1/25/2011

AXIS
BANK

THE LONGS AND THE SHORTS

Equity Research Report

Saurabh Ashok Thadani

Srikanth Kumar Konduri

saurabhthadani@gmail.com

konduri@aol.in

Mobile No: 07838590595

Mobile No: 07838590567

IMT Ghaziabad | Team: Rambling Souls

The Longs and the Shorts

Axis Bank Stock Valuation

January 25, 2011

Axis Bank Ltd (CMP ` 1,297.2)
Recommendation: BUY
Target Price: ` 1,430
Upside: 10.25%
Investment Period: 3 months
Stock Information:
BSE Code: 532215
NSE Code: AXISBANK
Sector: Banking
Market Capitalization (in ` Crores): 52,671.76
52-week High/Low (in `): 1,608/965

Axis Bank vis--vis Sensex:

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Axis Bank Stock Valuation

Performance in Q3 FY11:

Net Profit from after Tax for Q3 FY11 was ` 891,36 lacs compared to ` 655,98 lacs
in Q3 FY10, recording a Y-o-Y growth of 35.9%, while the growth is 21.25%
compared to Q2 FY11 (` 735,14 lacs)

Total income has increased by 28.78% Y-o-Y

Interest earned increased by 33.10% Y-o-Y

Percentage of Net NPAs is reduced by 17 bps to 0.29% from 0.46% Y-o-Y, which is
the lowest ever it has ever achieved

About Axis Bank:

Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd.
The Bank as on 31st December, 2010 is capitalized to the extent of ` 409.90 crores with the
public holding (other than promoters and GDRs) at 53.62%.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai.
The Bank has a very wide network of more than 1281 branches (including 169 Service
Branches/CPCs as on 31st December, 2010). The Bank has a network of over 5303 ATMs (as
on 31st December, 2010) providing 24 hrs a day banking convenience to its customers. This
is one of the largest ATM networks in the country.
The Bank has strengths in both retail and corporate banking and is committed to adopting the
best industry practices internationally in order to achieve excellence.

Source: Axis Bank website homepage

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The Longs and the Shorts

Axis Bank Stock Valuation

Growth opportunities in Indian Banking Sector:

Indian banks have compared favourably on growth, asset quality and profitability with other
regional banks over the last few years. The banking index has grown at a compounded annual
rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market
index for the same period. Policy makers have made some notable changes in policy and
regulation to help strengthen the sector. These changes include strengthening prudential
norms, enhancing the payments system and integrating regulations between commercial and
co-operative banks.
Specifically, at one extreme, the sector could account for over 7.7 per cent of GDP with over
` 7,500 billion in market cap, while at the other it could account for just 3.3 per cent of GDP
with a market cap of ` 2,400 billion. Banking sector intermediation, as measured by total
loans as a percentage of GDP, could grow marginally from its current levels of ~30 per cent
to ~45 per cent or grow significantly to over 100 per cent of GDP. In all of this, the sector
could generate employment to the tune of 1.5 million compared to 0.9 million today.
Availability of capital would be a key factor the banking sector will require as much as `
600 billion (US$ 14 billion) in capital to fund growth in advances, non-performing loan
(NPL) write offs and investments in IT and human capital upgradation to reach the highperforming scenario.
We can witness consolidation within public sector banks (PSBs) and within private sector
banks. Foreign banks begin to be active in M&A, buying out some old private and newer
private banks. Some M&A activity also begins to take place between private and public
sector banks.

As a result, foreign and new private banks grow at rates of 50 per cent, while PSBs improve
their growth rate to 15 per cent. The share of the private sector banks (including through
mergers with PSBs) increases to 35 per cent and that of foreign banks increases to 20 per cent
of total sector assets. The shares of banking sector value add in GDP increases to over 7.7 per
cent, from current levels of 2.5 per cent. Funding this dramatic growth will require as much
as ` 600 billion in capital over the next few years.

