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Valuation attractive post correction, better risk-reward; Axis to Buy
Sharp correction on global/local concerns, time to be constructive
Indian financials stocks under our coverage have corrected by up to 34% over
the past 1m/3m on concerns of high NPLs, likely lower loan growth and
global slowdown. Our stress-case scenario analysis shows stocks could fall
further by up to 11% assuming a significant increase in NPLs and lower
earnings. But we believe valuation of stocks such as ICBK, YESB and INBK are
already reflecting a stress-case scenario. While global events/NPL concerns
could lead to pressure on stock price performance in the near term, stocks are
trading below median valuations and we think long-term investors should
build positions selectively, given favorable risk-reward ratios.
Stress test shows downside risk is limited
Our stress analysis showing max downside risk of 11% assumes: (1) lower
earnings from lower loan growth, and higher NPL provisions over FY11-FY14E,
(2) valuations based on ABV assuming higher NPLs (50%-60% CAGR over
FY11-FY13E), 100% write-off of net NPLs, 15% provision on restructured book
and 0.6% provision on standard assets, (3) lower sustainable RoE.
Rates close to peak, GDP healthy, valuations attractive
On the positive front, our economist believes that interest rates have likely
peaked and will start falling in FY2013, and GDP growth will remain healthy
at +7.3% in FY12E and +7.8% in FY13E. Further, valuations are now
attractive, with stocks currently trading below median levels.
Significant upside potential for top picks, upgrade Axis to Buy
We reduce 12-m TPs for Indian financials stocks under our coverage by up to
23% to reflect higher adjusted book value and fine-tune FY12E-FY14E EPS for
PFC and SRTR to reflect 1QFY12 results. We reiterate Buy on: IndusInd Bank
(on CL) and Yes Bank given their strong earnings growth between FY11-
FY14E as we believe margin pressure will be offset by higher CASA ratio,
ICICI Bank on attractive valuations vs RoA and growth on sustained margins,
BoB and PNB on valuations vs RoE. While PFC (Neutral) shows significant
upside potential, risk to earnings could arise from state debt restructuring. We
upgrade Axis Bank to Buy from Neutral on attractive valuations.
Key risks
Recession in US/ Europe, lower GDP growth in India, higher rates/NPLs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuation attractive post correction, better risk-reward; Axis to Buy
Sharp correction on global/local concerns, time to be constructive
Indian financials stocks under our coverage have corrected by up to 34% over
the past 1m/3m on concerns of high NPLs, likely lower loan growth and
global slowdown. Our stress-case scenario analysis shows stocks could fall
further by up to 11% assuming a significant increase in NPLs and lower
earnings. But we believe valuation of stocks such as ICBK, YESB and INBK are
already reflecting a stress-case scenario. While global events/NPL concerns
could lead to pressure on stock price performance in the near term, stocks are
trading below median valuations and we think long-term investors should
build positions selectively, given favorable risk-reward ratios.
Stress test shows downside risk is limited
Our stress analysis showing max downside risk of 11% assumes: (1) lower
earnings from lower loan growth, and higher NPL provisions over FY11-FY14E,
(2) valuations based on ABV assuming higher NPLs (50%-60% CAGR over
FY11-FY13E), 100% write-off of net NPLs, 15% provision on restructured book
and 0.6% provision on standard assets, (3) lower sustainable RoE.
Rates close to peak, GDP healthy, valuations attractive
On the positive front, our economist believes that interest rates have likely
peaked and will start falling in FY2013, and GDP growth will remain healthy
at +7.3% in FY12E and +7.8% in FY13E. Further, valuations are now
attractive, with stocks currently trading below median levels.
Significant upside potential for top picks, upgrade Axis to Buy
We reduce 12-m TPs for Indian financials stocks under our coverage by up to
23% to reflect higher adjusted book value and fine-tune FY12E-FY14E EPS for
PFC and SRTR to reflect 1QFY12 results. We reiterate Buy on: IndusInd Bank
(on CL) and Yes Bank given their strong earnings growth between FY11-
FY14E as we believe margin pressure will be offset by higher CASA ratio,
ICICI Bank on attractive valuations vs RoA and growth on sustained margins,
BoB and PNB on valuations vs RoE. While PFC (Neutral) shows significant
upside potential, risk to earnings could arise from state debt restructuring. We
upgrade Axis Bank to Buy from Neutral on attractive valuations.
Key risks
Recession in US/ Europe, lower GDP growth in India, higher rates/NPLs
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