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[email protected] July 2013
- On a restructuring mode- On a restructuring mode
Theme for growth
• Branch expansion• Capital Infusion• Restructuring the balance sheet profile
Analyst - Sanjeev JainPhone - 033-3051-2174Email Id - [email protected]
1
BuyPRICE TARGET - `1458
Initiating Coverage Report
Contents Pages
Investment & Valuation Brief 03
Company Background 04-05
Management Background 06
Business Model 07
Banking Sector Outlook 08
Investment Rationale 09-23
Peers Analysis 24
Valuations & Recommendations 25
Financial Projections 26
Ratio Analysis 27
Key Concerns 28
Analyst Page 29
Research Performance 30
Disclaimer 31
2
22nd July 2013
BUY Axis Bank Ltd
Source: Company, ACE Equity, Microsec Research
Axis Bank is the third largest Private Sector Bank (in terms of business andprofitability) to have begun operations in 1994. As on 31st March 2013, theBank’s balance sheet size crossed over INR3.4 trillions with strong distributionnetwork of 1947 branches and 11245 ATMs spread across the country. It alsohas overseas offices in Singapore, Hong Kong, Shanghai, Colombo, Dubai andAbu Dhabi. It differentiated itself from other players in the industry through itsexcelling in customer delivery through insight, empowered employees andinnovative use of technology coupled with its ubiquitous branches and ATMs.Axis Bank is one of the few Indian Banks, which has smartly managed totransform itself into a true financial conglomerate with its presence in corebanking besides, Insurance, Asset Management, Mutual Fund, Broking, HomeFinance etc.
We Initiate Coverage on Axis Bank with a BUY rating. Our rating underpinsthe Bank’s strong business growth momentum, diversified revenue stream,healthy low cost deposits (CASA) base which leads to improve in Net InterestMargin (NIM), improving core income with healthy profitability, strong riskmanagement, improving asset quality with healthy Provision Coverage Ratio(PCR), in-depth assessment of capital with strong Capital Adequacy Ratio(CAR), improving cost efficiency, healthy Return Ratios and last but not least,well aligned bank with the regulator’s guideline.
Axis Bank has managed to keep return ratios healthy. Among its peers it isbetter placed in terms of strong return ratios. It has delivered ROE and ROA of~19% and 1.7% respectively in FY13. We believe that Axis is likely to maintainits return ratios over the next couple of years and may deliver ~1.6% and ~18%ROA and ROE respectively in FY15E .
On the basis of P/BV, Axis Bank is trading at lower valuation amongst top fivePrivate Banks. At the CMP of INR1190, the stock is trading at FY13 P/BV of1.68x. The current valuation of 1.46x FY14E and 1.27x FY15E Book Value looksattractive. We recommend a BUY on the stock with a target price of INR1458(1.55x FY15E BV) with an upside potential of ~23% from the current level withan investment horizon of 12-15 months.
Sector- Banking
3
[email protected] July 2013
Source: Company, Microsec Research
Company Background Axis Bank is one of the first new generation Private Sector Bank to have begunoperations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking ofUnit Trust of India (SUUTI) (then known as Unit Trust of India), Life InsuranceCorporation of India (LIC), General Insurance Corporation of India (GIC), NationalInsurance Company Ltd., The New India Assurance Company Ltd., The OrientalInsurance Company Ltd. and United India Insurance Company Ltd. The Bank was set upwith a capital of INR115 crores, with UTI contributing INR100 crores, LIC - INR7.5crores and GIC and its four subsidiaries contributing INR1.5 crores each.
Presently, Axis Bank is the third largest Private Sector Bank in terms of business andprofitability. As on 31st March 2013, the Bank’s balance sheet size crossed over INR3.4trillions with strong distribution network of 1947 branches and 11245 ATMs spreadacross the country. It also has overseas offices in Singapore, Hong Kong, Shanghai,Colombo, Dubai and Abu Dhabi. It differentiated itself from other players in the industrythrough its excelling in customer delivery through insight, empowered employees andinnovative use of technology coupled with its ubiquitous branches and ATMs. The Bankoffers a wide range of banking products and financial services to corporate and retailcustomers through a variety of delivery channels and through its specialized subsidiariesin the areas of Investment Banking, Insurance, Mutual Fund, Broking, Home Finance etc.
