Axis Bank Ltd - Research Report
Private Client Research
Rating
Buy
Sector
Bank - Private
Company
Bank - Private
January 09, 2019
Sensex: 36212.91
CNX Nifty: 10855.15
NSE: AXISBANK
BSE: 532215
Reco Price
Rs. 665
Price Target (1 Year)
Rs. 931
Upside
40.00%
Date
January 09, 2019
Sensex
36212.91
CNX Nifty
10855.15
Exchange
Code
NSE
AXISBANK
BSE
532215
Stock Data
CMP (Rs)
670.10
Face value (Rs)
2
52 Week Range (Rs)
677.95 - 481.25
Market cap (Rs Crores)
172199.64
Price To Book Value (x)
2.63
P/E Ratio (x)
N/A
EV/EBIDTA (x)
17.75
One Year indexed Stock Performance
Axis Bank Ltd
Sensex
Return (%)
1m
6m
12m
36m
Absolute
13.57
27.96
18.56
60.59
Sensex
3.58
0.77
5.14
45.87
Shareholders
(in %)
31-Dec
Promoter
23.71
Public
76.29
Others
00
Total
100
+91 22 6639 3000
research@stockaxis.com
Profile
Axis Bank is the third largest private sector bank in India. The bank offers the entire spectrum of financial services to customer segments covering Large and Mid-Corporates, MSME (Micro, Small and Medium Enterprises), Agriculture and Retail.
With its 3,882 domestic branches (including extension counters) and 12,660 ATMs across the country as on 30th September 2018, the network of Axis Bank spreads across 2,211 cities and towns, enabling the bank to reach out to a large cross-section of customers with an array of products and services. The bank also has ten overseas branches - in Singapore, Hong Kong, Dubai (at the DIFC), Shanghai and Colombo; representative offices in Dubai, Abu Dhabi, Dhaka and Sharjah and an overseas subsidiary in London, UK.
Axis Bank is one of the first new generation private sector banks to have begun operations in 1994. The bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The share holding of Unit Trust of India was subsequently transferred to SUUTI, an entity established in 2003.
Improvement in asset quality, lower credit cost and growth in advances and deposits to drive performance
Story so far:
The bank saw a good run in the last decade with deposits having increased by 8 times,
advances by 12 times and its market capitalization by 20 times. The bank had a smooth
run up until FY16, when RBI initiated its Asset Quality Review (AQR). The RBI came
down heavily on banks for restructuring bad loans under various schemes. Axis Bank
continued reporting respectable asset quality till FY16 and after the RBI’s
action, the bank released a watch list of Rs. 22,600 crore, where it expected 60%
of the assets to flow to Non-Performing Assets (NPAs) in the following six quarters.
This was after continually reassuring the market that its corporate book is free
of any major stress. Since then, the bank has been reporting enhanced provisions
and write-off, leading to reduced profitability. The RBI also cut short the tenure
of the MD and CEO, Shikha Sharma in FY18, and asked the board to pick a new MD and
CEO. The bank is now headed by Amitabh Chaudhary, ex MD and CEO of HDFC Standard
Life Insurance Company Ltd.
Story at a Glance (Rs. Crore):
Asset Quality:
Investment Rationale:
Asset Quality pain receding
In Q2 FY19, Axis Bank’s slippages declined 69% YoY and 36% QoQ to Rs. 2,780
crore, its lowest level in the last 10 quarters. Over 855 of the slippages were
from the pool of stressed assets that have already been identified. Gross Non-Performing
Assets (GNPA) at 5.96% and Net Non-Performing Assets (NNPA) at 2.54% also improved
sequentially. The bank has already provided over 80% for its exposure in Insolvency
and Bankruptcy Code (IBC) accounts (List 1 and 2), and provided for 20% of its exposure
to IL&FS, which amounted to Rs. 238 crore. The bank’s overall provision
coverage ratio (the extent of provisions already made with respect to NPAs) was
high at 74%, significantly reducing the need for further provisioning on existing
NPAs. Most of the slippages reported by the bank in the past few quarters were from
the accounts rated BB & below. This low rated corporate portfolio has now been
reduced to Rs. 8,860 crore at the end of Q2 FY19 as compared to Rs. 27,411 crores
at the end Q1 FY17. This portfolio presently comprises only 1.7% of the gross customer
assets. We expect the slippages to further moderate going forward which will lead
to decline in NPAs.
