Goldman Sachs upgrade Kotak Mahindra Bank, adds to Conviction List

New Delhi: Goldman Sachs notes that Kotak Mahindra Bank has underperformed the Bank NIFTY over the last two years with its standalone bank valuation de-rated to 1SD-below-mean. The key debates have been the bank’s risk appetite and its ability to deliver sustainable growth by utilizing excess capital and sweating its infrastructure to drive the ROEs higher.

Goldman Sachs believes that Kotak Mahindra Bank is well-positioned in this cycle to put capital to work, and successful execution of its retail asset strategy to drive the MCap to US$100bn by FY27E. With these positives and with 28% upside to their 12-month target price of Rs 2,135; they upgrade the stock to Buy from Neutral and add it to their Conviction List.

Goldman Sachs turns constructive on Kotak Bank given its: (1) beneficial position in a rising interest rate environment; (2) sustainable loan growth at a +20% CAGR on utilization of excess capital and realize operating leverage aided by its digital platform (“811”); (3) best in class PPOP-ROA; and (4) limited dilution risk as promoter’s stake already at RBI limits, leading to an improvement in ROEs of c.200bps in FY22-25E. They believe Kotak Mahindra Bank is positioned for an earnings upgrade cycle; and hence raise their estimates by c.7%/13% for FY23E-FY25E on higher margins and lower loan-loss provisions.

This drives their 12-month target price to Rs2,135 (from Rs1,984). They expect core operating profits to grow at a 22% CAGR (vs. a <15% CAGR in FY19-22) and net profits to grow at an 18% CAGR in FY22-25E. Goldman Sach’s FY23E-25E estimates are ~8% higher on average than consensus.

Goldman Sachs however details these risk to their thesis: (1) continued sell-off by global investors in the banking space due to macro situation; (2) investor comfort on the leadership changes, which are due in 2023; (3) subpar performance in subsidiaries as they contribute c.30% of market cap; (4) significantly higher SA deposit rates to improve SA growth performance and hence compromise on profitability; (5) 811, which has seen a renewed focus by the bank, is unable to scale up compared to expectations; and (6) continued turmoil in global markets and higher-than-expected increase in policy rates by the RBI impacting valuations.