While Uday Kotak's retirement as MD and CEO of Kotak Mahindra Bank was long anticipated, a lack of clarity on a succession plan has forced the stock to underperform other large private sector banks over the past one year pushing its valuation down to an all-time low.
The 9 percent fall in the stock, against a 12 percent rise in NSE Bank Nifty, over the past one year has brought Kotak Mahindra Bank's valuation at par with peers, sharply bringing down the valuation gap between Kotak and other private sector banks, said analysts.
Going ahead, a smooth leadership transition remains key for the stock, although on most fundamental factors Kotak outsmarts its rivals.
“Over the last four years Kotak's 1-year forward valuation has de-rated from 4x P/B and now trades in line with HDFC Bank (merged),” noted investment banking firm Investec. During the same time, the bank has improved its return on equity (ROE) over 200 basis points to over 14 percent.
Furthermore, Kotak Mahindra Bank’s 1-year forward valuation is now lower compared to its own 10-year historical price-to-book average value of 3.84x. Nonetheless, despite the correction in valuation, Kotak Mahindra Bank still remains slightly expensive compared to other banks.
Also Read: How brokerage calls on Kotak Mahindra Bank changed over last year
Can loan growth and asset quality hold up?
Over FY21-23, the bank delivered robust traction in loan growth at a ~19 percent CAGR (compound annual growth rate). On a 10-year period, loan growth stands at 15 percent CAGR. Despite spike in interest rates, retail credit growth remains strong and Kotak Bank will continue to be a big beneficiary of this, believe analysts.
“The bank remains well placed to capture growth opportunities in macro upcycle. The bank has also been driving a loan mix shift toward higher margin assets,” said analysts at Morgan Stanley.
Meanwhile, on the deposits side, Kotak Mahindra Bank has a high CASA ratio of 49 percent. CASA stands for Current Account Savings Account.
“Asset quality remains steady, and the strong CASA ratio will limit pressure on margins and enable a ~15 percent net profit CAGR over FY23- 25E,” according to domestic broking firm Motilal Oswal Financial Services.
Analysts have always lauded Uday Kotak for avoiding any NPA mess. “His intelligence in banking is unparalleled. His deep insights always helped Kotak avoid non-performing assets for so many years,” wrote Aditya Shah, a SEBI-registered investment advisor on X.
Also Read: Banking Central | Why Uday Kotak's era is far from over at Kotak Mahindra Bank
As of Q1 FY24 end, Kotak Bank’s gross NPA stood at 1.77 percent, down 3.56 percent from peak of COVID crisis. Net NPA moderated from 1.28 percent to 0.40 percent during the same period.
Transition is key
While Uday Kotak has been credited in taking the bank’s market capitalization from Rs 945 crore to Rs 3.51 lakh crore in the past 20 years, mimicking similar growth in coming years will depend on how smooth the leadership change is.
“Considering the culture at KMB, promotion of an insider to the top job (vs a lateral hire) would be preferred by investors, in our view,” said Jai Prakash Mundhra and Chintan Shah of ICICI Securities.
The Street believes Shanti Ekambaram and KVS Manian, both whole-time directors, are the front-runners for the top job. As an interim arrangement, Dipak Gupta, the Joint Managing Director, will carry out the duties of the MD and CEO until December 31, 2023.
Uday Kotak, meanwhile, will continue as a non-executive director of the bank. With 25.72 percent stake, he also remains the biggest shareholder in the bank.
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