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Kotak Mahindra Bank- Review

September 13, 2010

Kotak looks set for ~40% loan growth in the medium term, given its small base and deposit traction. We see its niche franchises keeping NIMs > 5%, with operating leverage the other major earnings driver. Comparisons with the histories of India’s three biggest private sector banks also indicate an inflection point.

The signs are that the worst is probably over for flow businesses. It’s unlikely to be the game-changer, but the positive surprise could act as a near-term catalyst. Kotak’s integrated bank-broking approach, we believe, gives it a competitive edge on customer acquisition over competing standalone brokers.

JP Morgan raised FY12 and FY13 EPS forecasts by 9% and 19%, primarily based on higher loan growth and lower cost assumptions.
They forecast a consolidated ROE of 20% by FY13, even with suboptimal leverage. The parent bank remains the key EPS driver,
with a lower contribution from flow business.

Kotak is in a strong consensus upgrade cycle, which we expect to continue. In that context, a Sep-11 P/E of 16x and a P/BV of 2.6x appear attractive, with a potential ROE of 25%. We retain OW, with a new PT of Rs1000.

You might also want to read at IIFL as recommended by Kotak Securities here.

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