Axis Bank Milestones
Axis Bank opens itsRegistered Office andCorporate Office.
Bank inauguratedits first branch atAhmadabad.
“Axis” the FirstIndian Bank launchedtravel currency card.
Bank gets listedon London stockexchange.
Launched creditcard business.
Launched India's firstand only Indiancurrency prepaid travelcard for foreignnationals.
Reached 2 lakh installedEDC machines – thehighest for any bank inIndia
4
[email protected] July 2013
5Source: Company, Microsec Research
Key Subsidiaries
Key Subsidiaries
Axis Capital Ltd.
Axis Private Equity Ltd.
Axis Trustee Services Ltd.
Axis Asset Management
Company Ltd.
Axis Mutual Fund Trustee
Ltd.
Axis Bank UK Ltd.
Axis Finance Ltd.
As on 31st March 2013, the Bank has seven subsidiaries through which it offers a wide range of banking products andfinancial services to corporate and retail customers.
[email protected] July 2013
6
Board of Directors & Management
Shikha Sharma
K. N. Prithviraj
V. R. Kaundinya
S. B. Mathur
Prasad R. Menon
R. N. Bhattacharyya
Samir K. Barua
A. K. Dasgupta
Som Mittal
Sanjiv Misra
Ireena Vittal
Rohit Bhagat
Chairman
MD & CEO
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
[email protected] July 2013
7
•Corporate lender
•Corporate deposits
• Slow growth
Phase 1: upto FY03
•Developed CASA franchise• Fee income – diversity in revenue• Period of very high growth inbusiness and network
Phase 2: FY04-09 • Predictable, consistent
profitable growth• Reduced risk concentration• Increase share of customer wallet• Improve operating leverage• Better placed in industry growth.
Phase 3: FY10 onwards
Evolution of Axis Bank’s Business Model
Continue to build and strengthenRetail Banking franchise .
Leverage strengths in CorporateBanking & Infrastructure linkedFinancial services Banking franchise
Build a full-service offering to SMEcustomers Banking franchise .
Capture end-to-end opportunities inPayments across customer segmentsBanking franchise .
Axis’s BusinessStrategy
Bank’s Business Strategy Along Four Key Themes
[email protected] July 2013
Banking Sector Review & Outlook
The Indian Banks have performed extremely well over the last few years. However, thistime around, Indian Banks are facing a tougher challenge with slowdown in global anddomestic economy. The slowdown in the economy, delayed in number of projects(which have dented the ability of Indian companies to repay their loans) coupled withhigh interest rate and the significant fall in the value of INR vs. major currencies hasaffected the entire capital intensive industry as well as consumers which has deterioratedthe asset quality of Indian Banks specially, Public Sector Banks.
Moderate global economic recovery and the measures taken by the government is likelyto revive domestic growth. In the latest economic data release, Inflation and CurrentAccount Deficit has shown some improvement. We believe that Indian rupee mayappreciate owing to various steps being taken by the Government and the RBI. The stepstaken for the revival of investment, including monetary policy easing and progressiveinfrastructure de-bottlenecking is likely to increase capacity expansion and improve theability of Indian companies to repay their loan. Banks which are better placed are likelyto generate better business and returns as the economy shows resilience of all themeasures being taken.
Favorable demographics
Rapid urbanization in India
8
Falling WPI Inflation
Underpenetrated banking sector
4.7%
Source: Company, Microsec Research
[email protected] July 2013
Investment Rationale Advances growth continues to surpass industry loan growth
Despite challenging environment, Axis has maintained its advances growth above theindustry advances growth over the past few years. Bank’s advances have grown at aCAGR of ~20% over the period of FY10-13. In FY13, the Bank has reported a 16.03%YoY advances growth to INR196966 crores while industry reported a 15.79% YoYadvances growth. Out of the Bank’s total advances, Retail and Large and Mid corporateadvances contained ~27% (~INR53200 crores) and ~50% (~INR98500 crores)respectively. The Bank’s strong relation with the corporates, focus more towards retailbusiness, diversified product portfolio, the Bank’s ubiquitous branches and hassle freecustomer services and strong risk management has pushed up the Bank’s advancesgrowth above the industry.
