Uncertainty looms over Kotak's future: Analysts cut valuation, forecasts

Kotak Mahindra Bank continued its losing streak, shedding 4% in morning trade following news that its joint managing director  KVS Manian has resigned with immediate effect. The stock was trading at Rs 1559 at 9:35 AM on May 2, 2024.

On the contrary, Federal Bank was trading 4% higher on anticipation that the exiting Kotak veteran may be joining the bank as managing director. At 9:35 AM, the stock was trading at Rs 169.40.

Brokerages have lowered their target price on Kotak Mahindra Bank after its joint managing director, KVS Manian, resigned with immediate effect after 29 years of service.

Analysts state that losing a longstanding key management personnel (KMP) is another blow amidst a series of KMP departures over the past year, compounded by the RBI's recent curb on onboarding new customers. With a relatively new CEO, numerous senior exits in a short timeframe, an attrition rate above industry norms, and RBI's digital ban underscoring deficiencies in the bank's touted digital strength, concerns about leadership and digital capabilities intensify.

Nuvama has downgraded the stock to "reduce" from "buy" and cut its target price to Rs 1530 from the current market price. IIFL Securities retained a 'sell' rating on Kotak Mahindra Bank and shared a target price of Rs 1,800 per share. While the stock has underperformed by 18 percent over the last year, analysts still find its valuations expensive compared to peers.

Jefferies India maintained its hold call and retained its target price at Rs 1970 a share. Jefferies previously warned that shifts in senior leadership could prompt senior executive departures. They expect more exits among senior and mid-level management, potentially exacerbating challenges due to RBI's credit card and digital service restrictions. Such departures could significantly affect the company's growth and valuation.

Last year, Kotak Bank experienced many departures among senior executives. Uday Kotak, the CEO, and Dipak Gupta, the Joint MD, had to leave as their term ended. The Chief Financial Officer retired, and the Chief Digital Officer resigned in November 2023. Kotak's attrition rate is higher than its competitors. Recently, RBI stopped Kotak from adding new customers digitally and issuing new credit cards. In a stern letter, RBI criticized Kotak for not building strong enough IT systems and controls to match its growth.

"We believe senior level exits coupled with the digital ban shall impact Kotak’s growth, opex, and profitability over the next 12–18 months. Every 10bp rise in opex shall result in a 3% fall in PBT. We see continued risk arising out of other likely exits," Nuvama said in its latest note.

Nuvama sees Kotak's outlook as uncertain due to recent negative events and high attrition. According to senior bankers, the ban could set the bank back one to two years compared to aggressive peers. While many banks responded to RBI directives in Q4, some like ICICI voluntarily improved key metrics and slowed unsecured loans. Apart from complying with industry-wide directives, Kotak will need to invest in stronger technology and monitoring systems. This might slow growth and increase operating expenses, although the exact impact is hard to quantify. Nuvama expects the ban to last at least a year. While Kotak Bank might report earnings in line with peers in Q4, the uncertainty of the next 12 to 18 months doesn't make it a significant trigger for the stock to gain momentum back, analysts said.

"We cut multiples sharply to 1.7x BV FY26 from 2.3x and value the subsidiaries at INR560. Our multiple is pegged at a 10% discount to Axis. At our new TP of INR1530, the stock rates ‘REDUCE’ from ‘BUY’. While the stock has already corrected sharply, we expect it to underperform peers going ahead. We recommend switching to ICICI, Axis, IIB, HDFC Bank (for a 1Y-plus horizon), and a few select NBFCs including Shriram," Nuvama report added