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

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. The media speculated that the two possible internal candidates would be KVS Manian and Shanti Ekambaram, both of whom are very experienced at Kotak Bank. Manian oversees corporate banking, while Ekambaram is responsible for consumer and digital banking.
According to Macquarie, changes in leadership can be disruptive. If one of the nominated internal candidates is nominated, they will be a good fit for the organization’s culture. The main challenges are maintaining the asset and balance sheet quality established by its predecessor and improving ROE, which lags behind larger peers. There is also a need to focus more on smaller, more granular deposits, as a significant portion of recent deposit growth has come from bulk/bulk deposits.
“Over the past four years, Kotak has downgraded its P/B from 4x to 2.3x (consolidated) and now trades on par with HDFC Bank (consolidated) and at a discount to ICICIBC. During this period , the bank has managed to improve RoE by more than 15%, while improving growth trajectory and securing CoF advantage.We estimate the bank will generate 20% EPS growth with stable RoE above 15% and remains our top choice among large-cap banks with ICICI Bank,” Investec said in its latest note. Morgan believes Kotak Bank is well positioned to capture growth opportunities during the current economic recovery, thanks to strong funding capacity and efficient underwriting operations. The bank’s strategy of transitioning to higher-margin assets will also help protect margins as capital costs rise. Morgan favors the big banks because of their relatively more favorable valuations.
The stock is currently trading at a fiscal year P/BV of 2.4, which analysts consider expensive because it has a 10-15% premium spread over its larger counterparts.