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Result Update

August 3, 2015
Rating matrix
Rating : Hold Kotak Mahindra Bank (KOTMAH) | 690
Target : | 660
Target Period : 12 months Growth trajectory intact; merger to add value
Potential Upside : -4%
The merged banks PAT came in lower-than-expected at | 190 crore
Whats changed? in Q1FY16 (I-direct estimate - | 635 crore)
Target Changed from | 718 to | 660 Variation in earnings was due to lower-than-expected other income
EPS FY16E Changed from | 16.1 to | 8 at | 593 crore (I-direct estimate - | 816 crore) and higher-than-
EPS FY17E Changed from | 19.3 to | 13.1 expected operating expense at | 1593 crore. Higher operating
Rating Unchanged expense could be attributable to integration cost (| 63 crore in
Q1FY16) and alignment of employee compensation making |339
Quarterly performance
crore pension provision for erstwhile ING Vysya Bank employees.
| Crore Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%)
NII 1598.2 1465.3 9.1 1589.7 0.5 Provision surged to | 305 crore; higher than our estimate of |80
Other Income 592.4 979.5 -39.5 1767.2 -66.5 crore, owing to addition in stressed assets from ING Vysya Bank
PPP 597.0 979.5 -39.1 1767.2 -66.2 which forms ~2.5% of overall combined book. Accordingly,
PAT 189.8 573.2 -66.9 1320.8 -85.6 provision on advance climbed higher to | 266 crore in Q1FY16.
NIM declined at 4.2% in Q1FY16 vs 5.1% in Q1FY15, owing to lower
Key financials (Merged)
yield on integrated book and higher interest outgo on saving account
| crore FY14 FY15 FY16E FY17E
of ING Vysya Bank to the tune of | 30 crore. NII came in-line with our
NII 5473 6142 6538 7247
PPP 3705 4166 3424 4278
estimate at | 1598 crore (I-direct estimate - | 1575 crore).
PAT 2165 2477 1457 2369 Credit and deposit grew 9.0% YoY to | 103614 crore and 12.7% YoY
to | 116812 crore, respectively, with CASA ratio at 34.3%
Valuation summary (Merged) As the management has guided for incremental 50 bps credit cost in FY16
FY14 FY15 FY16E FY17E and one-time provisions made in Q1FY16, we have significantly revised
P/E 73.2 50.5 85.9 52.8 our FY16 expected profit lower to |1457 crore for the merged bank.
Target P/E 70.0 48.3 82.2 50.5
P/ABV 8.4 5.9 5.6 5.1
Credit book structure expected to alter with merger
Target P/ABV 8.1 5.7 5.5 5.1 Kotak Mahindra Bank, promoted by Uday Kotak, post receiving a licence
RoA 1.5 1.5 0.8 1.1 in 2002 has grown to a loan-book size of | 103614 crore in FY15 and built
RoE 13.0 12.1 6.5 9.6 a branch network of 1260 branches. Banks retail loans form ~50% of
total loans, which enabled KMB to earn the best NIM in industry at 4.5-
Stock data
4.9% led by high yielding retail loans. With ING Vysya Bank merger,
Market Capitalisation | 127813 crore
GNPA (Q1FY16) | 2421 crore
composition of loan portfolio has been altered with retail advances
NNPA (Q1FY16) | 1077 crore proportion declining to ~43% from 50%. Accordingly, blended margins
NIM (Q1FY16) 4.2 of merged business declined to 3.8-4.0% from 4.5% range in FY16-17E.
52 week H/L 744/460 Savings rate deregulation; raising same to 6% proves beneficial
Equity capital | 453 crore The savings rate was hiked to 6% by KMB post deregulation by the RBI in
Face value |5
September 2010. The bank almost tripled its savings deposits from | 3331
DII holding (%) 3.7
FII holding (%) 35.3
crore in March 2011 to | 14036 crore by March 2015. CASA ratio
improved from 28-29% in the past to 32-33% and is seen averaging
Price performance around 32-34% in merged bank. For combined entity, post merger, we
Return % 1M 3M 6M 12M expect deposit growth at 20.0% CAGR to | 177084 crore in FY17E.
Kotak Mahindra bank 3.4 7.6 8.4 47.1 Strong management, business model and controlled asset quality
HDFC Bank 4.1 12.3 3.1 32.4
Axis Bank 1.2 -0.4 -3.8 40.8
KMB had stable asset quality with NNPA ratio of 1% and negligible
restructured assets. With the merger, GNPA ratio is seen rising to 2.84%,
Research Analyst NNPA ratio to 1.67% in FY16. Kotaks PAT in FY15 remained healthy at
Kajal Gandhi | 1866 crore (24% YoY). Post revisions, we expect merged banks PAT to
kajal.gandhi@icicisecurities.com decline in FY16E to | 1457 crore and grow 62% to | 2369 crore by FY17E.
Vishal Narnolia Maintain HOLD, merger to add strength
vishal.narnolia@icicisecurities.com
KMB trades at rich valuations consistently due to its superior return ratios
Vasant Lohiya and NIM (RoA of ~1.8% and NIM at ~4.8-5%). Post merger, NIMs and
vasant.lohiya@icicisecurities.com
RoA are expected to further dip to 3.8-4.0% and 9.5% in FY17E. However,
they will continue to stay better than peers. Synergy benefits are
expected to accrue over time and improve RoA. Factoring in integration
expense and increased provisioning related to erstwhile ING Vysya Bank,
we have lowered our ABV to | 128.5 from | 145.6. Accordingly, we revise
our target price to | 660 (earlier | 718), valuing on SOTP basis.
Maintaining multiple at 4.0x for bank, thereby we maintain HOLD rating.

