Kotak Mahindra Bank Analysis: The True Wealth Creator

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Let’s delve deeper into Kotak Mahindra Bank Analysis.

I come from a banking background, someone had spent more than 1000 days in a leading private sector bank HQ . However I have never knew much about Kotak Mahindra Bank. How do they operate , who are their clients or most importantly why the Bank has been consistently valued above 4 by Price to Book value metrics etc.

Firstly I came to know about KMBL was through Motilal Oswal multi year analysis backed 19th “Wealth Creation Study”.

According to the latest Motilal Oswal 24th Annual Wealth Creation Study undertaken in 2019, Kotak Mahindra Bank has emerged one of the Most Consistent Wealth Creator.KMBL ranked sixth with price CAGR of 34 percent over the 10-year period 2009 to 2019. The P/E ratio was 35x in 2019 versus 15x in 2009. RoE in 2019 stood at 12 percent as against 10 percent in 2009.

Recently I conducted a detailed comparative analysis of the Private Banks of India.This blog is an attempt to share the findings with focus on Kotak Mahindra Bank. Here we go:

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Step 1:Financial Analysis: (Cost to income, ROE, ROA, CASA, NIM, Profit Growth)

Step 2:Qualitative Analysis: (Leverage, Asset Quality, NPA, Real Estate exposure, Management Quality)

Step 3:Valuation: (Return Analysis, PB, Reverse Discounted Cash Flow).

1: Financial Analysis

(A) It includes analysing Operational as well as Financial performance of the banks. Firstly let us analyse Kotak Mahindra Bank’s Operational parameters vis a vis its peers as below:

Bank NIM Cost to Income(%) CASA
Kotak Mahindra Bank 4.4 47.0 56.7
HDFC Bank    4.3             39.6 40.0
ICICI Bank     3.7             41.0   41.0
Axis Bank      3.6             45.8     39.0
KMBL score well in 2 out of 3 operational parameters

(B) Secondly let us analyse Kotak Mahindra Bank’s Financial parameters vis a vis its peers as below:

Bank ROE RoA 10 Year Profit CAGR (%)
Kotak Mahindra Bank 13.67 2.14 20.66
HDFC Bank 16.50 1.98 24.68
ICICI Bank 8.07 0.78 7.57
Axis Bank 2.15 0.2 -4.27
KMBL Scores well on all 3 parameters

If we compare ROA of KMBL with HDFC Bank then it is better but in ROE HDFC Banks scores better than KMBL. Why is this so? The answer lies in the next segment.

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Step 2: Qualitative Analysis

Let us now look at the quality of the portfolio of all the leading private banks:

Bank Gross NPA(%) Leverage (D:E) Real Estate Exposure (%) Management to median employee Salary (X)
Kotak Mahindra Bank 2.7 2.78 9% 52
HDFC Bank 1.4 5.38 9% 175
ICICI Bank   5.5   2.80 20% 99
Axis Bank 4.7 6.20 20% 62
KMBL Score well in 4 out of 4 qualitative parameters

The reason why HDFC Bank scores better than KMBL in RoE lies here: Leverage . Due to high leverage of HDFC Bank , HDFC Bank outscores KMBL in ROE as

RoE = (1+D/E) X RoA 

So the point to take home is that KMBL inspite of having conservative leverage almost matches the most celebrated bank’ ROE (HDFC Bank)

If we collate the results of Step 1 & Step 2 then clearly the winner is Kotak mahindra Bank.

Now once we know that on Financial and qualitative parameters Kotak Bank is best managed bank then the only open point remains is Valuation.

Step 3:Valuation Analysis

First let us compare the return generated by these stocks. Also seeing these returns in context with Price to Book value gives us the picture that clears why market gives high multiple to KMBL earnings or book assets:

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Price to book value are in line with the 10 year Stock price CAGR with market giving premium to HDFC Bank & KMB for their consistent earning growth leading to healthy price CAGR.

If we look at the historical P/B (average 3.72) of the Bank then at current market price with P/B of 3.96 the Bank seems to offer no margin of safety

(B) Reverse DCF

Let us look at the valuation using Reverse DCF. Here we have used FCF= PAT-Capex for simplification as for a bank standard CFO does not make any meaning (vis-a-vis PAT).

This model tells us that the Market have factored in 16% Free Cash Flow growth rate for next 10 year against 20% of historical growth rate shown by KMBL in past 10 years.

What We Think About Kotak Mahindra Bank?

Let us summarize our analysis below:

To know more about Kotak Mahindra Please watch the video 

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Amitabh Vatsya
Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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