Kotak Mahindra Bank Ltd

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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

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

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

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

Large branch network and diverse offerings have enabled Pessimistic view on business banking; composition higher-than-industry average growth; expect momentum to otherwise stable.. continue.. 3,000 30% 100% 90% 12.6% 12.2% 12.8% 12.8% 13.7% 14.4% 14.8% 14.8% 2,500 25% 24% 25% 25% 25% 23% 80% 19.4% 19.4% 19.2% 19.3% 19.3% 19.5% 19.1% 19.2% 2,000 21% 20% 70% 18% 60% 13.8% 12.9% 13.1% 12.3% 11.9% 11.3% 10.8% 10.2% 1,500 15% 15% 50% 13.7% 12.8% 13.9% 13.0% 12.9% 12.9% 13.5% 12.0% 13% 12% 40% 7.3% 7.5% 8.0% 8.0% 8.0% 8.3% 9.0% 9.1% 1,000 10% 30% 20% 500 5% 30.7% 32.9% 30.6% 32.3% 32.1% 31.4% 30.7% 32.6%

10%

1,260 1,526 2,640

1,293

1,424

2,117

1,361 1,591 1,697 1,769 0 0% 0% Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Corp. banking CV/CE Agri Advances (INR Bn) Growth (%) (yoy) Business banking HL/LAP Small biz., PL, CC Others

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Healthy CAR enables chaaing growth opportunities. RWA 811 has been instrumental in driving liabilities business.. density stands favorable at 80%. 3,500 60% 25% 53% 3,000 51% 50% 52% 50% 19.2% 48% 20% 18.4% 18.2% 18.3% 47% 17.1% 44% 44% 16.8% 16.3% 2,500 42% 15.8% 16.0% 15.4% 39% 40% 2,000 15% 30% 1,500 10% 20% 1,000 5%

500 10%

1,635 1,808

3,010

1,657 1,897

2,408

1,926

1,494 1,574 1,410 0 0% 0%

Deposits (INR Bn) Growth (%) (yoy) CASA (%) CAR (%) Source: Company, KRChoksey Research Source: Company, KRChoksey Research We expect NIMs to stay stable on back of increasing share Prudent underwriting has resulted in superior asset quality.. of high yielding portfolio.. 3.0% 70% 5% 2.6% 2.6% 2.5% 2.4% 2.5% 4.0% 4.0% 2.5% 2.3% 60% 3.8% 3.9% 3.8% 3.8% 3.8% 3.9% 2.2% 2.2% 4% 3.7% 2.0% 50% 3.3% 2.0% 1.8% 3% 40% 1.5% 1.3% 1.3% 1.2% 1.3% 1.9% 1.9% 1.1% 1.1% 30% 1.8% 1.9% 1.7% 1.7% 1.8% 1.0% 2% 1.7% 1.7% 1.5% 1.0% 0.9% 0.9% 0.8% 20% 1% 0.5% 10%

0.0% 0% 0%

GNPA (%) NNPA (%) PCR (%) Risk-adjusted NIMs (%) RoA (%) Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Kotak Mahindra Bank (standalone) (INR Mn) Income Statement FY2015 FY2016 FY2017 FY2018 FY2019E FY2020E Interest income 97,199 1,63,842 1,76,989 1,97,486 2,55,512 3,20,820 Interest expense 54,961 94,838 95,728 1,02,168 1,35,665 1,70,201 Net interest income 42,237 69,004 81,261 95,318 1,19,847 1,50,620 Non interest income 20,285 26,122 34,772 40,521 50,029 61,392 Total income 62,522 95,126 1,16,033 1,35,840 1,69,876 2,12,012 Operating expenses 32,547 54,715 56,185 64,256 73,552 91,488 Employee costs 95,069 1,49,841 1,72,218 2,00,096 2,43,429 3,03,500 Other operating expenses 17,880 26,546 28,500 34,754 42,015 49,893 Pre-provision profit 29,975 40,411 59,848 71,583 96,324 1,20,524 Provisions 1,645 9,174 8,367 9,399 11,298 13,983 Profit before tax 28,330 31,237 51,481 62,184 85,026 1,06,542 Tax expense 9,670 10,339 17,366 21,339 29,178 36,561 Net profit 18,660 20,898 34,115 40,845 55,849 69,981

Source: Company, KRChoksey Research

Balance sheet SOURCES OF FUNDS

Shareholders' funds 1,41,411 2,39,591 2,76,161 3,74,816 4,28,478 4,95,716 Borrowings 1,21,497 2,09,753 2,10,955 2,51,542 2,99,937 3,57,643 Deposits 7,48,603 13,86,430 15,74,259 19,26,430 24,08,038 30,10,048 Other liabilities & provisions 48,580 86,790 84,507 96,521 1,00,026 1,22,760 TOTAL LIABILITIES & EQUITY 10,60,121 19,22,598 21,45,900 26,49,332 32,36,479 39,86,167 USES OF FUNDS

Cash and cash equivalent 62,624 1,08,797 2,25,720 1,96,201 2,31,758 2,89,698 Investments 3,04,211 5,12,602 4,50,742 6,45,623 7,70,572 9,33,115 Advances 6,61,607 11,86,653 13,60,821 16,97,179 21,16,675 26,39,859 Fixed & other assets 31,679 1,14,546 1,08,616 1,10,329 1,17,473 1,23,495 TOTAL ASSETS 10,60,121 19,22,598 21,45,900 26,49,332 32,36,479 39,86,167