ICICI Securities Ltd | Retail Equity Research


Variance analysis
Q1FY16 Q1FY16E Q1FY15 YoY (%) Q4FY15 QoQ (%) Comments
NII 1,598.2 1,575.3 1,465.3 9.1 1,589.7 0.5
NIM declined at 4.2% in Q1FY16, owing to lower yield on integrated book
and higher interest outgo on saving account of ING Vysya Bank to the tune
NIM (%) 4.20 4.90 5.00 -80 bps 4.80 -60 bps of | 30 crore
Other Income 592.4 815.6 627.4 -5.6 914.0 -35.2

Net Total Income 2,190.6 2,390.9 2,092.6 4.7 2,503.7 -12.5


Integration cost of | 63 crore and | 339 crore of pension provision for
Staff cost 928.8 613.3 571.7 62.5 348.4 166.6 erstwhile ING Vysya Bank employees led to higher opex
Other Operating Expenses 664.9 749.6 541.4 22.8 388.0 71.3

PPP 597.0 1,028.1 979.5 -39.1 1,767.2 -66.2


Provision surged to | 305 crore; owing to addition in stressed assets from
Provision 305.3 80.0 114.8 166.0 106.0 187.9 ING Vysya Bank, which forms ~2.5% of overall combined book
PBT 291.7 948.1 864.7 -66.3 1,661.2 -82.4
Tax Outgo 101.9 312.9 291.5 -65.0 340.4 -70.1

PAT 189.8 635.2 573.2 -66.9 1,320.8 -85.6 PAT growth came in lower-than-expected due to higher opex and provision

Key Metrics
GNPA 2,421.8 2,067.9 2,007.7 20.6 1,237.2 95.7 GNPA rose QoQ to 2.3% vs 1.9%
NNPA 1,077.3 935.6 891.0 20.9 609.1 76.9
Total Restructured assets 418.0 200.0 662.0 -36.9 159.1 162.7 | 271 crore of RA added due to integration of ING Vysya Bank
Source: Company, ICICIdirect.com Research

Change in estimates
FY16E FY17E
(| Crore) Old New % Change Old New % Change Comments
Net Interest Income 7,096.9 6,537.8 -7.9 8,473.6 7,247.0 -14.5 NII revised downwards due to lower anticipated advance growth
Pre Provision Profit 4,801.3 3,424.3 -28.7 5,758.3 4,278.1 -25.7
NIM (%) 3.9 3.6 -28 bps 3.9 3.5 -43 bps
Bank has guided on realising ~| 1800-2000 crore from its stressed portfolio over
PAT 2,814.5 1,456.9 -48.2 3,383.1 2,369.5 -30.0 next three years not factored by us in estimates
ABV (|) 254.4 119.6 -53.0 286.9 128.5 -55.2
Source: Company, ICICIdirect.com Research

Assumptions
Current Earlier
FY14 FY15 FY16E FY17E FY16E FY17E
Credit growth (%) 9.4 24.8 0.9 18.7
Deposit growth (%) 15.8 26.7 1.0 19.9
CASA ratio (%) 32.5 35.4 36.0 35.6
NIM calculated (%) 4.5 4.5 3.6 3.5
Cost to income ratio (%) 49.7 52.1 64.4 60.3
GNPA (| crore) 1,703.8 2,010.4 3,615.9 4,371.3
NNPA (| crore) 675.7 779.8 1,819.6 2,544.1
Slippage ratio (%) 1.6 1.0 1.7 1.3
Credit cost (%) 0.4 0.3 0.9 0.4
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 2


Company Analysis
Business aspects
Kotak Mahindra Bank has a presence across all financial verticals, namely
banking, securities, investment banking, asset management, consumer
finance and life insurance. The company has a diversified product offering
and has an experienced management.
In the past six years, credit and deposit CAGR has been 26% and 29%,
respectively, to | 66161 crore and | 74860 crore by FY15, higher than
industry averages. Kotak Bank has largely been a retail lender with 64% of
its loan book in retail in FY10. It has now moderated to 44% in FY15. In
FY15, credit grew 24.8% YoY and deposits 26.7% YoY. In FY15, advances
growth recovered with corporate banking loans surging 26% YoY while
overall growth was 24.8% YoY to | 66161 crore. Ex CV/CE, growth was
28.2% YoY. Deposits grew a strong 26.7% YoY to | 74860 crore.
Post merger, Kotak Banks loan book stands at | 103614 crore with
Going ahead, the management has guided 15-20% growth
alteration in composition of loan portfolio; retail advances proportion
in advance in FY16E.
declining to ~43% from 50%. Going ahead, we expect credit off-take at
17.6% in FY16-17E to | 150856 crore.
Exhibit 1: On YoY basis healthy business growth
210000
180000

177084
150000

150856
147669
(| crore)

