Kotak Mahindra Bank Ltd

Page 1 Kotak Mahindra Bank Ltd. COMPANY UPDATE 30th August, 2018 th India Equity Institutional Research II Company Update II 30 August, 2018 Page 2 Kotak Mahindra Bank Ltd DECODING KOTAK CMP Target Potential Upside Market Cap (INR Mn) Recommendation Sector INR 1276 INR 1544 21% 2,454,818 BUY BFSI OVERVIEW – “concentrated India, diversified financial services” – Annual Report FY18 The Indian financial services space was always inhabited by a few visionary groups for whom demonetisation was a boon and the event only accelerated their agenda of financialization. One such visionary group is Kotak which offers financial products across the board – credit, deposits, wealth management, broking, life insurance, general insurance, investment banking, asset management, auto loans. With such a vast array of products in its kitty, the opportunity to cross-sell across the group is large. For example, 50% volume for life and general insurance comes from Kotak’s own distribution network. In this note, Decoding Kotak, we have tried to dissect each of the main subsidiaries that we believe will continue to grow larger and will be instrumental in driving synergy benefits and cross-sell opportunities as well as improving profitability level at the group level. While 811 continues to be the bank’s strategy to acquire customers, our recent interaction with the bank makes us believe strategies at each of the subsidiaries too are at play in full-force. We also believe that each business has (a) certain trigger(s) that will unfold gradually over time. As a group, Kotak has enough management bandwidth and a highly qualified and skilled bench to execute its evolution and ride the Indian financialization wave. Based on our SoTP, KMBL trades at 3.7x its FY20E consolidated book value. Given the opportunity and KMBL’s quality and pedigree, we believe it will be a steady compounder. MARKET DATA KEY FINANCIALS Shares outs (Mn) 1906 Particulars (INR Bn) FY15 FY16 FY17 FY18 FY19E FY20E EquityCap (INR Mn) 9533 NII 97.2 163.8 177.0 197.5 255.5 320.8 Mkt Cap (INR Mn) 2454818 PPOP 30.0 40.4 59.8 71.6 96.3 120.5 52 Wk H/L (INR) 1424/962 PAT 18.7 20.9 34.1 40.8 55.8 70.0 Volume Avg (3m K) 2135.1 EPS (INR) 24.2 11.4 18.5 21.4 29.3 36.7 Face Value (INR) 5 BVPS (INR) 183.1 130.6 150.0 196.7 224.8 260.1 Bloomberg Code KMB IN ABVPS (INR) 175.2 123.7 140.7 187.9 215.2 249.5 P/BV (x) (consol.) 4.6 3.7 4.2 4.7 4.2 3.7 SHARE PRICE PERFORMANCE Source: Company, KRChoksey Research 100% ownership in key subs makes Kotak amongst the best positioned ones to play the financialization 250 theme KMBL’s 100% ownership in key subs like Prime, life/general insurance, securities/broking, Kotak Capital, AMC renders it a top contender for playing the Indian financialization theme. These subs have 190 been as much instrumental in delivering shareholder returns as the standalone banking entity. Over the last 10 years (FY08-18), standalone PAT has grown at CAGR of 30% while consolidated PAT has grown at 20% CAGR. Over the same period, KMBL’s MCAP has grown at 25% CAGR. On consolidated basis, subs 130 contribute 34% at the PAT level and 26% in terms of book/net worth. Unfolding of structural changes in the economy over the last couple of years has accelerated formalization of the economy. A by-product of this has been mobilization of savings towards more modern and sophisticated avenues. Given the 70 macro tailwinds, coupled with array of product offering and brand equity of Kotak, we believe KMBL 17 17 15 16 18 18 16 can be a steady compounder. While KMBL maybe perceived as expensive based on its trailing P/BV of - - - - - - - 4.6x (+13% premium to last 5 years’ avg P/BV), we are of the view that quality commands premium. Feb Feb Feb Aug Aug Aug Aug Based on our estimates for the parent and each of the subs, KMBL is currently trading at 3.7x its FY20E consolidated book value. Our SoTP valuation and target price imply a multiple of 4.5x FY20E consol. BV Kotak Mahindra Bank Ltd Sensex (+22% upside, BUY). Subs contribute 19% to our value estimate while the parent/bank accounts for the remaining 81%. Going forward, given that some of the subs (life insurance, AMC) are yet to attain scale and derive operating leverage, we believe proportion of value contribution by subs is likely to increase MARKET INFO as the financialization theme emerges. We have refrained from commenting on the issue of reduction of promoter stake in the bank due to lack of SENSEX 38723 clarity on the subject. Issuance of preference share (PNCPS) would have diluted promoter stake but not NIFTY 11692 voting rights. Soon after, RBI rejected the proposal. We believe this to be a overhang on stock