Accumulate Kotak Mahindra; target of Rs 485: PLilladher

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Accumulate Kotak Mahindra; target of Rs 485: PLilladher

Prabhudas Lilladher is bullish on Kotak Mahindra Bank and has recommended accumulate rating on the stock with a target of Rs 485 in its May 6, 2011 research report.

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Prabhudas Lilladher is bullish on Kotak Mahindra Bank and has recommended accumulate rating on the stock with a target of Rs 485 in its May 6, 2011 research report.

"Kotak Mahindra Bank (KMB) reported consolidated PAT of Rs4.9bn, up 17.4% YoY and 28.1% QoQ and standalone PAT of Rs2.5bn, up 22.8% YoY and 32.4% QoQ; both higher than our estimates. For standalone banking operations, net interest income (NII) grew by healthy 18.2% YoY and 8.8% QoQ, driven by strong 41.2% YoY advances growth. Deposits grew by 22.5% YoY and 3.4% QoQ. Notably, CASA ratio improved to 30.0% from 27.8% in the previous quarter. Reported consolidated NIM improved by 20bps QoQ to 5.6%. However, adjusting for the impact of strong recovery from an NPA account in Kotak Mahindra Prime in Q3FY11, margins remained flattish at ~5.6% on a QoQ basis. Non-interest income increased by 15.7% QoQ on account of a strong 85.9% QoQ increase in income from treasury operations. On account of higher recoveries during the quarter, (~Rs1.0bn) the bank enjoyed a provision write-back of Rs72m, which boosted bank's profitability. Negligible slippages, coupled with higher recoveries during the quarter, resulted into a steep 18.9% QoQ decline in gross NPAs. Provision coverage declined to 65.0% from 68.4% in Q3FY11. However, with technical write-offs, it declined to 70% from 72% last quarter."

"Strong bounce back was seen in the IB business, with revenues nearly doubling on a QoQ basis, while profit for the quarter alone was 37% higher than the profit recorded during the 9MFY11 period. Kotak Prime continues to grow strongly and maintains healthy profitability. In the life insurance business, although the gross premium growth seems to be affected by the new ULIP guidelines, the profitability improves, both on a YoY as well as on a QoQ basis. Securities business suffered due to sequentially lower volumes and margin pressures, while higher promotion expenses affected the profitability of the asset management business."

"KMB continues to perform well in its lending operations. Sequentially stable margin was one of the key positives during the quarter. However, margin pressures are likely to emerge as the rising cost of funds catches up, with yields remaining largely capped due to bank's focus on expanding corporate loan book. Nevertheless, this augurs well in terms of lower provisioning requirement for the bank. Moreover, the bank has been performing exceedingly well on the asset quality front and we do not expect any negative surprises, given its lower restructured portfolio. Consequently, we believe KMB is a safer bet in the current environment. We have revised our earnings estimates downwards for the standalone banking business by 2.9% and 11.8% for FY12E and FY13E, respectively. We maintain our 'Accumulate' rating, with a revised price target of Rs 485," says Prabhudas Lilladher research report.

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