120000

127137
122968
119018

116812
112755

109155
90000
105198
103676

103614
100506
100289

95101
88856

60000
.
30000
0
FY14

Q1FY15

Q2FY15

Q3FY15

FY15

1QFY16

FY16E

FY17E
Advances Deposits

Source: Company quarterly earnings update , ICICIdirect.com Research

Retail loans now constitute ~43.6% of total credit in standalone whereas


due to auto loans of Kotak Prime, in consolidated, retail forms ~43% of
total credit of | 125522 crore as on FY15.
Exhibit 2: Loan book movement over the years (standalone)
| crore FY13 Q1FY14 Q2FY14 Q3FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Growth yoy (%) Proportion (%)
CVs and contruction eqmt. 7805 7508 6781 6005 5441 5104 5062 5027 5204 5626 10.2 5.4
Personal Loans incl small busines 2897 2940 3082 3156 4632 4723 5301 5929 6263 7429 57 7.2
Home loans 10727 11030 11307 11454 12100 12312 12894 13738 14709 20756 68.6 20.0
Corporate banking 12291 14849 14759 16621 14337 18568 21140 22044 20299 31205 68 30.1
Agricultural finance 8356 7841 7910 9023 10468 9941 10137 10849 12106 15268 53.6 14.7
Others 6393 6371 6770 6890 6010 706 6414 7054 1158 1854 163 1.8
Total 48469 50539 50609 53149 52988 56922 60948 64641 66161 103614 82.0 100.0
Source: Company, ICICIdirect.com Research

KMB earns the best NIM in industry at 4.7-5% led by high yielding retail
loans and working capital corporate loans. NII has grown from | 1858
crore in FY10 to | 4224 crore by FY15 supported by strong credit and
savings deposit growth. Post merger, NIM has declined to 4.2% in
Q1FY16, owing to decline in proportion of high yield retail credit and
higher interest outgo on saving account of ING Vysya Bank. Going ahead,
we expect benign NII growth at 8.6% CAGR to | 7247 crore by FY17E on
account of slower credit growth and margin compression. However, as

ICICI Securities Ltd | Retail Equity Research Page 3


integration benefits unfold with proportion of retail advances rising in
overall book, NIMs are expected to revive and inch up, not factored by us.
Exhibit 3: Decline in NIM led by low yield book accretion

5.2
5.0 5.0 5.0

(%)
4.9 4.9 4.9
4.8 4.8 4.8 4.8 4.8
4.7 4.7 4.7
4.6 4.6 4.6 4.6
4.4
4.2 4.2
4.0

Q2FY12

Q3FY12

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

FY15

Q1FY16
NIM (%)

Source: Company quarterly earnings update, ICICIdirect.com Research

Deposit franchise (branches) build-up gradually enabled KMB to maintain


healthy margins of >4.5% since FY08 despite a challenging environment.
In the past two or three years due to higher focus on savings deposits,
CASA has been stable at 31% wherein other banks saw a decline in
CASA. The combined branch network post merger stands at 1260 as of
June 2015.
With strong savings deposits growth at 30% YoY to | 22730 crore,
branches are expected to deliver a strong performance over time. Initial
cost is incurred on employees and setup upfront. We expect deposits to
grow at 20% CAGR to | 177083 crore in FY17E.
Exhibit 4: Branch network grows to 1260 branches to support CASA accretion

1400
1200

1000
800
600
400

200
0
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16

Source: Company quarterly earnings update, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 4


Other income growth remains strong
Non interest income has grown 44.9% to | 2028 crore in FY15. Core fee
income and treasury gains enabled the bank to achieve stronger other
income. Q1FY16 saw decline of 5.6% YoY in non interest income to
| 592 crore mainly led by lower traction from integrated business. Also, a
change in mutual Fund fees recognition from upfront to over the life, has
led to lower fee income. We expect non-interest income traction to
remain slower in FY16E and than pick-up in FY17E and thereby expect
9.5% CAGR in FY16-17E to | 3522 crore.

Strong management, business model and controlled asset quality


KMBs asset quality has been one of the most stable with NNPA ratio of
~1% and negligible restructured assets. This depicts the strong
operational business model of the bank and management having full
control.
Exhibit 5: NPA levels maintained at comfortable levels
3.0
2.8 2.9
2.6
2.2 2.3
Kotak Bank has identified total stress to the tune of 6% in 2.0 2.0 2.0 2.0 1.9 1.9 1.9 1.9
1.8 1.9
erstwhile ING Vysya Banks book, which constitutes 2.5% 1.6 1.5 1.6 1.6 1.6 1.7
1.4 1.5 1.6 1.4
(%)

of the merged entity


1.0 1.0 1.0 1.1 1.1 1.0 1.0 1.0 0.9 1.0
0.8 0.8
0.6 0.7 0.6 0.6 0.6 0.6 0.6
0.2
-0.2
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
FY15
Q1FY16
FY16E
FY17E
GNPA NNPA

Source: Company quarterly earnings update, ICICIdirect.com Research

GNPA surged QoQ by ~40 bps at 2.3% in Q1FY16 owing to merger


related incremental addition of stressed assets. Kotak Bank has identified
total stress to the tune of 6% in erstwhile ING Vysya Banks book which
constitutes 2.5% of the merged entity. Standard restructured loans also
increased at | 418 crore (0.4% of net advances) owing to | 271 crore from
integration.
We expect GNPA and NNPA ratios to inch up at 2.9% and 1.7%,
respectively, by FY17E. Accordingly, provision expenses are expected to
remain higher at 1.0% (annualised) in FY16E and then come down at
0.5% (annualised) in FY17E.

