Kotak Mahindra Bank’s capital raising plan gets a thumbs up from Morgan Stanley; check target price

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Published: April 27, 2020 4:37:16 PM

After having secured board approval to raise equity capital of up to 6.5 crore shares at Rs 5 each, private lender Kotak Mahindra Bank is staring at a capital infusion of close to Rs 7,300 crore.

Kotak Mahindra Bank is one of the leading private lenders in the country and experts believe that under the current turmoil it is one of the best-placed banks along with HDFC Bank to absorb bad loans.

After having secured board approval to raise equity capital of up to 6.5 crore shares at Rs 5 each, private lender Kotak Mahindra Bank is staring at a capital infusion of close to Rs 7,300 crore. The move could see a stake dilution of 3.4% and improve the book-value of equity per share by 10%, according to global brokerage and research firm, Morgan Stanley. With the plan to raise capital in place, the brokerage firm expects Kotak Mahindra Bank’s share price to surge almost 30% from current levels, taking it to Rs 1,680 per share.

The capital raising will be done via private placement, follow-on-public offering (FPO), Qualified Institutional Placement (QIP), or a combination thereof, as may be considered appropriate by the bank members. If Kotak Mahindra Bank is able to raise Rs 7,300 crore, that would increase bank’s Tier 1 ratio by 2.9%. “Proforma BVPS for F21e would increase by 10%, on our computations. On core P/BV, the stock would be at 2.1xF21e book (vs.2.3xearlier). The promoter shareholding would reduce to 29% vs.30% currently,” Morgan Stanley said in a research report.

Kotak Mahindra Bank is one of the leading private lenders in the country and experts believe that under the current turmoil it is one of the best-placed banks along with HDFC Bank to absorb bad loans. Morgan Stanley expects Kotak Mahindra Bank’s ability to absorb loan losses increase to 23% from the current 17%, however, the expected return on equity (ROE) is pegged to come down by 0.3%. Slower than expected loan growth coupled with sharp compression in net interest margin could hit the expected target price for Kotak Mahindra Bank. Morgan Stanley sees, slower than expected loan capital markets revenue and a sharp asset quality deterioration as the possible risks to the target price.

The private sector bank led the rally of financials on Dalal Street today, gaining 5.15% to settle at Rs 1,304 per share. According to the latest shareholding pattern available with the stock exchanges, Kotak Mahindra Bank’s promoter Uday Kotak reduced his shareholding marginally to 29.63% at the end of the January-March quarter. Despite the rampant selling by foreign institutional investors that the bourses witnessed in the month of March, Kotak Mahindra Bank saw less than 1% of FIIs selling their stake in the lender. 

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