Source: Company, KRChoksey Research

Key ratios FY2015 FY2016 FY2017 FY2018 FY2019E FY2020E Growth rates Advances (%) 24.8% 79.4% 14.7% 24.7% 24.7% 24.7% Deposits (%) 26.7% 85.2% 13.5% 22.4% 25.0% 25.0% Total assets (%) 21.0% 81.4% 11.6% 23.5% 22.2% 23.2% NII (%) 13.5% 63.4% 17.8% 17.3% 25.7% 25.7% PPOP (%) 16.3% 34.8% 48.1% 19.6% 34.6% 25.1% PAT (%) 24.2% 12.0% 63.2% 19.7% 36.7% 25.3% Balance sheet ratios Credit/Deposit (%) 88.4% 85.6% 86.4% 88.1% 87.9% 87.7% CASA (%) 36.4% 38.1% 44.0% 50.8% 51.7% 53.1% Advances/Total assets (%) 62.4% 61.7% 63.4% 64.1% 65.4% 66.2% Leverage (x) 7.3 7.8 7.9 7.4 7.3 7.8 CAR (%) 17.2% 16.3% 16.8% 18.2% 16.3% 15.4% Operating efficiency Cost/income (%) 52.1% 57.5% 48.4% 47.3% 43.3% 43.2% Opex/total assets (%) 3.1% 2.8% 2.6% 2.4% 2.3% 2.3% Opex/total interest earning assets (%) 3.5% 3.9% 2.9% 2.8% 2.6% 2.6% Profitability NIM (%) 4.5% 4.9% 4.2% 4.2% 4.2% 4.3% RoA (%) 1.9% 1.4% 1.7% 1.7% 1.9% 1.9% RoE (%) 14.1% 11.0% 13.2% 12.5% 13.9% 15.1% Asset quality Gross NPA (%) 1.9% 2.4% 2.6% 2.2% 2.0% 1.8% Net NPA (%) 0.9% 1.1% 1.3% 1.0% 0.9% 0.8% PCR (%) 50.8% 55.5% 52.0% 56.5% 58.0% 58.0% Net slippage (%) 0.3% 2.4% 0.6% 0.2% 0.3% 0.2% Credit cost (%) 0.3% 0.8% 0.5% 0.4% 0.4% 0.4% Per share data EPS (INR) 24.2 11.4 18.5 21.4 29.3 36.7 BV (INR) 183.1 130.6 150.0 196.7 224.8 260.1 ABV (INR) 175.2 123.7 140.7 187.9 215.2 249.5

Source: Company, KRChoksey Research

ROA Tree FY2015 FY2016 FY2017 FY2018 FY2019E FY2020E Interest income 10.0% 11.0% 8.7% 8.2% 8.7% 8.9% NII 4.4% 4.6% 4.0% 4.0% 4.1% 4.2% Operating income 6.5% 6.4% 5.7% 5.7% 5.8% 5.9% Opex 3.4% 3.7% 2.8% 2.7% 2.5% 2.5% PPOP 3.1% 2.7% 2.9% 3.0% 3.3% 3.3% Provisions 0.2% 0.6% 0.4% 0.4% 0.4% 0.4% PBT 2.9% 2.1% 2.5% 2.6% 2.9% 3.0% PAT 1.9% 1.4% 1.7% 1.7% 1.9% 1.9% Leverage (x) 7.3 7.8 7.9 7.4 7.3 7.8 RoE (%) 14.1% 11.0% 13.2% 12.5% 13.9% 15.1%

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 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 10 Kotak Mahindra Bank Ltd Kotak Mahindra Prime Ltd (car finance) Kotak Mahindra Prime (KMPL) is the car financing arm of KMBL, focusing on PVs and MUVs (KMBL does CVs). Besides offering auto loans to individuals, the company also provides complete finance solutions to car dealers for their working capital loans and infrastructure requirements in form of inventory funding and terms loans. Of the total business, 84% is auto finance largely dominated by PVs. The total loan book stands at INR 281 bn, having grown at a CAGR of 14.1% over the last 7 years. In terms of focus segments, the company does 3 categories of cars – 1) lower end (Maruti, Hyundai), 2) upper middle segment (Honda, Toyota, Volkswagen) and 3) top end. Of the three, focus is primarily on the upper middle segment where the company enjoys a large market share. The company attributes its strong market share to long-standing relationships at the dealership level. Having been around for 30 years and given that dealers seek longevity of financing partners, it remains a preferred choice amongst large number of dealerships. Over FY19-21E, we are factoring in advances CAGR of 15%. From our interaction, we could infer that KMPL would rather compromise on growth than on quality and risk. For instance, despite a large number of incumbents offering tenors of up to 7 years, 90% of KMPL’s book is within the 3-year maturity bucket. Another factor that restricts KMPL from disbursing longer-tenor loans is that the customer segment is largely self-employed. In case of salaried customers, banks may go up for higher tenors since the cash flow certainty is higher. We are of the view that in today’s age of rapidly changing technology, design and consumer preferences, longer tenor loans are a risky bet. Given the group’s philosophy, KMPL has been able to maintain good asset quality with GNPAs/NNPAs at 0.86%/0.37% (FY18). Despite 90% of the book being in the 3-year maturity bucket, we believe the PCR at 57% is at comfortable levels. Going forward, KMPL plans to enter 2W financing. Although competitive, the segment could fetch higher yields. Given the competitive nature of the auto finance sector (including 2W finance), we do not expect any substantial improvement in profitability. On back of declining NIMs, we expect ROE to remain around 13%.

14.1% CAGR over FY11-18; expecting 15% over FY19/20 Dealership funding has been stable at 17-18%.. 400 371.8 30% 60 18% 27.3% 323.3 48.8 25% 44.9 281.1 300 39.0 17.8% 20.2% 242.9 20% 40 216.0 34.4 191.5 200 170.6174.1 15.8% 15% 15.0%15.0% 17.5% 134.0 12.8%12.4% 111.4 17.4% 10.0% 10% 20 17.3% 100 5% 2.1% 1.7 2.0 2.2 2.4 0 0% 0 17% FY15 FY16 FY17 FY18 Top 20 exposure (INR Bn) Avg ticket size (INR Bn) Advances (INR Bn) Growth (%) % of total advances

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Given Kotak's underwriting philosophy and customer focus, maturity profile should stay favorable.

Advances composition, by maturity (%) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 upto 30/31 days 16% 13% 15% 13% 12% 12% 11% 10% 1 - 2 months 4% 7% 8% 6% 6% 7% 5% 5% 2 - 3 months 5% 6% 4% 6% 7% 4% 7% 6% 3 - 6 months 15% 14% 13% 13% 12% 11% 15% 14% 6 months - 1 year 19% 20% 19% 19% 18% 18% 15% 18% 1 - 3 years 34% 33% 34% 36% 37% 38% 38% 37% 3 - 5 years 7% 6% 6% 7% 8% 8% 7% 10% 5 years and over 1% 0% 0% 0% 0% 2% 3% 1%

Source: Company, KRChoksey Research

Opex/avg total assets (%) - Expect cost ratios to Competitive pressures will limit NIM expansion.. remain stable.. 14.0% 1.8% 12.0% 1.7% 10.0% 1.7% 1.6% 1.7% 8.0% 1.6% 1.6% 6.0% 1.5% 1.5% 1.5% 4.0% 1.5% 1.5% 1.5% 1.5% 1.5% 4.4% 3.9% 4.4% 4.3% 1.4% 2.0% 3.6% 3.8% 3.5% 3.5% 3.5% 3.5% 3.4% 0.0% 1.3%

Yield on advances (%) Cost of funds (%) NIM (%)

