Axis Bank: Valuation has become more attractive

India Infoline News Service | Mumbai |

Axis Bank’s execution on its focused retail strategy in the wake of project loan slowdown has been commendable. The share of retail loans in advances has increased from 19.5% in FY11 to 27.4% in FY13.

CMP Rs1,240, Target Rs1,625, Upside 31.0%  

Impressive delivery on retail strategy

Axis Bank’s execution on its focused retail strategy in the wake of project loan slowdown has been commendable. The share of retail loans in advances has increased from 19.5% in FY11 to 27.4% in FY13. The bank has mainly focused on secured products such as home loans, LAP and Auto Loans. On the liability side, the contribution of retail deposits (TDs + SA) has significantly increased from 39% in FY11 to 49% in FY13. The execution on the retail strategy was corroborated by rapid 2.7x growth of branches in semi-urban/rural areas over FY10-13. Continued brisk branch addition, improving maturity of network and widening distribution of retail products would drive further increase in retail share. Apart from adding granularity, ‘retailisation’ of balance sheet is lending stability to growth, margins and asset quality.


Poised to deliver healthy earnings growth and robust RoA

NIM is likely to stabilize around 3.5% in the longer run. Improvement in CASA ratio, benign wholesale rates and reduction in retail TD rates would comfortably offset the impact of lending rate cuts. The bank has alleviated concerns around its asset quality by giving an impaired assets accretion guidance of Rs50bn and credit cost guidance of 85-90bps. Rising share of secured retail products in advances augurs well for the longer term asset quality. We estimate Axis Bank to deliver 19% earnings CAGR over FY13-15 despite assuming conservative credit costs. Bank’s RoA is estimated to recover to historical high of 1.7% in FY15 after marginally correcting in FY14.


Sharp price correction is a great opportunity to Buy

Post the recent steep price correction, Axis Bank’s valuation stands at 1.4x FY15 P/adj.BV which is extremely alluring for a 1.7% RoA and 18% RoE (well-capitalized) delivering bank. Relative valuation argument is equally strong with discount to more diversified players such as HDFC Bank (55%) and IndusInd Bank (40%) near historic high. We expect such discount to contract significantly over the coming 3-6 months driven by sustained strong quarterly performance of Axis Bank. Retain BUY rating and 9-month target of Rs1,625. Elevate Axis Bank as our Top Pick in the sector. 


Financial summary

Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Total operating income
134,379
162,174
190,087
229,999
Yoy growth (%)
20.0
20.7
17.2
21.0
Operating profit (pre-provisions)
74,308
93,031
109,191
132,924
Net profit
42,425
51,794
59,421
73,384
yoy growth (%)
25.2
22.1
14.7
23.5





EPS (Rs)
102.7
110.7
127.0
156.8
Adj. BVPS (Rs)
540.6
692.5
790.6
915.7
P/E (x)
12.1
11.2
9.8
7.9
P/Adj.BV (x)
2.3
1.8
1.6
1.4
ROE (%)
20.3
18.5
16.7
17.9
ROA (%)
1.6
1.7
1.6
1.7
CAR (%)
13.7
17.0
16.4
14.8
Source: Company, India Infoline Research
BSE 548.10 6.50 (1.20%)
NSE 547.95 6.50 (1.20%)

***Note: This is a NSE Chart

 

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