Axis Bank Buy Target Price: Rs1,550 :: Centrum

Axis Bank

Buy

Target Price: Rs1,550

CMP: Rs1,365         

Upside: 14%

We interacted with the management of Axis Bank to take stock of the situation. Following are the key take-aways:

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m  Optimistic on macro: The bank is upbeat on the macro outlook going ahead led by reform announcements in recent months. The bank believes that FDI in retail and Banking Laws amendments among other things have improved business sentiment materially. With government now being gradually viewed as pro-business and more reforms on the anvil, the positivity in sentiments should lead to a revival in investment cycle.  Potential passing of land acquisition bill and formation of Cabinet Committee on Investment (CCI), should allay concerns on project implementation and speed up revival in investment activity.

Our take: The investment cycle slowdown has been on account of 1) uncertain business environment and perception of the government as anti-business and 2) regulatory and clearance issues. With business environment improving and government displaying its pro-business stance by implementing politically tough reforms, uncertainty in business environment has been addressed to an extent. The second round of reforms (land acquisition bill and speedy clearance by CCI), which have a direct bearing on project implementation, are crucial in inducing corporates to look at capital expenditure again.

m  Asset quality stress within guided range: The bank continues to maintain its guidance of incremental stress on asset creation of Rs40-45bn for FY13, though the management was not forthcoming on exposure to the mining sector. On power sector exposure, currently operational projects have sufficient coal supply to generate 60-65% PLF and hence maintain regular loan servicing. However, as more power projects come on-stream during H1FY13 and FY2014, the coal shortage may get acute. Nevertheless, the management is confident that the interim period should see the government reaching a final stand on pooling of coal prices. Moreover, easing in international coal prices and significant focus on improving domestic coal supply (as part of 12th 5 year plan) should further allay investor concerns towards the power sector. 

Our take: Conservatively, we have factored in slippage rate of 1.5% which implies a credit cost of~ 80bps and %GNPA of 1.2% for FY2013 and FY2014. We will revisit our asset quality assumption upon actual implementation of reforms related to infrastructure sector.

m  Loan growth guidance at 1.3x system growth:  The bank guides for a loan growth equivalent to ~1.3x system loan growth which translates to a range of 18-20% YoY growth during FY2012. Currently, loan growth continues to be driven by 1) past sanctions coming up for disbursals and working capital demand on the corporate side and 2) healthy credit demand in the retail segment. Given the optimistic outlook for FY2014, the management expects loan growth to inch up. The bank has resisted from lending to SME segment borrowers falling below SME-4 rating with a view to improve risk composition. The management shared that power sector exposure will remain ~5% given continued flow of disbursals from past sanctions and conversion of off-balance sheet exposure to funded exposure as bills mature.

m  Focus on retail credit – a strategic decision: The management clarified that the evident focus on retail segment was the result of a strategic decision taken in CY2009 and not an opportunistic move. The decision to balance the loan book by incrementally focusing on retail segment in CY2009 was followed by efforts to create the necessary infrastructure: skill development, processes & systems, underwriting models, recovery mechanisms and training & recruitment of ground level staff. The bank will continue to focus on the retail segment with a view to shore up its share to 30% of the loan book.

m  No rush to raise capital: Given the still healthy capital position (Tier I @ 9.92% including M9FY13 profits) and moderate credit growth (18-20% for FY2013), the bank is not in a hurry to raise capital.  It should be noted that the bank has obtained a board approval for ~11% dilution of equity base through preferential allotment, QIP and GDR. The capital raising is similar to the one executed by the bank in 2009 in terms of broad structure which was priced at 3.2x historical book value (FY2009). At current market price, 11% dilution of equity base implies capital raising of Rs 62bn – an addition of ~Rs130-140 to book value. The Tier I capital raising will improve capital adequacy by ~200bps to +14.5% and there by allay concerns on the bank’s ability to maintain strong balance sheet growth as well as strengthen the cushion to absorb asset quality pain.
m  NIM guidance range of 3.25%-3.5%: On the margin front, the management reiterates its NIM guidance range of 3.25%-3.5%. While wholesale deposit rates have eased during the year, liquidity has tightened again as deposit growth continues to lag credit growth. Implicitly, the management indicated that the liquidity situation may remain tight in H2FY13 given the busy season though H1FY14 may bring in seasonal benefits of easy liquidity and hence offer some potential easing in wholesale deposit rates.

m  Raising price target: We have revisited our earnings estimates post the interaction with the management to factor in capital raising given the improved clarity on the matter. In the light of revision in earnings estimates and inclusion of capital raising, our fair value estimate stands revised at Rs1550. We maintain Buy rating on the stock with an upside of ~15% from current market price.

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