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INVESTMENTS can be considered in the stock of Kotak Mahindra Bank. At Rs 308, the stock is trading at a price to book value of just below 3. The valuation, which is at a premium to that of most other banks, reflects the growth expectations built into the price.

Given the low base of its operations, the potential for growth as well as the competitive advantages of Kotak Mahindra Bank suggest that such expectations are justified. If the promises shown by the bank were fulfilled, then returns to the investor would be attractive. This would be possible if the per share earnings grow at a compounded annual rate of 25 per cent or more over the next five years.

The bank is just about finding its feet in the industry having established 29 branches. It, however, has established its brand name in the investment banking and securities broking business. The bank is also jostling for space in the extremely competitive businesses of car financing, asset management and life insurance. The people behind the show are vastly experienced and this is already reflected in the traction seen in all of the core businesses.

The bank's profits for the nine-month period ended December 2004 has been stagnant. This is mainly because of the continuing losses on rapidly growing businesses of branch banking and life insurance as well as losses in the treasury business. Over the next 12 months, the losses on all the three segments are likely to abate significantly contributing to profit growth. In terms of business and revenue growth, however, the performance has been commendable reinforcing the beliefs that are sustaining the premium valuation enjoyed by the bank.

Suresh Krishnamurthy

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