Buy Kotak Mahindra Bank Ltd For Target Rs.1,507 - HDFC Securities
Over the years, Kotak Mahindra Bank (KMB) has transformed itself into one of the leading financial powerhouse in India. On the banking side, it has a strong liability franchise with a clear focus on consistent and sustainable growth, resulting in best in class return ratios. Stringent underwriting standards and focus on risk adjusted returns has helped the bank in maintaining stable asset quality across the cycles. We believe KMB is fundamentally one of the strongest banks. It has a diversified business model, which could help in hedging against downturns in specific segments and gives access to multiple growth avenues. The bank is trading at comparatively high valuations and implementation of regulations in the discussion paper released by the RBI on tenures of CEOs could lead to a sharp de-rating for the stock. Uday Kotak, being the promoter of the bank, has already served 10 years as CEO/whole time director. His term is expiring on Dec. 31, 2020
We like KMB for the long term because of its strong fundamentals (1) sufficient capital (CRAR 21%; Tier 1 20.6%) (2) Strong, granular liability franchise - best-in-class CASA ratio (Q1FY21-56.7%) (3) Superior asset quality (NNPA 0.9%) backed by prudent and consistent Management track record.
Valuations and Recommendations:
Management sounded cautious on the business prospects in the near term and remained selective on the growth front. We have envisaged ~11% CAGR growth for topline and 9% CAGR for bottom line over FY20-22E. ROAA and ROAE for FY22E are estimated at 1.7% and 11.1% respectively. We anticipate non-tax provisions of 1.24% of average assets over FY21-22E. Due to superior asset quality, beat-inclass NIMs, ROEs and ROAs of KMB we feel that the stock is trading at rich valuation. Despite a 21.1% Tier 1 ratio in the bank and significant excess liquidity, the bank remains extremely risk-averse. This could lead to lower sustainable RoEs for the bank
We feel that investors can buy KMB at LTP of Rs.1305 (3.1xFY22E core ABV + value of subsidiaries post holding company discount) and add further in the Rs.1177-1183 band (2.7xFY22E core ABV + value of subsidiaries post holding company discount) for SOTP based Base case fair value of Rs.1425 (3.45xFY22E core ABV + value of subsidiaries post holding company discount) and the Bull case fair value of Rs.1507 (3.7xFY22E core ABV + value of subsidiaries post holding company discount) over next 6 months.
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