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Stable asset quality despite SE focus; given the maturity Competitive pressures will limit improvement in profile, PCR seems adequate.. profitability.. 1.0% 80% 25% 22% 10 21% 20% 0.8% 20% 18% 8 60% 16% 14% 0.6% 15% 13% 13% 13% 13% 13% 6 40% 0.4% 10% 7.8 7.9 8.0 4 6.8 6.2 6.2 6.4 6.3 6.3 6.4 6.5 20% 0.2% 5% 2.7% 2.8% 2.5% 2.6% 2.5% 2.3% 2.0% 2.1% 2.0%2.0%2.0% 2

0.0% 0% 0% 0

PCR (%) GNPA (%) NNPA (%) Leverage (x) RoA (%) RoE (%)

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Kotak Mahindra Prime Limited (non-deposit taking AFC-NBFC) (INR Mn) INCOME STATEMENT FY15 FY16 FY17 FY18 FY19E FY20E FY21E Interest income 23,961.1 24,822.4 26,189.9 28,600.3 31,995.0 36,446.6 41,513.9 Interest expense 15,189.7 15,842.6 16,805.0 18,240.7 20,079.9 22,807.7 26,228.9 Net interest income 8,771.3 8,979.8 9,384.9 10,359.6 11,915.1 13,638.9 15,285.0 Non-interest income 2,443.3 2,793.3 3,031.6 3,345.9 3,740.8 4,292.9 4,927.7 Total income 11,214.6 11,773.0 12,416.5 13,705.5 15,655.8 17,931.8 20,212.8 Opex 3,259.3 3,636.9 3,942.2 4,308.6 4,879.2 5,599.4 6,427.5 PPOP 7,955.3 8,136.1 8,474.3 9,396.9 10,776.6 12,332.4 13,785.3 Provisions 215.8 409.7 596.3 378.1 604.5 695.1 799.4 PBT 7,739.5 7,726.4 7,878.0 9,018.8 10,172.1 11,637.2 12,985.9 Tax 2,665.9 2,703.3 2,730.4 3,122.6 3,521.9 4,029.2 4,496.1 PAT 5,073.6 5,023.1 5,147.6 5,896.2 6,650.2 7,608.1 8,489.8

Source: Company, KRChoksey Research

BALANCE SHEET FY15 FY16 FY17 FY18 FY19E FY20E FY21E EQUITY AND LIABILITIES Shareholders' funds Share capital 45.0 45.0 35.0 35.0 35.0 35.0 35.0 Reserves & surplus 33,462.2 38,481.6 42,235.7 48,129.4 54,779.6 62,387.6 70,877.4 Total shareholders' funds 33,507.2 38,526.6 42,270.6 48,164.3 54,814.5 62,422.6 70,912.4 Borrowings 1,20,442.4 1,58,227.2 1,57,246.0 1,69,136.5 1,89,432.9 2,17,847.9 2,50,525.1 Other liabilities & provisions 53,193.2 42,505.7 72,095.1 85,646.5 1,03,370.9 1,18,700.7 1,36,588.8 TOTAL 2,07,142.8 2,39,259.5 2,71,611.7 3,02,947.4 3,47,618.3 3,98,971.2 4,58,026.2 ASSETS Fixed assets 275.0 289.3 287.7 300.7 306.8 312.9 319.1 Cash & cash equivalent 2,998.6 7,508.7 10,472.7 9,463.1 10,882.5 12,514.9 14,392.1 Advances 1,91,476.4 2,15,992.3 2,42,879.0 2,81,145.6 3,23,317.5 3,71,815.1 4,27,587.3 Investments 9,236.0 11,582.5 12,853.3 7,053.6 8,111.6 9,328.3 10,727.6 Other assets 3,156.8 3,886.7 5,118.9 4,984.4 5,000.0 5,000.0 5,000.0 TOTAL 2,07,142.8 2,39,259.5 2,71,611.7 3,02,947.4 3,47,618.3 3,98,971.2 4,58,026.2

Source: Company, KRChoksey Research

Key performance indicators FY15 FY16 FY17 FY18 FY19E FY20E FY21E Advances growth (%) 10.0% 12.8% 12.4% 15.8% 15.0% 15.0% 15.0% Borrowings growth (%) -22.9% 31.4% -0.6% 7.6% 12.0% 15.0% 15.0% Fixed assets growth (%) -1.9% 5.2% -0.5% 4.5% 2.0% 2.0% 2.0% Advances/total assets (%) 92.4% 90.3% 89.4% 92.8% 93.0% 93.2% 93.4% Spread analysis Yield on advances (%) 12.5% 11.7% 11.1% 10.6% 10.4% 10.3% 10.2% Yield on funds (%) 12.2% 11.3% 10.4% 10.1% 10.0% 9.9% 9.8% Cost of funds (%) 11.0% 11.4% 10.7% 11.2% 11.2% 11.2% 11.2% NIM (%) 4.3% 3.8% 3.5% 3.5% 3.5% 3.5% 3.4% Cost structure/operational efficiency Opex/NII (%) 37.2% 40.5% 42.0% 41.6% 41.0% 41.1% 42.1% Opex/total income (%) 29.1% 30.9% 31.8% 31.4% 31.2% 31.2% 31.8% Opex/avg total assets (%) 1.6% 1.6% 1.5% 1.5% 1.5% 1.5% 1.5% Asset quality GNPA (%) 0.77% 0.81% 0.89% 0.86% 0.86% 0.86% 0.80% NNPA (%) 0.44% 0.41% 0.38% 0.37% 0.37% 0.37% 0.35% PCR (%) 43.0% 49.3% 57.8% 57.4% 57.4% 57.4% 56.3% Credit costs (bps) 12 bps 20 bps 26 bps 14 bps 20 bps 20 bps 20 bps Capital Tier I capital (%) 15.3% 15.6% 15.6% 16.1% 15.8% 15.6% 15.5% Tier II capital (%) 3.0% 2.6% 1.7% 1.6% 1.4% 1.4% 1.2% CAR 18.4% 18.2% 17.2% 17.7% 17.2% 17.0% 16.7% Leverage (x) 6.2 6.2 6.4 6.3 6.3 6.4 6.5 RWA/total assets (%) 106% 103% 100% 99% 100% 100% 100% Profitability RoA (%) 2.5% 2.3% 2.0% 2.1% 2.0% 2.0% 2.0% RoE (%) 15.7% 14.0% 12.9% 12.9% 13.0% 13.0% 12.8%

