Kotak Bank has been a well run bank among the private banks of India. With gross npa of 1.94% and net npa of 0.73%, its track record has been extraordinary. The net margins are over 4%; business is growing. And the market is willing to pay the price for its equity. At current prices, it doesn't come cheap in excess of 4 times September 2018 adjusted book value.
Yet I reckon, if it grows at 15% in the next 3 years and market allots a pb of 3.50, the investor will have about 8.50% annualized return. Is that enough, is a question for the investor as of now.
However, with the RBI asking the promoters to reduce their stake from 30% (current) to 20% by December which we see likely not happening by the time, there are chances that the stock prices might get lower. Time will tell whether they will become attractive enough to meet the investor's opportunity costs.
This article presents options available to the promoters well; however, I don't think this will leave investors on edge. Investing isn't a short term game; so they should relax and take it easy. If they believe in the capabilities of the promoter manager, they should be fine.
At the moment though, the promoters have the following options to keep the regulator happy, unless the RBI accepts the current status of Rs.5 b perpetual non-cumulative preferred shares.
The promoters have the option of selling 191 m shares or issuing 477 m fresh shares in order to meet the RBI's directive. I am assuming that fresh issue will have to take place at discounted prices. With the first option, the promoters will have challenge of dealing with some Rs.224 b cash; they will not only have to pay taxes on it, but also will have to check out the alternative investment opportunities. If fresh shares are issued, the bank will get about Rs.530 b in cash which can be useful in meeting its growth targets. But then, Kotak bank has a Tier 1 capital ratio of 17.04%; so it already has enough cash for its growth requirements.
It is an uneasy conundrum for the promoters for sure. To keep able promoters' stake high enough is a good idea so that investors benefit from aligned objectives. Whether 30% or 20% is a good stake, will have to be dealt with independently. Yet, the RBI cannot have a separative guideline for one bank and another for other banks.
Kotak bank stock had a high price of Rs.1,417 in July 2018. I find that even at current prices which are much lower, it is not cheap. But then investing is a waiting game, isn't it?
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