(KMB IN) Rating: HOLD CMP: Rs1,177 TP: Rs1,291 October 24, 2018 Q2FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating HOLD HOLD Target Price 1,291 1,398 NII (Rs. m) 131,930 154,428 132,675 159,743 % Chng. (0.6) (2.1) Op. Profit (Rs. m)113,044 137,631 115,471 141,610 % Chng. (2.1) (2.8) EPS (Rs.) 33.4 42.4 35.1 44.2 % Chng. (4.8) (4.1) Key Financials FY18 FY19E FY20E FY21E NII (Rs m) 112,749 131,930 156,428 186,525 Op. Profit (Rs m) 95,953 113,044 137,631 166,368 PAT (Rs m) 56,561 63,917 81,100 99,050 EPS (Rs.) 29.6 33.4 42.4 51.8 Gr. 17.6 13.0 27.0 22.2 DPS (Rs.) 0.6 0.7 0.9 0.9 Yield 0.1 0.1 0.1 0.1 NIM 4.3 4.1 4.1 4.3 RoAE 13.0 12.2 13.7 15.7 RoAA 2.0 1.9 2.0 2.1 P/BV (x) 4.6 4.1 3.6 3.6 P/ABV (x) 4.8 4.2 3.7 3.7 PE (x) 39.8 35.2 27.7 22.7 CAR 17.6 14.7 14.4 14.3 Key Data KTKM.BO KMB IN 52-W High / Low Rs.1,424 / Rs.983 Sensex / Nifty 34,034 / 10,225 Market Cap Rs.2,245bn/ $ 30,651m Shares Outstanding 1,907m 3M Avg. Daily Value Rs.6920.37m Shareholding Pattern Promoter s 30.02 Foreign 54.68 Domestic Institution 8.79 Public & Others 6.51 Promoter Pledge (Rs bn) Stock Performance 1M 6M 12M Absolute 2.5 1.0 10.5 Relative 9.3 2.7 5.8 Pritesh Bumb priteshbumb@plindia.com 91-22-66322232 Steady performance; retain HOLD Quick Pointers Steady asset quality with improved provision coverage ratio Margins continue to be under pressure as yields still lag cost of funds KMB s s lone earnings was largely in-line with expectations with PAT at Rs11.4bn (PLe: Rs11.8bn) but operating pressure felt some pressure as NII growth was slower and higher other opex offset better other income. Loan growth continued to be across segments except business banking, while deposit traction especially CASA was good. On Subs, capital market businesses were soft, while financial services businesses were seen with steady trends. Post our downgrade in Jul 18 to Hold stock has seen correction of 12% and currently trades at 3.3-3.4x core book which is still premium/at par peers and promoter stake stance still remains unclear and hence we retain HOLD rating with revised TP of Rs1,291 based 3.2x Sep-20 lending book and SOTP for subs. Better liability profile, good loan growth and steady asset quality remain key catalyst for higher valuations. Slower NII growth remains a set-back: NII grew by 16.3% YoY lagging loan growth of 21% YoY and margins pressure of 10bps QoQ to 4.2% as yields have been lagging cost of funds. Overall operating performance was better (slightly miss from estimates) on better other income as it saw good fee growth and lower staff expenses but was offset by higher other opex growth. Bank continues to invest in marketing of products across business lines and use technology as acquisition strategy which has upfront costs as well but helping improve business momentum. Loan growth momentum slightly slower; CASA remains at strong footing: Bank s loan grew by 21% YoY which was slightly slower on back of continued consciousness in SME/business banking (wholesale) and slowdown in Car loans in retail and corporate banking. Management had been mentioning risk based pricing is not appropriate in the market place and but has started improving. On