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 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 14 Kotak Mahindra Bank Ltd Kotak Mahindra Life Insurance Company Ltd Kotak Mahindra Life Insurance Co. (KMLife) is the fifth largest among the private insurance industry on individual APE basis. For FY18, the company reported NBP of INR 34 bn, having grown at 15% over FY11-18.While FY11-14 period was muted, rather negative in terms of growth, KMLife has registered robust growth numbers over FY15-18. While part of the growth can be attributed to the macro tailwinds on account of demonetization, etc. which accelerated the pace of financialization, increasing focus on individual business, persistency and renewals is another factor. Since FY14, share of individual business in NBP terms has increased ~700 bps to 58% while that of group business has declined to 42%. The company has witnessed robust traction in renewals too which have grown at 22% CAGR over FY14-18. This, along with consistent focus on persistency, has yielded improved margins and overall profitability. For FY18, KMLife reported VNB margins of 29.3% (>HDFC Life @ 23.2%) driven by, amongst other factors, capping of ULIP exposure. Also, staying true to the business of underwriting risk, the company is focused on building the protection business which as of FY18 stood at 7% of the overall. In terms of opex, we believe the small scale offers opportunity to improve business process efficiencies. For this, the company is already investing in training Life Advisors and the sales hierarchy has been stepped up to ensure improved productivity. In October 2017, KMBL acquired 26% stake held by Old Mutual Plc in its life insurance arm, thus effectively taking its total ownership in the business to 100%. At INR 12.9 bn purchase price, the implied value of the life insurance arm works out be to ~INR 50 bn. Given FY18 EV of INR 58.2 bn, the implied acquisition P/EV works out to be 0.9x (P/GWP = 0.8x) compared to average P/EV of 4.2x for the listed comparables. Going forward, we believe there are several levers that would play out favorably – scale, focus on improving persistency, capping ULIPs, increasing share of protection, KMB’s backing in terms of distribution and brand equity. Considering the bigger picture – insurance penetration level and overall formalization and financialization – KMLife is quite favorably placed. Solvency stands at >3x. Expecting 18% CAGR in NBP-APE... Increasingly focusing on individual business... 50 60% 100% 40.1 23% 30% 40 40% 80% 42% 42% 33.5 49% 51% 52% 46% 28.1 30 24.2 20% 60% 21.6 17.0 20 0% 40% 11.1 77% 70% 9.0 7.9 8.4 10 7.1 -20% 58% 51% 54% 58% 20% 49% 48% 0 -40% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

NBP-APE (INR Bn) Individual APE (INR Bn) Individual business Group business NBP-APE growth (%) Indi. APE growth (%) Source: Company, KRChoksey Research Source: Company, KRChoksey Research

Distribution mix (%) - Majority business is sourced Product mix (based on Individual NBP APE) (%) through banca or direct channel... 100%

80% 48% 49% 47% 61% 56% 60% ULIP, 36% Par, 35%

40% 52% 51% 53% 20% 39% 44%

FY14 FY15 FY16 FY17 FY18 Non-par, 29% Banca Agency and others

Source: Company, KRChoksey Research Source: Company, KRChoksey Research

AUM has grown at 16% CAGR over FY11-18... 500 30%

400 24% 25% 24% 23% 21% 22% 20% 20% 300 15% 13% 13% 200 11% 10% 10%

100 5% 85.9 97.2 109.6 121.0 150.7 167.9 207.9 250.0 303.0 369.9 454.7 0 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

AUM (INR Bn) Growth (%) Source: Company, KRChoksey Research

Focus on persistency and renewals has yielded results... 100%

80%

60%

40%

20%

0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 13th month 25th month 37th month 49th month 61st month Source: Company, KRChoksey Research

Individual new business FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Total number of policies (#) 72,442 86,899 1,69,479 1,59,960 1,86,251 2,59,917 2,98,979 3,37,934 Total premium (INR Bn) 4.1 3.7 6.9 6.4 7.5 10.6 14.4 19.7 Sum assured (INR Bn) 58.3 69.4 145.9 180.6 121.8 184.1 260.7 406.9 Premium per policy (INR) 56,091.3 42,506.1 40,625.1 40,198.6 40,233.4 40,924.8 48,051.9 58,350.2 Sum assured per policy (INR) 8,04,380 7,99,059 8,60,776 11,28,938 6,54,125 7,08,330 8,71,861 12,04,015

Group new business FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Total number of policies (#) 160.0 708.0 774.0 942.0 869.0 996.0 1,066.0 705.0 Total premium (INR Bn) 1.2 3.5 5.0 6.3 7.9 11.5 14.1 14.3 Sum assured (INR Bn) 154.0 741.4 944.6 1,295.6 1,419.5 2,720.2 3,296.8 1,048.5 Premium per policy (INR Mn) 7.5 5.0 6.5 6.7 9.1 11.5 13.3 20.3 Sum assured per policy (INR Mn) 962.2 1,047.2 1,220.4 1,375.4 1,633.5 2,731.1 3,092.7 1,487.3 Source: Company, KRChoksey Research

Peer valuations Based on FY2018 financials (INR Mn) GWP EV MV MCAP / GWP MCAP / EV ICICI Pru Life 2,70,688 1,87,880 5,58,720 2.1 3.0 SBI Life 2,53,542 1,90,700 6,55,200 2.6 3.4 HDFC Life 2,35,644 1,52,200 9,36,340 4.0 6.2 Average 2.9 4.2 Median 2.6 3.4 Kotak Life 65,990 58,240 3.1 3.5 ^ implied ^ assumed

VNB margin (%) - peer comparison FY18 Calculating implied P/GWP (x) FY18 Kotak Mahindra Life Insurance 29.3% EV (INR Mn) 58,240 ICICI Prudential Life Insurance 16.5% P/EV (x) - assumed 3.5 SBI Life Insurance 16.2% MCAP (INR Mn) 2,03,840 HDFC Standard Life Insurance 23.2% GWP (INR Mn) 65,990 Bajaj Allianz Life Insurance 12.5% Implied P/GWP (x) 3.1

