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