Neutral on Kotak Mahindra Bank - Motilal Oswal

• Mkt Cap USD5.8b
• CMP Rs785
• Neutral)

Kotak Mahindra Bank asset growth accelerates, lending business drives profitability; EPS upgrade; Neutral
Key highlights include:

- Kotak Mahindra Bank's 1QFY11 consolidated PAT grew 27% YoY (down 22% QoQ) to Rs3.3b. While consolidated profit grew 27% YoY, lending business consolidated profit grew strongly at 121% YoY to Rs2.7b led by (1) strong loan growth of 11% QoQ and 40% YoY to Rs329b, and (2) a decline in NPA provisions.

- Capital market related business (broking and IB) posted 31% decline YoY. A decline in market share (80bp YoY) and falling yields is putting pressure on K-Sec profitability.

- On a lower base, KMCC (IB business) profits grew 43% YoY to Rs69m. Pressure on KMCC profitability despite increasing deal flows remains a concern. AMC business profits also declined 29% YoY.

- GNPA was largely stable QoQ; provision coverage ratio (including technical write-offs) improved to 65% from 58% in 4QFY10. The bank requires ~Rs450m of additional provisioning to comply with a 70% PCR deadline by 2QFY11.

- We have upgraded our standalone earnings estimates by ~13% for FY11 and ~22% for FY12 to account for higher loan growth, lower credit cost and the benefit of recent capital raising. However, upgrades in lending businesses are offset by downgrades in capital market related business profits. Overall we have upgraded consolidated earnings estimates by 5% in FY11 and 10% in FY12.

- We expect earnings CAGR (excluding insurance) of 21% over FY10-12 and expect the bank to post EPS of Rs43 in FY11 and Rs53 in FY12. BV will be Rs299 in FY11 and Rs352 in FY12. The stock trades at 2.2x FY12E P/BV and 15x FY12E EPS (adjusted for the value of the insurance business). Maintain Neutral.

Source : Equity Bulls

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