Axis Bank :: Avendus 2012 top ideas

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Large value even if the asset quality risk plays out

AXSB’s mean RoE for FY12f‐FY13f is likely to stay at c20%, despite
factoring in high loan‐loss provisions. The net profit CAGR is forecast at
19.4%. Savings deposits growth has been ahead of peers, at above
20%, in the past three quarters, despite a sharp rise in interest rates.
The strong liability franchise, with CASA ratio of 42.2%, is likely to
protect NIM in the range of 3.0%‐3.5%. The stock currently trades at a
1.48x one‐year forward adjusted book value. The large discount to
peers with similar RoEs is unlikely to sustain. Rollover TP to Dec12 and
lower it to INR1,376. The TP values the stock at an adjusted P/B of
1.99x. Maintain Buy. The deterioration in asset quality, resulting in a
rise in NPL provisions, is a key risk factor.
Large potential upside over the 12‐month period
Our Dec12 TP implies a potential return of c65% over the 12‐month period. The
TP values AXSB at a one‐year forward adjusted P/B of 1.99x. If the P/B returns
to the normal mean of 2.18x during FY10‐FY11 (on applying a 10% de‐rating to
the FY11 P/B), the potential upside could be even larger, at c81%.
Underperformance in 2011 amidst rising concerns on asset quality
In 2011, AXSB underperformed the Bankex and Sensex by 8% and 15%,
respectively. The underperformance was largely driven by concerns on asset
quality, due to the large exposure to the infrastructure and SME sectors.
Despite high concerns, the gross and net NPL ratio increased by only 7‐bp and
8‐bp, to 1.08% and 0.34%, respectively, and restructured loans stayed below
2.00% of loans since end‐Mar11. Despite moderation, net profit growth has
been above 25% in the past three quarters.
Current valuation implies a distress case scenario
Even if the worst‐case scenario is applied for FY12f‐FY14f – incremental NPL at
0.85%, net NPL ratios at 0.80%, NPL provisions/assets at 0.91% and semiexplicit
period growth at 17% – the DCF value has an upside of 28%. The CMP
implies a distress scenario for asset quality, net NPL ratio and NPL provision/
assets at 1.29% and 2.04%, respectively, which implies a CAGR of
‐17.1% in PAT over FY12f‐FY14f.
Strong liability mix may protect NIM in the range of 3.0%‐3.5%
AXSB’s mean RoE for FY12f‐FY14f is likely to stay at c20%, despite factoring in
high loan-loss provisions. The PAT CAGR is forecast at 19.4%. Savings deposits
growth has been ahead of peers, above 20%, in the past three quarters, despite
a sharp rise in rates. The strong liability franchise and CASA ratio of 42.2% are
likely to protect NIM in the range of 3.0%‐3.5%.
Rollover TP to Dec12; maintain Buy
We value AXSB based on the P/E, P/B and DCF methods. We lower the semiexplicit
period growth assumption in the DCF by 5% to 20%. We raise our
assumption for incremental NPL and NPL provisions/assets by up to 20‐bp and
6‐bp for FY12f‐FY14f. We lower PAT forecast for FY12f‐FY14f by upto 4%. We
roll over the TP to Dec12 and lower it to INR1,376. Maintain Buy. A rise in
incremental NPL and NPL provisions is the key risk factor


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