ICICI Securities Ltd | Retail Equity Research Page 5


Healthy performance of consolidated entity
Exhibit 6: Consolidated profit over the years, ex bank other subsidiaries form ~40% of PAT
Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16
Kotak Bank 252 260 276 297 282 280 362 436 403 353 340 407 430 626 611 527 191
Kotak Securities 23 29 24 50 23 40 38 *13 31 40 46 44 68 66 60 96 67
Kotak Mahindra Capital 1 -4 4 5 6 4 2 4 4 -2 7 5 -4 -7 -6 30 3
Kotak Prime 94 90 104 97 94 114 105 119 117 125 123 126 120 125 120 143 119
Kotak AMC & Trust 9 7 3 3 4 -5 11 2 7 17 12 4 0 -1 -10 -18 20
International Subsidiaries -3 -7 -4 3 -5 8 5 -1 -10 1 9 6 7 13 14 18 25
Kotak Investment advisors 11 8 7 10 8 9 6 8 1 4 7 5 8 4 2 11 0
Kotak Mahindra Investments 3 3 3 6 4 16 8 5 4 11 11 16 17 25 24 40 30
Kotak Mahindra Old Mutual 46 53 47 57 32 47 53 58 71 44 60 65 49 52 51 76 66
Total (net off aflliates/minority) 436 433 464 528 443 502 577 666 627 583 591 678 695 899 863 913 518

Source: Company, ICICIdirect.com Research

Exhibit 7: Profitability performance at consolidated level


PAT (| crore) Q1FY16 Q1FY15 YOY (%) Q4FY15 QoQ (%)
Kotak Bank 190.8 430.0 -55.6 527.0 -63.8
Kotak Securities 67.0 68.0 -1.5 96.0 -30.2
Kotak Mahindra Capital 3.0 -4.0 NA 30.0 NA
Kotak Prime 119.0 120.0 -0.8 143.0 -16.8
Kotak AMC & Trust 20.0 0.0 NA -18.0 NA
International Subsidiaries 25.0 7.0 NA 18.0 38.9
Kotak Investment advisors 0.0 8.0 -100.0 11.0 -100.0
Kotak Mahindra Investments 30.0 17.0 76.5 40.0 -25.0
Kotak Mahindra Old Mutual 66.0 49.0 34.7 76.0 -13.2
Total (net off equity aflliates/minority) 517.8 695.0 -25.5 913.0 -43.3

Source: Company quarterly earnings update, ICICIdirect.com Research

Kotak Prime
The overall loan book has increased nearly four times in seven years from
| 5615 crore to | 19728 crore in Q1FY16. Kotak Prime, the next highest
profit making segment, grew tepidly with loan growth of 11.5% YoY to
| 19728 crore in Q1FY16 while car loans within the same grew 12.3% YoY
to | 15070 crore. PAT came in flat QoQ | 119 crore.

Exhibit 8: Kotak Mahindra Prime profitability on a slower track


| Crore Q1FY16 Q4FY15 Q1FY15 YoY Gr. (%) QoQ Gr. (%)
PBT 183.0 218.0 183.0 0.0 -16.1
PAT 119.0 143.0 120.0 -0.8 -16.8
Loans 19728.0 19707.0 17693.0 11.5 0.1
-car loans in same 15070.0 14726.0 13418.0 12.3 2.3
CAR (%) 18.3 18.3 - -
ROA (%) 2.5 2.5 - -
NET NPA -cars (%) 0.5 0.4 - -
Source: Company quarterly earnings update, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 6


Exhibit 9: Kotak Prime second highest profit contributor
Q1FY16 Q4FY15 Q3FY15 Q2FY15 Q1FY15 Q4FY14 Q3FY14 Q2FY14 Q1FY14 Q4FY13 Q3FY13 Q2FY13 Q1FY13 Q4FY12 Q3FY12
PBT 183 218 183 190 183 192 190 191 179 174 158 170 139 143 152
PAT 119 143 120 125 120 126 123 125 117 119 105 114 94 97 104
Loans 19728 19707 19073 18819 17693 17371 16858 16952 17093 17022 16042 15173 14114 13386 12379
-car loans 15070 14726 14234 13946 13418 13273 13066 13136 13055 12777 12237 11756 11154 10577 9737
CAR 18.3 18.3 17.3 17.7 17 17.7 17.1 16.4 16 15.4 15.8 15.8 15.9 16.3 16.8
ROA 2.5 2.5 2.3 2.5 2.5 2.6 2.6 2.6 2.5 2.6 2.4 2.8 2.4 2.9 3
Net NPA -cars 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.4% 0.3% 0.2% 0.2% 0.2% 0.2% 0.1% 0.2% 0.20%
Source: Company, ICICIdirect.com Research

Kotak Securities
Kotak Securities (K-Sec), a KMB subsidiary, has been one of the large
stock broking firms offering both retail and institutional services. It had
9% market share in FY07, which has declined to as low at 2.7%
currently on account of rising options volume generating lower yields
and relative lower push by the broker in the same. The company
clocked an average daily turnover of | 3,720 crore in FY07 and was at
| 3920 crore in FY14, which rose to | 7813 crore in Q1FY16 on the back
of increased volumes in industry.
The end of the JV with Goldman Sachs in May 2006 has not made any
meaningful impact on its market share. Competition intensified in the
recent past in the Indian broking space, which resulted in a fall in broking
yields for all players.
Exhibit 10: Average daily turnover trend

