Why investors have an insatiable appetite for Kotak Mahindra Bank

As if Kotak Mahindra Bank Ltd’s shares hadn’t outpaced peers by a big-enough margin already, the stock added another 4% to the tally on Wednesday. Investors just can’t have enough of it, and analysts have had no option but to play catch-up. For instance, Nomura had a “neutral” rating with a target price of Rs1,150 until 1 May. It has now upgraded to a “buy” rating with a 12-month target of Rs1,400.

This week, sentiment for the lender’s shares got a further boost after the company reported better-than-expected results for its consolidated operations. The March quarter results showed the group’s subsidiaries shouldered the growth in profits while the core banking operations continued to thrust forward, more or less insulated from the bad loan mess some other private sector banks are grappling with. Kotak Mahindra Bank is now the second-most valuable lender in the country, in terms of its market capitalization.

Consolidated profit rose 27.4% for the fourth quarter, driven by asset management, capital markets and insurance business of the group.

The share of Kotak Mahindra Bank in total consolidated profit fell to 65% for fiscal year 2018 (FY18) from 69% in the previous year.

Indeed, what made the market relook at valuations at the group level was the bumper performance by its insurance business. The insurance operations reported a profit growth of 36% for FY18 and the embedded value was pegged at Rs5,824 crore. The group’s other big subsidiaries that include the asset management business and investment banking business also performed well.

On a stand-alone basis, the bank missed Street estimates on net profit growth, which came in at 15% for the quarter as one-time employee expenses ate into profits. Core operating metrics remained robust with net interest income and other income growing 19.4% and 15%, respectively. Asset quality that has set Kotak Mahindra Bank apart from others continues to do so.

Analysts believe that given the strong consolidated performance, the valuation multiples do not look expensive. Besides, with rumours of an acquisition of Axis Bank Ltd refusing to die, the possibility of inorganic growth is another reason investors are excited. What can go wrong?

For Kotak Mahindra Bank, loan growth came from commercial vehicles and unsecured lending, which grew more than 40%. The growth in consolidated profits was led by the capital markets and securities business, which can be cyclical. This leaves the door open for volatility in earnings in FY19 and investors would do well to keep a check on their appetite.livemint