Deposits, CASA grew by 30% YoY (36% YoY on daily average) with mix remaining steady at 50% as strong accretion in SA. Bank s focus has been on the <1year & lower TDs which are stickier and CASA growth to keep cost of funds on lower side especially in current environment. Asset quality steady: Bank s asset quality profile has remained broadly steady with GNPA/NNPAs at 2.15%/0.81% in Q2FY19, while PCR improved to 63%. Other stress exposure like SMA-2 also remains very miniscule at Rs1.65bn (0.09% of loans). Retain Hold as promoter stake reduction remains unclear: Prime reason for our downgrade to HOLD in previous quarter was on demanding valuations and modest earnings performance, post that stock has seen 12% correction as multiples have come off but at current multiples of 3.3-3.4x core book are still premium/at par to peers private banks and we do not see very large upside in near term especially in view of limited clarity on promoter stake. October 24, 2018 1
NII growth of 16% was slightly slower on margin pressures Other income came in strong on back of fee income growth of 26% YoY, while treasury was muted Staff opex was lower, but other opex was up on higher marketing/advertisement expenses, acquisition cost, card related pay-outs Q2FY19 Financials Weaker NII but earnings in-line Standalone (Rs mn) Q2FY19 Q2FY18 YoY gr. QoQ gr. Interest Income 58,109 47,601 22.1 54,797 6.0 Interest Expense 31,218 24,475 27.6 28,968 7.8 Net interest income (NII) 26,891 23,127 16.3 25,829 4.1 Other income 12,053 9,539 26.4 11,646 3.5 Total income 38,944 32,665 19.2 37,475 3.9 Operating expenses 17,994 15,417 16.7 17,150 4.9 -Staff expenses 7,452 7,230 3.1 7,204 3.4 -Other expenses 10,542 8,188 28.7 9,945 6.0 Operating profit 20,950 17,248 21.5 20,325 3.1 Total provisions 3,538 2,165 63.4 4,696 (24.7) Profit before tax 17,412 15,083 15.4 15,629 11.4 Tax 5,995 5,140 16.6 5,380 11.4 Profit after tax 11,417 9,943 14.8 10,249 11.4 Balance sheet (Rs mn) Loan growth momentum was slightly slower, while deposits continued its traction Margins have been under pressure falling 10bps to 4.2% Deposits 2,058,298 1,656,709 24.2 1,897,440 8.5 Advances 1,849,403 1,525,741 21.2 1,769,270 4.5 Ratios Q2FY19 Q2FY18 Profitability ratios YoY chg (bps) QoQ chg. (bps) RoaA 1.6 1.8 (12) 1.6 8 RoaE - Calc 11.7 11.4 25 10.8 90 NIM 4.2 4.3 (13) 4.3 (10) Asset quality remains steady with improved PCR at 63% Asset Quality ratios Gross NPL 40,331 38,142 5.7 38,995 3.4 Net NPL 15,008 19,188 (21.8) 15,271 (1.7) Gross NPL ratio 2.2 2.5 (32) 2.2 (2) Net NPL ratio 0.8 1.3 (45) 0.9 (5) Coverage ratio 63.1 49.7 1,342 60.7 238 CASA mix remained at 50% with strong growth from SA deposits. Daily average basis also CASA growth remained strong Business & Other Ratios Low-cost deposit mix 50.2 47.8 240 50.3 (10) Cost-income ratio 46.2 47.2 (99) 45.8 44 Non int. inc / total income 30.9 29.2 175 31.1 (13) Credit deposit ratio 89.9 92.1 (224) 93.2 (339) CAR 18.0 18.7 (70) 17.6 40 Tier-I 17.4 19.4 (200) 18.3 (90) October 24, 2018 2