Source: McKinsey Research Report, Indian banking Sector 2010

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Axis Bank Stock Valuation

Method used for stock valuation:

The widely accepted industry norm is that share price is the most appropriate indicator of a
companys earning capabilities, so that if the price is high, earnings are expected to be high
for that period.
We have used Price-Earnings ratio (PE) as an essential indicator of a company financial
health from the perspective of a shareholder who either wants to invest or would like to
withdraw his amount from the companys shares.
Usually, speculators will look forward to invest in those companies for which the PE ratio is
less than that of the industry average, as it is an indication that the stock price is bound to rise
so as the companys earnings in the near future.
While a lofty PE ratio also implies that the shareholders will expect the earnings of the
company to rise in tandem to justify the high PE ratio. Most probable event will be that
wherein the company fails to meet the expected earnings leading to the downward slide of
stock price.
However, the comparison has to be restricted within the sector since PE ratios and
profitability ratios vary according to the sector. As an example, energy utilities like Oil &
Gas might have low PE ratios, owing to their low growth opportunities while high technology
companies might have higher PE ratios out of the expectations from shareholders about the
innovation driven growth in those companies.
Our analysis involved observing the PE ratio trend of a particular stock on a daily basis for
the past three years, and by charting the approximate cycles we have zeroed in upon the
possible stock movement based on the present day value of its PE ratio.
PE ratio is calculated by dividing the daily closing price with the sum of EPS of the stock for
past four quarters. For instance, PE ratio for the day 25th January 2011 (Q4 FY11), will be
found as:

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Axis Bank Stock Valuation

Axis Bank PE Ratio Analysis:

We have calculated the PE ratio for Axis Bank over the past 3 years and found it to be
varying between 6.2 and 41.6. Currently trading at a PE of 16.89 it looks like an attractive
investment for the medium to long term investor. We see an upside of at least 10% over the
coming quarter. The increase of 10% over its current price would give it a PE ratio of 18.5
which is still way below the industry average of 27.66 making it quite realistic. Also we have
seen that last time the PE ratio was at the current levels it touched a high of 22 before it
started to dip again.
Here is a snapshot of the excel sheet with the PE ratios for the last 3 years. Please refer to the
attachment for the complete data.
Date

Open

High

Low

Close

Volume Adj. Close

P/E

1/25/2011 1325.25 1344.7

1293.1

1298.1

354900

1298.1

16.89794

1/24/2011 1285

1343

1285

1322.1

290200

1322.1

17.21036

1/21/2011 1275

1295

1266.25 1284.4

275800

1284.4

16.7196

1/20/2011 1274.7

1328

1255.05 1285.75 358900

1285.75

16.73718

1/19/2011 1290

1296.6

1267.25 1281

165100

1281

16.67534

1/18/2011 1230

1296.55 1230

335300

1279.2

16.65191

1/17/2011 1222

1239.6

1201.55 1227.55 295900

1227.55

15.97956

1/14/2011 1279

1279

1196

1201.35 365500

1201.35

15.63851

1/13/2011 1314

1326.8

1265

1269.2

1269.2

16.52174

1279.2

151000

We have drawn a chart for the PE ratios over the quarters for the past 3 years. From the chart
it is visible that the PE ratio has started to stabilize at the current levels and is likely to start
moving up in the medium term. So we advice the investors who can hold the stock for a
period of 3 months to 9 months to stay invested in it as they are likely to benefit from the
uptrend expected.

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The Longs and the Shorts

Axis Bank Stock Valuation

Axis Bank: PE Ratio

40
35
30
25
20
15
10
5
Q4 FY11

Q3 FY11

Q2 FY11

Q1 FY11

Q4 FY10

Q3 FY10

Q2 FY10

Q1 FY10

Q4 FY09

Q3 FY09

Q2 FY09

Q1 FY09

Q4 FY08

Financial figures for Q3 FY11:

Q3 FY11

Q2 FY11

% Q-o-Q

Q3 FY10

% Y-o-Y

38383.1

36242.5

5.9

28836.5

33.1

Interest expended

(21051.9)

(20091.5)

4.8

(15345.4)

37.2

Net Interest

17331.2

16151

7.3

13491.1

28.5

Other income

11477.1

10332.4

11.1

9880.9

16.1

Total Income

28808.3

26483.4

8.8

23372

23.2

Operating expenses

(12224)

(11620)

5.2

(9626)

27.0

Provisions

(3139)

(3788)

(17.1)

(3731)

(15.9)

PBT

13446

11076

21.4

10015

34.3

Tax

(4532)

(3725)

21.7

(3455)

31.2

Reported PAT

8914

7351

21.3

6560

35.9

EPS

87.0

71.9

20.9

65.0

33.8

Amount of NPA

3855.4

4093.5

(5.7)

4295.5

(10.2)

(` m)
Total Interest
Income

Income

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Axis Bank Stock Valuation

Q3 FY11

Q2 FY11

% Q-o-Q

Q3 FY10

% Y-o-Y

NIM (%)

3.8

3.7

0.1

4.0

(0.2)

Cost of Funds (%)

4.8

4.8

0.0

4.8

(0.0)

CASA (%)

