Axis Bank – Acquires ENAM’s IB and broking business-Angel Broking

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Axis Bank – Event Update

Acquires ENAM’s IB and broking business

Angel Broking recommends a Buy with a Target Price of Rs1,679.

Axis Bank has entered into an all-share deal worth `2,067cr with Enam Securities,

following which the investment banking and equity broking business of the latter

will be merged with the bank’s wholly-owned subsidiary. Enam will however,

retain its AMC and PMS business. Shareholders of Enam Securities will own 3.3%

equity stake in Axis Bank post the deal.

Good strategic fit for the bank: Axis Bank is a dominant player in placement and

syndication of debt issues and was ranked first in the Bloomberg Underwriters’

league table for Debt Arrangers for the period Jan-Sep 2010. With this deal it

takes over one of the top-three domestic firms in the primary equity issuance

space. Enam bagged the third place with a market share of 9.3% in the Indian

domestic equity and rights issuances as per the Bloomberg league table for

FY2010. In our view, the acquisition is a good strategic fit for Axis Bank enabling

it to fill the gap in its portfolio and provide a more complete offering to its clients.

The deal will also help the bank in further bolstering its already strong fee

income.

Valuations expensive but justified: For FY2010, total income of the businesses

being acquired from Enam Securities stood at `242cr, with PBT of `92cr.

Similarly, for FY2011 till October 20, 2010, total income stood at `182cr, with

PBT of `77cr. On an annualised basis, FY2011 PBT works out to ~`132cr and

PAT at ~`88cr, implying valuations of 23.4x FY2011E earnings, which is at

~39% premium to the listed brokerages, on 1HFY2011 annualised PAT basis.

However, this should be seen in the context that such deals are usually executed

at a large premium on account of the synergies involved. In any case the

acquisition size is just ~3.3% of the market capitalization of Axis Bank and is

unlikely to materially impact the valuations either way.

Outlook and Valuation: We remain positive on the bank and believe that it

deserves premium valuations owing to its attractive CASA franchise, multiple

sources of sustainable fee income, strong growth outlook and A-list management.

At the CMP, the stock is trading at 2.7x FY2012E ABV of `524.7. We recommend

a Buy on the stock, with a revised Target Price of `1,679(`1,705), after

conservatively adjusting for the estimated goodwill arising from the acquisition.