Delivery BUY- Kotak Mahindra Bank

Kotak Mahindra Bank (Tgt 1300+ in LONG TERM) Very Safe Investment for one year with around 30-40% returns)
A financial powerhouse, with strong presence in almost all financial services the Bank will continue to be well-positioned to capitalise on ample opportunities in the Indian financial sector.
52-week High/Low
Rs 1436 / 302
Current Price
Rs 961 (as on 1st February 2008)
Kotak obtained its banking license in 2002. Today Kotak group has strong presnce in most of the financial services such as securities, investment banking, life insurance, asset management, mutual fund and banking, and it has become one of the leading players in capital markets in India.
Today, the group has a net worth of over Rs 5,609 crore, employs around 17,100 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 344 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 3.6 million customer accounts.

Outstanding consolidated performance
For the quarter ended Dec '07 Kotak Mahindra Bank reported 88% growth in Interest income at Rs 992.32 crore with the interest on advances going up 78% to Rs 698.46 crore. Interest expenses increased 90% to Rs 506.03 crore restricting the growth of net interest income (NII) by 86% to Rs 486.29 crore. Other income 125% to Rs 1490.39 crore, this included fee income of Rs 527.47 crore. Operating profit increased 124% to Rs 651.75 crore despite 110% increase in operating expenses (including staff cost) at Rs 1324.93 crore. PAT before minority interest increased 116% to Rs 352.42 crore. Share of minority interest stood as profit at Rs 5.60 crore compared to Rs 4.57 crore. Also profits from associates stood at Rs 5.71 crore compared to Rs 2.11 crore. Finally, PAT grew 114% to Rs 363.73 crore. NII for the nine months ended Dec '07 increased by 73% to Rs 1195.67 crore. Net total income was up by 97% to Rs 4338.41crore with 108% increase in other income at Rs 3142.74 crore. However the operating expenses increased by 96% to Rs 3052.32 crore restricting the operating profit to grow by 100% to Rs 1286.09 crore. Provisions increased by 134% to Rs 222.12 crore and tax provision increased by 84% to Rs 346.12 crore. After accounting for minority interest and share of profits the Net profit increased by 104% to Rs 751.13 crore.

All its subsidiaries are doing well

Kotak Mahindra Prime – car finance, other lending
Auto advances up 32% to Rs 43 bn as on December 2007 from Rs 33 bn as on December 2006. Other advances were Rs 13 bn as on December 31, 2007. PAT was up 244% to Rs 373.7 mn in Q3FY08 from Rs 108.8 mn in Q3FY07.
Kotak's small lending business gives it some strong advantages: it can grow at a rapid pace despite slowing growth in the system. In addition, it can stay focused on high-margin businesses, which help to sustain its above-average net interest margins. This business is expected to increase significantly over time.

Kotak Investment Advisors Limited (KIAL) – alternate assets management
Effective October 1, 2007, the investment management of real estate and private equity funds of the group have been assigned to Kotak Investment Advisors Limited (erstwhile Kotak Mahindra Securities Limited), which is 100% beneficially owned by Bank. KIAL manages / advises private equity and realty funds aggregating to an AUM of Rs 38 bn. Currently raising a domestic private equity fund and second round of international realty fund.

International Subsidiaries
As on December 31, 2007, assets managed / advised by international subsidiaries were USD 3.5 bn (USD 1.4 bn as on December 31, 2007). This company was the lead manager to the Rs 2.2 bn Prime Focus FCCB issue.

Kotak Mahindra Capital Company – investment banking and primary dealer
Kotak Investment Banking for CY 2007 was ranked No. 1 by Bloomberg for (a) India Domestic IPOs, (b) India Domestic Equity Offerings (IPO, Additional Offerings and QIP) Kotak Investment Banking was Joint Global coordinator and Book Running Lead Manager to the Rs 39.7 bn GMR Infrastructure Ltd, Rs 16.2 bn Kotak Mahindra Bank Ltd, Rs 5.9 bn CESC Ltd and Global coordinator and Book Runner for the Rs 6.0 billion Godrej Industries Ltd Kotak Investment Banking was Book running Lead Manager to the following major Public issues Rs 17.7 bn Mundra Port & Special Economic Zone Ltd Rs 6.9 bn Edelweiss Capital Ltd, Rs 4.4 bn BGR Energy Systems Ltd, Rs 3.1 bn Jyothy Laboratories Ltd

Kotak Securities – stock broking
Kotak Securities (retail, online and institutional segments) clocked average daily volumes of over Rs 75 bn during Q3FY08 (Rs 40 bn during Q3FY07). Average daily volumes for FY07 were Rs 37 bn Kotak Securities accounted for 7.8% of total average daily market volumes in YTD FY08 AUM in Portfolio Management Services was Rs 46.2 bn as on December 2007 (Rs 21.3 bn as on December 2006)Kotak Institutional Equities growth momentum continues and we expect this momentum to be sustained. To this end, Kotak institutional equities is focused on client coverage, relationship and is investing in and recruiting quality professionals to help sustain this growth.