9000
8000
7000
6000
(| Crore)

5000

8372
8372
7813
4000

6621
6053
5205

3000
4648
4522

4261

4248
4160
4137
3925

3903
3814
3800

3720
3692
3673
3600

3582

3343
3300

2000
1000
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Source: Company, ICICIdirect.com Research

Exhibit 11: Market share in average daily volume surges in Q1FY16 (reported)

5.5
5.3
5
4.5 4.5
4.3
The market share of Kotak Securities remained at 2.7% in 4 3.9
3.8 3.7 3.8
(%)

Q1FY16 3.5 3.5


3 3.0 2.9 2.9 2.9 2.9 2.85
2.7 2.7 2.8 2.7
2.5 2.5 2.5 2.6 2.5 2.4 2.3 2.4
2.2
2
FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16

Source: Company quarterly earnings update, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7


In Q1FY16, Kotak Securities clocked 12.1% YoY growth in topline at | 250
crore on healthy daily volume of | 7813 crore vs. 6053 crore in Q1FY15.
PAT came in at | 67 crore; same as in same quarter in previous fiscal
owing to higher expenses incurred during the quarter.

Kotak Mahindra Old Mutual Life Insurance is a 74:26 JV between Kotak


Mahindra Bank and Old Mutual Life. Kotak Life had managed to capture
market share of ~3%. It recorded 74% CAGR in annualised premium
equivalent (APE) over FY04-07. Post FY09, after which growth collapsed,
annualised premium equivalent (APE) has been hovering around | 1000
crore till now. Annual profits touched around | 229 crore as on FY15
growing from | 14 crore in FY09.
The life insurance performance has stabilised with lower growth now.
After de-growing in FY14, new business premium surged 78% YoY to
| 388 crore with APE increasing 92% YoY. Q1FY16 PAT was at | 66 crore
led by strong individual premium growth.
On APE (Single @ 1/10th) basis, Kotak Bank share for Exhibit 12: Life insurance business statistics on APE basis market share is 29%
Q1FY16 is 48% (Q1FY15 27%) for first year individual Premium (| crore) Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15
premium Renewal 327.0 334.0 527.0 240.0 337.0 350.0 571.0
Indvl Regular 104.0 101.0 186.0 58.0 111.0 133.0 301.0 124.0
Group 127.0 127.0 205.0 134.0 170.0 159.0 328.0 248.0
Single 49.0 37.0 88.0 26.0 50.0 26.0 46.0 16.0
New Business Premium 280.0 265.0 479.0 218.0 331.0 318.0 675.0 388.0
APE 235.9 231.7 399.8 194.6 286.0 294.6 633.6 373.6
Solvency Ratio (%) 3.1 3.2 3.2 3.1 3.0 3.0 3.1 3.2
PAT 44.0 60.0 65.0 49.0 52.0 51.0 76.0 66.0
Source: Company quarterly earnings update, ICICIdirect.com Research

Kotak Mahindra Asset Management


Kotak AMC has grown its average AUM at 21% CAGR to | 38600 crore by
FY07-15. Its share of equity in total has been rising gradually from 14% in
FY09 to 24% in FY14. In Q1FY16, average AUM grew 35% YoY to | 48337
crore. This has helped in improving profitability to | 20 crore in Q1FY16
vs. | nil profit in Q1FY15.

Kotak Mahindra Capital (KMCC)


The Kotak Mahindra Group carries on its investment banking business
through Kotak Mahindra Capital Company (KMCC), a subsidiary of Kotak
Mahindra Bank (KMB). Kotak bought the 25% stake held by Goldman
Sachs in KMCC in May 2006 by paying | 210 crore, making it a 100%
subsidiary. KMCC has a strong presence in managing equity issuances
and advising on M&A transactions and has benefited largely from the
boom in investment banking activity in India. The company de-merged its
principal and trading investments division (including primary dealership)
in March 2007 (to free up surplus capital) and now primarily operates as a
full service investment bank, offering advisory and transactional services.
It earned revenue of | 21 crore and PAT of | 3 crore in Q1FY16.

ICICI Securities Ltd | Retail Equity Research Page 8


Outlook and valuation
KMB has been trading at rich valuations consistently due to its superior
return ratios with FY15 RoA of 1.9%. It earns highest NIM in the industry.
This depicts its strong operational business model and management
having full control via consistent performance.

With ING Vysya Bank merger, the bank brought down promoter stake
from 40% to 34% and also added value and geographical synergies in the
company. Post merger, NIMs and RoA is expected to decline to 3.8-4.0%
and 9.5% in FY17E, however, will continue to remain competitive
compared to peers. Synergy benefits are expected to accrue over time
and will enable the bank to improve RoA. Factoring in integration expense
and increased provisioning related to erstwhile ING Vysya Bank, we have
lowered our ABV to |128.5 from | 145.6. Accordingly, valuing on SOTP
basis, we revise our target price at | 660 (earlier | 718), maintaining
multiple at 4.0x and, thereby, maintain our HOLD rating on the stock.

