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Kotak Mahindra Bank (KTKM.BO)
Strong Outperformer, Downgrade to Hold
Strong outperformance, downgrading to Hold — Kotak Mahindra has been
among the strongest outperformers in the Indian financial sector over the last 6
months (+17% relative to Bankex). We believe this leaves relatively lower upside
potential for the stock in case of an easing in overall macro pressures.
Downgrade the stock to Hold (2M) with revised Rs500 target price. We also
change earnings marginally (0% to -4%) over FY12-13E, to factor in lower growth
and margins.
Low risk exposures, should continue outperformance if macro worsens —
Kotak’s relatively low exposure to the more vulnerable infrastructure and power
sectors, higher retail exposure (low asset risks currently) and relatively healthy
growth and return momentum position it well for a slower economic, higher asset
risk environment. We believe Kotak will likely continue to be a relative
outperformer near term (especially if asset quality risks increase) but absolute
upside will likely be limited as valuations are relatively high.
Quant View: Glamour — Kotak Mahindra currently lies in the Glamour quadrant
of our Value-Momentum map with strong momentum but relatively weak value
scores.
Kotak currently lies in the Glamour quadrant of our Value-Momentum map with
strong momentum but relatively weak value scores. The stock has moved from the
Unattractive quadrant to the Glamour quadrant in the past 3 months indicating an
improvement in the momentum scores although valuation still remains expensive.
Compared to its peers in the Insurance & Other Financials sector, Kotak fares worse
on the valuation metric but better on the momentum metric. Similarly, compared to
its peers in its home market of India, Kotak fares worse on the valuation metric but
better on the momentum metric.
From a macro perspective, Kotak has a high beta to the region so is likely to rise (or
fall) faster than the region. It is also likely to benefit from falling commodity (ex-oil)
prices, falling EM yields, weaker US Dollar, and a weaker Yen.
Kotak Mahindra Bank
Company description
KTKM is a private-sector bank in which Mr. Uday Kotak, the major shareholder, and
his associates have a 45% stake. Main businesses of the bank are consumer
lending, retail broking, investment banking, asset management, and rapidly growing
life insurance. Its focus is to develop a niche wealth-management platform.
Investment strategy
We rate KTKM Hold/Medium Risk (2M) with a target price of Rs500. KTKM, in our
view, is a play on the overall financial-services market in India and is backed by a
management team that has a track record of managing market and credit risk well
and of being conservative in its approach. We believe KTKM has transformed itself
into a ‘bank-asset manager-broker’ from a more cyclical ‘broker-bank’. While we
believe this increases the business stability, franchise and earnings sustainability,
though it is still meaningfully linked to capital market performance. While capital
market businesses (broking, asset management, life insurance), remain an integral
part of overall customer strategy, they are currently under pressure from a cyclical,
regulatory and competitive perspective. We believe, there is value and synergy for
the group to be had from these businesses but going forward these will provide the
upside kickers than form the bulk of the value of the stock.
KTKM’s lending businesses have now reached critical scale, have enough capital
for growth, improving deposit mix, a strong return profile and improving asset quality
performance. Kotak’s relatively lower exposure to the perceived vulnerable
segments of infrastructure and power along with its strong asset quality
performance has led to a strong outperformance for the company over recent
months. However, given its relatively higher valuations now, we believe any upside
from here would have to be based on a more positive macro or growth environment,
which its likely to remain under pressure near-term.
Valuation
Our target price of Rs500 is based on our valuation of KTKM's different businesses
via the sum-of-the-parts methodology. This values the banking business at Rs348
per share at 3.0x PBV 1-year forward (Sep'12), the vehicle loan financing business
at Rs76 per share at 2.5x 1-year forward P/BV, the investment banking and broking
business at 10x 1-year forward PE or Rs17, the insurance subsidiary at Rs21 (12x
1-year forward NBAP), and we attribute Rs36 to the AMC business (4% of AUM for
domestic MF, and 6% for Portfolio and alternative assets). Our target multiples are
in line with the best of breed private-sector banks and other financial services
business, however they are not near peak multiples in the historical India scenario,
as we believe the business leverage to capital markets has reduced and the nearterm
challenges will cap growth at well below historical peak growth levels.
Risks
We rate KTKM as Medium Risk, even while our quantitative risk rating system,
which tracks the 260-day share price volatility of the stock, suggests Low Risk. We
believe the Medium Risk rating is justified on account of its relatively smaller
balance sheet, capital market leverage and relatively moderate deposit franchise.
