With improved risk-reward ratio of Kotak Mahindra Bank Ltd, the valuation premium of the bank over its peers has decreased, and as a result, global brokerage CLSA has raised the recommendation from O-PF to 'buy' for the stock.
The target price has remained unchanged at ₹2,080 per share, indicating a 23% upside.
The brokerage claims that the private lender's valuation premium to HDFC Bank Ltd and ICICI Bank Ltd is down 10% - 20%.
Additionally, the brokerage considers the bank to be a big bank growth leader. Over the past 18 months, Kotak's loan growth has accelerated to +20%, led by an increased management willingness to lend and a decrease in its cost of funds, which enables Kotak to compete in product segments like mortgages.
Only 2% of the system's loans are originated by Kotak, and the company only accounts for 1.5% of all unsecured, business, and mortgage loans.
"This implies Kotak can deliver higher-than-peer growth over the next decade, where we expect 3% to 5% higher growth versus peers over FY23-25CL (calendar year)," said the brokerage.
Over the past three years, the bank has underperformed its peers by 50%-130%. So far this year, the price has decreased by 7%.
The brokerage also anticipates a rise in the bank's cost-to-income ratio, even as the cost of growth would moderate.
"The bank's efficiency is best in class and branch addition targets are moderate. High operational expenditure (opex) growth was due to spending on digital and retail asset build-up. We expect cost growth to moderate from FY24CL leading to cost income improvement," said the brokerage in its report.
Additionally, the brokerage stated that while the CEO transition is a concern and should be clarified in the following three to four months, continuing improvement in liabilities is essential for higher valuations. According to reports from last month, Kotak Mahindra Bank hired consulting firm Egon Zehnder to handle a global hunt for a new CEO to succeed its founder and CEO Uday Kotak.
According to the report, the bank's board is broadening its hunt for qualified outside candidates. Shanti Ekambaram and KVS Manian, both division presidents and full-time directors, are potential candidates for the bank's top position.
Furthermore, according to reports, Kotak Bank was competing to buy IDBI Bank, in which the LIC and the government are seeking to sell their stake.
"Our analysis suggests an IDBI Bank takeover at a 25% premium would be 30% book accretive and 15-18% earnings accretive, providing strong M&A optionality," said the brokerage.
