Accumulate Kotak Mahindra Bank; target of Rs 1104: KR Choksey

KR Choksey's research report on Kotak Mahindra Bank

Q2FY18 performance was a strong with advances growing 21.1% yoy (7.2% qoq) to Rs. 15,25,741 mn, while interest income grew 7.9% yoy (2.2% qoq). With NIMs remaining within the bank’s guided range of 4.25%, NII grew at a good pace of 16% yoy and 3% qoq (CoF down 90 bps yoy and yields down 130 bps). Calculated annualized NIM was 4.1% against 4.3% for Q2FY17 and 4.2% for Q1FY18. CASA saw healthy growth of 44% yoy and 10% qoq, (CASA ratio – 47.8% versus 43.9% for Q1FY18, 39% for Q2FY17). Cost/income ratio stands at 47.2% versus 49.1% for Q2FY17 and 49.4% for Q1FY18. PAT was slightly below our expectations, at Rs. 9,943 mn, up 22% yoy and 9% qoq. On the asset quality front, the Bank has shown improvement as its gross NPAs stand at 2.47%, down 2 bps yoy and 11 bps qoq. Net NPAs, at 1.26%, are up 6 bps yoy and 1 bp qoq. Despite the strong traction in corporate loan book and given the current corporate lending environment, the Bank has been able to maintain its asset quality over the last many quarters.

Outlook
We expect the bank to deliver 20% loan book CAGR over FY18-20E on back of faster customer acquisition through its 811 strategy and focus on consumer segment. We believe the bank’s asset quality to improve tremendously on account of undeterred focus on quality loan underwriting without compromising on risk-adjusted returns (although we remain watchful on the NIMs as further contraction will be a negative). The fact that the bank has negligible exposure to the RBI-identified accounts makes the bank stand out. Further, we expect significant value creation through diversification of revenue streams by way of penetration into consumer durables finance, ~100% acquisition of BSS Microfinance and through asset management, securities and insurance businesses. Given the ROEs and scope for improvement, at current market price of Rs. 980 per share, we feel most of the value creation that is to come is priced in. Hence, we assign ACCUMULATE recommendation on the stock, valuing it at 4.8x FY20E BV translating into a value per share of Rs. 1,104, offering an upside of 9%.

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