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Investment Thesis
• Presence across nearly all financial
services businesses in India.
• Management team is among the best
in the business – its execution of
conversion from a NBFC into a bank
has been exemplary.
• Historically traded as a capital market
proxy, but earnings mix has changed
over the past few years.
• Earnings progression in lending
businesses could be under pressure
given weak funding franchise and
sharp rise in funding costs.
• Valuations are full: Trades at 16.5x
F2012e EPS.
Key Value Drivers
• Lending businesses: 1) NIM
progression; 2) Volume growth 3)
Trend in loan loss provisioning
• Securities business: 1) Growth in
market volume; 2) Market share; 3)
Commission rates
• Asset management: 1) Growth trend &
composition of assets under
management; 2) Commission rates
• Insurance: 1) Growth in premiums; 2)
NBAP margins & multiples
Potential Catalysts
• Trend in short rates
• Capital market activity (equity market
turnover, equity issuance trend)
• Market share trends in various
businesses (securities in particular)
Key Risks
• Upside: Lending margins hold up
better than expectations, market share
trends in securities businesses turns
around.
• Downside: Slowdown in
global/domestic economic growth;
NPL formation accelerates again,
margins compress more than
expectations.
Price Target Rs340 Derived from Probability-weighted Sum of the Parts
Bull
Case
Rs480
17.2x Base
Case F013e
EPS
Better than expected macro environment / performance of
businesses: Lending margins remain at current levels as short
rates remain benign and volume growth picks up. Market share
trends (particularly in the broking business) are stronger than
expectations. AUMs in the domestic mutual fund business rise
sharply from current levels.
Base
Case
Rs330
11.9x Base
Case
F2013e EPS
Loan growth slows but remains robust, margin compression
from rising short rates: Volume growth in lending businesses
remains robust, helping offset margin compression. We build in
23% loan growth in Kotak Bank + Kotak Prime in F12/13. Credit
costs remain low. Capital market activity continues to rebound and
Kotak holds market share at current levels. Domestic mutual fund
AUM sees a rebound in coming year.
Bear
Case
Rs225
8.1x Base
Case
F2013e EPS
Disruptive rise in interest rates: Inflation is sustained at higher
level for longer, so there may be a disruptive rise in interest rates,
hence leading to asset quality issues. This will also have a
concurrent impact on volume growth in the lending businesses and
growth trends in capital-market linked businesses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment Thesis
• Presence across nearly all financial
services businesses in India.
• Management team is among the best
in the business – its execution of
conversion from a NBFC into a bank
has been exemplary.
• Historically traded as a capital market
proxy, but earnings mix has changed
over the past few years.
• Earnings progression in lending
businesses could be under pressure
given weak funding franchise and
sharp rise in funding costs.
• Valuations are full: Trades at 16.5x
F2012e EPS.
Key Value Drivers
• Lending businesses: 1) NIM
progression; 2) Volume growth 3)
Trend in loan loss provisioning
• Securities business: 1) Growth in
market volume; 2) Market share; 3)
Commission rates
• Asset management: 1) Growth trend &
composition of assets under
management; 2) Commission rates
• Insurance: 1) Growth in premiums; 2)
NBAP margins & multiples
Potential Catalysts
• Trend in short rates
• Capital market activity (equity market
turnover, equity issuance trend)
• Market share trends in various
businesses (securities in particular)
Key Risks
• Upside: Lending margins hold up
better than expectations, market share
trends in securities businesses turns
around.
• Downside: Slowdown in
global/domestic economic growth;
NPL formation accelerates again,
margins compress more than
expectations.
Price Target Rs340 Derived from Probability-weighted Sum of the Parts
Bull
Case
Rs480
17.2x Base
Case F013e
EPS
Better than expected macro environment / performance of
businesses: Lending margins remain at current levels as short
rates remain benign and volume growth picks up. Market share
trends (particularly in the broking business) are stronger than
expectations. AUMs in the domestic mutual fund business rise
sharply from current levels.
Base
Case
Rs330
11.9x Base
Case
F2013e EPS
Loan growth slows but remains robust, margin compression
from rising short rates: Volume growth in lending businesses
remains robust, helping offset margin compression. We build in
23% loan growth in Kotak Bank + Kotak Prime in F12/13. Credit
costs remain low. Capital market activity continues to rebound and
Kotak holds market share at current levels. Domestic mutual fund
AUM sees a rebound in coming year.
Bear
Case
Rs225
8.1x Base
Case
F2013e EPS
Disruptive rise in interest rates: Inflation is sustained at higher
level for longer, so there may be a disruptive rise in interest rates,
hence leading to asset quality issues. This will also have a
concurrent impact on volume growth in the lending businesses and
growth trends in capital-market linked businesses.
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