Brokerages retain ratings, target prices for Kotak Mahindra Bank despite Uday Kotak’s exit

Kotak explained that due to personal commitments, including his son’s November 2023 wedding near the end of his tenure in December, he felt it was wise to resign.

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Uday Kotak’s resignation from the helm of affairs at Kotak Mahindra Bank seems to have little impact on the stock with most brokerages maintaining their target prices and ratings unchanged.

Jefferies India has retained its ‘buy’ tag on the stock and kept the target price at Rs 2,400. Macquarie, too, stuck to its ‘neutral’ rating and target price at Rs 1,860. Investec, on its part, kept the ‘buy’ rating and retained the target price at Rs 2,300 a share. Morgan Stanley continued with the ‘equal weight’ views and the target price of Rs 2,250 a share.

According to Macquarie, Kotak’s early resignation doesn’t alter the uncertainty about the next CEO in January 2024 and the bank’s ability to find a suitable replacement for the iconic banker.

Kotak cited personal commitments, including his son’s wedding in November, to step down before the December deadline set by the Reserve Bank of India.

The lender said that two candidates have been submitted to the banking regulator for approval, but analysts said that it’s unclear if they are internal or external. Analysts expect an RBI response by December.

Dipak Gupta, who has taken over as the interim chief of the bank, reaches an end to his current tenure on December 31. News reports suggest that the two internal candidates are likely to be KVS Manian and Shanti Ekambaram, both seasoned extensively at Kotak Bank. Manian oversees corporate banking, while Ekambaram is responsible for consumer and digital banking.

According to Macquarie, leadership changes can be disruptive. If one of the suggested internal candidates is appointed, they would align with the organisation’s culture. The key challenges include maintaining the asset and balance sheet quality set up by their predecessor and improving ROE, which has lagged behind larger peers. There’s also a need for greater focus on smaller, more granular deposits, as a significant portion of recent deposit growth came from bulk/wholesale deposits.

“Over the last four years Kotak has de-rated from 4x P/B to 2.3x (consolidated) and now trades at par with HDFC Bank (merged) and at a discount to ICICIBC. During this period, the bank has managed to improve its RoEs to 15-percent-plus, while improving the growth trajectory and ensuring the CoF advantage. We estimate the bank to deliver 20 percent EPS growth rate with stable RoEs of over 15 percent and remain our top pick in the large-cap bank along with ICICI Bank,” said Investec in its latest note.

Morgan believes Kotak Bank is well-positioned to seize growth opportunities in the current economic upswing, thanks to its strong funding capabilities and effective underwriting practices. The bank’s strategic shift towards higher-margin assets should also help protect margins as funding costs rise. Morgan’s preference is for larger banks due to their more favorable relative valuations.

Stock currently trades at 2.4x FY25 P/BV which analysts believe is expensive as it is at a 10-15 percent premium to its larger peers.