ANTIQUE STOCK BROKING LIMITED

FROM THE RESEARCH DESK

8 August 2016 | 1

MANAGEMENT MEET UPDATE

Current Reco

: BUY

Previous Reco

: BUY

CMP

: INR780

Target Price

: INR860

Kotak Mahindra Bank Limited

Synergy benefits + enhanced focus to drive earnings

Potential Return : 10%

Nitin Aggarwal, CFA

+91 22 4031 3421

nitin.aggarwal@antiquelimited.com

Renish Patel

+91 22 4031 3426

renish.patel@antiquelimited.com

Market data
Sensex

Sector

28,078
Banks

Market Cap (INRbn)

1,421.0

Market Cap (USDbn)

21.3

O/S Shares (m)

1,835.1

52-wk HI/LO (INR)

790/586

Avg Daily Vol ('000)

2,371

Bloomberg

KMB IN

FY16

FY17e

FY18e
33.8

Source: Bloomberg

Valuation
EPS (INR)

18.5

26.4

BPVS (INR)

126

142

163

P/E (x)

42.2

29.6

23.1

P/ABV (x)

6.5

5.8

5.1

ROE (%)

8.7

11.8

13.2

Source: Bloomberg

Returns (%)
1m

3m

6m

12m

Absolute

10

12

10

Relative

(1)

(3)

10

Source: Bloomberg

Shareholding pattern
Promoters

34%

Public

66%

Others

0%

Source: Bloomberg

Price performance vs Nifty

120
110
100
90
80
Aug-15 Dec-15 Apr-16 Aug-16
Kotak Mahindra
Source: Bloomberg, Indexed to 100

NIFTY

We met the management of Kotak Bank to discuss the ongoing progress

and the road ahead now that the integration with ING Vysya Bank is largely
over. Following are the key takeaways from our meeting - a) Corporate
loan growth is still driven by the refinancing as fresh working capital demand
remains soft, b) KMB maintained FY17 loan growth guidance of 20%, c) Costincome ratio likely to decline to 50% by 4QFY17 (57.5% in FY16) led by
improving productivity and revenue growth, d) Fee income growth to recover
and the synergy benefits arising from merger will show up in FY17, e) Credit
cost to remain at 50bp for FY17 (82bp for FY16) and thereafter decline to 3035bp for FY18, f) Plans to reach 1,400 branch count by Dec-2017 while
relocation of 70 odd branches will happen during FY17, and, g) Promoter
shareholding needs to be lowered to 30% by Dec-2016 and 20% by Mar2018.
Loan growth being driven by market share gains; guidance maintained at 20% y-y for FY17
KMB mentioned that refinancing activity remains the major driver of loan growth and the
fresh demand from corporates remain muted. However the corporate loan growth is likely to
pick-up aided by higher focus as the integration process is now compete. Retail loan growth
is however holding strong and the bank is seeing sustained uptick in CV/CE segments. KMB
maintained full year credit growth guidance at 20% YoY.
Cost-income ratio to decline to ~50% by Q4FY17; branch rationalization will further
improve productivity
KMB expects cost-income ratio to show a consistent improvement and expects it to decline to
50% by 4QFY17 after a one-off employee expenses on account of integration pulled it up to
~57% in FY16. This will be aided by improved productivity and synergy benefits which will
manifest in current fiscal. KMB plans to relocate ~70 odd branches during FY17 (mainly in
metros) while it plans to open another 67 branches by Dec-2017 thus taking the total branch
count to 1,400 (1,333 currently).
Asset quality getting back in shape; credit cost to moderate to 30-35bp by FY18E
KMB reported significant deterioration in asset quality post merger which resulted in credit
cost going up to 82bp for FY16. However the management appears confident of maintaining
stable asset quality trends going ahead and expect credit cost to moderate to 30-35bp by
FY18E (similar to the pre-merger levels). The outstanding SMA-2 account remains best-in-class
and the slight deterioration witnessed during 1QFY17 due to one large account has now
been resolved.

Maintain KMB as one of our top BUYs amongst private banks

The share of bank in total consolidated profits now stands at 69% and we expect this to
increase further as synergy benefits show up fully in FY17. KMB's planned relocation of more
than 70 branches during FY17, primarily in metro cities, will help optimize cost and boost
network productivity. We expect merger synergies to show up in pace of customer acquisition,
space rationalization and higher cross sales. We estimate KMB to deliver 40% earnings cagr
over FY16-18E estimate return ratios to reach pre-merger levels over the next three years. We
reiterate our BUY rating with PT of Rs860 (3.6x FY18E ABV for lending business).

