Analyst corner: Downgrade KMB to ‘neutral’ with TP revised to Rs 1,800

KMB has delivered 32% returns since our Oct’20 upgrade, resulting in a sharp expansion in trading multiple to 4.2x FY22E ABV – a 17% premium to its five year average multiple. The sharp out performance in the stock (aided by MSCI inclusion) when seen in the context of growth outlook and return ratios (average RoE of 12.7% over FY21-23E) drives us to downgrade our rating to Neutral

During 2HFY19-2HFY21, KMB delivered tepid loan growth (5% CAGR, 3% excluding ECLG linked loans). The management expects an improvement in asset growth after doing an exemplary job in building a robust liability franchise. We currently estimate loan growth to sustain at 12% CAGR over FY21-23E. Asset quality metrics have improved as collection efficiency improved to mid-90s in Sep’20. The management remains confident on the quantum of its COVID-19 provisions (62bp of loans). We thus factor in a credit cost of 1.2% for FY21E, which will gradually decline to 0.7% by FY23E as PCR has improved sharply to 76%. KMB has delivered 18%/19%/21% CAGR in BV over the past 3/5/10 years owing to successive capital raises. However, with Tier I at 22.8% (highest in the past decade), modest growth trajectory and no further requirement to dilute as the promoter holding issue is already settled, we estimate BV to compound at 13% CAGR over FY21-23E. We, thus, downgrade our rating to Neutral and revise our TP to INR1,800/share (3.6x Sep’22E ABV + value its subsidiaries at INR511/share).

During 2 HFY19-2 HFY21, KMB delivered tepid loan growth (5% CAGR, 3% excluding ECLG-linked loans) v/s 18% for HDFCB and 8-12% for its peers. The management expects an improvement in asset growth after doing an exemplary job in building a robust liability franchise. We expect loan growth to sustain at 12% CAGR over FY21-23E.

The bank has significantly lowered its cost of funds (CoF) to 3.8% (decline of 140bp YoY) – the lowest among its peers – aided by a sharp reduction in its savings and term deposit (TD) rates. KMB inarguably has the best-in-class liability franchise, with a CASA mix of 57%.