Kotak Mahindra Finance: Buy

Recommendation: Buy

Sanjiv Shankaran

A SHARP reduction in its main items of expense helped Kotak Mahindra Finance (KMF) increase its profit margins for the first nine months (April-December) of this financial year.

The company registered a net profit of Rs 36.73 crore for the period, up 104 per cent over the corresponding previous period. Kotak Mahindra's total income grew by a marginal 3 per cent to Rs 169 crore during the first nine months of this financial year.

Interest charges comprised about 30 per cent of KMF's total income in April-December against an average of 40-44 per cent of Sundaram Finance, a finance company that sticks largely to on-lending of funds.

The implication is that KMF has more room to manoeuvre compared to a more traditional finance company that can be subjected to tremendous pressure in a competitive market where everyone operates on thin spreads.

Interest charges dropped 8 per cent to Rs 50 crore during the first nine months of 2000-01. For the same period, the provisioning for non-performing assets (NPAs) dropped 80 per cent to Rs 2.16 crore. As on March 31, 2000, KMF's total NPAs was 1.62 per cent of its assets.

The operating profit (excluding depreciation, NPA provisioning and tax) was Rs 88 crore, up by about 7 per cent compared to the corresponding previous period. The operating profit margin was 52 per cent for the first nine months of the current financial year.

KMF's net profit increased by about Rs 18.76 crore (104 per cent) to record Rs 36.73 crore for April-December of the current year. The net profit margin for the same period was 21.73 per cent as against 10.95 per cent for the corresponding period of the previous year.

Outlook: Pannier Trading Company, a private company that holds 75 per cent equity in the stock broking company, Kotak Securities, is to be merged with KMF. The merger ratio is 25 shares of KMF for every share in Pannier. The addition of Kotak Securities will boost KMF's profit margin because Kotak Securities' distribution and broking business has the potential to produce high returns without a significant addition to capital employed in the business. For example, in 1999-2000, admittedly a good year for capital market players, Kotak Securities had a net profit margin of about 42 per cent.

With the addition of Kotak Securities to its fold, KMF would draw its earnings from all dimensions to the financial sector -- life insurance is on the anvil -- except commercial banking. The existing mix of businesses provides some degree of insulation from a downturn in one or more segments. Commercial banking is an entirely different line.

KMF has the networth to get into commercial banking and, thus, gain access to cheap resources. But commercial banking may also involve much greater exposure to corporate lending, a segment that hurt KMF during the economic slowdown in the late 1990s.

The company has announced that a decision on banking will be taken by end of the current financial year. For now, KMF represents one of the more attractive long-term investment opportunities in the financial sector at the current price of Rs 82.

Pic.: Mr Uday Kotak, Vice-Chairman, Kotak Mahindra Finance.