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Action: Initiate with a Buy rating and TP of INR1,400
We recommend a Buy rating on AXSB for its high beta asset book, robust
funding franchise and valuations, for which we have already factored in
stress-case loan losses. In our view, AXSB is best leveraged to a turn in
the rate cycle in India.
Factoring in stress-case LLPs for power sector bad loans
We build in LLPs of 71bps and 104bps for FY12F and FY13F,
respectively, for possible loan losses related to AXSB's power sector
exposure. Our forecasts factor in incremental slippages of 200bps through
FY13F, compared with management guidance of 100bps. While street
estimates have yet to factor in these LLPs, we believe the valuations
already reflect this and we recommend adding to positions at the current
level.
We expect strong loan growth, high CASA per branch to sustain RoE
We expect AXSB to clock loan book growth of 23.5% for FY12F and
22.3% for FY13F, versus system loan book growth of 16-18% for FY12F.
Given current CASA momentum, we expect a CASA CAGR of 22.5%
through FY13F, which should help to maintain NIM in the 3.4-3.5% range.
We expect a 22% CAGR in core fee income through FY13F.
Valuation: AXSB shares are trading at 1.9x FY13F adjusted book
value and 11.6x FY13F EPS. Our TP of INR1,400 implies FY13F P/ABV
of 2.4x and P/E of 14.1x, for an ROA of 1.3% and ROE of 18.4%.
Catalysts: A turn in the rate cycle and investment cycle, plus
accelerated resolution of power sector bottlenecks.
Valuation
Initiate with Buy and TP of INR1,400
We expect Axis Bank to grow its loan book at a CAGR of 23% over FY11-13E. We
expect this to drive revenue and PAT CAGRs of 21% and 12.4%, respectively, over the
same period after factoring in stress-case LLPs of 104bps for FY13F. We expect Axis
Bank to clock RoA and adjusted RoE of 1.3% and 18.4%, respectively, for FY13F. Axis
Bank shares currently trade at 1.9x FY13F adjusted book value (ABV), which is 1
standard deviation below its historical mean of 2.4x one-year forward ABV. Our TP of
INR1,400 implies FY13F P/ABV of 2.4x. We arrive at our TP of INR1,400 using a threestage
residual-income valuation methodology that assumes the following:
• We forecast loan book growth of 23.5% for FY12F and 22.3% for FY13F, versus
management guidance of 23-25% over FY12-13E.
• We forecast fee income growth of 23% for FY12F and 21% for FY13F.
• We estimate NIM of 3.45% for FY12F and 3.5% for FY13F, from 3.78% for 2Q FY12.
• On the bad loan front, we build in an increase in GNPLs to INR34.2bn (1.6% of loan
book) in FY13F, from INR16bn in FY11. We also forecast NNPL of INR8.9bn for
FY13F, up from INR4.1bn in FY11.
• Axis Bank currently has a capital adequacy ratio of 11.4% with tier-1 at 8.5% (9.3%
including 1H FY12 profits). We factor in issuance of 13.78m shares towards the Enam
acquisition.
• Axis Bank’s employee headcount was 25,590 at end-FY11, and we assume an addition
of 5,215 new employees by the end of FY13F. We expect the cost/income ratio to be at
43% in FY13F, from 42.7% in FY11, and we expect the cost/asset ratio to stay flat at
1.95% for FY13F, compared to 1.97% in FY11.
• We forecast pro forma diluted EPS of INR89.8 for FY12F and INR99.6 for FY13F. At
1.9x ABV and 11.6x diluted EPS for FY13F, we believe the stock is attractive. Our
target price of INR1,400 implies 2.4x adjusted book value (adjusted ROE of 18.4% for
FY13F) and 14.1x EPS for FY13F.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks, such as fuel availability and SEB (State Electricity Board) financial
health, are key upside catalysts.
Key risks: RBI persisting with a tight money policy, policy inaction with respect to power
sector bottlenecks and continued global macro uncertainty are potential downside risks.
Residual income valuation
We build the following assumptions into our three-stage residual-income model:
• We expect Axis Bank to grow its interest-earning assets at a CAGR of 21.9% over
FY11-14E, compared to an industry average of 17% on our forecasts. We expect this to
be followed by a CAGR of 12.9% over FY13-20E and a terminal growth rate of 4%
beyond that.
• We have modeled for an average ROE of 18.8% over FY12-20E and an 18.3% terminal
value ROE. Our discount rates range from 14.85% (current cost of equity) for FY11-
14E, 12.25% for FY14-20E and a 10% terminal rate.
