Outlook & Valuation: KMB has strengthened its liability profile with increased share of granular retail loans and sharp rise in CASA over the years. Moreover, its conservative lending and healthy performance across the asset quality cycles make it a preferred play amidst a not-so-benign operating environment. We expect improving liability profile and improved pricing power to aid the bank’s margin and profitability going forward. Keeping our estimates unchanged for forward years, we maintain our BUY recommendation on the stock with a SOTP-based revised Target Price of Rs1,600 (from Rs1,550 earlier) based on 4.2x FY21E adjusted PBV (4x earlier) and the value of its subsidiaries, implying a FY21 P/ABV of 5.7x.
We apply a P/B multiple of 4.8x to the FY20 book value of the parent bank and arrive at a TP of INR 1,620 per share on SoTP basis, an upside of 8.4% over CMP. Since, our last “BUY” rating, the shares of Kotak Bank has advanced 6.4%. We remain positive on the counter and recommend an “Accumulate” rating.
Kotak Mahindra Bank (KMB) delivered a steady Q1FY20, reinforcing our view that its earnings momentum would sustain in spite of the challenging environment. Key highlights: a) Growth momentum softened due to lower growth in corporate/business banking (cautious stance) and below-trend vehicle finance growth (slow underlying sales). b) That said, an improving NIM profile (returns consciousness) supported 20%-plus YoY NII growth. c) The continued focus on building up the stable and low-cost franchise is evident from CASA growth of 20%-plus YoY (contrary to softening trend at peers) and suggests it is priming for growth. Given KMB’s: a) best-in-class liability franchise (CASA ratio of >50%); b) marginal stress baggage—GNPL at 2.19%; and c) strong capitalisation (tier-1: >17%), a strong foundation is in place to capture emerging opportunities. Key variables: the roadmap for reduction in promoter shareholding. Maintain ‘BUY’ with a revised SoTP of INR1,632 (rolling forward by one quarter; earlier INR1,576).