Kotak Mahindra Bank - In a right direction - ICICI Securities

We initiate coverage on Kotak Mahindra Bank (Kotak) with an ADD rating and a target price of Rs810 (based on SOTP). Following the global financial crisis, Kotak has focused on building its financing and asset management businesses. It has transformed itself from a broker-lender to lender-asset manager-broker. The bank has a stable management team with a track record of managing market and credit risks well. Lately, Kotak has been cautious on growth and has consciously slowed down in areas where it expected stress. However, the bank continues to pursue its branch expansion strategy with focus on strengthening its retail franchise. In its non-lending business, Kotak has been able to maintain a sustainable position and is poised to capitalise on an industry recovery. We view Kotak's conservative approach as appropriate in current weak environment. However, at its current stock valuation (2.5x P/BV FY16E), we believe the positives are priced-in. Key risks are: income growth not keeping pace with cost growth as Kotak expands its branch network and slowdown in the capital market business.

- Focused on building a long-term sustainable franchise: Given the cyclical and volatile nature of the capital market business, the management shifted its focus towards the more stable financing (bank and auto financing) and asset management businesses. Since then, Kotak has been successful in transforming itself from a broker-lender to lender-asset manager-broker. Its share of profit from the financing business has increased to 85% in FY13 from 43% in FY08.

- Ability to gauge warning signals and take early decisions: Kotak's management is usually conservative in its approach. Since H1FY13, in anticipation of a weak credit environment, it has been cautious on growth and has consciously slowed down in areas where it expected stress (CV/CE). It has also been able to avoid project and infrastructure lending. However, the bank continues to pursue its branch expansion strategy with focus on strengthening its retail franchise. We believe it to be an appropriate strategy in the current environment.

- Well positioned across most financial service products: Profit has come off sharply in non-lending businesses (capital markets and asset management). Besides the downturn in the capital markets, Kotak's businesses have also been impacted by regulatory challenges and intense competition. However, it has been able to maintain sustainable positions in these businesses. In the current environment, Kotak would be able to make modest profit growth as costs are being tightly controlled. Given its presence across the financial service business and strong capital position, Kotak is also well placed to grow inorganically.

- Valuation - Positives priced-in: The bank's conservative approach coupled with its relatively lower exposure to stressed segments has led to a strong outperformance by the stock over recent months. However, given its current valuation (2.5x P/BV FY16E), close to our implied target multiple (2.6x P/BV FY16E), we believe any upside from here would have to be based on a more positive macro environment.

Source : Equity Bulls

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