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AXIS Bank (AXBK.BO)
Preferred Pick at Reasonable Valuations
Reducing Target Price to Rs1400, maintain Buy — We are revising our EVAbased
target price for Axis Bank to Rs1400 (from Rs1510 earlier) and
benchmarking it to 2.5x 1Yr Fwd P/BV (from 2.75x). We believe Axis’ market
positioning and franchise remain undiminished; fundamentals remain strong and
operating momentum healthy. Maintain Buy.
Attractive valuations relative to peers, but leveraged to macro — Axis is
trading at a relatively sharp discount to peers (42% discount to HDFC Bank, 1.6
SD below historical mean) and relative to own history (1.8x 1yr Fwd P/BV, well
below historical mean). While valuations have corrected to attractive levels
(trades at 1.8x 1yr Fwd P/BV), it remains leveraged to the macro (rates, inflation,
and liquidity) and any signs of macro improvements should provide meaningful
stock upsides.
Asset quality a key risk, but remains healthy so far — Axis’ large SME and
corporate (infrastructure) exposure have come under intense scrutiny and risk
perceptions have increased significantly. However its performance so far remains
strong with stable NPLs high coverage levels.
Quant View: Unattractive — As per our quantitative methodology, Axis Bank
currently lies in the Unattractive quadrant of our Value-Momentum map with weak
momentum and weak valuation scores compared with peers in the banking
sector.
Axis Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. The stock has moved from the
Glamour quadrant to the Unattractive quadrant in the past 3 months indicating a fall
in momentum along with valuations remaining weak. Compared to its peers in the
Banks sector, Axis Bank fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, Axis
Bank fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Axis Bank has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling commodity
(ex-oil) prices, and a weaker US Dollar.
AXIS Bank
Company description
Axis Bank is India's third-largest private-sector bank after the significantly larger
ICICI Bank, and HDFC Bank. It is more than twice the size of the next largest
private-sector bank with 1,125 branches and 5,303 ATMs. The top three privatesector
banks collectively account for over 12% market share, while private-sector
banks as a group are over 15% of the system. Axis Bank is a small player in the
broader banking sector; its market share is close to 3% in terms of loans and
deposits. Axis Bank was started by the erstwhile Unit Trust of India (UTI) in 1994,
along with LIC and GIC, two government-owned insurance companies. UTI's stake
is now held by SUUTI, a government-owned entity, with a 23.6% holding. LIC and
GIC together own 11.3%, and collectively, SUUTI and government-owned insurance
companies own approximately 37.2% of the bank.
Investment strategy
We rate Axis Buy/Low Risk. It is one of the few clean (in terms of asset book),
rapidly growing, profitable, and competitive private-sector banks in India. However,
after an explosive growth period over the last few years we expect the business to
consolidate medium term and would expect growth rates on assets, fees and
earnings to ease compared to its historically high levels. The operating environment
has remained challenging in recent months, and Axis has witnessed asset
pressures (albeit controlled) and concerns about the potential follow through of
recent high growth; we believe economic stability and strong management track
record should limit meaningful asset quality pressures.
Valuation
Our target price of Rs1,400 is based on an EVA model using the following key
assumptions: a) risk-free rate of 8.0%, b) long-term loan loss of 120bps per annum
(higher than sector averages, due to greater lumpiness in its loan book growth), and
c) long-term cost-to-income ratio of 42%. We prefer using an EVA-based valuation
benchmark to P/BV because EVA concentrates on the economic value creation of
the bank. We use P/BV as a secondary valuation methodology. Believing that Axis
should trade above government banks and in line with the highest multiples for
large private-sector banks given its ROE, we ascribe 2.5x 1yr Fwd P/BV to Axis,
equating to Rs1,454.
Risks
We rate Axis Bank as Low Risk, in line with our quantitative risk-rating system, and
to reflect the bank's well diversified loan portfolio and relatively healthy asset quality,
along with its sustained high profitability. Key downside risks to achieving our target
price include: 1) Greater-than-expected asset quality pressures, as Axis has grown
rapidly; 2) Sharp slowdown in rapidly growing fee income; 3) The bank's large share
of wholesale funding could be exposed to tighter funding; 4) Dependence on
treasury returns; 5) A government-related entity is a dominant shareholder in Axis;
any disorderly sale would have an impact on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
AXIS Bank (AXBK.BO)
Preferred Pick at Reasonable Valuations
Reducing Target Price to Rs1400, maintain Buy — We are revising our EVAbased
target price for Axis Bank to Rs1400 (from Rs1510 earlier) and
benchmarking it to 2.5x 1Yr Fwd P/BV (from 2.75x). We believe Axis’ market
positioning and franchise remain undiminished; fundamentals remain strong and
operating momentum healthy. Maintain Buy.
