Top Conviction Ideas : Buy Kotak Mahindra Bank Ltd for Target Rs. 2,500 - Axis Securities Ltd
* MFI Stress Peaks; Credit Costs to Taper Gradually: The stress in the MFI has peaked, and slippages in this segment are expected to gradually taper from H2 onwards. Similarly, the asset quality challenges in the Personal Loans (PL) and Credit Card (CC) segments have stabilised. The bank is witnessing emerging stress in the retail CV segment. Consequently, the bank has tightened its underwriting policies. The management expects the stress in the retail CV segment to subside over the next couple of quarters. With the slippages in the unsecured portfolio having peaked out and the incremental stress formation across most segments (ex-Retail CV) remaining benign, KMB expects credit costs to taper sequentially.
* Growth Momentum to be Healthy; Calibrated Improvement in Unsecured Mix: The management has reiterated its guidance of growing the advances at 1.5-2x of nominal GDP growth. With Asset quality challenges in the unsecured portfolio now behind, the bank will look to resume growth in the PL, CC and MFI segments. While the MFI portfolio contribution to the portfolio will remain capped at 3-4%, KMB believe PL and CC remain key growth drivers. Another focus area for the bank would be the mid-market segment, wherein KMB will look to accelerate growth. We expect KMB to deliver a healthy ~17% CAGR credit growth over FY25-28E.
* NIMs to Bottom-out in Q2; Improved Unsecured Share to Support NIMs: The repo rate cut in Jun’25 is yet to reflect on the yields, and thus margins will continue to remain under pressure in Q2. However, the SA rate action (reduction of ~75 bps) should reflect in Q2, partially supporting NIMs. However, the impact of TD repricing would be visible from H2 onwards. Thus, from Q3 onwards, KMB's margins should find support from the (1) Impact of CRR cut, (2) Improving growth in the unsecured segments and an improving mix in the overall portfolio, and (3) Downward repricing of deposits. We expect FY26 margins to remain lower at ~4.7%, before improving to ~4.9-5% over FY27-28E, driven by aforementioned factors.
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