Kotak’s reported standalone PAT of Rs 570 crore was in line with our expectations, but adjusted for a one-off fee reversal of Rs 60 crore, lending business PAT was higher. The 2QFY16 results indicate that most of the P&L drags from the ING integration are behind us, with sequential growth picking up, margins stabilising and opex normalising lower and even the elevated credit costs for the ING book coming within management guidance. In all, we factor in Rs 10-11 billion of ING-related integration costs in FY16F, after which we think profitability will mean-revert, leading to a sector-best earnings CAGR of 24-25% over FY15-18F. We therefore maintain our ‘buy’ rating but with the stock’s 15% run-up over the past two months (vs Nifty +7%), upside could be somewhat limited.
Our target price is Rs 750/share implies upside potential of ~10%.
Our calculations imply just 6% y/y opex growth for Kotak after the normalization of employee expenses (1QFY16 had an additional INR 3.4bn charge towards pensions). Given the almost 2x jump in network that ING provided, branch expansion has come off (9 branches added in 1QFY16), leading to lower opex growth.
Reported fees of Rs 610 crore were affected by Rs 60 crore of income reversals, which are not likely to recur. Even on an adjusted basis, fee growth was flat y/y due to one-off fees in earlier qtrs. On a transactions basis, Kotak is seeing ~20% core fee growth.
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