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KMB still somewhat away from an optimal business model

Our view – Slippages rise and loan growth slows, while dependence on ActivMoney continues Net Interest Margin – Margin declined sequentially but mainly due to loan mix change and not rise in cost of funds: NIM was at 4.91%, down -11bps QoQ and -31bps YoY. 2Q was the first quarter when the full impact of the RBI embargo was felt. As a consequence, the share of secured assets has gone up in the portfolio. The cost of funds seems to have stabilised. Management cited positive prospective loan mix evolution from RBI embargo removal (once it happens) aiding unsecured retail, traction for rural loans, including CV/CE and a comeback in microfinance..

Asset Quality – Slippages rose on sequential basis driven by stress on unsecured loan segments: Gross NPA additions amounted to Rs 18.75bn for 2QFY25, translating to an annualized slippage ratio of 1.9% for the quarter. Gross NPA additions had amounted to Rs 13.58bn during 1QFY25. 30-35% of the net slippages for the quarter emerged from the credit cards book. There was increased delinquency in micro-credit due to over-leverage and slowdown in the rural economy.

Balance sheet growth – Advances growth slowed on sequential basis while the dependence on ActivMoney continued on the deposit side: The advances for the bank stood at Rs 3,995bn, up by 2.5% QoQ and 14.7% YoY. Unsecured retail segment grew only by 1% QoQ, largely due to embargo on credit cards and to some extent in personal loans. Micro-credit de-grew by -4% and is expected to de-grow in Q3 also. The deposits were at Rs 4,615bn, up by 3.1% QoQ and 15.1% YoY. Saving deposits are up by 5% QoQ, with the bank citing green shoots in this regard. However, the bank has relaunched ActivMoney in Q2 and it grew by 9% QoQ and 41% YoY.

We maintain a relatively cautious ADD on KMB with an unchanged price target of Rs 2150: We value the standalone bank at 2.2x FY26 P/BV for an FY26/27E RoE profile of 13.4%/13.4%. We assign a value of Rs 727 per share to the subsidiaries. (See Comprehensive con call takeaways on page 2 for significant incremental colour.) Result Highlights (See “Our View” above for elaboration and insight)

* Opex control: Total cost to income ratio was at 47.5% up 122/99bps QoQ/YoY and the Cost to assets was at 3.0% flat QoQ but down -6bps YoY.

* Fee income: Core fee income to average assets was at 1.5%, up/down 2bps/- 4bps QoQ/YoY.

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