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Kotak Mahindra Bank
A financial powerhouse
With strong presence in almost all financial services the Bank will continue to be well-positioned to capitalise on ample opportunities in the Indian financial sector.
| Buy | Kotak Mahindra Bank |
| BSE Code | 500247 |
| NSE Code | KOTAKBANK |
| Bloomberg | KMB@IN |
| Reuter | KTKM.BO |
| 52-week High/Low | Rs 1436 / 302 |
| Current Price | Rs 961 (as on 1st February 2008) |
Kotak obtained its banking license in 2002. Today Kotak group has strong presnce in most of the financial services such as securities, investment banking, life insurance, asset management, mutual fund and banking, and it has become one of the leading players in capital markets in India.
Today, the group has a net worth of over Rs 5,609 crore, employs around 17,100 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 344 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 3.6 million customer accounts.
Outstanding consolidated performance
For the quarter ended Dec ’07 Kotak Mahindra Bank reported 88% growth in Interest income at Rs 992.32 crore with the interest on advances going up 78% to Rs 698.46 crore. Interest expenses increased 90% to Rs 506.03 crore restricting the growth of net interest income (NII) by 86% to Rs 486.29 crore. Other income 125% to Rs 1490.39 crore, this included fee income of Rs 527.47 crore. Operating profit increased 124% to Rs 651.75 crore despite 110% increase in operating expenses (including staff cost) at Rs 1324.93 crore. PAT before minority interest increased 116% to Rs 352.42 crore. Share of minority interest stood as profit at Rs 5.60 crore compared to Rs 4.57 crore. Also profits from associates stood at Rs 5.71 crore compared to Rs 2.11 crore. Finally, PAT grew 114% to Rs 363.73 crore.
NII for the nine months ended Dec ’07 increased by 73% to Rs 1195.67 crore. Net total income was up by 97% to Rs 4338.41 crore with 108% increase in other income at Rs 3142.74 crore. However the operating expenses increased by 96% to Rs 3052.32 crore restricting the operating profit to grow by 100% to Rs 1286.09 crore. Provisions increased by 134% to Rs 222.12 crore and tax provision increased by 84% to Rs 346.12 crore. After accounting for minority interest and share of profits the Net profit increased by 104% to Rs 751.13 crore.
All its subsidiaries are doing well
Kotak Mahindra Prime – car finance, other lending
Auto advances up 32% to Rs 43 bn as on December 2007 from Rs 33 bn as on December 2006.
Other advances were Rs 13 bn as on December 31, 2007.
PAT was up 244% to Rs 373.7 mn in Q3FY08 from Rs 108.8 mn in Q3FY07.
Kotak’s small lending business gives it some strong advantages: it can grow at a rapid pace despite slowing growth in the system. In addition, it can stay focused on high-margin businesses, which help to sustain its above-average net interest margins. This business is expected to increase significantly over time.
Kotak Investment Advisors Limited (KIAL) – alternate assets management
Effective October 1, 2007, the investment management of real estate and private equity funds of the group have been assigned to Kotak Investment Advisors Limited (erstwhile Kotak Mahindra Securities Limited), which is 100% beneficially owned by Bank.
KIAL manages / advises private equity and realty funds aggregating to an AUM of Rs 38 bn.
Currently raising a domestic private equity fund and second round of international realty fund.
International Subsidiaries
As on December 31, 2007, assets managed / advised by international subsidiaries were USD 3.5 bn (USD 1.4 bn as on December 31, 2007).
This company was the lead manager to the Rs 2.2 bn Prime Focus FCCB issue.
