth in cus­tomer as­sets (+20.7% YoY and +6.1% QoQ), best-in-class NIMs (4.3%) and strong growth in core fee in­come (+28.6% YoY and +0.6% QoQ). Con­sol­i­dated PAT surged by 20% YoY and 7% QoQ to Rs.14.4 bn backed by strong bot­tom-line growth recorded by Ko­tak Prime (+15.4% YoY and 13.6% QoQ to Rs.1.5 bn), Ko­tak Life (+57.7% YoY and -2.9% QoQ to Rs.1 bn) and Ko­tak Se­cu­ri­ties (+22.9% YoY and -5.6% QoQ to Rs.1.2 bn). Cus­tomer as­sets growth was aided by 17.5% YTD and 6.4% QoQ growth in Cor­po­rate port­fo­lio, 17.1% YTD and 13% QoQ growth in small busi­ness and per­sonal loans and 12.7% YTD and 6.7% QoQ growth in CV/CE port­fo­lio. No­tably, the Bank has started ben­e­fit­ting from the full in­te­gra­tion of erst­while ING Vysya Bank (IVB) es­pe­cially post de­mon­eti­sa­tion.

The Bank has com­pleted the process of buy­ing back the re­main­ing 26% stake in Ko­tak Life from Old Mu­tual. Un­der the deal, Ko­tak Life was val­ued at Rs.48.9 bn. CASA ra­tio im­proved by 390 bps QoQ to a record high of 47.8% led by 61.9% YoY and 21.5% QoQ growth in sav­ing de­posits. Strong growth in SA de­posit was led by ac­qui­si­tion of new cus­tomers and some large gov­ern­ment busi­ness.

The Bank will launch its con­sumer fi­nance (CF) busi­ness through its NBFC sub­sidiary i.e. Ko­tak Prime, which will help the Bank to op­ti­mally utilise the ex­cess cap­i­tal avail­able at Ko­tak Prime. With the pos­i­tive ini­tial re­sponse to the Bank’s Dig­i­tal 811 Ac­count, the man­age­ment be­lieves that the trac­tion will con­tinue in FY18 as well. How­ever, stand­alone opex was par­tially im­pacted due to higher ad­ver­tis­ing cost. The Bank has not re­ceived any ma­te­ri­ally ad­verse ob­ser­va­tion from the RBI in its an­nual su­per­vi­sion au­dit for FY17.

The Bank has un­doubt­edly proven its com­pet­i­tive edge over its pri­vate sec­tor peers with higher fee based in­come gen­er­a­tion, as­set qual­ity man­age­ment and ef­fec­tive man­age­ment of fi­nan­cial busi­ness sub­sidiaries. It con­tin­ues to wit­ness mod­er­a­tion in SMA-2 bal­ance, which clearly sug­gests a sta­ble as­set qual­ity trend. Look­ing ahead, we ex­pect the strong trac­tion in earn­ings to con­tinue owing to the ro­bust growth in loan book, mod­er­ate credit cost and healthy mar­gins. We value the stand­alone en­tity at 4xFY19E ad­justed BV and ex­pect sub­sidiaries to fetch Rs.257/share af­ter de­duct­ing hold­ing com­pany dis­count of 15%.

Tech­ni­cal Out­look: The stock looks very good on the daily chart for medium-term in­vest­ment. It is mak­ing a higher high and higher low pat­tern on the daily chart and is mov­ing with a strong up­trend. The stock trades above all im­por­tant DMA lev­els on the daily chart.

Start ac­cu­mu­lat­ing at this level of Rs.1015.60 and on dips to Rs.965 for medium-to-long-term in­vest­ment and a pos­si­ble price tar­get of Rs.1150+ in the next 12 months.

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