Here's Why I Think Kotak Mahindra Bank (NSE:KOTAKBANK) Is An Interesting Stock

Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like Kotak Mahindra Bank (NSE:KOTAKBANK). Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

See our latest analysis for Kotak Mahindra Bank

Kotak Mahindra Bank's Earnings Per Share Are Growing.

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. It certainly is nice to see that Kotak Mahindra Bank has managed to grow EPS by 28% per year over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. I note that Kotak Mahindra Bank's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. While we note Kotak Mahindra Bank's EBIT margins were flat over the last year, revenue grew by a solid 26% to ₹345b. That's progress.

In the chart below, you can see how the company has grown earnings, and revenue, over time. Click on the chart to see the exact numbers.

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Kotak Mahindra Bank's forecast profits?

Are Kotak Mahindra Bank Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a ₹3.2t company like Kotak Mahindra Bank. But we are reassured by the fact they have invested in the company. Indeed, they have a glittering mountain of wealth invested in it, currently valued at ₹990b. That equates to 31% of the company, making insiders powerful and aligned with other shareholders. Very encouraging.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations over ₹570b, like Kotak Mahindra Bank, the median CEO pay is around ₹82m.

The Kotak Mahindra Bank CEO received total compensation of just ₹35.3m in the year to March 2019. That looks like modest pay to me, and may hint at a certain respect for the interests of shareholders. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Should You Add Kotak Mahindra Bank To Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about Kotak Mahindra Bank's strong EPS growth. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that Kotak Mahindra Bank is worth keeping an eye on. Now, you could try to make up your mind on Kotak Mahindra Bank by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.

Of course, you can do well (sometimes) buying stocks that are not growing earnings and do not have insiders buying shares. But as a growth investor I always like to check out companies that do have those features. You can access a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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