ANTIQUE STOCK BROKING LIMITED

8 August 2016 | 2

FROM THE RESEARCH DESK

RoA decomposition
INRm

Mar-2014

Mar-2015

Mar-2016

Mar-2017

10.2

10.0

11.0

9.4

9.1

Interest expenses/Assets

5.9

5.7

6.4

5.4

4.9

Net interest income/Assets

4.3

4.4

4.6

4.1

4.2

Treasury income/Assets

0.2

0.3

0.1

0.1

0.1

Other Inc. from operations/Assets

1.6

2.1

1.8

1.4

1.4

Total income/Assets

6.0

6.5

6.4

5.5

5.7

Employee expenses/Assets

1.4

1.5

1.9

1.5

1.5

Other operating expenses/Assets

1.6

1.8

1.8

1.4

1.4

Operating profit/Assets

3.0

3.1

2.7

2.6

2.9

Tax/Assets

0.9

1.0

0.7

0.8

0.8

Loan loss provisions/Assets

0.4

0.2

0.6

0.3

0.4

Net profit/Assets

1.8

1.9

1.4

1.5

1.6

Interest income/Assets

Mar-2018

Source: Company, Antique

SoTP valuation
SOTP

Value (INRm)

Per Share

Kotak Sec

60,754

33

Kotak AMC

39,348

21

6,988

20x Sep-17 Earnings

15,524

2.5x Sep-17 book

KMCC
Intl Subs

Basis
20x Sep-17 Earnings
5% of AUMs

Others

42,104

23

20x Sep-17 Earnings

Insurance

60,637

33

P/NBAP

225,355

123

164,717

90

Total
Ex-insurance
Total Subsidiary Valuation
Lending Biz Valuation

225,355

123

1,338,139

737
860

No of Shares
Source: Company, Antique

1,834

3.6x Sep-17 book

ANTIQUE STOCK BROKING LIMITED

8 August 2016 | 3

FROM THE RESEARCH DESK

Financials
Profit and loss account (INRm)

Capital Adequacy Ratio

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

Year-ended March 31 FY14

Interest Income

97,199 163,842 198,108

228,066

RWA (INRm)

87,671

FY15

FY16 FY17e

FY18e

1,002,675 1,244,522 1,487,460 1,739,138 2,070,965

Interest Expense

50,471

54,961

94,838

112,652

122,646

Tier I (%)

18.0

16.8

15.3

14.8

Net Interest Income

37,200

42,237

69,004

85,456

105,419

Tier II (%)

0.9

0.8

1.0

0.8

0.9

16.0

13.5

63.4

23.8

23.4

18.9

17.6

16.3

15.6

15.1

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

% NII Growth
Treasury Income

Total CAR (%)

14.2

1,818

3,148

2,132

1,919

1,957

Non-interest income

13,997

20,285

26,122

30,406

36,062

Net Revenue

51,198

62,522

95,126 115,862

141,481

Employees Expenses

11,722

14,667

28,040

31,461

36,369

Credit / Deposit(%)

89.8

88.4

85.6

84.7

84.7

Other Op. Expenses

13,705

17,880

26,675

29,256

33,766

Investment / Deposit (%)

43.1

40.6

37.0

36.8

36.3

Operating Profit

25,772

29,975

40,411

55,146

71,346

CASA (%)

31.9

36.4

38.1

38.6

39.4

19.5

16.3

34.8

36.5

29.4

RoaA (%)

1.7

1.8

1.1

1.4

1.5

7,699

9,670

10,339

16,460

21,099

12.2

13.2

8.7

11.8

13.2

0.1

0.1

0.1

0.1

0.1

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

% OP Growth
Tax
Total Provisions
Net Profit

3,047

1,645

9,174

6,734

9,290

15,025

18,660

20,898

31,952

40,957

FY16 FY17e

FY18e

Balance sheet (INRm)

Year-ended March 31 FY14
Capital
Reserves and Surplus
Deposits
Borrowings
Other Liabilities & Provisions
Total liabilities

FY15

Key assumptions
Deposit

7,724

9,172

9,172

9,172

Deposit growth (%)