Source: Company, KRChoksey Research

Kotak Mahindra Life Insurance Co. Ltd. (INR Mn) REVENUE ACCOUNT FY15 FY16 FY17 FY18 FY19E FY20E FY21E Gross premium 30,380.5 39,716.8 51,395.5 65,986.7 83,190.8 1,05,076.9 1,31,426.8 (-) Reinsurance ceded 624.6 584.0 720.9 872.1 998.3 1,260.9 1,577.1 Net premium 29,755.9 39,132.9 50,674.6 65,114.7 82,192.6 1,03,815.9 1,29,849.7 Income from investments 26,393.5 5,159.4 23,918.8 17,590.7 21,636.2 26,981.0 33,158.0 Contribution from S/H's account 84.0 53.0 27.7 43.1 50.0 60.0 60.0 Other income 79.7 36.6 65.7 59.8 60.0 60.0 60.0 Total income 56,313.1 44,381.9 74,686.7 82,808.2 1,03,938.8 1,30,917.0 1,63,127.7 Commission 1,764.1 2,581.1 3,248.1 3,793.4 4,658.7 5,779.2 7,097.0 Opex related to insurance business 6,690.6 7,941.3 9,281.8 11,112.6 13,310.5 15,761.5 19,451.2 Service tax and GST 294.2 327.3 380.6 535.8 550.0 580.0 600.0 Total expenses 8,754.9 10,857.5 12,902.0 15,477.0 18,519.2 22,120.8 27,148.2 Benefits paid (net) 17,852.2 18,240.3 22,871.7 27,709.3 34,520.9 42,564.5 53,238.4 Change in valuation of liability 11,189.3 13,924.5 17,201.8 25,056.9 33,393.6 45,081.3 60,859.8 Provision for linked liabilities 16,055.0 -682.6 19,042.7 10,876.7 14,982.7 16,780.6 18,794.3 Surplus/(deficit) before tax 2,373.9 1,923.1 2,460.1 3,533.7 2,522.4 4,369.7 3,087.1 Provision for tax 218.6 158.8 220.8 367.1 264.9 458.8 324.1 Surplus/(deficit) after tax 2,155.4 1,764.4 2,239.4 3,166.5 2,257.6 3,910.9 2,762.9 PROFIT AND LOSS ACCOUNT FY15 FY16 FY17 FY18 FY19E FY20E FY21E Transfer from P/h's account 1,617.6 1,652.3 2,030.6 2,924.4 2,076.9 3,598.0 2,541.9 Income from investments 898.8 1,094.6 1,251.2 1,562.1 1,868.7 2,254.1 2,659.8 Total income 2,516.4 2,746.8 3,281.8 4,486.5 3,945.7 5,852.2 5,201.7 Total expenses 102.9 86.3 75.5 141.3 118.4 175.6 156.1 PBT 2,413.6 2,660.5 3,206.3 4,345.2 3,827.3 5,676.6 5,045.7 Tax expense 124.6 153.1 173.5 211.1 191.4 283.8 252.3 PAT 2,288.9 2,507.5 3,032.7 4,134.1 3,635.9 5,392.8 4,793.4 BALANCE SHEET FY15 FY16 FY17 FY18 FY19E FY20E FY21E SOURCES OF FUNDS Shareholders' funds Share capital 5,102.9 5,102.9 5,102.9 5,102.9 5,102.9 5,102.9 5,102.9 Reserves and surplus 7,604.1 10,111.5 13,144.3 17,278.4 20,914.3 26,307.1 31,100.5 Sub-total 12,707.0 15,214.4 18,247.2 22,381.3 26,017.2 31,410.0 36,203.4 Policyholders' funds Sub-total 1,39,031.6 1,51,844.3 1,89,758.2 2,25,213.9 2,75,013.9 3,38,618.0 4,20,408.6 Funds for future appropriation - linked liabilities 69.8 0.0 0.0 2,030.0 1,500.0 1,500.0 1,500.0 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sub-total 69.8 0.0 0.0 2,030.0 1,500.0 1,500.0 1,500.0 TOTAL 1,51,808.3 1,67,058.7 2,08,005.3 2,49,625.1 3,02,531.1 3,71,528.0 4,58,111.9 APPLICATION OF FUNDS Investments Shareholders' 10,519.7 13,996.4 15,875.5 19,049.3 22,478.1 26,524.2 31,298.6 Policyholders' 42,863.1 57,305.1 76,397.7 1,04,454.6 1,38,924.6 1,84,769.8 2,45,743.8 Assets held to cover linked liabilities 97,302.4 96,550.1 1,15,592.8 1,26,469.5 1,41,645.8 1,58,643.3 1,77,680.5 Loans 1,677.3 1,507.6 1,531.1 1,306.2 1,400.0 1,500.0 1,550.0 Fixed assets 397.3 440.7 618.1 653.9 680.0 700.0 720.0 Net current assets -951.4 -2,741.2 -2,010.0 -2,308.4 -2,597.5 -609.3 1,119.1 TOTAL 1,51,808.3 1,67,058.7 2,08,005.3 2,49,625.1 3,02,531.1 3,71,528.0 4,58,111.9

Source: Company, KRChoksey Research

Key metrics and assumptions (INR Mn) FY15 FY16 FY17 FY18 FY19E FY20E FY21E Persistency 13th month 80.9% 82.0% 82.6% 85.5% 25th month 75.7% 74.1% 73.9% 73.8% 37th month 73.2% 71.4% 69.3% 69.1% 49th month 54.2% 71.0% 68.8% 67.1% 61st month 30.9% 49.2% 62.7% 61.8%

NBP 15,402 22,097 28,497 34,042 41,872 52,765 66,961 NBP-APE 11,093 17,030 21,593 24,236 28,144 33,546 40,054

Reinsurance rate (%) 2.1% 1.5% 1.4% 1.3% 1.2% 1.2% 1.2% Commission ratio (%) 5.8% 6.5% 6.3% 5.7% 5.6% 5.5% 5.4% Opex ratio (%) 22.0% 20.0% 18.1% 16.8% 16.0% 15.0% 14.8% Total expense ratio (%) 27.8% 26.5% 24.4% 22.6% 21.6% 20.5% 20.2% Claims ratio (%) 60.0% 46.6% 45.1% 42.6% 42.0% 41.0% 41.0% Claims settlement ratio (%) 98.3% 98.5% 99.5% 99.3% Conservation ratio (%) 67.5% 68.8% 67.2% 73.1% 75.0% 77.0% 77.0% Expenses / total income (S/h's account) (%) 4.1% 3.1% 2.3% 3.1% 3.0% 3.0% 3.0%

Investment yield on P/h's funds (%) 21.6% 3.1% 14.7% 8.9% 9.0% 9.2% 9.2% Investment yield on S/h's funds (%) 9.6% 8.9% 8.4% 8.9% 9.0% 9.2% 9.2%

Total AUM 1,50,685 1,67,852 2,07,866 2,49,973 3,03,049 3,69,937 4,54,723 Source: Company, KRChoksey Research

