Kotak Bank: Q1FY16 Result Is In Line With Merged Estimates---Only Sustaining Abv 715-720 TGT May Be 745-800-850, Otherwise 680-616-572 Might Be On The Card

Technical Charts:

Technical Analysis (Time & Price):

KMB (CMP:705) has to sustain at least over 715-720 zone for an immediate to short term target of 737-745 area. Only consecutive closing above 745, it may scale 800-850 in the near term (bullish case scenario).

On the downside, inability to sustain above 715, might result selling in KMB and it may fall to 695-680 immediately. Only consecutive closing below 680, it may further fall to 658-645 and sustaining below that 628-616 & 595-572 might be on the card in the near term (worst bear case scenario).

Technical Trading Levels(Positional):

	SL</>5	FROM SLR
		KOTAKBK	CMP	705
			T1	T2	T3	T4	T5	T6	T7	SLR
Strong >	720		737	745*	759	781	800	811	828-850	<715
Weak <	715		695	680*	658	645*	628	616	595-572	>720

Some Inputs:

Q1 result of KMB is by & large in line with street estimates as merged entity (with ING). Although NP declined by almost 56% to Rs.190 cr against Rs.430 cr (YOY- Standalone), there is one time various integration costs of  nearly Rs.432 cr due to merger with ING Vysya Bank. If we do not consider this one time exceptional cost, the bottom line should be Rs.622 cr (190+432). Similarly restructured assets had grown manifold because of ING contribution of around 65% of total stressed assets.

Consolidated NP also declined by around 26% to Rs.517 cr (including all the other subsidiaries) and NIM (Q1) also fall drastically to 4.29% from 5%, while on brighter side, NII increased by 43%  (consolidated) & 60% (standalone-YOY). Analysts are expecting an average NII of around 4.2% for the next five years for the merged entity (KMB+ING). The cost to income ratio of the merged entity was higher than street estimates of 65% in Q1. The KMB management is looking to reduce it to near 50% by 2016-17, while analysts are skeptical about it and are expecting a figure of around 56%-50% in FY17-FY18. 

Looking ahead, the company is expecting an incremental credit costs in the remaining nine months for around 50 bps due to transfer of NPA/stressed assets from ING to Kotak loan book and also expecting normalization after FY16. Most of the stressed assets from ING are of corporate NPA(s) and the KMB is persuading active loan recovery through various resolutions & CDR. As on June'15, the total loan book of the merged entity stands around Rs.1.03 lakh cr, which is an increase of over 80% due to ING merger and the management is expecting a steady growth of 15-20% in it in the days ahead. The management expects that the total integration process/costs will be over by FY16 & by FY17, we should see fully normalised merged entity and operations. They will also gradually expand branches from the present strength of combined 1260 branches & 1942 ATM(s).

With the merger of ING, there will be significant increase of presence for the KMB in southern India, which may be termed as "growth engine" of "Shinning India". Due to higher rate of interest of SB A/C offered by Kotak, we may see a sequential higher deposits for ING customers also and the average revenue per branch of KMB will be higher too.

In Q1, loans to provision ratio is around 0.8% against Kotak's own historical ratio of 0.3%. Analysts are projecting an average ratio of 0.6% for the next five years. Going ahead, KMB has to outperform this key metric for further upside potential as par scrip price is concerned.

Techno Funda Valuation As Par BG Metrics (Modified):

Considering the average historical EPS of ING, which was around 33 and average industry PE of private banks (21.19) along with Kotak's own historical EPS, the valuations of KMB might be around:

Current median valuation: 815

Projected fair valuations: 900-960-1060 (FY:16-18)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	LONG TERM	SHORT TERM	MEDIAN VALUE
KOTAKBANK	45.67	121.55	21.19	790.70	826.35	808.53

KOTAKBANK

55.6

140.5

21.19

872.44

911.78

892.11

646.05

KOTAKBANK

63.55

161.65

21.19

932.73

974.78

953.76

646.05

KOTAKBANK

78.05

185.95

21.19

1033.68

1080.28

1056.98

646.05