• Our book value estimates factor in 3.5% dilution towards the Enam acquisition
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action: Initiate with a Buy rating and TP of INR1,400
We recommend a Buy rating on AXSB for its high beta asset book, robust
funding franchise and valuations, for which we have already factored in
stress-case loan losses. In our view, AXSB is best leveraged to a turn in
the rate cycle in India.
Factoring in stress-case LLPs for power sector bad loans
We build in LLPs of 71bps and 104bps for FY12F and FY13F,
respectively, for possible loan losses related to AXSB's power sector
exposure. Our forecasts factor in incremental slippages of 200bps through
FY13F, compared with management guidance of 100bps. While street
estimates have yet to factor in these LLPs, we believe the valuations
already reflect this and we recommend adding to positions at the current
level.
We expect strong loan growth, high CASA per branch to sustain RoE
We expect AXSB to clock loan book growth of 23.5% for FY12F and
22.3% for FY13F, versus system loan book growth of 16-18% for FY12F.
Given current CASA momentum, we expect a CASA CAGR of 22.5%
through FY13F, which should help to maintain NIM in the 3.4-3.5% range.
We expect a 22% CAGR in core fee income through FY13F.
Valuation: AXSB shares are trading at 1.9x FY13F adjusted book
value and 11.6x FY13F EPS. Our TP of INR1,400 implies FY13F P/ABV
of 2.4x and P/E of 14.1x, for an ROA of 1.3% and ROE of 18.4%.
Catalysts: A turn in the rate cycle and investment cycle, plus
accelerated resolution of power sector bottlenecks.
Valuation
Initiate with Buy and TP of INR1,400
We expect Axis Bank to grow its loan book at a CAGR of 23% over FY11-13E. We
expect this to drive revenue and PAT CAGRs of 21% and 12.4%, respectively, over the
same period after factoring in stress-case LLPs of 104bps for FY13F. We expect Axis
Bank to clock RoA and adjusted RoE of 1.3% and 18.4%, respectively, for FY13F. Axis
Bank shares currently trade at 1.9x FY13F adjusted book value (ABV), which is 1
standard deviation below its historical mean of 2.4x one-year forward ABV. Our TP of
INR1,400 implies FY13F P/ABV of 2.4x. We arrive at our TP of INR1,400 using a threestage
residual-income valuation methodology that assumes the following:
• We forecast loan book growth of 23.5% for FY12F and 22.3% for FY13F, versus
management guidance of 23-25% over FY12-13E.
• We forecast fee income growth of 23% for FY12F and 21% for FY13F.
• We estimate NIM of 3.45% for FY12F and 3.5% for FY13F, from 3.78% for 2Q FY12.
• On the bad loan front, we build in an increase in GNPLs to INR34.2bn (1.6% of loan
book) in FY13F, from INR16bn in FY11. We also forecast NNPL of INR8.9bn for
FY13F, up from INR4.1bn in FY11.
• Axis Bank currently has a capital adequacy ratio of 11.4% with tier-1 at 8.5% (9.3%
including 1H FY12 profits). We factor in issuance of 13.78m shares towards the Enam
acquisition.
• Axis Bank’s employee headcount was 25,590 at end-FY11, and we assume an addition
of 5,215 new employees by the end of FY13F. We expect the cost/income ratio to be at
43% in FY13F, from 42.7% in FY11, and we expect the cost/asset ratio to stay flat at
1.95% for FY13F, compared to 1.97% in FY11.
• We forecast pro forma diluted EPS of INR89.8 for FY12F and INR99.6 for FY13F. At
1.9x ABV and 11.6x diluted EPS for FY13F, we believe the stock is attractive. Our
target price of INR1,400 implies 2.4x adjusted book value (adjusted ROE of 18.4% for
FY13F) and 14.1x EPS for FY13F.
Key catalysts: Accelerated monetary policy easing, policy intervention to resolve power
sector bottlenecks, such as fuel availability and SEB (State Electricity Board) financial
health, are key upside catalysts.
Key risks: RBI persisting with a tight money policy, policy inaction with respect to power
sector bottlenecks and continued global macro uncertainty are potential downside risks.
Residual income valuation
We build the following assumptions into our three-stage residual-income model:
• We expect Axis Bank to grow its interest-earning assets at a CAGR of 21.9% over
FY11-14E, compared to an industry average of 17% on our forecasts. We expect this to
be followed by a CAGR of 12.9% over FY13-20E and a terminal growth rate of 4%
beyond that.
• We have modeled for an average ROE of 18.8% over FY12-20E and an 18.3% terminal
value ROE. Our discount rates range from 14.85% (current cost of equity) for FY11-
14E, 12.25% for FY14-20E and a 10% terminal rate.
• Our book value estimates factor in 3.5% dilution towards the Enam acquisition
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