Peers’ growth comparison FY13 FY14 FY15 FY16 FY17 FY18 Kotak Mahindra Life Insurance Company GP -5.4% -2.8% 12.5% 30.7% 29.4% 28.4% NP -5.8% -2.7% 12.2% 31.5% 29.5% 28.5% NBP 2.0% 7.0% 21.1% 43.5% 29.0% 19.5% APE 11.5% 5.6% 32.5% 53.5% 26.8% 12.2% FYP 13.4% 5.3% 34.5% 55.1% 26.5% 11.1% RP -10.3% -10.1% 4.8% 17.6% 30.0% 39.5% SP -12.9% 10.0% -0.8% 17.6% 36.3% 42.0% AUM 12.7% 10.4% 24.5% 11.4% 23.8% 20.3% S/h's AUM 46.3% 29.3% 29.2% 33.0% 13.4% 20.0% Linked AUM 6.8% 0.7% 19.6% -0.8% 19.7% 9.4% Non-linked AUM 30.5% 39.6% 35.8% 33.7% 33.3% 36.7% ICICI Prudential Life Insurance Company GP -3.4% -8.2% 23.2% 25.2% 16.6% 21.1% NP -3.7% -8.5% 23.4% 25.3% 16.6% 21.0% NBP 8.3% -21.8% 41.8% 26.9% 16.2% 17.1% APE 14.0% -21.5% 39.5% 9.9% 27.2% 16.1% FYP 14.8% -21.5% 39.2% 7.7% 28.8% 15.9% RP -8.9% -0.7% 15.1% 24.3% 16.9% 23.2% SP -21.6% -24.0% 60.0% 142.6% -17.5% 22.2% AUM 4.7% 8.7% 24.2% 3.6% 18.0% 13.9% S/h's AUM 41.5% 8.8% 9.4% 6.1% 6.8% 16.8% Linked AUM -0.5% 4.8% 24.0% 0.7% 16.7% 11.0% Non-linked AUM 23.9% 28.1% 30.4% 14.1% 25.8% 23.0% SBI Life Insurance Company GP -20.9% 2.7% 20.7% 23.0% 32.8% 20.6% NP -20.6% 2.6% 19.9% 22.6% 33.1% 20.7% NBP -20.6% -2.3% 9.2% 28.5% 42.7% 8.1% APE 9.4% 11.5% 10.8% 37.4% 35.3% 27.6% FYP 19.4% 14.5% 11.1% 39.0% 34.1% 31.1% RP -20.2% 7.7% 29.3% 18.8% 24.7% 32.3% SP -40.9% -19.4% 6.3% 12.6% 59.0% -28.2% AUM 11.8% 12.4% 23.3% 12.2% 23.1% 19.4% S/h's AUM 33.1% 29.9% 30.5% 16.1% 20.5% 16.7% Linked AUM 0.3% 7.7% 21.7% 3.5% 23.7% 23.2% Non-linked AUM 28.0% 16.8% 24.4% 21.4% 22.8% 16.0% HDFC Standard Life Insurance Company GP 11.0% 6.5% 22.9% 10.0% 19.2% 11.8% NP 10.9% 6.4% 23.3% 9.6% 19.1% 11.8% NBP 15.0% -9.0% 36.0% 18.1% 34.1% 15.0% APE 15.4% -22.2% 26.2% 13.5% 13.0% 15.0% FYP 15.5% -24.3% 24.3% 12.6% 8.4% 15.0% RP 8.5% 16.5% 16.4% 5.2% 9.4% 9.1% SP 13.8% 27.2% 52.3% 24.4% 60.6% 15.0% AUM 23.9% 26.7% 32.6% 10.7% 23.6% 16.3% S/h's AUM 41.5% 93.8% 35.9% 20.2% 22.9% 10.0% Linked AUM 20.0% 20.7% 31.3% 1.8% 17.7% 16.5% Non-linked AUM 34.3% 37.1% 35.4% 29.9% 34.1% 16.5% Source: Company, KRChoksey Research

ADV (INR Bn) Growth (%) Average brokerage per transaction (bps) Source: Company, KRChoksey Research Source: Company, KRChoksey Research

No. of unique active clients (000s) (source: www.nse.com) Company name FY14 FY15 FY16 FY17 FY18 FY19 (YTD) ICICI Securities Ltd 501 595 560 618 798 820 Growth (%) 19% -6% 10% 29% Zerodha 18 30 62 166 541 675 Growth (%) 73% 104% 167% 227% HDFC Securities Ltd 279 348 408 483 602 635 Growth (%) 25% 17% 18% 25% Sharekhan Ltd 275 343 336 366 535 553 Growth (%) 25% -2% 9% 46% Axis Securities Ltd 77 120 184 259 405 393 Growth (%) 56% 53% 41% 56% Angel Broking Pvt Ltd 140 160 171 230 364 389 Growth (%) 14% 7% 35% 58% Kotak Securities Ltd 223 268 247 274 369 389 Growth (%) 20% -8% 11% 35% Motilal Oswal Securities Ltd 123 153 166 207 308 320 Growth (%) 24% 9% 25% 48% Karvy Stock Broking Ltd 126 172 167 181 245 259 Growth (%) 37% -3% 9% 35% India Infoline Ltd. 235 286 263 198 225 233 Growth (%) 22% -8% -25% 14% SBICAP Securities Ltd 68 114 126 169 214 211 Growth (%) 67% 11% 35% 26% 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 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 21 Kotak Mahindra Bank Ltd Kotak Securities (INR Mn) INCOME STATEMENT FY15 FY16 FY17 FY18 FY19E FY20E FY21E Revenue from operations 5,971.4 5,678.6 7,965.7 10,026.2 12,544.2 15,458.8 18,618.8 Brokerage income 5,449.5 5,147.0 6,649.8 8,172.9 10,134.9 12,567.7 15,149.4 Fees income 521.9 531.7 1,315.9 1,853.3 2,409.3 2,891.1 3,469.3 Revenue from other operating activities 3,022.5 3,318.0 3,172.4 5,153.8 6,117.8 7,127.7 8,299.0 Interest income 2,274.3 2,283.7 2,782.6 4,175.6 5,367.8 6,377.7 7,549.0 Profit on trading in securities 748.2 1,034.4 389.8 978.3 750.0 750.0 750.0 Total revenue from operations 8,993.9 8,996.7 11,138.1 15,180.0 18,662.0 22,586.5 26,917.7 Other income 604.5 749.1 1,248.5 1,365.5 1,253.9 1,341.6 1,416.0 Total revenue 9,598.4 9,745.7 12,386.6 16,545.5 19,915.9 23,928.1 28,333.8 Total expenses 4,846.0 5,672.3 6,426.7 7,522.9 8,651.3 9,862.5 11,243.3 EBIT 4,752.4 4,073.4 5,959.9 9,022.6 11,264.5 14,065.5 17,090.5 Finance cost 338.4 263.7 527.0 1,062.8 1,676.2 1,931.6 2,317.9 PBT 4,414.0 3,809.7 5,432.9 7,959.8 9,588.3 12,133.9 14,772.5 Tax 1,518.2 1,303.1 1,820.3 2,650.2 3,192.5 4,040.1 4,918.6 PAT 2,895.8 2,506.6 3,612.7 5,309.5 6,395.8 8,093.9 9,853.9 Source: Company, KRChoksey Research BALANCE SHEET FY15 FY16 FY17 FY18 FY19E FY20E FY21E EQUITY AND LIABILITIES Shareholders' funds Share capital 16.0 16.0 16.0 16.0 16.0 16.0 16.0 Reserves & surplus 23,824.2 26,330.8 29,943.5 35,253.0 41,648.8 49,742.7 59,596.6 Total shareholders' funds 23,840.2 26,346.8 29,959.5 35,269.0 41,664.8 49,758.7 59,612.6 ST Borrowings 4,685.5 948.2 8,668.5 21,285.1 23,413.6 28,096.3 33,715.6 Trade payables 13,079.5 11,257.0 22,164.9 22,841.5 23,069.9 23,300.6 23,533.6 Other liabilities and provisions 2,062.1 1,116.6 1,258.6 2,096.3 2,096.3 2,096.3 2,096.3 TOTAL 43,667.3 39,668.6 62,051.4 81,491.9 90,244.7 1,03,252.0 1,18,958.2 ASSETS Fixed assets 733.4 611.4 585.6 628.2 628.2 628.2 628.2 Cash & cash equivalent 16,068.6 14,105.6 22,439.9 29,705.2 32,488.1 37,170.7 42,824.9 Trade receivables 10,840.1 9,748.9 20,385.1 17,012.1 17,012.1 17,012.1 17,012.1 Investments 8,296.6 11,403.6 12,626.0 14,062.8 15,469.0 17,016.0 18,717.5 Other assets 7,728.6 3,799.2 6,014.8 13,452.2 16,026.4 20,217.9 25,206.2 Margin funding receivables 0.0 0.0 0.0 6,631.4 8,620.8 11,207.1 14,569.2 TOTAL 43,667.3 39,668.6 62,051.4 81,491.9 90,244.7 1,03,252.0 1,18,958.2 Source: Company, KRChoksey Research

