Monday, June 18, 2012

>KOTAK MAHINDRA BANK LIMITED: Kotak Prime should grow in line with the car industry

Good story, but in the price; initiate at 2-EW

Kotak is a portfolio of well-run businesses, which, though small, have sustainable positions in their segments and are positioned for continued growth. The core banking business should continue to grow through network expansion while its car finance business, Kotak Prime (KP), should grow in line with the car industry. In the capital markets, Kotak has retained its market positions (although its profits have declined along with industry activity) and is well positioned for an industry recovery, in our view. Its strong balance sheet and broad-based presence also
position it well for inorganic growth. However, at the current valuation of 2.7x 2013E P/BV (one-year forward) and 19.0x P/E (one-year forward) these positives appear to be in the stock. Our 12-month price target of Rs540 is based on its historical average 12-month forward P/E multiple of 18x.

Financing businesses appear well positioned for continued profitable growth: We believe the banking business is well invested and should grow through network expansion – replicating the HDFC Bank and Axis Bank trajectory. Furthermore, the bank should also continue to benefit from strong cross-selling opportunities owing to Kotak’s presence in other financial services businesses. KP’s strong car finance franchise should enable it to grow profitably in sync with the Indian auto industry.

Capital market businesses look well positioned for industry recovery: Profits from Kotak’s capital markets businesses (brokerage and investment banking) have declined as the industry has slowed. However, Kotak has retained its market position in key segments (particularly cash equities and ECM) in these businesses. In the event of a sustained downturn, modest profit growth through cost cuts is achievable, in our view.

Broad-based presence and capital create opportunities for inorganic growth:
Kotak’s well-capitalized position is an asset in an environment in which valuations have been compressed. Its foothold in asset management and insurance mean that Kotak has a platform for inorganic growth across the entire financial services spectrum.

To read report in detail: KOTAK MAHINDRA