We believe, the Bank’s focus towards retail business along with the offtake of past projectsanctions and working capital demand by the corporate may help it to deliver theiradvances growth of ~19% and ~21% in FY14E and FY15E respectively while, industrymay grow by ~16% and 17% in the same period.
Focus towards retailbusiness along with theofftake of past projectsanctions going forwardmay boost the Bank’s loanbook growth.
Axis Bank ‘s Advances Growth Trend
Source: Ace Equity, Company, Microsec Research10
Industry Vs. Axis Bank
Quarterly Advances Growth Trend
Private Banks Vs. Axis Bank
22nd July 2013
11
Break up of advances, increasing focus towards Retail Banking
Source: Company, Microsec Research
Axis Bank has reduced its exposure from Large &Mid corporate from ~54% in FY11 to 50% in FY13owing to the risk from the slowdown in theeconomy. Furthermore, ~62% of corporateadvances have rating of at least ‘A’ in March 2013and looks healthy. Moreover, the Bank hasincreased its exposure towards retail business andthe retail loan portfolio continues to be focused onsecured products. As on 31st March 2013, theBank’s retail loan portfolio contribution to its totalloan portfolio stood at 27%, of which securedloans accounted for ~87% of the total retail loans.In addition, SME and Agriculture loan bookcontributed 15% and 8% respectively.
[email protected] July 2013
12 Source: Company, Microsec Research
Axis Bank is now focusing more on retail segmentwith a strong risk management. Out of the total retailloan book, the Bank has increased focus on its securedretail loan portfolio such as home loans whilereducing its exposure from unsecured retail loanssuch as personal loans. As on 31st March 2013,secured loans accounted for ~87% of the total retailloans and also, the Bank has reduced its exposure topersonal loans significantly to 7% from 14% in March2011. Moreover, it has also increased its exposure toauto loans by 300bps to 14% in March 2013 from 11%in March 2011.
Break up of retail loan portfolio
[email protected] July 2013
13 Source: Company, Microsec Research
Healthy loan portfolio
Rating Distribution : Large and Mid Corporate
Rating Distribution : Small & Medium Enterprise
62% of corporate advanceshave rating of at least ‘A’ inMarch 2013
80% of SME advances haverating of at least ‘SME3’ inMarch 2013
[email protected] July 2013
14
Axis Bank has a healthy deposits franchise with large portion of low cost deposits basei.e. CASA deposits. As on 31st March 2013, the Bank’s total deposits stood at ~INR252600crores. Of which CASA deposits contributed ~44% or ~INR112000 crores, which is betterplaced amongst its peers. The Bank’s ubiquitous branches, hassle free customer services,innovative use of technology were the core reasons for this commendable deposit base.We believe, the Bank’s behemoth business structure along with thoughtful businessstrategy and expansion of its branches and ATMs may boost its deposits growth rate. Weanticipate ~17% and 21% YoY deposits growth for the Bank in FY14E and FY15Erespectively with healthy low cost deposits base (CASA), which may help it to improveits NIM, whereas Industry’s deposits may grow by ~15% and ~17% in the same period.
Healthy deposits franchise
Axis Bank ‘s Deposits Growth Trend
Quarterly Deposits Growth Trend
Source: Company, Ace Equity, Microsec Research
Industry Vs. Axis Bank Private Banks Vs. Axis Bank
22nd July 2013
Customer convenience andhigh quality services throughstrong distribution andinnovative use of technologycontinued to be the bedrockof the Bank’s growthstrategy.
