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    CLSA downgrades Kotak Mahindra Bank on high valuations

    CLSA downgrades Kotak Mahindra Bank on high valuations

    CLSA downgrades Kotak Mahindra Bank on high valuations
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    By Ankit Gohel   IST (Published)

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    Kotak Mahindra Bank has been one of the best performing private lenders with a strong liability franchise and the ability to grow in pockets like mortgages. But analysts believe that the bank’s stock price factors in the high growth and trades at premium valuations.

    Kotak Mahindra Bank has been one of the best performing private lenders with a strong liability franchise and the ability to grow in pockets like mortgages. But analysts believe that the bank’s stock price factors in the high growth and trades at premium valuations.
    Global research firm CLSA is of the view that Kotak Mahindra Bank rightly has been trading at a premium to the sector, but with the recent move up it is trading 10-20 percent higher than its own 3-year trading history and, on a relative basis, at a 35 percent premium to HDFC Bank.
    Even the optionality of a potential value-accretive acquisition seems to be priced into the stock price, it said.
    Through a tough credit cycle over the past few years, the bank’s asset quality has held up well with the least credit costs versus larger private peers.
    Kotak’s liability franchise has scaled up massively in the past 4-5 years; today, its cost of funds is lower than the top-3 private banks, CLSA noted, saying that such advantage has enabled the bank build a low-risk loan book and allows it to compete profitably in low-yield segments such as mortgages/corporate loans where the bank has just 2-3% market share.
    CLSA has downgraded Kotak Mahindra Bank to Underperform from Outperform but raised its target price on the stock to Rs 2,000 per share from Rs 1,600 earlier. It prefers ICICI Bank/Axis Bank/HDFC Bank on better risk-reward.
    CLSA has raised its earnings estimates by 7 percent for FY21-23F and now expect RORWAs of 2.8 percent by FY23F. It expects the bank to deliver a steady 20-25 percent Cagr earnings growth over the medium-term.
    “We factor in higher growth of 17-18 percent for Kotak Bank and one of the lowest credit costs of 80 bps in FY23F; post factoring in the upside, valuations are 30x FY23F earnings. Also, while RORWAs have inched up, ROEs remain lower than peers due to continuous capital raise,” the brokerage house said.
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