Kotak Securities has a network of over 867 offices (own & franchisees) across 309 cities and towns and services more than 390,000 secondary market customers Kotak Mahindra Asset Management Company and Trustee Company – asset management
Total AUM as on December 2007 was Rs 208.7 bn (Rs 126.9 bn as on December 2006).
Equity AUM as on December 2007 was Rs 43.6 bn (Rs 26.4 bn as on December 2006).
KMAMC has 71 branches and satellite offices servicing over 596,000 investors.
Kotak Indo World Infrastructure Fund NFO during Q3FY07 garnered Rs 9.6 bn.

Kotak Mahindra Old Mutual Life Insurance - life insurance
Kotak Life Insurance (KLI) premium income grew 96% to Rs 4178.8 mn in Q3FY08 from Rs 2,132.6 mn in Q3FY07. First year regular premium grew 98% to Rs 2,661.4 mn in Q3FY08 from Rs 1,34 3.9 mn in Q3FY08 Kotak Life has a network of 106 branches in 74 cities (65 branches as on 31st December 2006). As on December 31, 2007, KLI had over 443,700 individual policies on books representing a basic sum assured of ~ Rs 169 bn (excluding riders).
Additionally, Kotak Life had around 330 group policies covering over 677,400 lives with an aggregate sum assured of ~ Rs 224 bn.

Best investment bank play
Kotak's high exposure to capital markets is positive, and is a solid structural bull story in that space. India's demographic changes and strong growth should produce a surge in the addressable market for retail and wholesale capital market services and that this segment will experience strong growth. Kotak, with its market leadership in broking and capital markets, is one of the best listed plays on this theme.

India's savings rate has been rising consistently since 1999, and it is now at 29% vs 22% ten years ago. Rising household savings has been a key driver, expanding from 14% of GDP to 22% between 1986 and 2006. As a result, the total stock of household savings rose at a 12% CAGR over 1996–2006. The capital markets and investment services are natural beneficiaries of this trend. The Indian middle-class has traditionally favoured government-guarante ed fixed-income investments. As disposable incomes rise, particularly for younger people, those investments have started to lose their attractiveness vis-à-vis riskier equity-related investments.

Kotak is well geared to exploit that with a full suite of investment services: retail broking, mutual funds, life insurance, portfolio management and wealth management.

This gives Kotak a very strong advantage. Kotak's each product appeals to different segments of the market – a full suite helps Kotak retain customers. Moreover, the product-neutral wealth-management service provides the added advantage of being able to sell third-party mutual fund products, which ensures that the product providers and the marketing machine operate independently and can capture a larger part of customer flows.

Well placed to withstand competition
Kotak has a strong brand name and many strengths.

Branding: Although some of the new entrants are formidable brands, Kotak enjoys unique branding as a specialist investment house. This should continue to give it a headstart in the market, especially in the western region.

Incumbent advantage – reach and franchisees. : Kotak is already present in 60 cities, having rolled out its network. With real estate costs having risen sharply during the past few years, new players will have to fight to match Kotak's reach. In addition, Kotak's franchisee network has already been locked-in – new players may find that the best "target" franchisees are already gone. Even if they manage to lure some franchisees away from Kotak, that will take time and may succeed only to a limited extent.

Commercial banking licence: Kotak's commercial banking licence is a very strong differentiator. It allows the bank to seamlessly sell both assets and liabilities – linked financial products – and provides it with a natural reach and customer acquisition platform. Kotak is one of the few banks to have a strong suite of investment products. Most brokers do not have bank licences, and most banks do not have strong broking businesses.

Synergy across businesses: The other strong advantage for Kotak is its holding structure, which gives it a strong synergy across businesses. With almost all the businesses held as 100% subsidiaries, Kotak responds to a central command and control structure much better than in other similar conglomerates.

Valuation
In FY 2008, we expect Kotak to register EPS of Rs 28.5 In FY 2009, this EPS is likely to rise to Rs 38.8. The share price trades at Rs 961. While the P/E on FY 2008 EPS is 33.6, it falls to 25 on FY 2009 EPS.