Kotak Mahindra Capital Company – investment banking and primary dealer
Kotak Investment Banking for CY 2007 was ranked No. 1 by Bloomberg for (a) India Domestic IPOs, (b) India Domestic Equity Offerings (IPO, Additional Offerings and QIP)
Kotak Investment Banking was Joint Global coordinator and Book Running Lead Manager to the Rs 39.7 bn GMR Infrastructure Ltd, Rs 16.2 bn
Kotak Mahindra Bank Ltd, Rs 5.9 bn CESC Ltd and Global coordinator and Book Runner for the Rs 6.0 billion Godrej Industries Ltd
Kotak Investment Banking was Book running Lead Manager to the following major Public issues
Rs 17.7 bn Mundra Port & Special Economic Zone Ltd
Rs 6.9 bn Edelweiss Capital Ltd
Rs 4.4 bn BGR Energy Systems Ltd
Rs 3.1 bn Jyothy Laboratories Ltd
Kotak Securities – stock broking
Kotak Securities (retail, online and institutional segments) clocked average daily volumes of over Rs 75 bn during Q3FY08 (Rs 40 bn during Q3FY07). Average daily volumes for FY07 were Rs 37 bn
Kotak Securities accounted for 7.8% of total average daily market volumes in YTD FY08
AUM in Portfolio Management Services was Rs 46.2 bn as on December 2007 (Rs 21.3 bn as on December 2006)
Kotak Institutional Equities growth momentum continues and we expect this momentum to be sustained. To this end, Kotak institutional equities is focused on client coverage, relationship and is investing in and recruiting quality professionals to help sustain this growth.
Kotak Securities has a network of over 867 offices (own & franchisees) across 309 cities and towns and services more than 390,000 secondary market customers
Kotak Mahindra Asset Management Company and Trustee Company – asset management
Total AUM as on December 2007 was Rs 208.7 bn (Rs 126.9 bn as on December 2006).
Equity AUM as on December 2007 was Rs 43.6 bn (Rs 26.4 bn as on December 2006).
KMAMC has 71 branches and satellite offices servicing over 596,000 investors.
Kotak Indo World Infrastructure Fund NFO during Q3FY07 garnered Rs 9.6 bn.
Kotak Mahindra Old Mutual Life Insurance - life insurance
Kotak Life Insurance (KLI) premium income grew 96% to Rs 4178.8 mn in Q3FY08 from Rs 2,132.6 mn in Q3FY07. First year regular premium grew 98% to Rs 2,661.4 mn in Q3FY08 from Rs 1,34 3.9 mn in Q3FY08
Kotak Life has a network of 106 branches in 74 cities (65 branches as on 31st December 2006). As on December 31, 2007, KLI had over 443,700 individual policies on books representing a basic sum assured of ~ Rs 169 bn (excluding riders).
Additionally, Kotak Life had around 330 group policies covering over 677,400 lives with an aggregate sum assured of ~ Rs 224 bn.
Best investment bank play
Kotak’s high exposure to capital markets is positive, and is a solid structural bull story in that space. India’s demographic changes and strong growth should produce a surge in the addressable market for retail and wholesale capital market services and that this segment will experience strong growth. Kotak, with its market leadership in broking and capital markets, is one of the best listed plays on this theme.
India’s savings rate has been rising consistently since 1999, and it is now at 29% vs 22% ten years ago. Rising household savings has been a key driver, expanding from 14% of GDP to 22% between 1986 and 2006. As a result, the total stock of household savings rose at a 12% CAGR over 1996–2006. The capital markets and investment services are natural beneficiaries of this trend. The Indian middle-class has traditionally favoured government-guarante
Kotak is well geared to exploit that with a full suite of investment services: retail broking, mutual funds, life insurance, portfolio management and wealth management.
This gives Kotak a very strong advantage. Kotak’s each product appeals to different segments of the market – a full suite helps Kotak retain customers. Moreover, the product-neutral wealth-management service provides the added advantage of being able to sell third-party mutual fund products, which ensures that the product providers and the marketing machine operate independently and can capture a larger part of customer flows.
Well placed to withstand competition
Kotak has a strong brand name and many strengths.
Branding: Although some of the new entrants are formidable brands, Kotak enjoys unique branding as a specialist investment house. This should continue to give it a headstart in the market, especially in the western region.
Incumbent advantage – reach and franchisees.
Commercial banking licence: Kotak’s commercial banking licence is a very strong differentiator. It allows the bank to seamlessly sell both assets and liabilities – linked financial products – and provides it with a natural reach and customer acquisition platform. Kotak is one of the few banks to have a strong suite of investment products. Most brokers do not have bank licences, and most banks do not have strong broking businesses.