Strong CASA deposits underpins low-cost deposits franchise The Bank has improved its low cost deposits base from ~41% in FY11 to ~44% in FY13.Bank’s behemoth business structure along with thoughtful business strategy, focus moretowards Retail Banking and capturing salary accounts with providing high class andhassle free services to its customers and continued expansion of its branches and ATMshelped it to boost its CASA portfolio. Bank’s key priority towards healthy growth inCurrent & Savings account deposits has helped it to cross CASA deposit of over ~INR1.12 trillions in FY13. We anticipate that the Bank will maintain its CASA ratio of ~44%in FY14E and FY15E. Customers convenience and high quality services through strongdistribution and innovative use of technology continued to be the bedrock of the Bank’sgrowth strategy.
Source: Company, Ace Equity, Microsec Research
CASA growth continues to rise
Bank’s branch expansion continues to rise CASA per branch continues to rise
15
[email protected] July 2013
16
Net Interest Income continues to rise
Axis Bank has consistently maintained its Net Interest Income (NII) growth above theindustry. Bank’s NII has grown at a CAGR of ~21% whereas, Industry's NII grew at aCAGR of ~14% over the period of FY11-13. Moreover, NII contribution to its totalrevenue was ~60% in FY13 as against ~58% in FY11. It is mainly because of its focusedefforts on both the asset and liability sides of the balance sheet with rebalanced itsfunding mix and focus towards retail deposits base (CASA) with stable assets quality.
We expect ~19% and ~22% YoY growth of NII in FY14 and FY15E respectively. TheBank’s focus towards retail banking business with rising low cost deposits base and inanticipation of improvement in corporate balance sheet with stable asset quality provideus confidence on our valuation.
Axis Bank’s NII growth trend
Source: Company, Ace Equity, Microsec Research
Axis Bank Vs. Industry
Contribution of NII to Total Income is on the rise Rising interest income
[email protected] July 2013
18
Higher CASA deposits supports Margin stabilityThe Bank’s NIM has consistently been higher than the industry’s averagenotwithstanding challenging environment. In FY13, its NIM improved by 5bps to3.18% against industry’s decline by 8bps to ~2.5% primarily because of the Bank’s lowcost deposits base (CASA) which has improved from ~41% in 2011 to ~44% (~INR1.12trillions) in 2013. As on 31st March 2013 Bank’s retail contribution to the loan booksstood at 27% or ~INR53200 crores, of which secured loans accounted for ~87% of thetotal retail loans.
We anticipate the Bank’s margin may be in the range of 3.25-3.30% in FY15E,supported by reduction in deposits cost owing to increase in low cost deposit base andexpectation of improvement in domestic economy.
Quarterly Net Interest Margin Trend
Improving low costdeposits base and shiftingfocus towards retailbanking boosted margin.
Source: Ace Equity, Microsec Research
Improving Net Interest Margin (NIM)
Improving Cost of funds boosted NIM.
17
[email protected] July 2013
Improving asset quality; Strong coverage ratioIn the current challenging environment, where the banking sector is suffering from assetquality problems, Axis Bank has been able to improve its asset quality. Over the past fewquarters, the Bank has improved its NNPA and GNPA ratios. In Q4FY13, its GNPA andNNPA stood at 1.06% and 0.32% as against 1.10% and 0.33% in Q3FY13 respectively. Itis better placed amongst its peers in term of superior asset quality. Moreover, it is wellpositioned to tame time liabilities with ~79% of its Provision Coverage Ratio (PCR) and itis in third position amongst its peers in terms of high PCR. The Bank’s thoughtfulbusiness strategy and strong risk management with in-depth analysis of borrowers’profile enabled it to improve its asset quality problems.
The Bank possesses high rated loan books, around 62% of corporate advances have ratingof at least ‘A’ and ~80% of SME advances have rating of at least ‘SME3’ in March 2013.Moreover, the Bank has reduced its credit risk exposure from the top five stress sectorslike Infrastructure, Power etc by 209bps to ~27% in FY13 from ~29% in FY12. Itssuperior asset quality with reducing credit risk exposure from stress sector boosted ourconfidence on it. The following graphs depicts the Credit Risk exposure of top fivesectors.