Overall loan book momentum was slightly slower mainly from corporate and Auto loans Auto loans are seeing aggressive pricing and hence company going cautius Biz banking continue to see stress and caution, but the small biz SME has been showing good demand Consolidated Loan Book All segments contribute to growth Loan Book (Rs mn) Q2FY19 Q2FY18 YoY gr. QoQ gr. CV/CE 170,480 122,050 39.7 160,240 6.4 Auto Loans 206,960 199,000 4.0 203,650 1.6 Personal Loans, Small biz 291,430 209,180 39.3 262,760 10.9 Home loans & LAP 360,640 294,290 22.5 340,050 6.1 Corporate 673,190 564,930 19.2 661,780 1.7 Biz Banking 185,750 181,130 2.6 181,160 2.5 Agriculture 224,250 197,410 13.6 212,490 5.5 Others 109,020 109,590 (0.5) 111,490 (2.2) Total Advances 2,221,720 1,877,580 18.3 2,133,620 4.1 Loan Book mix Q2FY19 Q2FY18 YoY (bps) QoQ (bps) CV/CE 7.7 6.5 1.2 7.5 0.2 Auto Loans 9.3 10.6 (1.3) 9.5 (0.2) Personal Loans, Small Biz 13.1 11.1 2.0 12.3 0.8 Home loans & LAP 16.2 15.7 0.6 15.9 0.3 Corporate 30.3 30.1 0.2 31.0 (0.7) Biz Banking 8.4 9.6 (1.3) 8.5 (0.1) Agriculture 10.1 10.5 (0.4) 10.0 0.1 Others 4.9 5.8 (0.9) 5.2 (0.3) Margins remain under pressure as yields lag cost of funds rise 4.7% 4.8% 4.9% 4.8% 4.9% 5.0% 5.0% 4.7% 4.9% 4.2% 4.3% 4.4% 4.4% 4.3% NIM 4.5% 4.5% 4.6% 4.3% 4.5% 4.2% 4.4% 4.3% 4.2% 4Q13 1Q14 2Q14 3Q14 October 24, 2018 3
CASA mix steady with continued growth on SA deposits CASA 32% 29% 29% 31% 32% 34% 36% 38% 36% 35% 31% 29% 30% 44% 39% 37% 42% 44% 51% 48% 47% 50% 50% 4Q13 1Q14 2Q14 3Q14 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Asset quality steady, PCR moves further up Gross NPA Net NPA 3Q14 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% Credit cost remained in tight band of 40-50bps Credit Cost 3Q14 Capital market entities see slowdown, while financial services like MF & insurance continue to do well on profitability Consol Financials (Rs mn) Consolidated performance Table Q2FY19 Q2FY18 YoY gr. QoQ gr. Standalone Bank 11,417 9,943 14.8 10,249 11.4 Kotak Prime 1,390 1,320 5.3 1,600 (13.1) KMCC 250 50 400.0 250 - Kotak Securities 1,300 1,250 4.0 1,340 (3.0) International Subs 330 170 94.1 380 (13.2) Kotak AMC 510 150 240.0 390 30.8 Kotak Mah. Investments 480 450 6.7 950 (49.5) Lending business 12,807 11,263 13.7 11,849 8.1 Flow business 2,870 2,070 38.6 3,310 (13.3) Consol PAT (ex - insurance) 14,570 12,440 17.1 16,750 (13.0) Insurance 1,170 1,030 13.6 1,140 2.6 Consolidated PAT 15,740 13,470 16.9 17,890 (12.0) October 24, 2018 4
contribution Prime, securities dominate subs earnings, life biz improving Kotak Prime Kotak Sec KMCC Kotak Life AMC Intl. subs KIAL KIL 6,200 5,400 4,600 3,800 3,000 2,200 1,400 600 (200) (Rs m) Consolidated ROEs Bank to see gradual improvement in return ratios Du-pont Analysis 2013 2014 2015 2016 2017 2018 2019E 2020E Net Interest Income 4.38% 4.50% 4.54% 4.84% 4.34% 4.30% 4.10% 4.14% Fees 2.02% 2.01% 2.50% 2.29% 2.15% 2.36% 2.27% 2.31% Investment profits 0.19% 0.20% 0.31% 0.17% 0.26% 0.14% 0.12% 0.11% Net revenues 6.60% 6.70% 7.35% 7.30% 6.75% 6.80% 6.48% 6.55% Operating Expense -3.33% -3.25% -3.68% -3.95% -3.19% -3.15% -2.97% -2.91% Provisions -0.22% -0.30% -0.16% -0.57% -0.40% -0.37% -0.47% -0.35% Taxes -1.01% -1.06% -1.20% -0.92% -1.05% -1.13% -1.06% -1.14% Total Costs -4.56% -4.61% -5.03% -5.44% -4.64% -4.65% -4.50% -4.41% ROA 2.04% 2.09% 2.32% 