Synergy across businesses: The other strong advantage for Kotak is its holding structure, which gives it a strong synergy across businesses. With almost all the businesses held as 100% subsidiaries, Kotak responds to a central command and control structure much better than in other similar conglomerates.
Valuation
In FY 2008, we expect Kotak to register EPS of Rs 28.5 In FY 2009, this EPS is likely to rise to Rs 38.8. The share price trades at Rs 961. While the P/E on FY 2008 EPS is 33.6, it falls to 25 on FY 2009 EPS.
| | 0503 (12) | 0603 (12) | 0703 (12) | 0803 (12P) | 0903 (12P) |
| Interest Earned | 776.13 | 1215.69 | 1981.73 | 3602.39 | 5403.59 |
| Interest Exp. | 328.65 | 519.57 | 976.43 | 1888.31 | 3021.30 |
| Net Interest Income | 447.48 | 696.12 | 1005.30 | 1714.08 | 2382.29 |
| Other Income | 935.38 | 1638.43 | 2315.39 | 4750.62 | 6650.87 |
| Net Total Income | 1382.85 | 2334.55 | 3320.69 | 6464.70 | 9033.16 |
| Operating exp. | 1055.11 | 1667.07 | 2387.35 | 4708.56 | 6639.07 |
| Operating Profits | 327.75 | 667.48 | 933.34 | 1756.14 | 2394.09 |
| Provisions & Cont. | 18.18 | 51.25 | 154.65 | 359.78 | 485.70 |
| Profit Before Tax | 309.56 | 616.23 | 778.69 | 1396.37 | 1908.39 |
| Provision for Tax | 115.67 | 213.00 | 254.21 | 460.80 | 629.77 |
| PAT before MI | 193.89 | 403.23 | 524.48 | 935.56 | 1278.62 |
| Less: minority int. | 26.31 | 94.68 | 0.66 | -25.00 | -31.25 |
| Add: assoc. profits | 3.33 | 294.61 | 14.43 | 19.60 | 24.50 |
| Net Profit | 170.91 | 603.16 | 538.25 | 980.16 | 1334.37 |
| EPS*(Rs) | 5.0 | 17.5 | 15.6 | 28.5 | 38.8 |
| * Annualized on current equity of Rs 344.21 crore; | |||||
| Kotak Mahindra Bank: Consolidated Results |
| | 0712 (3) | 0612 (3) | Var. (%) | 0712 (9) | 0612 (9) | Var. (%) | 0703 (12) | 0603 (12) | Var. (%) |
| Interest Earned | 992.32 | 527.83 | 88 | 2544.14 | 1359.23 | 87 | 1981.73 | 1215.69 | 63 |
| Interest Exp. | 506.03 | 266.74 | 90 | 1348.47 | 667.95 | 102 | 976.43 | 519.57 | 88 |
| Net Interest Income | 486.29 | 261.09 | 86 | 1195.67 | 691.28 | 73 | 1005.30 | 696.12 | 44 |
| Other Income | 1490.39 | 662.77 | 125 | 3142.74 | 1511.45 | 108 | 2315.39 | 1638.43 | 41 |
| Net Total Income | 1976.68 | 923.86 | 114 | 4338.41 | 2202.73 | 97 | 3320.69 | 2334.55 | 42 |
| Operating exp. | 1324.93 | 632.42 | 110 | 3052.32 | 1559.23 | 96 | 2387.35 | 1667.07 | 43 |
| Operating Profits | 651.75 | 291.44 | 124 | 1286.09 | 643.50 | 100 | 933.34 | 667.48 | 40 |
| Provisions & Cont. | 135.02 | 51.30 | 163 | 222.12 | 94.80 | 134 | 154.65 | 51.25 | 202 |
| Profit before Tax | 516.73 | 240.14 | 115 | 1063.97 | 548.70 | 94 | 778.69 | 616.23 | 26 |
| Provision for Tax | 164.31 | 77.24 | 113 | 346.12 | 188.47 | 84 | 254.21 | 213.00 | 19 |
| PAT before MI | 352.42 | 162.90 | 116 | 717.85 | 360.23 | 99 | 524.48 | 403.23 | 30 |
| Less: minority int. | -5.60 | -4.57 | 23 | -19.39 | 3.29 | LP | 0.66 | 94.68 | -99 |
