The current valuations at ~2.9x March 2015f book after adjusting for Rs 140 of valuations for its flow business are expensive. While asset quality is likely to hold up as the management has been very conservative in growing in the past 18 months, we see valuations stretched on a relative basis with HDFC Bank (Kotak just at a 10% discount on FY16f P/B and ~20% premium on FY16f P/E).

Premium valuations could sustain given high RoRWAs, continuity of top management and investor comfort with its conservative approach to asset quality.

Kotak’s lending business’ Q1FY15 PAT was 4% better than expected, largely due to higher fee income (up 38% y-o-y) and lower provisions (LLPs of 10 bps). Asset quality remained largely stable with GNPA ratio improving 10 bps sequentially; however, restructured book inched up to R145 crore versus R10 crore in the previous quarter.

Kotak has delivered well on some operating metrics with q-o-q margins at 5% (despite a reducing mix of CV/CE book), robust SA accretion (+R900 crore since the last two quarters). However, operational expenditure growth of 23% was higher than our forecast, which led to flat y-o-y PPOP (ex treasury) despite stronger NII + core fees (up 15% y-o-y).