Kotak Bank Share Price Sees More Downgrades, Continues to Decline

Following the immediate resignation of KVS Manian, Joint Managing Director of Kotak Mahindra Bank after 29 years, brokerages have revised their target prices downward. Analysts point out that the departure of such a longstanding key managerial personnel (KMP), along with multiple other exits over the past year and compounded by the RBI's recent restrictions on the bank, signals negative trends. These factors, combined with the appointment of a relatively new CEO, a higher-than-average attrition rate, and the RBI's critique highlighting gaps in its digital capabilities, amplify concerns regarding the bank's leadership stability and digital proficiency.

The recent rating downgrade by brokerage firm Nuvama on Kotak Mahindra Bank’s stock, shifting from "Buy" to "Reduce," accompanies a new target price of ₹1,530, a reduction from the current market price. IIFL Securities, meanwhile, continues to assign a 'Sell' rating, setting a target price of ₹1,800 per share. Despite an 18% underperformance over the past year, analysts consider the stock's valuations to remain relatively high compared to its industry peers.

Jefferies India has maintained its hold rating on the stock, keeping its target price steady at ₹1,970 per share. The firm had previously cautioned that changes in senior leadership might lead to further departures among top executives. Jefferies anticipates additional exits within the senior and mid-level management, which could compound the challenges already posed by the RBI's restrictions on credit card and digital services. These departures are likely to have a substantial impact on the company's growth and valuation.

"Kotak already saw many senior level exits last year. Uday Kotak, CEO and Dipak Gupta, Joint MD had to exit the bank due to RBI’s cap on WTD tenors; the CFO reached retirement age, the CDO resigned in Nov-23 and Kotak’s attrition rate remains higher than peers," Nuvama said. Recently, the RBI imposed restrictions on Kotak Bank, prohibiting it from acquiring new customers digitally and from issuing new credit cards. The central bank issued a strict reprimand, criticizing Kotak for failing to develop IT systems and controls robust enough to support its growth trajectory. 

Senior bankers suggest that the RBI's ban could delay Kotak Bank's progress by one to two years relative to its more aggressive competitors. In response to RBI's directives during the fourth quarter, banks like ICICI have voluntarily taken steps to enhance key financial metrics and reduce their exposure to unsecured loans. Kotak not only needs to adhere to these industry-wide mandates but also must invest in more robust technology and monitoring systems. These necessary enhancements are likely to decelerate growth and elevate operating costs, though the precise impact remains difficult to determine. Nuvama anticipates that the ban may persist for at least a year. Although Kotak Bank may post earnings comparable to its peers for the fourth quarter, the uncertainty over the next 12 to 18 months is expected to restrain any significant momentum in the stock, according to analysts.

"We cut multiples sharply to 1.7x BV FY26 from 2.3x and value the subsidiaries at ₹560. Our multiple is pegged at a 10% discount to Axis. At our new target price of ₹1,530, the stock rates ‘REDUCE’ from ‘BUY’. While the stock has already corrected sharply, we expect it to underperform peers going ahead. We recommend switching to ICICI, Axis, IIB, HDFC Bank (for a 1Y-plus horizon), and a few select NBFCs including Shriram," Nuvama’s report added.