Kotak is one of the most diversified financial institutions in India. The company has been successfully running an array of verticals, with comprehensive growth being observed across all major domains. We expect banking, alternative assets management and the international subsidiaries to be the key growth drivers.
The Bank has been successful in maintaining certain parameters at an above-industry level, such as net interest margin, and has been recording continuous growth as seen in its CASA ratio. While derivative exposure has severely affected the net interest income in the last quarter, we believe it will not have any substantial long-term impact. We expect the diversified business model to help the Bank operate smoothly even in the face of growing competition, and more so when the Indian banking sector opens up in FY10.
Our target price of Rs1,040 for FY09E for Kotak Mahindra Bank is based on sum-of-the-parts valuation methodology. We have arrived at a target P/B multiple of 4x for the standalone business through the two-stage Gordon growth model (assuming a sustainable RoE of 12%), thus valuing the standalone banking business at Rs465.
Kotak Mahindra Capital Company has been valued at a target multiple of 17x. This gives the investment banking business a valuation of Rs85. The brokerage business has been valued at Rs249, based on a target P/E multiple of 15x. The AMC has been valued at 6% of its FY09E AUM, based on a recent stake purchase of Standard Chartered AMC by IDFC. This leads to the valuation of Kotak AMC at Rs39. The Life insurance business has been valued at Rs104 by using NBAP multiple of 16x. Other subsidiaries, taken together, are valued at Rs97.