MOSL: KOTAK MAHINDRA BANK (Buy)-Building blocks for strong growth-KMB announces board approval to sell 6.2m shares

​Kotak Mahindra Bank: Building blocks for strong growth; KMB announces board approval to sell 6.2m shares

(KMB IN, Mkt Cap USD24.4b, CMP INR865, TP INR1015, 17% Upside, Buy)

• Kotak Mahindra Bank (KMB), in a board meeting held on 30 March 2017, approved the sale of up to 62m shares. This translates to 3.4% pre-issue dilution and capital raise of INR53b at CMP.
  
• The stated intent by management is to augment KMB’s capital base for the purpose of: a) pursuing consolidation opportunities, b) acquisition/resolution of stressed assets and participation in a “Bad Bank”, c) organic growth opportunities and digital expansion and d) growth in subsidiaries.
  
• The capital raise would result in a reduction in promoter shareholding to 31.04%, closely following the RBI’s requirement to lower promoter stake in the bank to 30% by June 2017.
  
• Post capital issue, tier I capital will improve by 225-250bp to ~18.5%. We expect KMB, backed by strong capitalization, to be a key player in M&A activities, considering the RBI’s directive to reduce promoter shareholding. KMB is well placed to capitalize on the fast-growing financials savings pool and weakening competition (particularly in corporate lending). We reiterate Buy with a target price of INR1,015 (3.6x FY19E cons. BV).