Private Client Research

Rating

Buy

Sector

Bank - Private

Company

Kotak Mahindra Bank Ltd

Bank - Private

April 01, 2020

Sensex: 28265.31

CNX Nifty: 8253.80

NSE: KOTAKBANK

BSE: 500247

Reco Price

Rs. 1180

Price Target (2 - 3 Years)

Rs. 2000

Upside

69.49%

Date

April 01, 2020

Sensex

28265.31

CNX Nifty

8253.80

Exchange

Code

NSE

KOTAKBANK

BSE

500247

Stock Data

CMP (Rs)

1181.65

Face value (Rs)

52 Week Range (Rs)

1740.00 - 1001.00

Market cap (Rs Crores)

226072.58

Price To Book Value (x)

4.64

P/E Ratio (x)

24.98

EV/EBIDTA (x)

24.99

One Year indexed Stock Performance

Kotak Mahindra Bank Ltd Sensex

Return (%)

12m

36m

Absolute

-26.09

-29.41

-11.67

35.10

Sensex

-25.90

-31.57

-27.29

-5.50

Shareholders

(in %)

31-Dec

Promoter

29.96

Public

70.04

Others

0.0

Total

100

+91 22 6639 3000

research@stockaxis.com

Profile

Kotak Mahindra Bank Ltd operates through the following segments: Treasury, Balance Sheet Management Unit (BMU) and Corporate Centre; Retail Banking; Corporate or Wholesale Banking; Vehicle Financing, Other Lending Activities; Broking; Advisory and Transactional Services; Asset Management; Insurance and Other Banking Business. The Treasury, BMU and Corporate Centre segment involves in money market, forex market, derivatives, investments and primary dealership of government securities, and asset liability management. The Retail Banking segment refers to lending, branch banking, and credit cards. The Corporate/Wholesale Banking segment includes wholesale borrowings, lending’s and other related services to the corporate sector which are not included under retail banking. The Vehicle Financing segment pertains to retail vehicle finance and wholesale trade finance to auto dealers. The Other Lending Activities segment manages financing against securities, securitization, and other loans and services. The Broking segment offers stock broking services. The Advisory and Transactional Services segment accomodates financial advisory and transactional services such as mergers and acquisition advice, and equity and debt issue management services. The Asset Management segment administers investments on behalf of clients and funds. The Insurance segment provides life insurance and general insurance. The Other Banking Business segment engages in other business not classified above. The company was founded by Uday Suresh Kotak on November 21, 1985 and is headquartered in Mumbai, India.

Indian Subsidiaries of Kotak Mahindra Bank Limited:

Kotak Life Insurance Limited
Kotak Asset Management Limited
Kotak Securities Limited
Kotak Mahindra prime Limited
Kotak Mahindra Capital Limited

Best in class in terms of Risk adjusted NIM and strong franchise

A successful liability franchise over the years:
KMB has grown its deposits at a CAGR of 18% over FY16- 19. At the same time, CASA deposits have grown at a CAGR of 31%, implying increasing share of low cost funds. As of 2QFY20, CASA ratio stood at 53.6% (+1553bps since FY16). Further, CASA + TDs <Rs10mn (“retail deposits”) account for more than 80% of the total deposits, thus providing a stable and granular funding base. We find the liability franchise scale up commendable, in light of the bank being able to reduce its cost of deposits by ~221bps (since FY13) to 5.26%. Additionally, the bank’s digital offering, 811, has been instrumental too. Overall, we think that there is a greater degree of stickiness as far as KMB’s deposit accounts are concerned.

Life Insurance business continues to deliver strong performance:
The Life Insurance business has seen good growth, Its Gross written premium has grown by 24% yoy in FY19 and stood at Rs. 8168 crores on the back of strong growth group premium. Business is growing at a CAGR of 15% since FY15-FY19. Kotak life Insurance’s Embedded Value as on FY19 grew by 26% to Rs.7300 crores; while its VNB stood at 37%. We believe this growth momentum to be continued in future as Life Insurance sector remains quite under penetrated and market share of private players continues in increasing trend.

Asset quality to remain healthy in future:
As bank is expanding its exposure towards retail lending; it will continue to face some challenges on unsecured loans. During Q3FY20 GNPA rose by Rs.400 Cr, to 2.4% to gross loans. We do not find this discomforting as looking to its healthy asset quality history .We believe this is elevated stress is restricted to few corporate accounts and not to entire book; in near term bank will come up with tough challenges and asset quality will stabilize in future. We expect slippages to remain under control as management has indicated that there are one to two large corporate account, Asset quality remains under control for corporate book. Kotak Mahindra Bank has limited exposures to defaulting borrowers.