performance until clarity emerges. SHARE HOLDING PATTERN (%) Particulars Jun 18 Mar 18 Dec 17 Promoters 30.03 30.04 30.06 FIIs 39.93 39.56 39.41 25% 26% DIIs 8.77 8.98 8.96 Others 21.27 21.43 21.58 Total 100 100 100 Advances CAGR FY19-20E NII CAGR FY19-20E ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS<GO> www.krchoksey.com Anushka Chhajed, [email protected], +91-22-6696 5620 Thomson Reuters, Factset and Capital IQ th India Equity Institutional Research II Company Update II 30 August, 2018 Page 3 Kotak Mahindra Bank Ltd Our estimates suggest the bank is currently trading at 3.7x FY20E consol. BV and our SoTP valuation implies a 4.5x P/BV. The bank is currently trading 4.6x its trailing book BV which is 13% higher than the average over the last 5 years. We are estimating a consolidated PAT CAGR of 23% over FY19/20E and BV CAGR of 14%. We maintain BUY (TP = INR 1,544). Kotak Mahindra Bank Ltd. - SoTP valuation Intrinsic value per Entity Valuation methodology Holding share (INR) FY20E KMBL - Standalone banking business / Parent 5x FY20E ABV 100% 1,247 Kotak Prime 2x FY20E BV 100% 65 Kotak Life Insurance 3x FY20E GWP 100% 165 Kotak Securities 15x FY20E EPS 100% 64 Kotak Capital 15x FY20E EPS 100% 7 Kotak AMC 5% FY20E AAUM 100% 59 Others 10 Holding co. discount (%) 20% Value of subs (INR per share) 297 Value of total (INR per share) 1,544 CMP (INR) 1,276 Upside (%) 21% Parent's contribution to total value per share (%) 81% Contribution by subsidiaries (%) 19% Consolidated net worth (INR Bn) Holding FY20E KMBL - Standalone banking business / Parent 100% 496 Kotak Prime 100% 62 Kotak Life Insurance 100% 31 Kotak Securities 100% 50 Kotak AMC 100% 5 Kotak Capital 100% 7 Total consolidated net worth* 651 Estimated value of the group (as per SoTP) 2,944 Implied trailing P/B (x) (based on TP and consol. NW) 4.5 Implied forward P/B (x) (based on CMP and consol. NW) 3.7 Consolidated PAT (INR Bn) Holding FY20E KMBL - Standalone banking business / Parent 100% 70.0 Kotak Prime 100% 7.6 Kotak Life Insurance 100% 5.4 Kotak Securities 100% 8.1 Kotak AMC 100% 1.5 Kotak Capital 100% 1.0 Total consolidated PAT* 93.5 *only considers the main subs Source: Company, KRChoksey Research ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS<GO> www.krchoksey.com Anushka Chhajed, [email protected], +91-22-6696 5620 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Company Update II 30th August, 2018 Page 4 Kotak Mahindra Bank Ltd SoTP valuation methodology reasoning Valuation Entity Comments methodology -One of the largest retail-focused banks; -Negligibleexposure to stressed corporate; KMBL - Standalone bank / Parent 5x FY20E ABV -Superior quality of credit underwriting translatinginto low NPAs; -Strong brand equity + new-age bank + in-sync with latest tech; -Valuation multiple in-line with comparablepeers. -Mainly into PV/auto finance (CV finance goes through the bank); -PV finance is an ever-competing industry; -Foray into 2W finance should be NIM accretive; Kotak Prime 2x FY20E BV -ROE has been declining mainly on account of dropping yields; -Valuation multiple is after considering lack of pricing power and competitive edge amidst increasing competitive intensity. -Focusing on protection; -Consciously restricting growth in ULIPs due to lower profitability; -Favorable and profitable distribution mix - majority through banca and direct channel; Kotak Life Insurance 3x FY20E GWP -Thought out strategy driving VNB margin higher (at 29.3%, > HDFC Life); - Exhibiting strong growth momentum; -Valuation multiple (P/GWP) higher than ICICI Pru, SBI Life, lower than HDFC Life despite strongest VNB margins and low base offering ample growth/scaleopportunity. Kotak Securities 15x FY20E EPS - In-line with the industry comparables. -AUM mix is changing in favor of more profitable segment, ie, equity; -Improved MF ranking on back of improved fund returns; Kotak AMC 5% FY20E AAUM -Valuation multiple is on the lower end of the peer valuations' spectrum. Kotak Capital 15x FY20E EPS Source: Company, KRChoksey Research ANALYST KRChoksey Research +91-22-6696 5555 / +91-22-6691 9576 Raghav Garg, [email protected], +91-22-6696 5584 is also available on Bloomberg KRCS<GO> www.krchoksey.com Anushka Chhajed, [email protected], +91-22-6696 5620 Thomson Reuters, Factset and Capital IQ India Equity Institutional Research II Company Update II 30th August, 2018 Page 5 Kotak Mahindra Bank Ltd Kotak Mahinda Bank Ltd (banking entity) – 811 an acquisition tool, ‘one-stop shop’ will ensure stickiness Led by its 811 strategy (launched on 29th March 2017), the bank is aiming to accelerate its customer acquisition.

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