Gross and Net Slippages have declined from its highs:
Retail to drive growth:
Despite the turbulence that the bank faced due to RBI’s asset quality review,
the retail franchise of the bank remained intact. At the end of Q2FY19, the bank’s
retail advances were 49% of the total advances and retail liabilities including
retail term deposits and Current Account Savings Account (CASA) deposits were 82%
of the total deposits. Retail advances grew a robust 20% YoY in Q2FY19 while SME
advances grew 14% YoY. Overall cost of deposits remained stable at 4.97%. Retail
also forms 82% of the bank’s fee income.
Advances Break-up:
Profitability to improve going forward:
With lower provisions and higher Net interest margins (NIMs), we expect the bank’s
profitability to see good growth going forward. The bank is also adequately capitalized
for growth in advances in the coming two years. It raised ~Rs. 8,700 crore in December
2017 and has a capital adequacy ratio of 16.45%. With strong capital base and decent
deposit growth, the bank is rightly positioned for credit growth going forward.
Industry
The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. In FY07-18, total lending increased at a CAGR (compound annual growth rate) of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 from US$ 181 billion on December 2014.
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
| Particulars | FY14 | FY15 | FY16 | FY17 | FY18 | FY19E | FY20E |
|---|---|---|---|---|---|---|---|
| Interest Earned | 30736.00 | 35728.00 | 41409.00 | 45175.00 | 46614.00 | 53223.00 | 61518.00 |
| Interest Expended | 18703.00 | 21341.00 | 24344.00 | 26789.00 | 27604.00 | 31200.00 | 35345.00 |
| NII | 12033.00 | 14386.00 | 17065.00 | 18386.00 | 19011.00 | 22023.00 | 26173.00 |
| Growth (%) | 24.20% | 19.60% | 18.60% | 7.70% | 3.40% | 15.80% | 18.80% |
| Other Income | 7766.00 | 8838.00 | 9955.00 | 12422.00 | 11863.00 | 12000.00 | 15300.00 |
| Total Income | 19799.00 | 23224.00 | 27020.00 | 30808.00 | 30873.00 | 34023.00 | 41473.00 |
| Operating Expenses | 8210.00 | 9610.00 | 10611.00 | 12726.00 | 14788.00 | 16258.00 | 18890.00 |
| Pre-provisioning Profit | 11590.00 | 13615.00 | 16409.00 | 18082.00 | 16085.00 | 17765.00 | 22583.00 |
| Provisions and Contingencies | 2110.00 | 2330.00 | 3719.00 | 12128.00 | 15519.00 | 10903.00 | 7126.00 |
| Profit Before Tax | 9480.00 | 11284.00 | 12690.00 | 5954.00 | 566.00 | 6862.00 | 15457.00 |
| Taxes | 3171.00 | 3836.00 | 4332.00 | 1987.00 | 102.00 | 2333.00 | 5255.00 |
| Tax Rate | 33.40% | 34.00% | 34.10% | 33.40% | 18.00% | 34.00% | 34.00% |
| Profit After Tax | 6309.00 | 7448.00 | 8358.00 | 3967.00 | 464.00 | 4529.00 | 10201.00 |
| Deposits | 280541.00 | 322244.00 | 358302.00 | 414983.00 | 455658.00 | 501224.00 | 566383.00 |
| Advances | 232382.00 | 284449.00 | 344663.00 | 381165.00 | 449844.00 | 508323.00 | 594738.00 |
| Equity | 37926.00 | 44475.00 | 53082.00 | 55901.00 | 63694.00 | 68223.00 | 78424.00 |
| ROE | 17.90% | 18.10% | 17.10% | 7.30% | 0.80% | 6.90% | 13.90% |
| Price | 292.00 | 560.00 | 445.00 | 491.00 | 509.00 | 665.00 | 665.00 |
| BV per Share | 161.00 | 188.00 | 223.00 | 233.00 | 248.00 | 266.00 | 306.00 |
| Market Capitalisation | 68618.00 | 132844.00 | 105929.00 | 117548.00 | 130740.00 | 170675.00 | 170675.00 |
| P/BV | 1.80 | 3.00 | 2.00 | 2.10 | 2.10 | 2.50 | 2.20 |
| No. of Shares | 235.00 | 237.00 | 238.00 | 240.00 | 257.00 | 257.00 | 257.00 |
Source: Stockaxis Research, Company Data
Valuation
At the current market price, the stock is trading at 2.5x FY19E BV and 2.2x FY20E BV. We value the stock at 3.05x FY20E BV arriving at a target price of Rs. 931.