Nomura upgrades Kotak Mahindra Bank to buy, sees 24% upside

Moneycontrol Bureau

Nomura has upgraded Kotak Mahindra Bank to buy from neutral earlier, with a target price of Rs 750 (implied upside of 24 percent). It believes the recent 20 percent correction provides investors with a good entry into a high-quality bank and Kotak’s earnings quality remains one of the best in the sector. The stock gained more than 1 percent.

After the ING Vysya Bank acquisition, investors’ expectations seemed high. However, Nomura feels Q1FY16 integration charges partially explain the lower acquisition cost and also set investors’ expectations on growth and asset quality lower.

Kotak upfronted around Rs 1,300 crore of ING-related integration charges (18 percent of ING Vysya’s net worth) explaining the lower 2.2 times valuation on the merger. While in the next 1-2 quarters part of these charges should continue, the brokerage expects significant synergy benefits after that lower operational cost; CASA uptick in ING’s book; and better quality growth in ING’s book. It says combined return on assets should fall to 1.5 percent in FY16F from 1.9 percent in FY15 due to integration but return on assets to revert to around 2 percent by FY17F.