| Add: assoc. profits | 5.71 | 2.11 | 171 | 13.89 | 10.97 | 27 | 14.43 | 294.61 | -95 |
| Net Profit | 363.73 | 169.58 | 114 | 751.13 | 367.91 | 104 | 538.25 | 603.16 | -11 |
| EPS*(Rs) | 42.3 | 19.7 | | 29.1 | 14.3 | | 15.6 | 17.5 | |
| * Annualized on current equity of Rs 344.21 crore. | |||||||||
| Kotak group: Company-wise Profit After Tax |
| | Q3FY08 | Q3FY07 | Growth | Q2 FY08 | YTD FY08 | YTD FY07 | FY07 |
| | (3 months) | (3 months) | (%) | (3 months) | (9 months) | (9 months) | (12 months) |
| Kotak Mahindra Bank (Standalone) | 101.67 | 45.40 | 124% | 75.38 | 224.73 | 104.11 | 141.37 |
| Kotak Mahindra Prime | 37.37 | 10.88 | 244% | 19.25 | 70.34 | 32.96 | 57.34 |
| Kotak Mahindra Capital Company | 21.58 | 18.94 | 14% | 49.19 | 89.95 | 47.31 | 67.87 |
| Kotak Securities | 146.73 | 80.41 | 82% | 99.12 | 307.63 | 180.64 | 255.71 |
| International subsidiaries | 33.60 | 19.63 | 71% | 5.94 | 46.76 | 27.08 | 35.01 |
| Kotak Mahindra AMC & Trustee Co | 3.36 | 2.33 | 44% | 3.62 | 10.40 | 10.23 | 11.47 |
| Kotak Investment Advisors Limited | 5.45 | 0.01 | 623% | 0.16 | 5.81 | 0.29 | 0.34 |
| Kotak Mahindra Investments | 23.86 | 3.30 | 107% | 6.05 | 37.76 | 11.02 | 26.25 |
| Others | -0.05 | -0.09 | - | -0.05 | -0.23 | -0.22 | -0.32 |
| Total consolidated profit after tax | 373.57 | 180.80 | - | 258.67 | 793.15 | 413.43 | 595.05 |
| Equity Affiliates | 5.71 | 2.11 | 108% | 4.82 | 13.88 | 10.98 | 14.43 |
| Minority interest and other adjustments | -0.43 | -0.32 | - | -1.08 | -0.71 | -20.80 | -28.06 |
| PAT (after minority interest / adjustments but excluding life insurance) | 379.71 | 182.59 | 114% | 262.41 | 806.32 | 403.61 | 581.42 |
| Kotak Mahindra Old Mutual Life Insurance* | -15.98 | -13.01 | | -20.96 | -55.19 | -35.70 | -43.18 |
| PAT (after minority interest / adjustments) | 363.73 | 169.58 | | 241.46 | 751.13 | 367.91 | 538.24 |
| Figures in Rs crore | |||||||
Gujarat Apollo Industries
Aiming new products, new markets
Introduction of new products for the road construction industry and entry in to mining and crushing equipment business augur well for the company’s sustained growth
| Buy | Gujarat Apollo Industries |
| BSE Code | 522217 |
| NSE Code | GUJAPOLLO |
| Bloomberg | GAPI@IN |
| Reuter | GJAE.BO |
| 52-week High/Low | Rs 399/ Rs 111 |
| Current Price | Rs 245 (as on 30th Jan’08) |
Gujarat Apollo Industries (GAI), formerly know as Gujarat Apollo Equipments, manufactures and designs various range of road construction equipments. This includes manufacturing asphalt plants, sensor paver finishers, bitumen pressure distributors and Kerb pavers, indirect heating equipment, asphalt batch mix and drum mix plants. GAEL controls more than 60% of the market in the product segments in which it operates, with over 1,400 customers and an equipment population of around 3,500 units. It has technical collaboration with Wheelaborator Clean Water Systems, US for manufacturing pavers.