Exhibit 13: DuPont Analysis (Bank standalone)


FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Net interest income/ avg. total assets 5.1 5.3 5.6 4.8 4.3 4.6 3.8 3.8 3.4 3.2
Non-interest income/ avg. total assets 1.9 1.0 1.9 1.8 1.7 1.8 1.6 1.8 1.6 1.6
Non-operating profit/ avg. total assets 7.0 6.3 7.5 6.5 6.0 6.5 5.4 5.6 5.1 4.8
Operating expenses/ avg. total assets 4.2 4.2 3.6 3.5 3.1 3.4 2.8 3.0 3.3 2.9
Operating profit/ avg. total assets 2.8 2.1 3.9 3.0 2.8 3.1 2.6 2.6 1.8 1.9
Provisions/ avg. total assets 1.1 0.6 1.5 0.3 0.1 0.3 0.3 0.3 0.7 0.3
Return on avg. total assets 1.2 1.0 1.7 1.9 1.9 1.9 1.5 1.5 0.8 1.1
Leverage 9.3 7.8 8.0 7.8 7.9 9.3 8.6 7.9 8.4 9.1
Return on equity 11.4 7.5 13.5 14.5 14.7 17.9 13.0 12.1 6.5 9.6
Source: Company, ICICIdirect.com Research

Exhibit 14: Valuation


FY14 FY15 FY16E FY17E
EPS (|) 9.4 13.7 8.0 13.1
Growth (%) 1.2 44.8 -41.2 62.6
P/E (x) 73.2 50.5 85.9 52.8
ABV 81.3 114.9 119.6 128.5
P/ABV (x) 8.4 5.9 5.6 5.1
GNPA (%) 1.9 1.8 2.8 2.9
RoNA (%) 1.5 1.5 0.8 1.1
RoE (%) 13.0 12.1 6.5 9.6
Source: Company, ICICIdirect.com Research

Exhibit 15: Valuation (|) Merged Entity


Company Value / share
KMB (Merged entity) 522
Kotak Life 23
Kotak Mahindra Prime 64
Kotak Mahindra Capital 11
Kotak Securities 30
Kotak AUM 12
662

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9


Details about merger with ING Vysya Bank (September 2014)
Effective April 1, 2015, ING Vysya Bank will merge with Kotak Bank as it
has received CCI and RBI approval for an all-stock amalgamation among
the banks. Post merger, Kotak Mahindra Bank will become the fourth
largest private bank with branches at 1261, business size of | 230000
crore, employees at ~40000 and customers at ~10 million.
With ~15.2% dilution of equity share capital, promoter holding in Kotak
Mahindra Bank is expected to decline to 34% from 40% currently, in line
with RBIs direction to bring down their holding to 30% by December
2016 and 20% by March 2018.
Rationale for deal
1. The merger would give Kotak Bank a deeper presence in southern
India as ING Vysya has two-third of its 577 branches in south. Kotak
Bank has 79% of its 684 branches in western & northern region. Thus,
the merger provides larger presence with minimum overlap
2. The merger would yield more liquidity with significant foreign
headroom in Kotak Bank even post merger, with foreign shareholding
at ~47% in the merged entity. The management indicated that they
will apply to RBI for raising the foreign holding limit to 74% from 49%
currently
3. Merger will allow Kotak Bank to leverage on large international
corporates in India with access to overseas relationships of ING
Group
4. The merger is also beneficial on the liability front as both banks have
CASA ratio of ~31%. Owing to strong SME business, ING Vysyas CA
float is healthy. Further, there is large scope for garnering savings
balances as Kotak Bank offers a higher rate of 5.5-6%
Merged entity will have 441 branches in the Top 8 cities
Owing to lower NIMs and higher CI ratio of ING Vysya Bank, Kotaks
banking business RoA is expected to decline to ~1.5% from 1.8%
immediately. RoA can further be maintained at 1.5% in FY15-17E.
However, we believe the benefits of merger synergies to accrue over
time, which will enable the merged entity to clock healthy return ratios
post FY17E.

Exhibit 16: Combined branch network (FY15) status (Total ~1261)


Branches ING Vysya Kotak Bank Kotak (Merged)
West 13% 46% 31%
North 22% 33% 28%
South 61% 15% 36%
East 4% 6% 5%
Source: Company, ICICIdirect.com Research

Exhibit 17: Advances mix (Q3FY15)


% ING Kotak Bank Merged
Agri 11 12 12
SME 38 7 17
Large corporates 39 31 33
Retail 19 50 40
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10


