Force Multiplier AXIS Bank Axis Bank is India’s third largest private sector bank. It has a wide presence through its 713 branches and extension counters and 2,904 ATMs across 433 cities and towns. The bank added 42 branches and 140 ATMs in the June 2008 quarter. Business Overview Axis Bank has been growing faster than the industry over the past five years. Its net interest income has grown at a 45 per cent compounded annual growth rate (CAGR) from 2003-04 to 2007-08, while net profits have grown at 40 per cent. A focus on branch expansion and an established ATM/branch network have helped attract retail clients. The bank’s corporate: retail asset mix is 76:24 presently, which might insulate it from the more credit risk prone retail segment. To enable focused lending, the bank has set up 24 SME centers and 39 agri-clusters. In retail, the bank offers high-end services, with specialized branches for high net worth clients. Fee from banking and advisory services such as cash management services and cross-selling of financial products, debt syndication and placement, have made a significant contribution to income, browing by 53 per cent CAGR over the past four years. On the costs front, the bank’s high current account and savings account over total deposits (CASA-40 per cent)may help it contain cost of funds amid rising interest rates. Axis Bank’s leading position in debt syndication and private placement may help it to capitalise on an expanding corporate debt market over the medium term. A high level of capital adequacy (13.3 per cent) allows room for investment in risky assets such as realty and capital markets. It also circumvents the need for fund-raising in the present high cost environment to bankroll growth plans. Financials Axis Bank’s net interest income spurted 93% to Rs 810.46 crore in the quarter ended June 2008 owing to the increase in advances and investments and higher share of demand deposits. Other income including fee income, trading income and miscellaneous income soared 70% to Rs 624.80 crore. Fee income rose 80% to Rs 483.54 crore with a strong growth in both its retail banking and corporate banking businesses. Trading income increased 15% to Rs 111.04 crore. The share of trading income to operating revenue decreased from 12% in the quarter ended June 2007 to 8% in the quarter ended June 2008. The bank has, therefore, become increasingly reliant on its core earning to generate profitability.Operating profit soared 118% to Rs 802.32 crore. However, provisions & contingencies surged by 194% to Rs.296.73 crore. As a result, profit before tax was up 89% to Rs 505.59 crore. After accounting for tax (up 91% to Rs.175.45 crore), net profit grew 89% to Rs 330.14 crore. These robust numbers are the result of the management’s focus on quality growth and profitability as well as its execution capabilities. Outlook and Valuation The management is confident of the business outlook with credit growth expectation of 40%-45%, margin being maintained at the Q1 level, and further reduction in the NPA ratio. Except for the credit card portfolio (~1% of overall book), asset quality across all retail loan products is good. Management has tightened its sanction process, intensified monitoring/counselling procedures and hastened recovery processes to lower the probability of NPAs in future. Axis Bank also has one of the most consistent growth track records. Its net profit has grown above 30% in 32 of the last 34 quarters.Axis Bank has a healthy asset mix, continues to witness strong growth in fund- and fee-based income, has among the lowest NPA, low exposure to unsecured loans and is expanding at a fast pace. With the Left parties losing their hold on Indian politics, chances of liberalisations in banking regulations including permitting foreign banks to acquire Indian banks have increased. Axis Bank is one of the best plays on this opportunity. At current market price of Rs 720, the stock is trading at 18x FY09E and 14x FY10E earnings that look attractive keeping in mind 1 year + investment horizon. So, we recommend Buy on the stock with first price target of Rs 924. At our target price the stock is likely to trade at P/E of 18x based on FY10E earnings translating into potential upside of 28%.
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