Motilal Oswal Financial Services has upgraded Kotak Mahindra Bank to a Buy, establishing a target price of Rs 2,400. The firm’s research highlights KMB’s readiness for industry-leading growth rooted in operational discipline, retail franchise strength, and digital initiatives. Investors are directed to appreciate Kotak Mahindra Bank’s resilience amid shifting macro pressures and its robust return ratios, making it an attractive proposition for medium-term holdings.

Summary of the Institutional Call

Kotak Mahindra Bank has shaken off a prolonged period of neutrality, with Motilal Oswal lifting its recommendation to Buy in January 2025 at Rs 1,759. The bank is now recognized for its granular credit expansion, focus on retail and SME lending, and adaptable liability franchise. Despite a modest near-term performance, KMB is projected to deliver a 20% earnings CAGR over FY26-28, with margins stabilizing and credit costs normalizing. Supported by a healthy capital buffer and a sweeping push into fee-driven subsidiaries, the bank is forecast to achieve industry-leading profitability and resilient growth through FY27. The assigned target price stands at Rs 2,400, powered by a stable return profile and prudent asset management.

Key Investment Thesis

- Motilal Oswal’s upgrade to Buy reflects confidence in KMB’s capacity for consistently superior Return on Assets (RoA) and Return on Equity (RoE). - Target price of Rs 2,400 anchors a compelling upside, based on 2.4x FY27E Adjusted Book Value per Share (ABV), with an SoTP value of Rs 764 attributed to subsidiaries. - Expectations for a 20% earnings CAGR over FY26-28 recognize the bank’s recovery after a period of margin compression and elevated credit costs. - KMB’s balance of loan expansion and de-risked asset book ensures robust performance even amidst sector volatility.

Actionable Levels and Valuation Table

Loan Growth and Retail Franchise Highlights

- KMB’s loan book expected to deliver a 16% CAGR over FY25-28, supported by retail, SME and mid-market segment expansion. - Deposit growth is projected at a 14.5% CAGR, sustaining a solid CASA ratio in the 42-43% band—a critical competitive advantage. - Strategic realignment of savings account rates to 2.5% and the ActivMoney sweep product will reduce funding costs and buttress margin stability.

Asset Quality Trends and Risk Management

- GNPA (Gross Non-Performing Asset) ratio is managed below 1.5%, while credit costs are expected to fall to 0.7% post-FY26, signaling stable asset quality. - KMB’s prudent lending approach in retail CVs and SME portfolios limits downside risk, with PCR (Provision Coverage Ratio) at a robust 77%. - Recent stress in Microfinance Institutions (MFI) portfolio has peaked, with tighter underwriting and improved collection efficiency guiding future stability.

Subsidiaries: A Structural Growth Engine

- Kotak AMC, Securities, Life Insurance, and Prime together are projected to contribute over 30% of consolidated profit by FY28. - These subsidiaries provide annuity-style, fee-driven income streams and remain central to KMB’s premium valuation profile. - Kotak Securities holds a significant 13% share of the Indian brokerage market, benefitting from elevated retail trading volumes and derivatives growth.

Margin Pressures and Recovery Outlook

- NIMs contracted by 32bps quarter on quarter in 1QFY26, but repricing initiatives are expected to mitigate further pressure and support recovery from 2H FY26. - CASA remains resilient despite sector-wide declines, with sweep products cushioning deposit cost pressures. - Cost-to-assets and efficiency ratios are expected to moderate, driven by digital adoption and steady branch expansion—150-200 new branches per year without increasing headcount.

Investor Strategy and Target Recommendation

- BUY the stock at levels below Rs 2,031; accumulate on dips towards Rs 1,850 with a target of Rs 2,400 for FY27. - Maintain a medium-term horizon (12–18 months) to capture full valuation upside, supported by earning growth, resilient return ratios and fee-driven income diversification. - Watch for improvements in NIM and further recovery in asset quality, as indicators for continued upside. - Any sector-wide volatility should be viewed as an opportunity for incremental accumulation, provided risk parameters such as GNPA and credit costs remain within management’s guided range.

Conclusion

With its robust operational performance, disciplined lending, diversified fee streams, and digital prowess, Kotak Mahindra Bank emerges as a compelling investment in the Indian banking sector. Motilal Oswal’s clear Buy call reflects confidence in the bank’s ability to weather cyclical downturns and capitalize on structural growth, setting a target price of Rs 2,400 for investors seeking high-quality exposure in the financials segment.