Company snapshot

800

700

600 Target Price: | 660

500

400

300

200

100

May-16
Jan-16
May-13
Sep-13

May-14
Sep-14

May-15
Sep-15
Sep-11

May-12
Sep-12

Jan-14

Jan-15
Sep-09

May-10
Sep-10

May-11

Jan-12

Jan-13
Sep-07

May-08
Sep-08

May-09

Jan-10

Jan-11
Jan-08

Jan-09
May-05
Sep-05

May-06
Sep-06

May-07
Jan-05

Jan-06

Jan-07

Source: Bloomberg, Company, ICICIdirect.com Research

Key events
Date Event
Mar-03 Promoter stake was at 63% in the bank, post incorporation in 2002
May-05 Announced bonus shares
May-07 In peak market, capital market related businesses were doing well and getting higher valuation multiples. Bank's market cap share in total market used tobe less
FY08 Announced stock split, FV reduced to 5 from 10
Jun-09 Anand Mahindra ceased to be a promoter of the bank
Feb-11 Bank aspired to be national, inorganic (route) is something that was on radar also. Thereafter, the stock saw a new rally and is rising continuously
Oct-11 Savings rate de-regulated by RBI, Kotak Bank offered higher interest rate of 6% above | 1 lakh and 5% below | 1 lakh vs the floor of 4%. This has been very helpful in
saving balance increase as it started adding | 600-800 crore in a quarter post this hike.
Mar-12 Asset quality maintained even with a large commercial vehicle and construction equipment portfolio
Jul-12 RBI asked promoters of Kotak Mahindra Bank to cut their stake in the bank to 20% from 45 % by 2018. With expectation of continuous dilution at higher multiple of
BV, stock price remained on an uptrend
May-13 G-sec yields spiked post Fed announcement on May 22 of its intention to taper QE and tight liquidity measures by RBI of MSF rate hike etc, impacted banks,
particularly wholesale funded however Kotak Bank although being lower on CASA remained resilient
Oct-13 Post liquidity tightening measures like MSF reversed by RBI, stock saw respite
Nov-14 Announced merger with ING Vysya Bank in ratio of 725 shares of Kotak bank for 1000 shares of ING Vysya Bank
Jan-15 Merger approved by shareholders
Apr-15 Scheme of amalgamation of Kotak Mahindra Bank and ING Vysya Bank comes into effect from April 1, 2015
Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern


Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Mar-14 Jun-14 Sep-14 Dec-14 Jun-15
1 Kotak (Uday Suresh) 30-Jun-15 33.52 612.5 0.0 Promoter 40.33 40.33 40.07 40.05 33.86
2 ING Bank N.V. 30-Jun-15 6.45 117.9 117.9 FII 35.09 35.09 34.61 35.09 35.32
3 Capital International, Inc. 30-Jun-15 5.86 107.1 34.6 DII 1.78 1.78 2.01 2.03 3.69
4 CPP Investment Board 30-Jun-15 3.93 71.7 0.0 Others 22.80 22.80 23.31 22.66 27.13
5 Sumitomo Mitsui Banking Corp 30-Jun-15 3.59 65.6 0.0
6 First State Investment Management (UK) Limited 30-Jun-15 2.02 37.0 -3.1
7 Genesis Investment Management, LLP 31-May-15 1.93 35.3 0.0
8 Caladium Investments Pte. Ltd. 30-Jun-15 1.64 30.0 -10.0
9 Mahindra (Anuradha) 30-Jun-15 1.44 26.4 -0.5
10 Matthews International Capital Management, L.L.C. 30-Jun-15 1.15 21.0 -7.5
Source: Reuters, ICICIdirect.com Research
Recent Activity (| crore and shares in mn)
Buys Sells
Investor name Value Shares Investor name Value Shares
ING Bank N.V. ,284.59m 117.90m Caladium Investments Pte. Ltd. -108.96m -10.00m
Capital International, Inc. 377.43m 34.64m Matthews International Capital Management, L.L.C. -81.72m -7.50m
Capital Research Global Investors 211.08m 19.37m Lyxor Asset Management -33.55m -3.31m
Birla Sun Life Asset Management Company Ltd. 91.63m 8.35m Kotak Mahindra Asset Management Company Ltd. -28.36m -3.20m
Norges Bank Investment Management (NBIM) 37.83m 3.77m First State Investment Management (UK) Limited -27.44m -3.08m
Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11


Financial summary
Profit and loss statement | Crore Key Ratios
(Year-end March) FY14 FY15 FY16E FY17E (Year-end March) FY14 FY15 FY16E FY17E
Interest Earned 8767.1 9719.9 17528.1 20092.8 Valuation
Interest Expended 5047.1 5496.1 10990.4 12845.8 No. of Equity Shares 77.0 154.5 181.4 181.4
Net Interest Income 3720.0 4223.8 6537.8 7247.0 EPS (|) 19.5 12.1 8.0 13.1
growth (%) 16.0 13.5 54.8 10.8 BV (|) 159.4 91.3 129.6 142.5
Non Interest Income 1399.7 2028.4 3083.8 3522.3 BV-ADJ (|) 151.9 87.4 119.6 128.5
Net Income 5119.8 6252.2 9621.6 10769.3 P/E 71.2 114.9 85.9 52.8
Operating expense 2542.7 3254.7 6197.3 6491.2 P/BV 9.1 15.9 5.8 5.4
Gross profit 2577.1 2997.5 3424.3 4278.1 P/ABV 9.0 15.6 5.6 5.1
Provisions 304.7 164.5 1281.9 741.6 Yields & Margins (%)
Taxes 770.0 966.9 685.6 1167.1 Yield on avg earning assets 10.6 10.4 9.7 9.6
Net Profit 1502.4 1866.1 1456.9 2369.5 Avg. cost on funds 6.9 6.8 6.8 6.6
growth (%) 10.4 24.2 -0.2 62.6 Net Interest Margins 4.5 4.5 3.6 3.5
EPS 19.5 12.1 8.0 13.1 Avg. Cost of Deposits 6.9 6.7 6.7 6.7
Source: Company, ICICIdirect.com Research Yield on average advances 13.2 12.5 11.6 11.5
Quality and Efficiency (%)
Cost / Total net income 49.7 52.1 64.4 60.3
Credit/Deposit ratio 89.8 88.4 86.1 85.2
GNPA 2.0 1.9 2.8 2.9
NNPA 1.1 0.9 1.4 1.7
ROE 13.8 14.1 6.5 9.6
ROA 1.8 1.9 0.8 1.1
Source: Company, ICICIdirect.com Research

