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Axis Bank (AXSB)
Banks/Financial Institutions
Complementary move: Axis acquires Enam’s IB/capital market businesses. Axis
Bank announced the acquisition of the IB/capital market related businesses of the Enam
group for `21 bn (about 3.3% of its equity). Enam is valued at about 19X FY2011E PER
(1H annualized), which we believe is reasonable for a strong brand given its premium
positioning in the investment banking space. To sum our view of the acquisition: (1) It
has no impact on Axis Bank’s earnings/RoEs, (2) it complements Axis Bank’s corporate
banking strength and (3) it will be a big boost for Axis Bank’s capital market businesses.
An attractive acquisition at `21 bn of Enam’s select businesses
�� We believe the acquisition of the Enam group’s select subsidiaries by Axis Bank is an interesting
and positive development for Axis Bank
�� Axis Bank proposes to acquire the investment banking and equity capital markets/distribution
businesses along with its entire team (about 450 employees) while Enam will retain the AMC
and portfolio management business
�� Mr Vallabh Bhansali will join the board of Axis Bank and the bank has the right to use the Enam
brand name for period of two years. The promoters of Enam have signed a non-compete
agreement for a period of five years.
�� At `21 bn purchase price (share swap diluting about 3.3%), the deal values the businesses at
19X FY2011E PER, ~25% premium over peers, which we believe is reasonable given the
premium franchisee of Enam as well as control premium offered in the deal
�� We estimate FY2011E earnings by annualizing the `770 mn PBT for 1HFY11. We see limited
hurdles from regulatory bodies on this acquisition
Axis Bank strengthens product portfolio; Enam benefits from client access and balance sheet size
The deal with Enam strengthens the product portfolio of Axis Bank, adding equity capital market
services to its offering along with its key strengths in loan syndication and issue management in
debt capital markets. SBI, ICICI Bank, Kotak Mahindra Bank and Yes Bank provide complete
product suites, which help client retention/acquisition and allow them to be primary bankers to
these clients, thus increasing per client revenue. The large balance sheet of Axis Bank will help
improve Enam’s market position in the investment banking business.
A small acquisition for its size and a non-dilutive one
Axis Bank is likely to issue about 13.8 mn shares (3.3% of dilution), which values the whole
deal at current CMP of Axis Bank at `21 bn. Axis Bank will also acquire Enam’s net current
assets of `3 bn (largely in the form of margin money/fixed deposits given to the exchanges).
We estimate that the current networth of these businesses of Enam is at `3 bn. The likely
profit of these businesses is likely to be about `1 bn (about 3.2% of Axis Bank FY2011E
profit), which makes it a non-dilutive acquisition
Retention of key employees remain critical
We believe the ability of Axis Bank to retain the key employees of Enam is imperative to
make the acquisition productive. Cost structures as well as revenue sharing with employees
needs to work differently from a bank set up and in line with investment banking industry
practices. At about `1.8 bn revenue and `0.8 bn PBT YTD, this division will contribute about
3-4% revenues and PBT of Axis Bank.
Likely changes in some business structures
Axis Bank will acquire these capital market businesses through its subsidiary. We believe that
at a later date, Axis Bank may look to shift the debt capital market related businesses from
the parent entity to its subsidiary to consolidate the capital market related businesses.
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