Encouraging user-industry prospects
The Union government has already embarked upon massive road construction projects, with the National Highway Development Program building the north-south and east-west corridors and the Golden Quadrangle Project connecting major cities. Besides, the government’s decision to throw open the construction of roads, bridges, airports and ports to the private sector and allowing 100% foreign investment in real estate projects has provided a boost to the construction industry.
The Eleventh Plan, entailing an investment of about Rs 2,09,400 crore in road infrastructure projects points to strong order flows. Road construction equipment contributes about 21-23 per cent of the total project cost in road projects, indicating the growth potential of the road equipment sector. The direct beneficiary of the vast investment in building up the national infrastructure of highways, bridges and ports would be the construction equipment manufacturers like GAI.
Further with more and more PPP (public private participation) road development under BOOT, BOO, BOT schemes, the need for more niche products will increase. GAI gets its more than 60% of the domestic sales from organized players like Punj Lloyd, Gammon, HCC etc.
Export market is as large and promising as domestic market
Gujarat Apollo Industries started exports in 2005-06, when the company took a strong strategic decision to focus only on niche products and only on the markets, where quality factor is preferred rather than simply the price and cost factor. Prior to that, GAI was focusing only on domestic market and in markets such as Pakistan, Srilanka, Afghanistan, where competition with Chinese and Korean manufacturers of road construction equipments was severe. Also the cost and final price was given preference, rather than the brand or the quality factor. Now exports account for around 25% of net sales.
There is a big demand in the form of replacement market in EU and US for the road construction equipment products. In fact the overall demand is as big as the demand for new construction equipments in India because of the size of the US/EU market. Today GAI focuses on exports to developed markets like Australia, Saudi Arabia, and European countries where quality is preferred and Indian plant or product is compared with the European standards.. GAI, has capitalised on this opportunity and is able to give the quality and other specifications at price, which is lower than EU plants.
The company’s product delivery cycle is 3 months, where after every three months, new contracts based on prevailing forex and raw material rates are entered into. Since the company’s products and prices are compared with EU products and plants, there is a sufficient gap of price and the company is able to get the advantage of the same.
Further of the total exports, nearly 35% is settled in Euro currency, where rupee is depreciated. Company imports some of the raw materials and pays royalty and other technical fees in US dollar, which provides natural hedge to some extent. For some contracts the company enters Letter of Credit in rupee terms. So, overall the dollar exposure in export is not more than 40% of the total exports. And for that it has been able to revise its prices.
New products, new opportunities and more markets
The company has ventured into new products. It has entered into a technical tie-up and licensing agreement with an EU company for manufacturing compactors (rollers). This equipment is also used in road construction along with pavers. So the company henceforth will sell its pavers along with compactors. No additional marketing or distribution efforts are required for marketing this product, as most of the company’s existing customers will be now procuring compactors also from GAI.
Also the company has entered into technical tie-up with another EU company to manufacture crushing and mining equipments. This EU company is one of the pioneers in mining and machining industry. These crushing and mining equipments are required for crushing big rocks, hard soil and mining of iron ore, coal, diamonds etc. This will be a major new growth driver for the company in the long run once it establishes its products in Indian markets as a major surge in investment is expected in the mining sector and there is good scope for a new player with good technical collaboration. Also there is an opportunity for seeing certain equipments to the technology provider, which is based in EU and deals in EU currency.
The company has laid down a capex of Rs 65 crore in three phases, which is to be completed in span of 30 months. Phase-1 of this plan for a capex of Rs 20 crore will be operative from Feb’08, which includes a new plant at Mehsana to manufacture the crushing and mining equipments as well as the compactors.
The company has made a preferential allotment of 5,50,000 warrants convertible at Rs 180 each aggregating to Rs 9.90 crore to the promoters. As a result the fully diluted equity share capital of the company will stand at Rs 11.05 crore. Further the company has sold its 49% stake in Johnson Screens (India) at Rs 25.80 crore. These funds will ensure sufficient equity for funding its planned expansions.
