MSCI: Kotak Mahindra Bank stock may see strong momentum, $690 million inflows, says Nuvama

Brokerage Nuvama Institutional Equities said shares of Kotak Mahindra Bank, which have been languishing for quite some time, could see a strong momentum going ahead, if MSCI increases the weight of the stock in its May review.

Kotak Mahindra Bank has released its March quarter shareholding pattern, which suggests that the foreign holding has dropped 147 basis points sequentially to 41.22 per cent in the bank. Nuvama said this could result in foreign headroom moving to 25.05 per cent against 22.38 per cent currently.

"The foreign headroom is just above the required threshold of 25 per cent and now could result in change of adjustment factor to 1 from 0.50 currently. As the shareholding is released before the MSCI price cutoff date for May 23 review and thus the possible weight up in Kotak Bank could happen in May review itself," NUvama said.

Nuvama said if its shareholding calculations hold true and MSCI consider 41.22 per cent as the current foreign holding, Kotak Mahindra Bank could see weight up led inflows to the tune of $690 million, which is almost 32 million shares buying (7-days average traded volume).

"The stock has been languishing for quite some time and the MSCI weight up trigger could lead to strong momentum," it said adding that the brokerage is continuously monitoring the event.

Foreign brokerage CLSA recently upgraded this stock to 'Buy' from 'Outperform' earlier, with an unchanged target of Rs 2,080, as it felt the underperformance of 50-130 per cent over peers in the last three years has made risk-reward incrementally favourable for the stock.

CLSA noted that KMB's valuation premium to ICICI Bank and HDFC Bank dropped to 10-20 per cent and even if one discounts the CEO transition, some premium for KMB is justified due to higher growth.

"With just 2 per cent market share and a formidable banking franchise, we expect Kotak to be a growth leader among large banks. Liability granularity has improved with a low cost of funds gap with peers, but the bank will need to deliver liability and asset growth together, CLSA said.

CLSA expects KMB to deliver 20 per cent earnings growth over FY22-25. It said CEO transition in December 2023 remains an overhang but clarity should emerge over the next 3-4 months. M&As, especially relating to liabilities, could be accretive, CLSA said while citing an example of ING Vyvsa.

Meanwhile, Nuvama reiterated its prior update and expects inclusion of Hindustan Aeronautics and Power Finance to MSCI indices and exclusion of Indus Towers and AC. Global Market cap cut-off date will be any day between April 17 and April 30. The announcement is likely on May 12, 3:30 am as per IST.

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