Kotak Mahindra Bank - Fundamental Call - Consortium

Kotak Mahindra Bank (KMB) surprised on all fronts delivering standalone PAT of Rs 361 crore & consolidated PAT of Rs 586 crore beating our & Street estimates by a wide 10-15%. Strong performance was boosted by robust NII of Rs 823 crore, surging 26% YoY, and higher other income at Rs 305 crore at standalone level. MTM reversal on investments & income from distressed assets (Rs 70 crore vs. double the same in Q3FY12) led to higher other income. Asset quality was stable with GNPA, NNPA ratio at 1.46%, 0.64%, respectively. Restructured assets constitute miniscule Rs 9.2 crore. Consolidated PAT was mainly (63%) contributed by bank but other subsidiaries also performed stably with Kotak Mahindra Prime (Rs 105 crore), Kotak Life Insurance (Rs 53 crore) & Kotak Securities (Rs 38 crore). Kotak AMC did well too (Rs 11 crore PAT). We have revised our FY13E credit & deposit growth to 27% & 31.8%, respectively. PAT expected to rise at 20.7% CAGR (earlier 18.5%) in FY12-14E. Recommend Buy on declines.

Business growth robust and higher margins stay...

Standalone bank advances grew 26% YoY to Rs 50245 crore while deposits grew a whopping 33.2% to Rs 51524 crore. The incremental saving deposits mobilisation has been strong at Rs 690 crore in Q3FY13 vs.Rs 386 crore in Q2FY13 to Rs.6616 crore. However, CASA ratio declined to 25.9% mainly due to a sharp rise of 37% in term deposits to fund credit growth. Even incremental loans grew on large corporates. Hence, NIM dipped 10 bps to 4.6% QoQ. We revised credit growth at 25.7% CAGR over FY12-14E and expect calculated NIM to range at 4.3-4.4%.

Outlook stable...

Bank's endeavour to maintain steady growth with caution on commercial vehicles & construction equipment segment provides visibility on growth with stable asset quality & marginal dip in NIM expected. C/I ratio is on declining trend (49% now) and guidance remains on lower side as most costs are frontloaded in capacity additions & benefits are gradually flowing now. C/D ratio is coming down to sub 100%.

Valuations rich but result signals outperformance continuing... Buy on declines

Bank's strong profitability and higher margins help it to maintain rich valuations. We have revised profitability and also bank valuation at 3.3x FY14E ABV. Its stressed assets ratio (NNPA + RA) remains <1% of total credit on a consistent basis. RoE of ~15% and RoA of 1.7% expected to be maintained. We recommend buy on declines with target of Rs 675.

Source : Equity Bulls

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