Balance sheet | Crore Growth ratios


(Year-end March) FY14 FY15 FY16E FY17E (Year-end March) FY14 FY15 FY16E FY16E
Sources of Funds Total assets 4.6 21.0 0.9 18.0
Capital 385.2 386.2 453.4 453.4 Advances 9.4 24.8 0.9 18.7
ESOPS 8.5 3.0 8.5 8.5 Deposits 15.8 26.7 1.0 19.9
Reserves and Surplus 11889.9 13722.6 23055.2 25389.4 Total Income 10.5 15.6 0.8 14.6
Networth 12283.5 14111.8 23517.1 25851.3 Net interest income 16.0 13.5 0.5 10.8
Deposits 59072.3 74860.4 147668.9 177083.5 Operating expenses 15.1 28.0 0.9 4.7
Borrowings 12895.6 12149.8 26658.1 31533.6 Operating profit 30.7 16.3 0.1 24.9
Other Liabilities & Provisions 3333.8 4858.1 7113.4 7469.0 Net profit 10.4 24.2 -0.2 62.6
Total 87585.2 105980.0 204957.6 241937.5 Book value 29.9 14.9 0.4 9.9
EPS 7.0 -38.1 -0.3 62.6
Applications of Funds Source: Company, ICICIdirect.com Research
Fixed Assets 1106.9 1206.7 1914.2 2058.5
Investments 25484.5 30422.1 54727.9 60708.2
Advances 53027.5 66160.5 127136.8 150855.7
Other Assets 1972.3 1928.4 9516.8 14583.8
Cash with RBI & call money 5979.9 6262.4 12700.2 14932.7
Total 87571.1 105980.0 205995.8 243138.9
Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12


ICICIdirect.com coverage universe (Banks)
CMP M Cap EPS (|) P/E (x) P/ABV (x) RoA (%) RoE (%)
Sector / Company (|) TP(|) Rating (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E
Bank of India (BANIND) 169 135 Sell 10,426 26 21 32 6.6 8.0 5.3 0.9 1.1 1.0 0.3 0.2 0.3 6 4 7
Bank of Baroda (BANBAR) 186 200 Buy 41,057 15 20 23 12.1 9.2 8.1 1.3 1.3 1.1 0.5 0.6 0.6 9 11 11
Punjab National Bank (PUNBAN) 156 145 Hold 28,251 17 19 26 9.5 8.2 6.1 1.3 1.2 1.1 0.5 0.6 0.7 8 9 11
Syndicate Bank (SYNBN) 98 100 Hold 6,478 23 23 31 4.3 4.3 3.1 0.8 0.8 0.8 0.5 0.5 0.6 12 11 14
Indian Bank (INDIBA) 143 200 Buy 6,124 21 23 28 6.8 6.3 5.0 0.6 0.6 0.6 0.5 0.5 0.6 7 7 9
Axis Bank (UTIBAN) 579 690 Buy 137,415 31 35 43 18.6 16.4 13.5 3.2 2.7 2.3 1.7 1.7 1.8 18 17 18
City Union Bank (CITUNI) 100 118 Buy 4,861 7 8 10 14.4 12.1 9.9 2.4 2.0 1.7 1.5 1.7 1.8 17 17 18
DCB Bank (DCB) 135 160 Buy 3,490 7 8 9 19.8 17.0 14.5 2.7 2.3 2.0 1.3 1.3 1.2 15 14 14
Federal Bank (FEDBAN) 68 76 Hold 11,677 6 6 7 11.6 11.9 9.8 1.5 1.5 1.3 1.3 1.1 1.1 14 12 13
HDFC Bank (HDFBAN) 1,097 1,225 Buy 274,175 41 49 59 26.9 22.4 18.6 4.5 3.8 3.3 1.9 1.9 2.0 19 18 19
IndusInd Bank (INDBA) 973 1,050 Buy 56,663 34 39 51 28.7 25.1 19.1 4.9 3.3 2.9 1.8 1.9 2.1 18 16 16
Jammu & Kashmir Bk(JAMKAS) 105 119 Buy 5,080 10 21 25 10.0 5.0 4.1 1.0 0.9 0.8 0.7 1.2 1.3 9 16 17
Kotak Mahindra Bank (KOTMAH) 691 660 Hold 126,387 14 8 13 50.6 86.0 52.9 6.0 5.8 5.4 1.5 0.8 1.1 12 6 10
South Indian Bank (SOUIN0) 23 27 Buy 3,165 2 3 4 10.3 7.8 5.9 1.0 1.0 0.9 0.5 0.6 0.8 9 11 14
Yes Bank (YESBAN) 832 950 Buy 34,644 48 61 78 17.3 13.7 10.7 3.0 2.5 2.1 1.6 1.7 1.8 21 20 21

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 13


RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns


ratings to its stocks according to their notional target price vs. current market price and then categorises
them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;

Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,


ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai 400 093

research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research Page 14


ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.

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ICICI Securities Ltd | Retail Equity Research Page 15