BSE SENSEX
29,647
S&P CNX
9,174
Kotak Mahindra Bank
CMP: INR865
TP: INR1,015 (+17%)
Building blocks for strong growth
KMB announces board approval to sell 6.2m shares
30 March 2017
Update
| Sector:
Financials
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
KMB IN
1,840
885 / 656
5/5/10
1,580.8
24.4
1618
66.4
Financials Snapshot (INR b)
Y/E MARCH
2017E 2018E 2019E
NII
80.7
90.6 110.3
OP
58.1
69.3
89.2
Cons. NP
48.2
59.2
75.7
Cons. EPS
26.3
32.3
41.3
EPS Gr. (%)
39.2
22.9
27.8
Cons. BV
207
238
278
Cons. RoE (%)
13.5
14.5
16.0
RoA (%)
1.6
1.8
2.0
P/E (Cons.)
32.8
26.6
20.8
P/BV (Cons.)
4.2
3.6
3.1
Stock Performance (1-year)
Kotak Mah. Bank
Sensex - Rebased
900
850
800
750
700
650
Kotak Mahindra Bank (KMB), in a board meeting held on 30 March 2017, approved
the sale of up to 62m shares. This translates to 3.4% pre-issue dilution and capital
raise of INR53b at CMP.
The stated intent by management is to augment KMB’s capital base for the purpose
of: a) pursuing consolidation opportunities, b) acquisition/resolution of stressed
assets and participation in a “Bad Bank”, c) organic growth opportunities and digital
expansion and d) growth in subsidiaries.
The capital raise would result in a reduction in promoter shareholding to 31.04%,
closely following the RBI’s requirement to lower promoter stake in the bank to 30%
by June 2017.
Post capital issue, tier I capital will improve by 225-250bp to ~18.5%. We expect
KMB, backed by strong capitalization, to be a key player in M&A activities,
considering the RBI’s directive to reduce promoter shareholding. KMB is well placed
to capitalize on the fast-growing financials savings pool and weakening competition
(particularly in corporate lending). We reiterate Buy with a target price of INR1,015
(3.6x FY19E cons. BV).
Strengthened tier 1 capital – best in system
The issue of 62m shares would result in pre- and post-issue dilution of 3.38% and
3.27%, respectively. The total amount works out to be ~USD800m, which is ~14%
of consolidated net worth, assuming that fresh shares will be issued at CMP of
INR860 (3.6x/3.1x FY18/19 BV – pre-dilution). Our calculations suggest that the
capital raise would further strengthen its tier 1 capital by ~225-250bp (16.2%
currently) and would be accretive to BV by ~9% in FY18 and 7.5% in FY19 (Exhibit
4). At CMP, KMB will trade at 3.3/2.9x FY18E/FY19E BV after taking capital raise
into consideration.
Serves dual purpose of fast-tracking growth…
Management is confident of fast-tracking its growth targets with stated digital
strategy and synergies from the merger with eIVBL. The bank intends to double its
customer base in 18 months (~8m currently). With sufficient capital, KMB is well
placed for both organic and inorganic growth (acquisition/participation in ARC and
“Bad Bank,” and pursuing consolidation opportunities). The bank sees significant
opportunities in stressed assets sale, with Mr Uday Kotak pegging capital
requirement at ~INR2.5t for asset reconstruction companies (ARC). We believe that
part of the proposed fund-raising could be used to explore capital infusion in KMB’s
ARC subsidiary.
…and meeting RBI’s directions with regard to reducing promoter stake
The RBI’s directive requires promoter shareholding to be brought down in phases
to 15% by March 2020, with the target for June being 30% (Exhibit 5). In line with
this, the promoter group sold 33.6m shares in March 2017, taking the shareholding
down to 32.1% (v/s 33.6% in December 2016). The proposed capital raise would
result in promoter shareholding of 31.04% post-dilution (Exhibit 6).
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526
Subham Banka
(Subham.Banka@MotilalOswal.com); +91 022 6129 1567
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.