Is Kotak Mahindra Bank a good investment?

Kotak Bank Analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/15/20233 min read


  1. What is a good investment?

  2. What are the factors to be considered while analysing banks?

  3. How does Kotak Mahindra Bank perform on these factors?

  4. Is Kotak Mahindra Bank a good investment?


1. What is a good investment?


Ben Graham defined investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 11-07-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if Kotak Mahindra Bank can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analysing banks?


The following ratios can help us to know if a bank is a good investment.


a. ROE over the last 10 years

b. Net Interest Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has Kotak Mahindra Bank performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 10% and 15% in the last 10 years.


b. Net Interest Margins over the last 10 years


NIMs have been in the range of 3.5% to 4.5% in the last 10 years.



c. Non Performing Assets Ratios over the last 10 years


Gross NPAs have been less than 3.2% in the last 10 years.


Net NPAs have been less than 1.2% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 50% and 151% over the last 10 years.


e. Coverage ratios over the last 10 years


Capital Adequacy Ratio has been between 17.9% and 23.7%.


4. Is Kotak Mahindra Bank a good investment?


Based on the above factors Kotak Mahindra Bank seems to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of 1870 and EPS of 75 its yield is around 4% which is not a satisfactory return.


Even if we consider that sales and profits have grown at more than 15% compounded for the last 10 years it means its sales and earnings could double every 5 years if it continues at the same pace.


Current earnings - say x

Earnings in 5 years - 2x

Earnings in 10 years - 4x

Earnings in 15 years - 8x

Earnings in 20 years - 16x


At the end of Mar 2023 , EPS was around Rs.75 and price was around Rs.1750 giving a P/E of 1750/75 which is approx.23.


If the above assumptions are correct the EPS in March 2043 would be 75 * 16 = Rs.1200.


Assuming a P/E of 20 the price would be 1200*20 = Rs.24000 which is 13.7 times the price of Rs. 1750 at the end of March 2023.


If we consider a price increase of 13.7 times in 20 years it indicates a growth of around 14% which is a good return.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw





Conclusion


Kotak Mahindra Bank is a good business but the price at which it is available currently does not promise a satisfactory return from these levels in the short term. However if you have a long term view of 10-20 years then Kotak Mahindra Bank can give good double digit returns if it continues to grow at the same pace that it has been growing in the past.