Kotak Mahindra Bank Ltd : Retain BUY rating and raise 12m PT to Rs2,005 - Yes Securities
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Buy Kotak Mahindra Bank Ltd For Target Rs.2,005
Sturdy growth, asset quality and earnings performance; causing mild upgrades in EPS/ABV estimates. Retain BUY rating and raise 12m PT to Rs2,005
KMB delivered a better‐than‐expected core operating performance, reflected in marginal beat on core PPOP (up 33% yoy and reversion of core PPOP margin to pre‐ Covid level) and significantly lower credit cost. The latter was underpinned by a strong asset quality performance that was manifested in restrained 60bps sequential increase in proforma Gross NPLs (to 3.3%), marginal one‐time restructuring at 0.28% of net advances and lower SMA‐2 book at 31 bps of net advances. On the proforma NPLs, KMB provided for interest accrued but not collected even for the moratorium period. As the bank did not dip into its Covid buffer, it was stable at Rs12.8bn (60 bps of advances).
After delivering a strong broad‐based 4.5% qoq growth (slower traction in CV/CE and unsecured retail), which was a seven‐quarter high, the management sees momentum sustaining in large segments of Mortgages, Agri Finance and Corporate lending. The deposits mix trends remain impressive with incremental gains on CASA (59% of deposits) and granularization. The improvement in LDR (utilization of excess BS liquidity) will aid NIM in coming quarters and this along with normalization of credit cost will drive a solid earnings performance. We estimate 20% earnings CAGR for KMB during FY20‐23 with a 20‐30 bps expansion in RoA. RoE improvement will be contingent on the pace of growth. The core bank trades at 3.5x FY23 P/ABV, at 20‐ 25% premium to HDFC Bank, thus scope for a large re‐rating is restricted. We retain BUY rating and upgrade price target to Rs2,005.
Management Commentary
Key takeaways:
* A nearly Management sees continuance of loan growth ‐ bank will focus on secured lending and better quality corporate lending ‐ will pursue calibrated growth in unsecured consumer credit.
* Large difference in stress levels between unsecured and secured retail assets – unsecured loans are 6% of loan book, but contributed 40% to the delta increase in proforma GNPL during Q3 ‐ corporate portfolio has been resilient.
* Some pockets of stress in secured retail too like CV financing, particularly the Bus segment (10‐15% of CV portfolio for the industry) where fleet utilization is low or abysmal.
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