We expect that the Bank is likely to maintain itsasset quality going forward backed by the reversal ininterest cycle, improvement in economic conditionand the Bank’s strong risk management with healthyloan portfolio and also government’s persistentsupport to ailing sectors. The management soundspositive it term of asset quality and confident on theoverall business growth.
Reducing fund and non fund based Credit Risk exposure of top 5 sectors
Banks thoughtful businessstrategy and strong riskmanagement with in-depthanalysis of borrowers’ profileenabled it to improve itsasset quality problems.
The management soundspositive it term of assetquality and confident on theoverall business growth.
Source: Company, Microsec Research 18
22nd July 2013
Asset quality trend Quarterly asset quality trend.
Healthy asset quality amongst its peers
Healthy Provision Coverage Ratio (PCR) Provision Coverage is better than its peers
19 Source: Company, ACE Equity, Microsec Research
NPAs’ recovery & Write-offs trend
[email protected] July 2013
Well capitalized Private Bank
Axis Bank is in well position to support its growth trajectory with 17% of CapitalAdequacy Ratio (CAR), which is well above the benchmark requirement of 9% stipulatedby Reserve Bank of India (RBI). Of this, Tier-I capital stood at 12.23%, while Tier-IIcapital stood at 4.77% as on 31st March 2013. The Bank’s CAR is better placed amongst itspeers. The Bank actively manages its capital to meet regulatory norms and current andfuture business needs considering the risks in its businesses, expectation of ratingagencies, share holders and investors, and the available options of raising capital.
In FY13, the Bank raised capital in the form of equity and debt to support future growth.It raised Tier I capital in the form of equity capital through a Qualified InstitutionalPlacement (QIP) and a preferential allotment of equity shares to the promoters of theBank. The Bank mobilized an aggregate of INR5537.47 crores through this offering, byissuing 34000000 equity shares through a QIP offering and 5837945 shares to promoters.Capital infusion of INR5537.47 crores has increased the Bank’s net worth by ~24% andadded ~INR55/share to the book value. Post this, the Bank’s ROE remained healthy at~18%. Moreover, Axis’s current capital structure meets the RBI’s Basel III norm.
Axis Bank’s healthy capital base
22
One of the best CAR amongst its peers
Source: Company, ACE Equity, Microsec Research
Shareholding pattern as on 31st March 2013
Bank’s recent Capitalinfusion of ~INR5537 croreshas increased the Bank’s networth by ~24% and added~INR55/share to the bookvalue.
Basel III RequirementA minimum common equitytier I capital of 5.5%, aminimum tier 1 capital ratioof 7.0% of risk weightedassets, a capital conservationbuffer of 2.5% comprisingonly common equity capitaland a minimum overallcapital adequacy ratio of9.0%.
The Basel III regulationswould be implemented inphases beginning from 1st
April 2013 and would befully implemented by March31, 2018.
20
[email protected] July 2013
Superior profitability growth continues to remain
The Bank’s operating profit has grown at a CAGR of ~21% whereas, Profit After Tax(PAT) grew at a CAGR of ~24% over the period of FY11-13. It is driven by robust growthin its Net Interest Income and Other Income at a CAGR of ~21% and 19% respectivelyover the same period. The Bank’s strong relation with the corporate, focus more towardsretail business, diversified product portfolio, Hassle free customer services through itsubiquitous branches and ATMs and stable asset quality are the core reasons for thisrobust performance. We anticipate that the Bank will maintain its growth rate over thenext couple of years supported by strong risk management with stable asset quality andfocus towards retail business portfolio.