Excellent first half financial performance
For the quarter ended Sep’07, the sales increased by 38% to Rs 42.61 crore. The OPM further improved by 320 basis points to 22%. After providing tax of Rs 3.10 crore, the PAT stood at Rs 5.98 crore, up by 65%.
For the six months ended Sep’07, the sales grew 25% to Rs 79.21 crore. The OPM stood at 20.4%, up from 17.8%. PAT was up by 46% to Rs 9.95 crore.
Valuation
For FY’08, we expect the company to register net sales and PAT of Rs 185.98 crore and Rs 23.80 crore. For FY’09, we expect the company to register net sales and PAT of Rs 266.77 crore and Rs 30.89 crore.. This gives an EPS of Rs 21.5 for FY’08 and Rs 28 for FY’09 earnings. At current market price of Rs 245, the scrip is available at P/E of just 8.8 times its FY’09 expected earnings. Widening of road construction equipment product range and entry in to mining equipment is likely to lead to strong rerating of the scrip in future.
| | 0503 (12) | 0603 (12) | 0703(12) | 0803(12P) | 0903(12P) |
| Sales | 62.76 | 104.95 | 145.56 | 185.98 | 266.77 |
| OPM (%) | 12.8 | 17.3 | 19.6 | 20.7 | 20.0 |
| OP | 8.05 | 18.16 | 28.53 | 38.56 | 53.35 |
| Other Inc. | 1.36 | 0.47 | 2.92 | 3.87 | 4.00 |
| PBIDT | 9.41 | 18.63 | 31.45 | 42.43 | 57.35 |
| Interest | 0.99 | 1.65 | 2.78 | 4.69 | 6.04 |
| PBDT | 8.42 | 16.98 | 28.67 | 37.74 | 51.31 |
| Dep. | 0.9 | 0.91 | 1.08 | 1.39 | 4.16 |
| PBT | 7.52 | 16.07 | 27.59 | 36.35 | 47.15 |
| Tax | 2.23 | 5.6 | 9.48 | 12.55 | 16.27 |
| PAT | 5.29 | 10.47 | 18.11 | 23.80 | 30.89 |
| EPS* (Rs) | 4.8 | 9.5 | 16.4 | 21.5 | 28.0 |
| *Annualised on diluted equity of Rs 11.05 crore of face value of Rs 10 each | |||||
| Gujarat Apollo Industries: Results |
| | 0709(03) | 0709(03) | Var % | 0709(06) | 0709(06) | Var % | 0703(12) | 0603(12) | Var % |
| Sales | 42.61 | 30.79 | 38 | 79.21 | 63.43 | 25 | 145.56 | 104.95 | 39 |
| OPM % | 22.0 | 18.8 | | 20.4 | 17.8 | | 19.6 | 17.3 | 13 |
| OP | 9.36 | 5.78 | 62 | 16.14 | 11.29 | 43 | 28.53 | 18.16 | 57 |
| Other Income | 0.53 | 0.05 | 960 | 0.97 | 0.14 | 593 | 2.92 | 0.47 | 521 |
| PBIDT | 9.89 | 5.83 | 70 | 17.11 | 11.43 | 50 | 31.45 | 18.63 | 69 |
| Interest | 0.54 | 0.15 | 260 | 1.36 | 0.56 | 143 | 2.78 | 1.65 | 68 |
| PBDT | 9.35 | 5.68 | 65 | 15.75 | 10.87 | 45 | 28.67 | 16.98 | 69 |
| Depreciation | 0.27 | 0.27 | 0 | 0.55 | 0.54 | 2 | 1.08 | 0.91 | 19 |
| PBT | 9.08 | 5.41 | 68 | 15.2 | 10.33 | 47 | 27.59 | 16.07 | 72 |
| Tax | 3.10 | 1.78 | 74 | 5.25 | 3.53 | 49 | 9.48 | 5.6 | 69 |
| PAT | 5.98 | 3.63 | 65 | 9.95 | 6.8 | 46 | 18.11 | 10.47 | 73 |
| EPS* | # | # | | # | # | | 16.4 | 9.5 | |
| *Annualiesed on diluted equity of Rs 11.05 crore of face value of Rs 10 each | |||||||||