1.86% 2.10% 2.16% 1.98% 2.15% Equity/Assets 14.49% 15.35% 16.50% 15.72% 15.68% 16.35% 16.09% 15.45% ROE 14.1% 13.6% 14.0% 11.8% 13.4% 13.2% 12.3% 13.9% Change in estimates We adjust earnings on margins, opex and slowdown in capital market business (Rs mn) Old Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Net interest income 132,675 159,743 131,930 156,428 (0.6) (2.1) Operating profit 115,471 141,610 113,044 137,631 (2.1) (2.8) Net profit 66,905 84,277 63,678 80,849 (4.8) (4.1) EPS (Rs) 35.1 44.2 33.4 42.4 (4.8) (4.1) ABVPS (Rs) 281.5 317.6 279.8 314.5 (0.6) (1.0) Price target (Rs) 1,398 1,291 (7.7) Recommendation HOLD HOLD October 24, 2018 5
We revise our TP to Rs1,291, (from Rs1,398) based on Sep-20 SOTP (rolled from Mar-20). Value (Rs m) Per Share (Rs) Valuation Basis Lending biz valuation 1,868,228 980 3.2x Sep-20 book Kotak Securities 157,599 83 17x Sep-20 Earnings Asset Management 121,317 64 7% of AUMs KMCC 18,751 10 17x Sep-20 Earnings International subsidiaries 24,241 13 2.5x Sep-20 book Others 61,129 32 15x Sep-20 Earnings Insurance 208,723 110 2.4x EV & 22x new biz multiple Total Subsidiary Valuation 591,759 311 Sep-20 based PT 1,291 KMB Standalone one year forward P/ABV trend P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 October 24, 2018 6
Income Statement (Rs. m) Int. Earned from Adv. 189,672 230,752 276,439 331,950 Int. Earned from invt. 39,330 49,072 57,356 66,479 Others 10,875 7,779 8,684 9,943 Total Interest Income 239,877 287,603 342,479 408,371 Interest Expenses 127,128 155,673 186,051 221,846 Net Interest Income 112,749 131,930 156,428 186,525 Growth 19.5 17.0 18.6 18.2 Non Interest Income 65,707 76,849 91,148 106,184 Net Total Income 178,456 208,780 247,576 292,708 Growth 14.6 19.3 19.0 18.7 Employee Expenses 35,792 38,810 43,598 48,983 Other Expenses 46,711 56,926 66,347 77,358 Operating Expenses 82,503 95,736 109,945 126,341 Operating Profit 95,953 113,044 137,631 166,368 Growth 21.8 17.8 21.7 20.9 NPA Provision 7,753 10,089 11,814 13,697 Total Provisions 9,778 15,011 13,290 15,026 PBT 86,176 98,032 124,341 151,342 Tax Provision 29,615 34,116 43,241 52,292 Effective tax rate 34.4 34.8 34.8 34.6 PAT 56,334 63,678 80,849 98,787 Growth 21.8 13.0 27.0 22.2 Balance Sheet (Rs. m) Face value 5 5 5 5 No. of equity shares 1,906 1,906 1,906 1,906 Equity 9,528 9,528 9,528 9,528 Networth 491,599 556,603 623,837 639,180 Growth 30.8 13.2 12.1 2.5 Adj. Networth to NNPAs 17,679 17,400 17,622 17,513 Deposits 1,926,433 2,311,719 2,750,946 3,287,380 Growth 22.4 20.0 19.0 19.5 CASA Deposits 977,750 1,172,144 1,400,353 1,679,997 % of total deposits 50.8 50.7 50.9 51.1 Total Liabilities 3,121,358 3,722,306 4,280,307 4,959,193 Net Advances 2,104,928 2,529,336 2,896,787 3,415,237 Growth 23.6 20.2 14.5 17.9 Investments 687,867 806,369 923,513 1,045,332 Total Assets 3,121,358 3,722,306 4,280,307 4,959,193 Growth 22.7 19.3 15.0 15.9 Asset Quality Gross NPAs (Rs m) 40,668 42,576 45,554 48,950 Net NPAs (Rs m) 17,679 17,400 17,622 17,513 Gr. NPAs to Gross Adv. 1.9 1.7 1.6 1.4 Net NPAs to Net Adv. 0.8 0.7 0.6 0.5 NPA Coverage % 56.5 59.1 61.3 64.2 Profitability NIM 4.3 4.1 4.1 4.3 RoAA 2.0 1.9 2.0 2.1 RoAE 13.0 12.2 13.7 