15.8

26.7

85.2

20.0

21.2

133,717

230,453

260,925

300,226

Cost of deposits (%)

6.9

6.8

7.4

6.5

5.9

590,723

748,603 1,386,430 1,663,716 2,016,424

Advances

128,956

121,497

33,338

48,580

209,753

233,954

270,634

Advances growth (%)

86,790 104,148

124,977

Yield on advances (%)

875,853 1,060,121 1,922,598 2,271,914 2,721,433

29,482

39,283

69,034

83,497

100,631

30,317

23,341

39,763

45,544

52,602

304,211 512,602 612,080

731,636

254,845
530,276

661,607 1,186,653 1,409,744 1,708,609

Fixed Assets

11,069

12,068

15,516

17,068

18,774

Other Assets

19,863

19,612

99,030

103,981

109,180

Total assets

Dividend Yield (%)

7,703

Bal. with banks/ call money

Loans and advances

Core RoE (%)

115,133

Cash & Balances with RBI

Investment

Business Ratios

875,853 1,060,121 1,922,598 2,271,914 2,721,433

9.4

24.8

79.4

18.8

21.2

12.1

11.2

8.1

9.6

9.8

(11.7)

19.4

68.5

19.4

19.5

7.7

7.9

8.7

8.1

7.7

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

Investments
Investments growth (%)
Yield on investments (%)

Earnings Ratios
Interest Inc. / Avg.assets (%)

10.2

10.0

11.0

9.4

9.1

Interest Exp./ Avg. assets (%)

5.9

5.7

6.4

5.4

4.9

NIM (%)

Per share data (INR)

Int. exp/ Int earned (%)

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

4.3

4.4

4.6

4.1

4.2

57.6

56.5

57.9

56.9

53.8

Oth. Inc./ Tot. Inc. (%)

27.3

32.4

27.5

26.2

25.5

Book value per share (INR)

77

88

126

142

163

Staff exp/Total opt. exp (%)

46.1

45.1

51.2

51.8

51.9

Adj. BVPS (INR)

73

84

120

134

154

Cost/ Income Ratio (%)

49.7

52.1

57.5

52.4

49.6

10.7

9.3

6.5

5.8

5.1

Prov./ Operating Profit (%)

11.8

5.5

22.7

12.2

13.0

Loan loss prov./Avg. loans (bps)

60.0

27.6

99.3

51.9

59.6

Year-ended March 31 FY14

FY15

FY16 FY17e

FY18e

Price/ Adj. Book value

EPS(INR)

15

18

18

26

34

P/E Ratio

52.1

42.5

42.2

29.6

23.1

13

23

43

28

% EPS Growth

Asset Quality

RoA decomposition
Interest income/Assets

10.0

11.0

9.4

9.1

Interest expenses/Assets

5.9

5.7

6.4

5.4

4.9

Net interest income/Assets

4.3

4.4

4.6

4.1

4.2

Treasury income/Assets

0.2

0.3

0.1

0.1

0.1

Other Inc. from operations/Assets

1.6

2.1

1.8

1.4

1.4

Year-ended March 31 FY14

FY15

FY16 FY17e

Gross NPA (INRm)

10,594

12,372

28,381

33,664

36,977

2.00

1.87

2.39

2.39

2.16

5,736

6,091

12,620

15,212

15,343

Net NPA (%)

1.08

0.92

1.06

1.08

0.90

Total income/Assets

6.0

6.5

6.4

5.5

5.7

% coverage of NPA

45.9

50.8

55.5

54.8

58.5

Employee expenses/Assets

1.4

1.5

1.9

1.5

1.5

1.4

0.9

2.5

1.5

1.4

Other operating expenses/Assets

1.6

1.8

1.8

1.4

1.4

Operating profit/Assets

3.0

3.1

2.7

2.6

2.9

Tax/Assets

0.9

1.0

0.7

0.8

0.8

Loan loss provisions/Assets

0.4

0.2

0.6

0.3

0.4

Net profit/Assets

1.8

1.9

1.4

1.5

1.6

Gross NPA (%)

Net NPA (INRm)

Delinquencies (%)
Source: Company, Antique

FY18e

10.2

Source: Company Antique

ANTIQUE STOCK BROKING LIMITED

FROM THE RESEARCH DESK

8 August 2016 | 4

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