Attractive valuations relative to peers, but leveraged to macro — Axis is
trading at a relatively sharp discount to peers (42% discount to HDFC Bank, 1.6
SD below historical mean) and relative to own history (1.8x 1yr Fwd P/BV, well
below historical mean). While valuations have corrected to attractive levels
(trades at 1.8x 1yr Fwd P/BV), it remains leveraged to the macro (rates, inflation,
and liquidity) and any signs of macro improvements should provide meaningful
stock upsides.
Asset quality a key risk, but remains healthy so far — Axis’ large SME and
corporate (infrastructure) exposure have come under intense scrutiny and risk
perceptions have increased significantly. However its performance so far remains
strong with stable NPLs high coverage levels.
Quant View: Unattractive — As per our quantitative methodology, Axis Bank
currently lies in the Unattractive quadrant of our Value-Momentum map with weak
momentum and weak valuation scores compared with peers in the banking
sector.
Axis Bank currently lies in the Unattractive quadrant of our Value-Momentum map
with weak momentum and weak value scores. The stock has moved from the
Glamour quadrant to the Unattractive quadrant in the past 3 months indicating a fall
in momentum along with valuations remaining weak. Compared to its peers in the
Banks sector, Axis Bank fares worse on the valuation metric and on the momentum
metric. On the other hand, compared to its peers in its home market of India, Axis
Bank fares better on the valuation metric but worse on the momentum metric.
From a macro perspective, Axis Bank has a high beta to the region so is likely to
rise (or fall) faster than the region. It is also likely to benefit from falling commodity
(ex-oil) prices, and a weaker US Dollar.
AXIS Bank
Company description
Axis Bank is India's third-largest private-sector bank after the significantly larger
ICICI Bank, and HDFC Bank. It is more than twice the size of the next largest
private-sector bank with 1,125 branches and 5,303 ATMs. The top three privatesector
banks collectively account for over 12% market share, while private-sector
banks as a group are over 15% of the system. Axis Bank is a small player in the
broader banking sector; its market share is close to 3% in terms of loans and
deposits. Axis Bank was started by the erstwhile Unit Trust of India (UTI) in 1994,
along with LIC and GIC, two government-owned insurance companies. UTI's stake
is now held by SUUTI, a government-owned entity, with a 23.6% holding. LIC and
GIC together own 11.3%, and collectively, SUUTI and government-owned insurance
companies own approximately 37.2% of the bank.
Investment strategy
We rate Axis Buy/Low Risk. It is one of the few clean (in terms of asset book),
rapidly growing, profitable, and competitive private-sector banks in India. However,
after an explosive growth period over the last few years we expect the business to
consolidate medium term and would expect growth rates on assets, fees and
earnings to ease compared to its historically high levels. The operating environment
has remained challenging in recent months, and Axis has witnessed asset
pressures (albeit controlled) and concerns about the potential follow through of
recent high growth; we believe economic stability and strong management track
record should limit meaningful asset quality pressures.
Valuation
Our target price of Rs1,400 is based on an EVA model using the following key
assumptions: a) risk-free rate of 8.0%, b) long-term loan loss of 120bps per annum
(higher than sector averages, due to greater lumpiness in its loan book growth), and
c) long-term cost-to-income ratio of 42%. We prefer using an EVA-based valuation
benchmark to P/BV because EVA concentrates on the economic value creation of
the bank. We use P/BV as a secondary valuation methodology. Believing that Axis
should trade above government banks and in line with the highest multiples for
large private-sector banks given its ROE, we ascribe 2.5x 1yr Fwd P/BV to Axis,
equating to Rs1,454.
Risks
We rate Axis Bank as Low Risk, in line with our quantitative risk-rating system, and
to reflect the bank's well diversified loan portfolio and relatively healthy asset quality,
along with its sustained high profitability. Key downside risks to achieving our target
price include: 1) Greater-than-expected asset quality pressures, as Axis has grown
rapidly; 2) Sharp slowdown in rapidly growing fee income; 3) The bank's large share
of wholesale funding could be exposed to tighter funding; 4) Dependence on
treasury returns; 5) A government-related entity is a dominant shareholder in Axis;
any disorderly sale would have an impact on the stock.
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