Big thumbs up for Kotak Mahindra Bank from investors; share price jumps 4% - what you should know

The share price of Uday Kotak-led Kotak Mahindra Bank soared nearly 4% on stock exchanges after the lender recorded a whopping 33% rise in its PAT during June 2019 (Q1FY20) quarter. At around 1342 hours, the share was trading at Rs 1509 per piece up by Rs 55.35 or 3.81%. Kotak also touched an intraday high and low of Rs 1511.75 per piece and Rs 1455.75 per piece respectively. Kotak Mahindra Bank posted a net profit of Rs 1,360 crore compared to Rs 1,025 crore recorded in the corresponding period of the previous year. Net interest income (NII) came in at Rs 3,173 crore in Q1FY20, witnessing growth of 23% as against Rs 2,583 crore in Q1FY19. Meanwhile, net interest margin (NIM) was at 4.49% in Q1 versus 4.28% in Q1FY19. 

What does analysts say about Q1FY20 result? 

Sujal Kumar and Manish Agarwalla Research Analyst at Phillip Capital said, "Bank’s net profit of Rs 13.6 bn (+33% yoy) was slightly below estimates on higher provisions. Total operating income at Rs 44.7 bn and opex at Rs 20.8bn was in line with our estimates. Advances grew by 18% yoy driven by Small Business, PL & Credit Cards (+29%), CV/CE (+24%) and Home Loan and LAP (+24%) and corporate and business banking grew by 7.4%. Deposit grew by 23% yoy with CASA deposit growing by 24%."

Rajiv Mehta Research Analyst along with Amar Ambani Head of Research at Yes Securities said, "Kotak Mahindra Bank (KMB) delivered a reasonably strong operating performance in Q1 FY20. Core PPOP grew 21% yoy and core PPOP margin was stable at 2.9%. Asset quality was well under control; absolute LLP was nearly flat yoy. Negligible MTM provisions on investment portfolio was instrumental in driving 33% yoy growth in earnings. SMA-2 outstanding remain negligible at 16 bps of advances and core PCR stays healthy at 67%. During the quarter, KMB raised exposure to HFCs (relatively lower exposure at 1.4% of advances) and further curtailed exposure to CRE (now at 1.6% v/s 2% as of Q1 FY19)."

The duo at Yes Securities said, "With a significant moderation in competitive intensity from NBFCs and a robust capital position (Tier-1 ratio at 17.9%), KMB is advantageously positioned to gain further market share at favourable risk-adjusted lending rates. We thus expect loan growth to accelerate next year and NIM to be comfortably maintained at current levels in the medium term. Recent investments in augmenting physical distribution and improving contribution of digital channels in business sourcing will drive a decline in cost/income ratio over FY19-21."

Therefore, the duo at Yes Securities reiterated, "we estimate KMB’s stand-alone earnings to grow by 20% pa over during the period. Stripping-off the value of holdings in subsidiaries, the bank trades at 3.8x P/ABV and 29x P/E on FY21 basis."

What about Kotak stock? 

The Yes Securities expert have given a target price of Rs 1,570 on Kotak Bank. 

The duo at Phillip Cap said, "We believe KMB is well‐positioned to capture loan market share and high proportion of low‐cost deposits will continue to provide tailwind to margins. Its superior underwriting skills, strong monitoring of portfolio, and cost optimization should lead to enhanced return ratio. We expect earnings CAGR of 23% over FY19‐21, resulting in a FY21 ROA of 1.83x.  At CMP, the stock trades at 4.1x/3.5x of our FY20/21 adj. BVPS of Rs 245/281, current valuation leaves little room for upside hence we maintain Neutral with a target of Rs 1,485 implying a FY21 P/adj. BVPS of 3.6x."