42.3

41.5

0.8

45.6

(3.3)

Non-int. inc/Int. exp

54.5

51.4

3.1

64.4

(9.9)

Cost to Income (%)

42.4

43.9

(1.4)

41.2

1.2

Provisions/Income (%)

6.3

8.1

(1.8)

9.6

(3.3)

BV (`)

454.3

432.5

21.8

391.4

62.9

RoE (%)

18.9

17.4

1.5

19.5

(0.6)

RoA (%)

1.8

1.5

0.3

1.7

0.0

CAR (%)

12.5

13.7

(1.2)

16.8

(4.3)

Gross NPA (%)

1.1

1.1

(0.0)

1.2

(0.1)

Net NPA (%)

0.3

0.3

(0.1)

0.5

(0.2)

Key Indicators

(%)

Source: Axis Bank Balance Sheet, Q3 FY11

Better than expected Q3 FY11 performance

Axis Bank announced a better than expect profit of ` 8,913.6 million.

Primary growth drivers of stock were high Net Interest Margin (NIM) and lowest ever
Net NPA percentage

Rise in NIM caught by pleasant storm

Axis Banks NIM improved by 13bps Q-o-Q to 3.8%

Significant improvement in CASA (contributing 9bps)

Implementation of lending rate hikes (contributing 8-9bps)

Growth in NII was strong at 7% Q-o-Q and 29% Y-o-Y

C/I ratio reduced by 140bps Q-o-Q

The bank expects fee income growth in the range of 20-25% in FY11

Increase in operating expenditure was only 5% Q-o-Q in spite of aggressive branch

expansion

Cost-to-income (C/I) ratio reduced by 140bps Q-o-Q to 42.4%

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Axis Bank Stock Valuation

Capital Adequacy stays healthy

The capital adequacy was comfortable with CAR at 13.8%

RoA recorded one of the best in the industry

RoA improved considerably to 1.8%, compared to 1.5% in Q2 FY11, with the drivers being:

Strong loan growth, material margin expansion

Higher non-interest income and sequentially lower provisioning

Negative growth drivers

In Q4 FY11, management expects NIM to correct by 15-20bps due to sharp increase

in the cost of funds

Fee income from the Large and Mid Corporate segment and Retail business has been
witnessing strong traction

The recent rise of 25 basis points on short term rates by RBI, owing to the fears of
rising inflation may subsequently lead the stock price to slide down

Comparison with ICICI Bank and SBI Bank:

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The Longs and the Shorts

Axis Bank Stock Valuation

Support from an attractive PE ratio:

Axis Bank enjoys the lower PE ratio (16.89) compared to that of ICICI Bank(27.35), SBI
Bank(17.43) and the industry average for the banking sector of 27.66, with a lower value
indicating more of the stock being undervalued rather than that of a low growth, thereby
making it a hot pick.
Currently, the stock is trading down 20.97% from its 52-week high of ` 1,608 and above
31.39% over the 52-week low of ` 967.15.

Solid Profit-After-Tax Growth:

PAT (% Change)

Axis Bank

ICICI Bank

SBI

Q-o-Q

21.3

16.2

12.9

Y-o-Y

35.9

30.5

14.08

The above mentioned PE ratio is quite well backed by the higher increase in PAT of Axis
Bank, giving it an edge over the other industry majors.

Reasonable Net Interest Income Growth:

NII (% Change)

Axis Bank

ICICI Bank

SBI

Q-o-Q

7.3

4.9

12

Y-o-Y

28.5

12.3

43

The Growth in Net Interest Income of Axis Bank was between that of SBI and ICICI Bank
making it a hot pick in the private banking sector.

Superior Return on Equity Growth:

RoE (% Change)

Axis Bank

ICICI Bank

SBI

Q-o-Q

1.5

1.3

(0.4)

Y-o-Y

(0.6)

2.1

(0.4)

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Axis Bank Stock Valuation

The growth in Return on Equity Q-o-Q was the highest for Axis Bank owing to the superior
performance of it in the last quarter which proves the efficiency of the management and
shows the potential it has to grow.

Superior Return on Assets Growth:

RoA (% Change)

Axis Bank

ICICI Bank

SBI

Q-o-Q

0.3

0.2

0.1

Y-o-Y

0.0

0.3

0.0

The growth in Return on Assets Q-o-Q was again the highest for Axis bank making it a
suitable investment for a medium to long term investor.
Source: indiainfoline.com

Attachments:

Excel Sheet showing the PE ratio calculations and analysis

The PDF showing Q3 FY11 results of AXIS BANK

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