KRChoksey is bearish on Kotak Mahindra Bank and has recommended reduce rating on the stock with a target of Rs 545 in its July 20, 2012 research report.
"Kotak Mahindra Bank reported muted consolidated earnings of Rs 443 crore which grew 6.6% Y-o-Y & down 14.9% Q-o-Q, below than our expectation. Standalone bank, Kotak prime and Kotak Life continued to be key growth drivers to consolidated PAT. Securities broking, investment banking and asset management businesses continued to see weak earnings and core operating performance. Net earnings from Broking, and investment banking management were down 54% & 40% sequentially reflecting challenging operating environment and falling business volumes. Kotak Life insurances net profits went down 30.4% Y-o-Y to Rs32 crs owing to subdued volume growth."
"On standalone basis, NII increased 27.0% y-o-y & 4.9% q-o-q led by strong loan growth of 30.9% y-o-y & 8.3% Q-o-Q and steady NIM. Standalone PAT grew modestly 12.1% y-o-y and down 4.9% q-o-q mainly due to weaker non interest income and higher loan loss provisions. Asset quality has slipped during the quarter as gross NPAs and net NPAs increased sharply 11.5% Q-o-Q & 43.3% Q-o-Q respectively. Provision coverage ratio (excluding write offs) declined from 61.3% in Q4FY12 to 50.3%. Maintain Reduce."
"Financing businesses contribution to consolidated earnings increased 76% in Q4FY12 to 85% in Q1FY13 owing to lower-than-expected earnings capital market linked businesses and weak earnings from Kotak life insurance. Standalone Banks NII grew by 27.0% y-o-y and 4.9% on q-o-q to Rs 721 crore led by strong loan growth and steady NIMs. Non-interest income increased only 5.5% Y-o-Y but down 5.1% Q-o-Q mainly due to sluggish fee income growth and lower distressed asset sale (Rs20 crore vs. Rs65 crore in Q1FY12). Net profits reported Rs282 croregrowing 12.1% y-o-y & down 4.9% q-o-q. Kotak prime (KP) reported PAT of Rs94 crore vs. Rs97 crore in Q4FY12, down 3.1% Q-o-Q. We expect the bank to deliver 26.5% CAGR in net earnings over FY12-FY14 driven by strong loan growth, steady NIMs and stable asset quality and improving productivity levels."
Valuation and Recommendation
"Overall, Kotak Mahindra Bank reported lower-than-expected earnings and weak core operating performance during the quarter. Strong loan growth outlook, resilient net interest margins, aggressive branch expansion strategy, focus on building quality liability franchise, best-in-class risk adjusted returns and better-than-expected recovery in capital market linked businesses are key value drivers for the stock. At Rs 585, the stock is trading at 17.1x core FY14 earnings and 2.9x core FY14 core book, expensive valuation relative to historical valuation band. The stock has outperformed the market by 18.0% in last six months. We remain positive on long term business fundamentals of the bank; however expensive valuation implies limited upside from current levels. Hence we maintain REDUCE rating on the stock with target price of Rs 545," says KRChoksey research report.
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