Kotak Mahindra Bank. Source: Company Data; PL Research. PE (x) Net dividend yield (%) Source: Bloomberg

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1 Higher operating expenses affect bottomline January 21, 2011 Abhijit Majumder Umang Shah Rating BUY Price Rs419 Target Price Rs531 Implied Upside 26.7% Sensex 19,047 (Prices as on January 20, 2011) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 45.61% Foreign 23.99% Domestic Inst. 5.84% Public & Other 24.56% Stock Performance (%) 1M 6M 12M Absolute (6.9) 7.1 (4.3) Relative (2.6) 0.6 (13.3) Price Performance (RIC: KTKM.BO, BB: KMB IN) Healthy core operating performance, higher opex affects bottom line: Kotak Mahindra Bank (KMB) reported consolidated PAT of Rs3.84bn, up 15.7% YoY and 5.3% QoQ and standalone PAT of Rs1.88bn, up 31.9% YoY, but down 3. 5% QoQ. While the consolidated PAT met our expectations, standalone PAT was lower than expected. For standalone banking operations, the operating expenses grew by 18.4% QoQ, with employee and other operating expenses growing nearly at the same pace. This was mainly on account of certain midyear salary hikes given for employee retention and higher advertising expenses towards the 25 years celebration campaign of the bank. Business growth stood healthy, with consolidated advances growing by 36.7% YoY and 6.9% QoQ, led by a sharp sequential increase in agri advances (up 12.8% QoQ), CV and construction equipment loans (up 11.5% QoQ) and mortgages (up 11.5% QoQ). Consolidated deposits grew strongly by 30.4% YoY, but declined by 0.8% QoQ. Importantly, CASA deposits declined by 12.7% QoQ, resulting into an over 400bps QoQ decline in CASA ratio to 27.8%. NIM declined by 20bps QoQ TO 5.4%. However, the margins have been normalized due to the impact of the strong recovery from a NPA account in Kotak Mahindra Prime, adjusting for the interest on recovery; the margins could have improved to ~5.6%. Large part of provisioning expenses pertains to the MTM provisions on G Secs. Asset quality improved as GNPAs declined by 0.9% QoQ. Provision coverage improved further to 68.4% from 66.3% in Q2FY11, and with technical write offs, it stood at 72%. Healthy performance by Kotak Prime and life insurance subsidiaries: Kotak Mahindra Prime reported a robust growth in bottom line, driven by a strong recovery from an NPA account, while overall disbursements continued to grow well. Capital market and asset management businesses continue to witness headwinds. On account of revised ULIP guidelines coming into effect, the overall premium growth got impacted, but tighter cost controls improved profitability. Key financials ( Y/e March) E 2012E 2013E Net interest income (Rs m) 28,283 29,495 36,323 43,769 Growth (%) Operating profit (Rs m) 24,136 27,104 34,597 41,343 PAT (Rs m) 13,070 15,504 19,956 25,121 EPS (Rs) Growth (%) Net DPS (Rs) Q3FY11 Result Update (Rs) Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Source: Company Data; PL Research Profitability & Valuation E 2012E 2013E NIM (%)* RoAE (%) RoAA (%) P / BV (x) P / ABV (x) PE (x) Net dividend yield (%) Source: Bloomberg Source: Company Data; PL Research *Calculated on average assets Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Valuation and Outlook: Kotak Bank continues to perform well in its lending operations. Outlook for most of its subsidiaries remains largely positive, while the insurance business is likely to take another couple of quarters to consolidate. The post results conference call highlighted management s focus on building capacity for the next phase of growth. The bank, thereby, announced a mid year salary hike to retain talent across group, the benefits of which are likely to accrue in the coming years. This, coupled with higher advertising expenses towards the completion of 25 years, too, affected the overall cost and income dynamics for the bank. We have, therefore, revised our earnings estimates downwards for standalone banking business by 7.2% and 5.6% for FY11 and FY12, respectively. Meanwhile, we have revised our consolidated (ex insurance) earnings by 10.0% and 7.2% for FY11 and FY12, respectively, to factor in the same. We maintain our BUY rating, with a revised price target of Rs531. January 21,