Profitability ratios FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Operating margin (%) 38.5% 32.4% 31.6% 37.5% 49.3% 41.4% 47.2% 53.7% 56.3% 58.6% 60.2% EBIT Margin (%) 39.5% 32.7% 31.6% 37.6% 49.5% 41.8% 48.1% 54.5% 56.6% 58.8% 60.3% PAT margin (%) 24.7% 20.6% 18.9% 25.6% 30.2% 25.7% 29.2% 32.1% 32.1% 33.8% 34.8% ROE (%) 10.7% 7.2% 6.1% 8.0% 12.9% 10.0% 12.8% 16.3% 16.6% 17.7% 18.0% Cost/income ratio (excl. 60.5% 67.3% 68.4% 62.4% 50.5% 58.2% 51.9% 45.5% 43.4% 41.2% 39.7% finance cost) (%) Cost/income ratio (%) 63.2% 68.6% 68.9% 62.6% 54.0% 60.9% 56.1% 51.9% 51.9% 49.3% 47.9%

Source: Company, KRChoksey Research

3,000 50% 2,500 40% 2,000 30% 1,500 20% 1,000 500 10% 0 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

AUM (INR Bn) Growth (%) Source: Company, KRChoksey Research

Share of equity is expected to rise (HDFC AMC at >50%) 100% 80% 61.5% 60% 75.0% 74.2% 85.6% 88.9% 90.1% 91.3% 83.9% 40% 20% 38.5% 14.4% 16.1% 25.0% 25.8% 0% 11.1% 9.9% 8.7% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: Company, KRChoksey Research Equity mix (%) Debt and others mix (%)

Expect ROEs to range between 35-40% on back of ROE comparison scale-up and equity-focus.. 80% 0.5% 100% 60% 80% 0.4% 40% 60% 40% 20% 0.3% 20% 0% 0.2% 0% -20% 0.1% -20% FY15 FY16 FY17 FY18 -40% -40% -60% 0.0% -60%

Reliance Nippon AMC ICICI AMC HDFC AMC SBI MF ROE (%) Fee/Avg AUM (%) Source: Company, KRChoksey Research UTI MF Kotak AMC

FY18 FY17 FY16

Benchma Outperfo Benchma Outperfo Benchma Outperfo Kotak AMC - Performance Return Return Return Benchmark rk return rmance rk return rmance rk return rmance snapshot (%) (%) (%) (%) (%) (%) (%) (%) (%)

Equity schemes Kotak 50 Nifty 50 9.0% 11.8% -2.7% 18.7% 18.6% 0.1% -4.6% -8.8% 4.3%

CRISIL Hybrid 35+65 - Kotak Balance 6.3% 10.0% -3.7% 23.3% 16.1% 7.2% -2.8% -2.9% 0.1% Aggressive Index

Kotak Classic Equity Nifty 100 16.4% 12.2% 4.2% 24.0% 20.9% 3.1% -9.3% -8.1% -1.3%

Kotak Emerging Equity S&P BSE Mid Small Cap 11.0% 16.8% -5.7% 39.6% 35.1% 4.4% -2.3% -3.3% 1.1% Scheme Kotak Equity Arbitrage Nifty 50 Arbitrage Index 6.2% 4.4% 1.8% 6.3% 6.1% 0.2% 6.8% 8.0% -1.2% Fund Kotak Midcap Fund Nifty Midcap 100 11.0% 10.3% 0.7% 33.7% 34.9% -1.2% 1.8% -1.9% 3.7% Kotak Opportunities Fund Nifty 500 9.3% 12.9% -3.6% 30.6% 23.9% 6.7% -5.6% -7.5% 1.9% Kotak Select Focus Fund Nifty 200 10.7% 12.4% -1.7% 29.7% 22.3% 7.4% -2.8% -8.1% 5.3% Kotak Taxsaver Nifty 500 6.3% 12.9% -6.6% 29.8% 23.9% 5.9% -8.0% -7.5% -0.5%

75% Nifty 50 Arbitrage Kotak Equity Savings Fund 8.3% 6.3% 2.1% 11.1% 13.9% -2.8% - - - Index and 25% Nifty 50

Kotak Infrastructure and S&P BSE 100 10.2% 12.1% -2.0% 30.7% 21.2% 9.5% - - - Economic Reform Fund

Debt schemes

Kotak Banking and PSU Crisil Short Term Bond 6.5% 6.1% 0.4% 9.3% 9.1% 0.2% 8.3% 8.0% 0.3% Debt Fund - Reg - Growth Fund Index

Kotak Bond Scheme - Reg - Crisil Composite Bond 2.7% 5.1% -2.4% 10.1% 11.1% -1.0% 5.3% 8.2% -2.9% Growth Fund Index

