Kotak Bank’s Q3 profit miss sparks mixed brokerage reactions, valuation may limit upside

UBS analysts have issued a Sell call on Kotak Mahindra Bank, setting a target price of Rs 1,875 per share

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Kotak Mahindra Bank shares were trading flat on January 23 after the lender’s December quarter net profit missed estimates. Nonetheless, the shares had surged 3 percent on January 20, when the bank reported numbers in the last hour of trade and margins were stable.

The bank reported lower than expected 7.6 percent increase in net profit at Rs 3,005 crore for the December quarter of the current financial year, while the market had pegged the net profit at Rs 3,243 crore. The bank also made a provision of Rs 143 crore on its alternate investment fund (AIF) investments.

At 12 pm, the stock was quoting at Rs 1,783 on the NSE, down by 1.3 percent from previous close. Given its premium valuation compared to other private banks, analysts believe the upside is limited.

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For instance, UBS analysts have issued a Sell call on Kotak Mahindra Bank, setting a target price of Rs 1,875 per share. The Q3 performance of the bank was deemed as in-line, featuring flat Net Interest Margins (NIMs) and modest loan growth, it noted, while adding current valuation limits the upside potential.

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Macquarie’s outlook on Kotak Mahindra Bank is more neutral. They have assign a target price of Rs 1,860 per share and note a positive surprise on margins in Q3. However, the overall performance was marred by a miss in Profit After Tax (PAT) due to higher credit costs, it noted.

Macquarie sees an upside risk in better-than-expected loan growth but cautions against downside risks from elevated credit costs impacting Return on Assets (RoAs).

The bank expects RoA to sustain at ~2-2.1 percent going forward, while Street estimates are 2.4 percent.

Domestic broking firm Yes Securities said that Kotak Bank’s RoA was below ICICI’s but valuation multiple still higher. “We maintain a less-than bullish ‘ADD’ rating on KMB with a revised price target of Rs 2160,” it said.

Meanwhile, Goldman Sachs has a more optimistic stance with a Buy call and a target price of Rs 2,280 per share. They highlight Q3 as another strong quarter, citing a 21 percent YoY growth in core Pre-Provision Operating Profit (PPoP).

They believe the new CEO Ashok Vaswani will redirect investor focus towards improving fundamentals, including expanded RoAs and strong Compound Quarterly Growth Rate (CQGR). Goldman Sachs finds the valuation attractive, trading below its 10-year average.

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