Broker’s call: Kotak Mahindra Bank (Buy)

Target: ₹2,140

CMP: ₹1,738.40

Capital structure key to multiple erosion Kotak Mahindra Bank’s stock price dropped 4 per cent in the past three years, over which its 1-year forward core P/B has de-rated from 4.8x to 2.7x despite core RoE recorded in FY23 being 80bps higher than the 13.4 per cent reported in FY20.

Core RoA improved from 1.7 per cent in FY20 to 2.3 per cent in FY23, as leverage dropped from 7.7x to 6.1x. We noted in our June-22 IC, “…an increasing concern among investors about sub-par ROEs as it is clear that dilutions alone cannot deliver compounding”. We also noted at that point that core RoE of 18 per cent remains very possible, with core leverage at 8x and sustainable core RoA of 2.1-2.3 per cent.

At 18 per cent core RoE or with visibility of achieving the same in short order, we would have been happy to value KMB at 3.8-4x given CASA strength-driven low cost of equity profile. However, with this still a few years away from appearing, the proviso of continued growth commitment from management is an important one.

With RBI raising risk weights on some of the growth-driving segments, there action of arguably the most risk-averse management is by no means a foregone conclusion.