Kotak Mahindra Bank Ltd - KR Choksey Research Report

Kotak Mahindra Bank Ltd
Initiating Coverage
Key Data
CMP Rs 598
Date March 17th 2008
Sector Banking
Face Value Rs.10
BSE Code 500247
52 Week H/L Rs 1435.5/ 425
Market Cap Rs 20592 Cr

Investment Rationale

The Kotak Mahindra Group’s flagship company, Kotak Mahindra Finance Ltd, which was established in 1985, was converted into a bank- Kotak Mahindra Bank Ltd in March 2003 becoming the first Indian company to convert into a Bank. Kotak Mahindra is one of India’s leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the diverse financial needs of individuals and corporates.The group has a net worth of over Rs. 5,609 crore, employs around 17,100 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 344 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore.
The Group services around 3.6 million customer accounts. Results of the bank were ahead of market estimates, net profit of the bank showed whopping growth of 124 percent to Rs101.67 crore during the quarter. For the first nine months of the current fiscal, net profit of the bank grew by 115.9 percent to Rs224.7 crore. Kotak Mahindra Banks (standalone) profit grew 124percent in 3QFY08 on the back of a 54percent growth in advances. Deposits were up 47 percent YoY to Rs 14500crore and CASA ratio improved to 24percent from 18percent a year ago. Other income grew 114perent YoY helped by treasury profits, fees and recoveries from distressed assets. Gross NPA’s declined from 3.18percent in Q3FY07 to 2.88percent in Q3FY08 and Net NPA’s from 2.47percent to 1.68percent for the same period. Capital adequacy ratio of the Bank as on December 31, 2007 was 18.4percent (11.6percent as on December 31, 2006), Tier I Capital was 14.2percent. We initiate coverage on Kotak Mahindra Bank with a strong buy recommendation.

Key Developments
Funding Credit Growth through CASA

In order to keep their borrowing costs under control, banks have always focused on garnering CASA deposits. Excessive mismatch between growth in credit and growth in CASA deposits drove banks to other high-cost alternatives, such as term deposits. Kotak Mahindra Bank is continuously increasing its CASA ratio to avoid the mismatch. The CASA ratio has increased from 19 in FY06 to 22 in FY07 and it was 24 in Q3FY07

Financial Performance:
Net profit of the bank showed whopping growth of 124 percent in Q3FY08

Kotak Mahindra Bank (KMB) together with its subsidiaries has a presence across financial services – lending, broking, investment banking, life insurance, asset management, and proprietary investments. For the first time, the bank’s(standalone) profitability crossed INR 1 bn mark up 124percent,buoyed by strong core lending operations. For the first nine months of the current fiscal, net profit of the bank grew by 115.9 percent to Rs224.7crore. Main drivers of the growth were improvement in margins, strong loan book growth, robust performance of Kotak Securities on account of buoyant capital markets, continued traction in asset management and a stronger than industry growth by Kotak Life.

Valuations

At the CMP of Rs 598, the bank is trading at 76x TTM Dec 07 earnings and 7.1x TTM Dec 07 book value. We initiate coverage on Kotak Bank with STRONG BUY recommendation.

Source : myinvestmentbuddy.com