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Sell
Kotak Mahindra Bank (KTKM.BO)
Return Potential: (5%) Equity Research
Expensive valuations vs. expected profitability; down to Sell
Source of opportunity
We downgrade Kotak Mahindra Bank (KMB) to Sell on: 1) Expensive valuation
at 2.9X FY12E P/B (standalone) vs. average RoE of 14% (FY12E-FY14E), 2)
Weakening core business fundamentals given incremental margin pressure
due to an increasing corporate loan portfolio as well as difficulty in repricing
retail loans, which account for bulk of the book (68% of total loans); we also
expect CASA deposit growth to be subdued on account of slower branch
expansion, 3) Rising competition among subsidiaries including brokerage, life
insurance, asset management (40% of our SOTP valuations) likely to put
further pressure on the bottomline.
Catalyst
We view KMB’s recent outperformance (+10%/+18% vs. Sensex in past 3/12
months) as overdone and expect the stock to correct from these levels.
From a fundamental perspective, we cut our NII growth estimates by 9%
each for FY12E/FY13E on lower margins of 4.6% and 4.7% (vs. 5% and
5.3% prior), respectively. We expect this decline to be driven in part by the
incremental skew in KMB’s loan book towards corporate clients (36%/38%
in FY12E/13E vs. 32% in FY11) and in part due to slower growth of CASA
deposits as branch expansions continue to lag other private banks such as
IndusInd (INBK.BO; CL-Buy) and Yes (YESB.BO; Buy).
Valuation
We fine-tune our FY12E-FY14E EPS by up to 6% to factor in higher fee income
offset by lower NII and higher provisions post 1QFY12. We raise our 12-m
SOTP-based TP to Rs460 (from Rs455), implying 5% potential downside, as
we roll forward our target BVPS to June-2012. KMB is currently trading at
2.9X FY12E P/B (standalone), at +1SD premium to its historical average.
Key risks
Key risks include faster expansion in branches leading to higher CASA;
turnaround in insurance, brokerage businesses.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sell
Kotak Mahindra Bank (KTKM.BO)
Return Potential: (5%) Equity Research
Expensive valuations vs. expected profitability; down to Sell
Source of opportunity
We downgrade Kotak Mahindra Bank (KMB) to Sell on: 1) Expensive valuation
at 2.9X FY12E P/B (standalone) vs. average RoE of 14% (FY12E-FY14E), 2)
Weakening core business fundamentals given incremental margin pressure
due to an increasing corporate loan portfolio as well as difficulty in repricing
retail loans, which account for bulk of the book (68% of total loans); we also
expect CASA deposit growth to be subdued on account of slower branch
expansion, 3) Rising competition among subsidiaries including brokerage, life
insurance, asset management (40% of our SOTP valuations) likely to put
further pressure on the bottomline.
Catalyst
We view KMB’s recent outperformance (+10%/+18% vs. Sensex in past 3/12
months) as overdone and expect the stock to correct from these levels.
From a fundamental perspective, we cut our NII growth estimates by 9%
each for FY12E/FY13E on lower margins of 4.6% and 4.7% (vs. 5% and
5.3% prior), respectively. We expect this decline to be driven in part by the
incremental skew in KMB’s loan book towards corporate clients (36%/38%
in FY12E/13E vs. 32% in FY11) and in part due to slower growth of CASA
deposits as branch expansions continue to lag other private banks such as
IndusInd (INBK.BO; CL-Buy) and Yes (YESB.BO; Buy).
Valuation
We fine-tune our FY12E-FY14E EPS by up to 6% to factor in higher fee income
offset by lower NII and higher provisions post 1QFY12. We raise our 12-m
SOTP-based TP to Rs460 (from Rs455), implying 5% potential downside, as
we roll forward our target BVPS to June-2012. KMB is currently trading at
2.9X FY12E P/B (standalone), at +1SD premium to its historical average.
Key risks
Key risks include faster expansion in branches leading to higher CASA;
turnaround in insurance, brokerage businesses.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell List
Coverage View: Neutral
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