21Source: Company, ACE Equity, Microsec Research
Operating Profit to grow at a CAGR of ~21% over FY13-15E
Other Income/Total Income
PAT to grow at a CAGR of ~18% over FY13-15E
Other Income to grow at a CAGR of ~18% over FY13-15E
[email protected] July 2013
13
Growing profitability boosted Return ratios
In the present challenging environment, where macro and micro economic environmentled to higher stress, Axis Bank has managed well and kept return ratios healthy. In FY13,its Return on Assets (ROA) was at historical high of 1.7% and Return on Equity (ROE)stood at 18.5% despite recent capital infusion of ~INR5537 crores. Moreover, it is betterplaced amongst its top four private peers in terms of high returns The Banks rapidbusiness expansion along with growing profitability and its active management ofcurrent and future business needs considering the risks in its businesses was the corereason of this achievement.
We believe that the Bank is likely to maintain its returns ratios over the next couple ofyears. We anticipate ~1.6% and ~18% ROA and ROE for FY15E respectively.
22
Healthy Return Ratios amongst its peers
Balance sheet growth is on the rise
The Bank’s balance sheet has grown at a CAGR of~18% to ~INR3.4 trillions over the period of FY11-13.We anticipate ~19% CAGR growth over the period ofFY13-15E.
Source: Company, ACE Equity, Microsec Research
Axis Bank’s ROE & ROA trend
22nd July 2013
Operationally efficient bank
Axis Bank well managed its cost efficiency reflected in itsCost/Income ratio which decreased by 210bps to 42.6% inFY13 despite the addition of 6163 new employees.Improvement in low cost deposits (CASA) coupled with focustowards retail segment and also its behemoth businessstructure helped it to improve its cost efficiency. The Bankhas consistently improved its cost/Income ratio from 2008despite significant scale-up in branches and employeestrength. Moreover, its initiative to recruitment of young andtalented employees have boosted the productivity of theBank. The Bank’s employee cost contributed 34.38% in itstotal operating expenses and the PAT contributed peremployee was ~INR14 lakh in FY13. We anticipate, theBank’s Cost/Income ratio may come down to ~41% in FY15E.
Improving Cost/Income ratio
Stable employee cost Business/employee likely to improve (INR Crs.)
Profitability/employee is on the rise (INR Crs.)
23
Assets/employee is on the rise (INR Crs.)
[email protected] July 2013
24 Source: Ace Equity, Microsec ResearchNote:- All figures are as on 31st March 2013, Return summary till 18th July 2013
[email protected] July 2013
Valuation and Recommendation Axis Bank has managed to keep return ratios healthy. It is better placed amongst its top four privatepeers in terms of strong return ratios. It has delivered ROE and ROA of ~19% and 1.7% respectivelyin FY13. We believe that the Bank may maintain its return ratios over the next couple of years andmay deliver ~1.6% and ~18% ROA and ROE respectively in FY15E .
P/BV BandValuation looks attractive
On the basis of P/BV, Axis Bank is trading at lower valuation amongst top five Private Banks. Atthe CMP of INR1190, the stock is trading at FY13 P/BV of 1.68x. The current valuation of 1.46xFY14E and 1.27x FY15E Book Value looks attractive. We recommend a BUY on the stock with atarget price of INR1458 (1.55x FY15E BV) with an upside potential of ~23% from the current levelwith an investment horizon of 12-15 months.
TTM P/BV; Valuation is inexpensive as compared to its peers
25 Source: ACE Equity, Microsec Research
22nd July 2013
26
Financials & Projections
Source: Company, Ace Equity, Microsec Research
[email protected] July 2013
Key Concerns
Glimpse of Axis Bank’s Branch
Further downturn in economic activities and growth may act as a vicious cycle oninvestment in Capex and consumer income and spending, which may impact the earnings ofthe Bank and its asset quality.
Recent increment in provision on restructuring as per the RBI new guideline may impact theprofitability.
Issuing of new Banking license may increase competition which may affect the Bank’smargin.
[email protected] July 2013
29
Recommendation
Strong Buy >20%
Buy between 10% and 20%
Hold between 0% and 10%
Underperform between 0% and -10%
Sell < -10%
Expected absolute returns (%) over 12 months
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Microsec Research: Phone No.: 91 33 30512100 Email: [email protected]
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[email protected] July 2013