Kotak Bond Short Term Crisil Short Term Bond 5.5% 6.1% -0.6% 9.1% 9.1% 0.0% 7.9% 8.4% -0.5% Plan - Reg - Growth Fund Index

Kotak Flexi Debt Scheme - Crisil Composite Bond 6.2% 5.1% 1.1% 11.2% 11.1% 0.1% 7.8% 8.2% -0.4% Reg - Growth Fund Index

Kotak Floater - ST - Reg - Crisil Liquid Fund Index 6.8% 6.8% -0.1% 7.3% 7.1% 0.2% 8.3% 8.0% 0.2% Growth

Kotak Gilt - Investment I-Sec Composite Gilt 3.3% 5.1% -1.7% 11.5% 10.9% 0.6% 5.7% 8.2% -2.6% Regular Plan - Growth Index

Kotak Income Crisil Short Term Bond Opportunities 6.5% 6.1% 0.4% 10.0% 9.1% 0.9% 9.1% 8.4% 0.6% Fund Index Fund - Reg - Growth

Kotak Liquid Scheme - Reg Crisil Liquid Fund Index 6.8% 6.8% -0.1% 7.2% 7.1% 0.1% 7.2% 8.0% -0.8% - Growth

Kotak Treasury Advantage Crisil Liquid Fund Index 6.7% 6.8% -0.1% 7.8% 7.1% 0.7% 8.4% 8.0% 0.4% Fund - Reg - Growth

Kotak Medium Term Fund Crisil Composite Bond 6.6% 5.1% 1.5% 10.3% 11.1% -0.8% - - - – Reg- Growth Fund Index

Kotak Corporate Bond Crisil Composite Bond 6.8% 5.1% 1.7% 9.1% 11.1% -2.0% - - - Fund Reg – Growth Fund Index

Kotak Low Duration Fund Crisil Liquid Fund Index 7.0% 6.8% 0.2% 8.8% 7.1% 1.7% - - - – Reg - Growth

Kotak Monthly Income CRISIL Hybrid 85+15 - 5.9% 6.2% -0.4% 15.1% 12.3% 2.8% - - - plan Conservative Index

Source: Company, KRChoksey Research

Kotak AMC (INR Mn) INCOME STATEMENT FY15 FY16 FY17 FY18 FY19E FY20E FY21E Revenue from operations 1,223.9 2,384.9 2,861.2 5,019.9 6,462.3 9,047.3 12,666.2 Other income 32.6 14.6 51.3 169.1 50.0 50.0 50.0 Total revenue 1,256.4 2,399.6 2,912.4 5,189.0 6,512.3 9,097.3 12,716.2 Employee expenses 483.0 529.2 638.6 771.3 969.4 1,187.5 1,424.9 Other expenses 1,132.5 1,150.9 1,687.9 3,173.2 4,039.0 5,654.6 7,916.4 Total expenses 1,615.5 1,680.1 2,326.5 3,944.5 5,008.3 6,842.0 9,341.3 PBT -359.1 719.4 586.0 1,244.5 1,504.0 2,255.3 3,374.9 Tax 2.7 126.1 203.6 432.4 511.4 766.8 1,147.5 PAT -361.8 593.3 382.3 812.1 992.7 1,488.5 2,227.4

Source: Company, KRChoksey Research

BALANCE SHEET FY15 FY16 FY17 FY18 FY19E FY20E FY21E EQUITY AND LIABILITIES Shareholders' funds Share capital 383.0 383.0 383.0 298.0 298.0 298.0 298.0 Reserves & surplus 213.3 797.9 1,180.2 1,975.5 2,968.2 4,456.7 6,684.1 Total shareholders' funds 596.3 1,180.9 1,563.2 2,273.5 3,266.2 4,754.7 6,982.1 ST borrowings 138.7 0.0 0.0 0.0 0.0 0.0 0.0 Trade payables 105.9 117.1 248.4 346.1 380.7 418.8 460.7 Other liabilities & provisions 191.9 229.0 372.3 863.8 863.8 863.8 863.8 TOTAL 1,032.8 1,527.0 2,183.8 3,483.5 4,510.8 6,037.3 8,306.6 ASSETS Fixed assets 222.4 205.9 190.3 176.0 164.0 152.0 150.0 Cash & cash equivalent 0.9 12.5 1.6 62.8 202.3 179.2 108.0 Trade receivables 10.0 214.5 286.1 571.2 571.2 571.2 571.2 Investments 275.0 504.1 1,260.0 2,082.2 3,123.3 4,685.0 7,027.5 Other assets 524.5 589.9 445.9 591.3 450.0 450.0 450.0 TOTAL 1,032.8 1,527.0 2,183.8 3,483.5 4,510.8 6,037.3 8,306.6

Source: Company, KRChoksey Research

KEY METRICS FY15 FY16 FY17 FY18 FY19E FY20E FY21E Revenue growth (%) -24.4% 91.0% 21.4% 78.2% 25.5% 39.7% 39.8% PAT growth (%) -208.4% -264.0% -35.6% 112.4% 22.2% 49.9% 49.6% AUM growth (%) 8.2% 41.8% 40.8% 49.7% 40.0% 40.0% 40.0%

Fee/Avg AUM (%) 0.32% 0.44% 0.37% 0.44% 0.40% 0.40% 0.40% ROE (%) -49.5% 66.8% 27.9% 42.3% 35.8% 37.1% 38.0% PAT margin (%) -28.8% 24.7% 13.1% 15.7% 15.2% 16.4% 17.5%

Source: Company, KRChoksey Research

Kotak Mahindra Bank Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside

30-Aug-18 1276 1544 BUY Buy More than 15% 20-Jul-18 1333 1526 BUY 02-May-18 1209 1402 BUY Accumulate 5% - 15% 22-Jan-18 1071 1172 ACCUMULATE Hold 0 – 5% 26-Oct-17 1014 1104 ACCUMULATE 21-Jul-17 980 1104 ACCUMULATE Reduce -5% – 0 27-Jan-16 795 953 BUY Sell Less than -5% 26-Oct-16 820 953 BUY 25-July-16 760 882 ACCUMULATE 12-May-16 739 882 ACCUMULATE 19-Jan-16 669 721 HOLD 03-Nov-15 685 720 HOLD 13-Apr-15 1,422 1,400 REDUCE 21-Jan-15 1,389 1,400 HOLD 7-Jan-15 1,251 1,260 HOLD

ANALYST CERTIFICATION: We, Raghav Garg (B.Com, M.Com (Applied Finance)), research analyst and Anushka Chhajed (B.com & CA), research associate, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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