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Kotak Mahindra Bank Downgraded – Morgan

March 10, 2008

Kotak Mahindra Bank’s heavy exposure to Capital markets for income has led it to a downgrade by Morgan Stanley. Market turnover in India is down 55% from peak levels. Kotak has multiple leverage to markets with both earnings and multiples, which are, dependent on the strength of the equity markets. Even now it is trading at 25x F2009E earnings (which could be revised down further if markets remain weak).

Morgan expects 10% decline in F2009 earnings of Kotak Bank. On a YoY basis, it is still 59% above F2007 levels. [See price Chart above]. Morgan revises Kotak’s earnings and multiples and rates it at UNDERWEIGHT and expects it to be an underperformer.

Kotak is expected to see a fall in FY2009 EPS to Rs 25.0 from Rs 27.1 for FY2008. Morgan Stanley sets a target price of Rs 450 on Kotak Bank.

Just before the sub-prime crisis, Deutsche bank came with a report on the Indian banking sector and had set a Target price of Rs 1,550 on Kotak Bank [Probably, a Bull Case]. However, with markets likely to move sideways to consolidate, Base Case estimates look relevant.

If you are holding to the stock, don’t panic and SELL. Instead add below Rs 500 levels. Fresh exposure can be taken in HDFC Bank rather than Kotak, with a long term view.

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