Strong operating performance:
Kotak Mahindra Bank reported steady 9M FY20 performance; while Q3 Net interest income (NII) expanded by 16.7% y-o-y to Rs.3430 crores and PAT increased 23.6% y-o-y to Rs.1596 crores. During the quarter Fee and other Income continue to grow well. We expect the bank to report healthy operating performance.

Industry

The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. In FY07-18, total lending increased at a CAGR (compound annual growth rate) of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.

Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II, and majority of the banks already meet capital requirements of Basel III, which has a deadline of 31 March 2019.

Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an extensive database of credit information which is accessible to all stakeholders. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been passed and is expected to strengthen the banking sector.

Credit off-take has been surging ahead over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism & easier access to credit.

Strong Prospects for Banking Sector:

Favorable demographics and rising income levels. India ranks among the top six economies with a GDP of US$ 2,597 in 2017 and economy is forecasted to grow at 7.3% in 2018. The sector will benefit from structural economic stability and continued credibility of Monetary Policy.
Increase in working population & growing disposable incomes will raise demand for banking & related services. Housing & personal finance are expected to remain key demand drivers. Rural banking is expected to witness growth in the future.
Rising fee incomes improving the revenue mix of banks. High net interest margins, along with low NPA levels, ensure healthy business fundamentals.
Wide policy support in the form of private sector participation & liquidity infusion. Healthy regulatory oversight & credible Monetary Policy by the Reserve Bank of India (RBI) have lent strength & stability to the country’s banking sector.
As of August 2018, total number of ATMs in India increased to 213,004 and is further expected to increase to 407,000 ATMs in 2021.
With entry of foreign banks, competition in the Indian banking sector has intensified. Banks are increasingly looking at consolidation to derive greater benefits such as enhanced synergy, cost take-outs from economies of scale, organizational efficiency & diversification of risks.

Profit & Loss Statement:- (Standalone)

(Rs Crores)

DESCRIPTION	Mar-18	Mar-19	Mar- 20(E)	Mar- 21(E)	Mar- 22(E)
Interest Earned	19748.50	23943.21	26493.49	30467.52	34428.29
Interest Expenditure	10216.81	12684.25	13129.19	14707.59	16460.66
Net Interest Income	9531.69	11258.96	13364.30	15759.92	17967.63
Growth(%)		0.18	0.19	0.18	0.14
Other Operating Income	4052.21	4604.03	5294.63	6088.83	7002.15
Total Income	13583.90	15862.99	18658.93	21848.75	24969.78
Growth(%)		0.17	0.18	0.17	0.14
Operating Expenses	6425.72	7514.80	8807.02	10268.91	11710.83
Pre provisional operating profit	7158.17	8348.19	9851.92	11579.84	13258.95
Provisions and Contingencies	939.95	962.39	1450.00	1350.00	1300.00
Profit Before Tax	6218.22	7385.79	8401.92	10229.84	11958.95
Taxes	2133.92	2520.46	2117.28	2577.92	3013.66
Profit After Tax	4084.30	4865.33	6284.63	7651.92	8945.30
Adjusted EPS	21.43	25.49	32.86	38.80	46.77
Adjusted Book Value	196.69	222.13	253.22	290.70	325.50
Key Ratios
Advances Growth(%)	0.25	0.21	0.12	0.15	0.15
Deposits Growth(%)	0.22	0.17	0.10	0.12	0.12
Cost to Income(%)	0.47	0.47	0.47	0.47	0.47

Source: Stockaxis Research, Company Data

Valuation

Kotak Mahindra Bank has been one of the most consistent performers over the years, driven by best in class return ratios & margin profile. A cautious approach within corporate, SME & unsecured retail is seen impacting growth. However, bank credit growth is seen remaining healthy compared to the industry. Performance of subsidiaries (life insurance and AMC) remains strong on growth & profitability, value enrichment remains positive. We Initiate a “Buy” on Kotak Mahindra Bank Limited with a SOTP of Rs.2000.

Company	Metric	Value Per Share
Kotak Mahindra Bank (Merged)	4.8x FY22E ABV	1581.4
Kotak Life	4.2x P/EV	202
Kotak AMC	8% AUM of FY19	72
Kotak Securites	15x FY19 EPS	52
Kotak Prime	5x FY19 NW	141
Kotak Investment	1.5x FY19 NW	56.6

Total Subsidiaries value		523.6
Holding Discount @ 20%		104.72
Net Value of Subsidiaries		418.88
SOTP		2000

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