Axis Bank: Retain Buy, cutting TP to INR1,200:Nomura research

Slower growth ahead

Action: Cutting TP to INR1,200 from INR1,400; retain Buy
We cut our target price on Axis Bank (AXSB IN) to INR1,200 from
INR1,400 on slower loan growth. We maintain our Buy rating. Our new TP
implies 2x FY13F ABV for an ROA of 1.4% and adjusted ROE of 19%.

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Slower growth ahead; LLPs of 86bps for FY13
Loan growth across the Indian banking system is under pressure; we
believe Axis Bank will be no exception to this trend. We now expect a loan
growth of 18% for FY13F versus our earlier estimate of 21.5%. Axis Bank
has increased its loan book at a CAGR of 59% between FY04-08 and at
30% during FY08-12. Compared to this high growth trajectory, we expect
a relative slowdown for Axis Bank going forward. We factor LLPs of 86bps
for FY13F. Its incremental delinquency ratio has trended down from over
2.3% in FY10 to 1.4% in FY12 and we factor in an incremental
delinquency of 1.6% for FY13F. Axis has a seasoned GNPL book and its
delinquency-to-recovery ratio has improved significantly over the past two
years. We retain our Buy rating but cut the fair value P/B multiple from
2.4x FY13F ABV to 2x FY13F ABV, given the slowdown in loan growth.
Our FY13F adjusted ROE is 19% versus earlier 19.5%.
Catalysts: Lower loan-loss provisions and higher loan growth
Valuation: At our new TP of INR1,200, Axis Bank trades at 2x FY13F
ABV of INR591. It currently trades at 1.7x FY13F ABV for an ROE of
19% and ROA of 1.4%.


Valuation methodology
We arrive at our new TP of INR1,200 using a three-stage residual-income valuation
methodology which assumes: 1) interest-earning assets CAGR of 20.1% over FY12-15F,
10.9% over FY15-20F and a terminal growth rate of 4% beyond that; 2) average ROE of
18.3% over FY12-20F and 14.4% terminal value ROE; and 3) discount rates of 15.1%
(current cost of equity) for FY12-15F, 12.25% for FY154-20F and a 10% terminal rate.
We lower our TP due to potentially slower loan book growth going forward. Our new TP
of INR1,200 implies FY13F P/ABV of 2x for an ABV of INR591 for FY13F.
Fig. : Key changes in our assumptions
Assumptions changes Old New
Loan growth - FY13 21.54% 17.63%
Non-interest income growth - FY13 20.00% 8.8%
PAT - FY13 (INRmn) 45,439 44,435
Cost-income ratio - FY13 43.72% 45.5%
Slippages for FY13 (INRmn) 25,178 22,148
LLPs for FY13 1.08% 0.86%
GNPL (INRmn) 32,135 25,576
GNPL ratio 1.54% 1.27%
Provision coverage ratio 70.76% 79.7%
RoA - FY13 1.40% 1.43%
RoE - FY13 19.53% 19.0%
Source: Nomura estimates
Risks that may impede the achievement of the target price
Key risks to our investment thesis are negative asset-quality surprises from power and
allied sectors due to continued policy inaction and worse-than-expected corporate capex
slowdown.