Challenges remain for Kotak Mahindra post merger with ING Vysya; Goldman retains ‘sell’

The Kotak MahindraBSE 3.74 % and ING VysyaBSE 0.53 % deal is indeed strategic (access to branch network, SME business), it's accretive, and pushes up Kotak from a niche to a more scaled player (4th largest private bank), but it would carry a lot of integration issues.

Kotak Mahindra Bank's acquisition of ING Vysya BankBSE 0.53 % will make Kotak the fourth largest private bank in the country in terms of total business, but analysts at top brokerage firms also see a couple of challenges in terms of integration and return ratios Stock Market Trading Tips

"The deal appears accretive, but returns could potentially settle lower. The deal terms and both companies' 1HFY15 results imply the deal would be book value and EPS accretive for Kotak, which trades at 5.0X FY15E P/B (standalone), compared to ING Vysya's 2.0X FY15E P/B," Goldman Sachs said in a report.

"However, Kotak's return ratios could be lower under the merged entity given lower profitability at ING Vysya. We maintain our sell rating on Kotak Mahindra BankBSE 3.74 % and buy rating on ING Vysya Bank," added the report Financial Astrology Trading Tips

As per the deal, Kotak Mahindra Bank will issue 725 shares for every 1,000 shares of ING Vysya. This is tantamount to a 15.2 per cent dilution in share capital of KTKM.

Post the recent rally in Kotak share price in the past two trading sessions, analysts still believe that it is a good buy even at current levels, but upside may be limited.

Given the fact that both are private sector banks, run by professional managers, and similar in size with a degree of commonality in business and risk approaches, could make the job of Mr Kotak, the group supremo, a little tricky, say experts Personal Numerology Trading Tips

"If Team Kotak can pull it off and quickly put in place a new organisational structure, the merged entity - India's fourth-largest private lender with good retail base, investment bank and corporate and SME loan book - could emerge as a formidable competitor to institutions like Axis," ET reported.

This transaction after all has taken a lot of time, possibly because of operating/cultural differences (ING Vysya is a restructured but still old private sector bank, which is a challenge) Nifty Trading Tips

Citigroup is of the view that this is also the first time Kotak has made a meaningful acquisition: it's now increasingly multi-platformed and this will require significant streamlining efforts.

Apart from that, the brokerage firm sees workforce reduction as unrealistic, integration a distraction in a growth-focused market and it won't necessarily be smooth.

It does appear value-enhancing and is the right step for Kotak Mahindra Bank, but analysts still await greater detail on near/medium-term actions or objectives to get a better sense of the opportunities, challenges and risks that such a transaction inevitably carries Intraday Trading Tips