Key downside risks to the stock and business would be: a) Sharp downturn in the
capital markets; b) Significant pressure on asset quality; and c) Sharp increases in
interest rates, which can pressure its relatively wholesale funding mix. Key upside
risks would include: a) Continued strong asset quality performance; b) Improvement
i n its relatively moderate deposit franchise; and c) Macro, capital market turnaround.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Kotak Mahindra Bank (KTKM.BO)
Strong Outperformer, Downgrade to Hold
Strong outperformance, downgrading to Hold — Kotak Mahindra has been
among the strongest outperformers in the Indian financial sector over the last 6
months (+17% relative to Bankex). We believe this leaves relatively lower upside
potential for the stock in case of an easing in overall macro pressures.
Downgrade the stock to Hold (2M) with revised Rs500 target price. We also
change earnings marginally (0% to -4%) over FY12-13E, to factor in lower growth
and margins.
Low risk exposures, should continue outperformance if macro worsens —
Kotak’s relatively low exposure to the more vulnerable infrastructure and power
sectors, higher retail exposure (low asset risks currently) and relatively healthy
growth and return momentum position it well for a slower economic, higher asset
risk environment. We believe Kotak will likely continue to be a relative
outperformer near term (especially if asset quality risks increase) but absolute
upside will likely be limited as valuations are relatively high.
Quant View: Glamour — Kotak Mahindra currently lies in the Glamour quadrant
of our Value-Momentum map with strong momentum but relatively weak value
scores.
Kotak currently lies in the Glamour quadrant of our Value-Momentum map with
strong momentum but relatively weak value scores. The stock has moved from the
Unattractive quadrant to the Glamour quadrant in the past 3 months indicating an
improvement in the momentum scores although valuation still remains expensive.
Compared to its peers in the Insurance & Other Financials sector, Kotak fares worse
on the valuation metric but better on the momentum metric. Similarly, compared to
its peers in its home market of India, Kotak fares worse on the valuation metric but
better on the momentum metric.
From a macro perspective, Kotak has a high beta to the region so is likely to rise (or
fall) faster than the region. It is also likely to benefit from falling commodity (ex-oil)
prices, falling EM yields, weaker US Dollar, and a weaker Yen.
Kotak Mahindra Bank
Company description
KTKM is a private-sector bank in which Mr. Uday Kotak, the major shareholder, and
his associates have a 45% stake. Main businesses of the bank are consumer
lending, retail broking, investment banking, asset management, and rapidly growing
life insurance. Its focus is to develop a niche wealth-management platform.
Investment strategy
We rate KTKM Hold/Medium Risk (2M) with a target price of Rs500. KTKM, in our
view, is a play on the overall financial-services market in India and is backed by a
management team that has a track record of managing market and credit risk well
and of being conservative in its approach. We believe KTKM has transformed itself
into a ‘bank-asset manager-broker’ from a more cyclical ‘broker-bank’. While we
believe this increases the business stability, franchise and earnings sustainability,
though it is still meaningfully linked to capital market performance. While capital
market businesses (broking, asset management, life insurance), remain an integral
part of overall customer strategy, they are currently under pressure from a cyclical,
regulatory and competitive perspective. We believe, there is value and synergy for
the group to be had from these businesses but going forward these will provide the
upside kickers than form the bulk of the value of the stock.
KTKM’s lending businesses have now reached critical scale, have enough capital
for growth, improving deposit mix, a strong return profile and improving asset quality
performance. Kotak’s relatively lower exposure to the perceived vulnerable
segments of infrastructure and power along with its strong asset quality
performance has led to a strong outperformance for the company over recent
months. However, given its relatively higher valuations now, we believe any upside
from here would have to be based on a more positive macro or growth environment,
which its likely to remain under pressure near-term.
Valuation
Our target price of Rs500 is based on our valuation of KTKM's different businesses
via the sum-of-the-parts methodology. This values the banking business at Rs348
per share at 3.0x PBV 1-year forward (Sep'12), the vehicle loan financing business
at Rs76 per share at 2.5x 1-year forward P/BV, the investment banking and broking
business at 10x 1-year forward PE or Rs17, the insurance subsidiary at Rs21 (12x
1-year forward NBAP), and we attribute Rs36 to the AMC business (4% of AUM for
domestic MF, and 6% for Portfolio and alternative assets). Our target multiples are
in line with the best of breed private-sector banks and other financial services
business, however they are not near peak multiples in the historical India scenario,
as we believe the business leverage to capital markets has reduced and the nearterm
challenges will cap growth at well below historical peak growth levels.
Risks
We rate KTKM as Medium Risk, even while our quantitative risk rating system,
which tracks the 260-day share price volatility of the stock, suggests Low Risk. We
believe the Medium Risk rating is justified on account of its relatively smaller
balance sheet, capital market leverage and relatively moderate deposit franchise.
Key downside risks to the stock and business would be: a) Sharp downturn in the
capital markets; b) Significant pressure on asset quality; and c) Sharp increases in
interest rates, which can pressure its relatively wholesale funding mix. Key upside
risks would include: a) Continued strong asset quality performance; b) Improvement
i n its relatively moderate deposit franchise; and c) Macro, capital market turnaround.
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