Franchise is improving; a host of negatives make stock an expensive bet at current levels; ‘Hold’ maintained.
Q1FY19 PAT at Rs 10.2 bn (up 12% y-o-y) was lower than our expectation of `11.4 bn. The miss was on account of lower NII growth
(up 15% y-o-y vs. 24.3% loan growth) and higher provisions (up 131% y-o-y). PAT was aided by lower staff cost (C/I at 45.8%), which was least in past four quarters. NIM was down 20 bps y-o-y and 5 bps q-o-q to 4.3%. With some pricing power coming back, KMB intends to maintain the current NIM with 20% loan growth in FY19.
Headline GNPA ratio improved by 5 bps q-o-q at 2.2% with PCR improving by 4.4% q-o-q at 61%. On a consolidated basis, PAT grew 17% y-o-y with strong show from AMC and life insurance. KMB to retain focus on customer acquisition, CASA traction and start consumer durables and 2-W financing.
(i) Advances were up 24.3% y-o-y on robust performance across CV & CE (40% y-o-y), mortgage loans (+23.8% y-o-y) and corporate loans (+24.3% y-o-y); (ii) Bank guided for 20%+ loan growth in FY19 with a cautious outlook in business banking segment (SMEs); (iii) Provision were higher (up 131% y-o-y and 53% q-o-q) to factor in the risk in business banking book; (iv) Customer base has reached 14.5 mn and is on its way to achieving 16 mn target in one quarter. KMB is incurring a cost of `16 bn (`12 bn on incremental SA rates; 5.2% cost of SA and `4 bn on acquisitions) to acquire customers; (v) SA accretion continued with 51% growth, leading to a 50.3% CASA ratio.
Maintain HOLD with TP of Rs 1,300
Relatively weak growth in NII (15% y-o-y), red flag on SME asset quality (citing challenges in erstwhile ING Vysya Bank exposures), limited clarity on promoter stake dilution and possible slowdown in capital market related income make KMB an expensive bet at current levels (stock up 17% in past 3 months). This along with low RoE (~12.2% in FY19) and possibility of further reduction in subsidiary income linked to capital markets make us retain our HOLD rating (core book at 4.5x FY20e P/ABV).