Kotak Bank Shares Tumble 4% Despite 67% YoY Growth In Q1 PAT; Should You Buy Or Sell?

Private sector lender, Kotak Mahindra Bank's share price nosedived by more than 4% on Monday despite the lender posting 67% YoY growth in Q1 net profit for FY24. The bank's earnings came in better than expected across key metrics, however, asset quality was impacted due to seasonal pickup in slippages. Also, subsidiaries performances ex-life beats estimates, but the life insurance business was under pressure. Nevertheless, the majority of brokerages have raised their target price on Kotak Bank's shares while maintaining a 'Buy' rating.

At the time of writing, Kotak Bank's shares traded at Rs 1904.70 apiece, down by Rs 66.40 or 3.4% on BSE. In the early deals, the stock erased its Rs 1,900 mark and dipped to an intraday low of Rs 1887.80 apiece. Overall, the stock has slipped by at least 4.22%.

In Q1FY24, Kotak Bank's net profit rose by 67% YoY to Rs 3,452 crore, while net interest income (NII) jumped 33% YoY to Rs 6,234 crore, and net interest margin (NIM) stood at 5.57%.

As of June 30, 2023, the bank's gross NPA was at 1.77% and NNPA came in at 0.40% (GNPA was 2.24% & NNPA was 0.62% at June 30, 2022). The provision coverage ratio stood at 78.0%.

Should you buy, sell or hold Kotak Bank's share price?

Brokerages Axis Securities, Prabhudas Lilladher and Nirmal Bang raised their target price on Kotak Mahindra Bank after the Q1 results.

In its research note, Nirmal Bang said, "We roll forward our valuation to June 2025E ABV, keeping our target multiple constant at 3.1x. After adding subsidiary valuation of Rs573 per share, we arrive at a target price (TP) of Rs2,372 (as against Rs2,243 earlier, valued at 3.1x FY25E ABV + subsidiary value per share). We are positive on the bank's business model and are confident of it maintaining its earnings trajectory over FY23-FY25E on the back of 16.5% CAGR in loan book, above-industry average NIM at 4.9-5% and good asset quality, thereby enabling it to maintain high RoA of 2.5%. We maintain a 'BUY' rating on KMB. Any announcement with respect to management transition in the near future will be a key monitorable."

Meanwhile, Axis Securities said, " We expect KMB's business growth to remain buoyant over the medium term. Even as margins contract (though remain well above 5%) on the back of a sharp increase in CoF and credit costs gravitate to normalised levels, we believe improving cost ratios should support the bank to deliver a consistent RoA of ~2.4% and RoE of ~14%-14.5% over FY24-25E."

Axis Securities maintained a 'Buy' recommendation with the current target price for Kotak set at Rs 2,300/share from earlier Rs 2,180/share.

Along similar lines, Gaurav Jani - Research Analyst, Prabhudas Lilladher in a note said, "KMB saw a mixed quarter. NIM beat of 16bps resulted in better NII that was offset by lower fees and higher opex. PPoP beat of 13.3% was mainly led by higher treasury and dividend income. Business growth QoQ was also more wholesale driven as corporate credit grew by 7.0%, while wholesale deposit growth was 18%. RTD share was 80% (vs 88% a year ago). A key positive has been continuing traction in unsecured segments with PL/CC/MFI share touching 10.4% (7.8% YoY). A healthy credit environment could further propel unsecured growth cushioning NIM, although opex would continue to remain elevated."

Hence, Jani's note added, "For FY24/25E we raise NIM by 17/19bps and increase opex by ~5.4% resulting in PAT upgrade of 5.0%. Valuation is at 3.0x; maintaining multiple at 3.5x on Mar'25 core ABV we slightly raise SOTP-based TP to Rs2,250 from Rs2,220. Retain 'BUY'."

Furthermore, Antique Stock Broking's note said, "KMB's performance continues to be healthy with RoA maintained at just below 2.8%. Even as NIM moderates and credit cost normalizes above 50 bps, we expect RoA of 2.3%/ 2.2% and core RoE of 14%-15% over FY24/ 25E. While we do not foresee a very near-term challenge, the key test for the bank would be sustaining performance in a weaker consumer credit cycle given the late push in unsecured retail assets (unseasoned) and diminishing strength on the liability side. Maintain BUY with SoTP-based TP of Rs 2,250."

On the other hand, Motilal Oswal's note said, "KMB delivered a healthy quarter with steady revenue growth and stable asset quality. NIM contracted due to the rising cost of deposits but was on expected lines. Asset quality remained steady, aided by healthy recoveries, while the restructured book moderated to 20bp of loans. KMB carries additional Covid-related provisions of Rs 3.4 billion (10bp of loans). We raise our earnings estimates by 7%/5% for FY24/25 and expect KMB to deliver RoA/RoE of 2.4%/14.3% in FY25. Reiterate Neutral with a TP of Rs 2,170 (3.0x FY'25E BV and Rs 560 for subs)."

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.