3 Q3FY11 Result Overview (Rs m) Consolidated Y/e March Q3FY11 Q3FY10 YoY gr. (%) Q2FY11 9MFY11 9MFY10 YoY gr. (%) Interest Income 16,538 11, ,493 44,187 33, Interest Expended 7,309 4, ,060 18,602 13, Net Interest Income 9,229 7, ,432 25,585 20, Non Interest Income 10,147 12,058 (15.8) 14,917 35,172 36,872 (4.6) CEB 3,017 3,176 (5.0) 3,213 9,492 9,637 (1.5) Net total Income 19,376 19,456 (0.4) 23,349 60,758 57, Operating Expenses 13,417 13, ,664 43,853 40, Employee 3,967 3, ,732 11,218 9, Policy holders reserves 5,370 6,632 (19.0) 9,928 20,909 21,459 Other operating expenses 4,080 3, ,004 11,726 10, Operating profit 5,959 6,066 (1.8) 5,685 16,904 16, Provisions 534 1,256 (57.5) 474 1,562 3,890 (59.8) Profit before tax 5,425 4, ,210 15,343 12, Tax 1,615 1, ,580 4,705 3, Net Profit after tax (before minority int) 3,810 3, ,631 10,638 9, Less: Share of minority interest Add: Share in profit of associates (66) Net Profit after tax (after minority int) 3,836 3, ,641 10,754 8, Asset Quality Gross NPA's 8,637 11,086 (22.1) 9,043 8,637 11,086 (22.1) Gross NPA's % of advances Net NPA's 2,747 5,725 (52.0) 3,320 2,747 5,725 (52.0) Net NPA's % of advances Provision Coverage Gross NPA's % excluding stressed assets Net NPA's % excluding stressed assets Capital Adequacy (%) CAR Tier Yield Measurement ratios (%) NIM reported Balance Sheet Items Deposits 261, , , , , Advances 400, , , , , Investments 157, , , , , Total Assets 558, , , , , January 21,

4 Q3FY11 Result Overview (Rs m) Standalone Y/e March Q3FY11 Q3FY10 YoY gr. (%) Q2FY11 9MFY11 9MFY10 YoY gr. (%) Interest Income 11,354 8, ,147 30,709 23, Interest on Advances 8,784 6, ,761 23,486 18, Income on investments 2,489 1, ,345 7,089 5, Bal with RBI & others Interest Expense 5,639 3, ,709 14,474 10, Net Interest Income 5,715 4, ,438 16,235 13, Non Interest Income 1,653 1, ,393 4,417 3, Net total Income 7,368 6, ,832 20,652 17, Operating Expenses 4,221 2, ,564 11,084 8, Employee 1,985 1, ,687 5,329 3, Other operating expenses 2,236 1, ,877 5,756 4, Operating profit 3,147 3,369 (6.6) 3,268 9,568 8, Core operating profits 2,084 2,693 (22.6) 2,204 7,585 5, Provisions 427 1,277 (66.6) 455 1,443 3,583 (59.7) Profit before tax 2,721 2, ,812 8,126 5, Tax ,431 1, Net Profit after tax 1,879 1, ,947 5,695 3, Asset Quality Gross NPA's 7,442 9,282 (19.8) 7,511 7,442 9,282 (19.8) Gross NPA's % of customer assets Net NPA's 2,353 4,675 (49.7) 2,530 2,353 4,675 (49.7) Net NPA's % of customer assets Provision Coverage Capital Adequacy (%) CAR Tier Yield Measurement ratios (%) NIM calculated Balance Sheet Items Deposits 282, , , , , CASA 78,682 63, ,179 78,682 63, CASA (%) Advances 288, , , , , Investments 142, , , , , Total Assets 431, , , , , January 21,

