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Initiating Coverage report on Axis Bank Ltd.
Axis Bank Ltd. (formerly known as UTI Bank Ltd.) incorporated in 1994 is one of the new generation private sector banks, which has established a track record of expanding its business at a faster pace than the industry. The bank was jointly promoted by the Specified Undertaking of the Unit Trust of India (SUUTI), Life Insurance Corporation (LIC), General Insurance Corporation (GIC), and other four PSU insurance companies i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. In terms of asset size and market capitalization, Axis Bank ranks third among the private sector banks and has got a network of 1120 branches/ extension counters, 5303 ATM’s as of Dec-10 across India and international presence in Singapore, Hong Kong and Dubai. It has five wholly-owned subsidiaries namely, Axis Securities and Sales Ltd., Axis Private Equity Ltd., Axis Trustee Services Ltd., Axis Asset Management Company Ltd. and Axis Mutual Fund Trustee Ltd.
Executive Summary
Ø Diversified loan book with highly rated Corporate and mid-corporate advances constituting more than 50% of the total advances.
Ø Healthy CASA ratio of ~44% provides respite to cost of funds and likely to sustain NIM in coming years.
Ø Growth in core business revenues, Fee income and better cost efficiency measures will enhance bank’s earnings quality.
Ø The bank is well capitalized and in a position to meet lending targets. The core operating performance and growth is expected to increase ROE and ROA in future.
Ø The asset quality of the bank is comfortable and has been maintained consistently, resulting in reduction of gross and net NPA ratios.
Ø An all-share deal worth Rs2067cr with one of India's leading financial services firm, Enam Securities Ltd would enhance positive synergies in future.
Valuations
The bank's total business, multiple sources of sustainable fee-income, distribution network and vast customer base in CASA-franchise enable it to leverage significant business opportunities in the current rising interest rate scenario. This along with a balanced loan portfolio and high proportion of low-cost funds will help the bank to earn better margins compared to its peers. Considering the above factors, we initiate coverage on the stock arriving at a target price of Rs1415 per share by assigning a multiple of 2.8x FY12E price to adjusted book for the period of one year, with a ‘Buy’ recommendation. At CMP of Rs1227.55, the stock is trading at 3.2x FY10 price to adjusted book and is expected to trade at 2.8xFY11E and 2.4xFY12E price to adjusted book.
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