15.7 Tier I 17.6 14.7 14.4 14.3 CRAR 17.6 14.7 14.4 14.3 Source: Company Data, PL Research Quarterly Financials (Rs. m) Y/e Mar Q3FY18 Q4FY18 Q2FY19 Interest Income 50,092 53,234 54,797 58,109 Interest Expenses 26,155 27,436 28,968 31,218 Net Interest Income 23,937 25,798 25,829 26,891 YoY growth 8.2 20.8 20.2 27.6 CEB 8,290 10,100 9,890 10,190 Treasury - - - - Non Interest Income 10,398 11,516 11,646 12,053 Total Income 60,490 64,750 66,443 70,162 Employee Expenses 7,342 7,664 7,204 7,452 Other expenses 8,793 9,470 9,945 10,542 Operating Expenses 16,135 17,134 17,150 17,994 Operating Profit 18,201 20,180 20,325 20,950 YoY growth 19.1 18.6 27.4 21.5 Core Operating Profits - - - - NPA Provision 1,698 1,749 2,600 2,213 Others Provisions 2,128 3,069 4,696 3,538 Total Provisions 2,128 3,069 4,696 3,538 Profit Before Tax 16,073 17,110 15,629 17,412 Tax 5,541 5,870 5,380 5,995 PAT 10,532 11,241 10,249 11,417 YoY growth 19.7 15.1 12.3 14.8 Deposits 1,808,260 1,926,433 1,897,440 2,058,298 YoY growth 21.1 22.4 16.0 24.2 Advances 1,590,710 1,697,179 1,769,270 1,849,403 YoY growth 23.1 24.7 24.3 21.2 Key Ratios CMP (Rs) 1,177 1,177 1,177 1,177 EPS (Rs) 29.6 33.4 42.4 51.8 Book Value (Rs) 255 289 324 331 Adj. BV (70%)(Rs) 246 280 315 322 P/E (x) 39.8 35.2 27.7 22.7 P/BV (x) 4.6 4.1 3.6 3.6 P/ABV (x) 4.8 4.2 3.7 3.7 DPS (Rs) 0.6 0.7 0.9 0.9 Dividend Payout Ratio 2.0 2.1 2.1 1.7 Dividend Yield 0.1 0.1 0.1 0.1 Efficiency Cost-Income Ratio 46.2 45.9 44.4 43.2 C-D Ratio 109.3 109.4 105.3 103.9 Business per Emp. (Rs m) 83 91 96 104 Profit per Emp. (Rs lacs) 12 12 14 15 Business per Branch (Rs m) 2,880 3,458 4,034 4,788 Profit per Branch (Rs m) 40 46 58 71 Du-Pont NII 4.30 4.10 4.14 4.28 Total Income 6.80 6.48 6.55 6.72 Operating Expenses 3.15 2.97 2.91 2.90 PPoP 3.66 3.51 3.64 3.82 Total provisions 0.37 0.47 0.35 0.34 RoAA 2.16 1.98 2.15 2.27 RoAE 13.19 12.33 13.89 15.87 Source: Company Data, PL Research October 24, 2018 7
Price Chart Recommendation History (Rs) 1425 1220 1016 811 607 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 25-Oct-17 Accumulate 1,127 1,010 2 10-Jan-18 Accumulate 1,127 1,006 3 20-Jan-18 Accumulate 1,165 1,060 4 13-Apr-18 Accumulate 1,165 1,118 5 30-Apr-18 Accumulate 1,239 1,210 6 10-Jul-18 Accumulate 1,239 1,369 7 20-Jul-18 Hold 1,398 1,347 8 5-Oct-18 Hold 1,398 1,075 Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 Axis Bank Accumulate 624 586 2 Bank of Baroda Accumulate 165 103 3 Bank of India Reduce 89 79 4 Federal Bank BUY 102 82 5 HDFC Bank BUY 2,310 1,968 6 HDFC Standard Life Insurance Company BUY 500 359 7 ICICI Bank Accumulate 329 317 8 ICICI Prudential Life Insurance Company BUY 507 323 9 IDFC Bank Accumulate 55 37 10 IndusInd Bank BUY 2,000 1,627 11 Jammu & Kashmir Bank BUY 94 40 12 Kotak Mahindra Bank Hold 1,398 1,075 13 Max Financial Services BUY 700 359 14 Punjab National Bank Hold 79 65 15 SBI Life Insurance Company BUY 779 564 16 South Indian Bank BUY 22 15 17 State Bank of India BUY 349 271 18 Union Bank of India Reduce 79 68 19 YES Bank BUY 250 215 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly October 24, 2018 8
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> October 24, 2018 9