5 Trend in performance of Kotak Mahindra Bank and its key subsidiaries (Rs m) Y/e March Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Kotak Bank (Standalone) NII 4,365 4,867 5,260 5,082 5,438 5,715 % y o y growth PAT 1,259 1,424 2,025 1,869 1,947 1,879 % y o y growth Kotak Mahindra Prime Healthy operating performance; one off operating expenses affect bottomline growth Revenues 2,401 2,546 2,735 2,999 3,158 3,840 % y o y growth (5.5) PAT % y o y growth Advances Auto (Rs bn) Advances Others (Rs bn) Healthy growth trend in auto advances continues, strong recovery from NPA account boosted bottomline Kotak Mahindra Old Mutual Life Insurance Gross Premium 5,859 7,116 11,371 5,577 7,348 6,108 % y o y growth (14.2) PAT (69) % y o y growth (13.7) (727.3) Revised ULIP guidelines affect gross premium growth; however tighter control over operating costs improves profitability Kotak Mahindra Capital Company Revenues % y o y growth (31.9) PAT % y o y growth (53.9) (184.2) (452.6) Industry outlook has improved and deal pipeline remains strong; bottomline improves marginally despite sequential decline in revenues January 21,

6 Trend in performance of Kotak Mahindra Bank and its key subsidiaries (Rs m) Y/e March Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Kotak Securities Revenues 2,345 1,927 1,872 1,744 1,980 1,957 % y o y growth (4.1) (21.9) (15.6) 1.6 PAT % y o y growth , (36.2) (31.9) (21.3) Average Daily Volumes (Rs bn) Market Share (%) Strong sequential traction in volumes continues (13.0% QoQ); market share stable, but revenues and profitability continue to remain under pressure Kotak Mahindra AMC Revenues % y o y growth (65.5) (52.9) PAT (40) 56 % y o y growth NM (46.8) (120.5) (75.5) AUM (Rs bn) Equity Debt AUM's decline QoQ in line with the industry trend; equity AUMs decline sharply by 9.1% QoQ leading to 2.8% QoQ decline in total AUMs Kotak Investment Advisors Limited (KIAL) Revenues % y o y growth (9.2) (16.9) (18.4) (2.7) (10.5) (5.7) PAT % y o y growth (18.1) (13.8) (30.4) (8.2) 11.6 (52.9) Commitments (Rs bn) Revenues remain largely flattish; but profits decline sharply by ~50% both on YoY as well as on a QoQ basis International Subsidiaries AUM (Rs bn) % y o y growth PAT % y o y growth (32.0) (40.9) (63.7) AUMs remain flat QoQ; however higher operating expenses QoQ result in 33.3% QoQ decline in profits January 21,

7 Trend in Consolidated PAT contribution by various subsidiaries Proportion of the lending business to consolidated profits rose significantly to 74% on account of a steep increase in the profitability of Kotak Prime. We expect the lending business to contribute 60 65% to bank s consolidated bottom line in the medium term. In terms of contribution of various subsidiaries towards consolidated bottomline, contribution from the broking and investment banking business remained fairly stable, while that of the life insurance business improved during the quarter. 100% 80% 60% 40% 20% 0% 20% Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 KMB 54% 49% 35% 42% 43% 48% 57% 53% 49% KMAMC 5% 3% 5% 7% 7% 3% 2% 1% 1% KSEC 3% 9% 29% 25% 18% 12% 14% 14% 12% KMCC 1% 2% 2% 1% 0% 3% 2% 2% 2% Intl Subs 6% 1% 9% 7% 7% 4% 5% 3% 2% KMIA 10% 5% 5% 3% 3% 2% 3% 3% 1% KMLI 7% 19% 0% 1% 6% 11% 2% 4% 6% KMP 25% 22% 7% 13% 15% 14% 23% 17% 24% SOTP Valuation Subsidiaries Basis (Rs bn) Multiple KMB Rs. Per share % of SOTP FY12E FY13E FY12E FY13E FY12E FY13E Kotak Securities KSEC Earnings % 10% KMCC KMCC Earnings % 2% Kotak AMC KAMC AUMs % % 3% Pvt Equity KMIA AUMs % % 2% Kotak Prime KMP ABV % 14% Investments KMI ABV % 1% International Subs Earnings % 2% Kotak UK Kotak UK Earnings % 1% Kotak OM Life KMLI* App Value % 7% Value of subsidiaries per share KM Bank ABV ** % 58% SOTP target price % 100% Source: PL Research 12 month forward price target based on 25% of FY12E & 75% of FY13E price targets above * post 15% holding company discount for its life insurance venture ** ABV reduced by Rs 6 per share for investments in subsidiaries and outstanding NNPAs January 21,

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