3rd February, 2012

INITIATING COVERAGE

AXIS BANK LIMITED

CMP : Rs. 1076.00 TARGET : Rs. 1586.00 Recommendation

RESEARCH
BUY
COMPANY DETAILS BSE Code NSE Symbol Bloomberg Market Cap. (Rs. Crs) Free Float 52 Week High(Rs) 52 Week Low(Rs) Dividend Yield (%) Beta Face Value 532215 AXISBANK AXIS IN 44331.16 62.45 1460.55 784.50 1.3 1.36 10

In view of the better than expected Q3FY'12 result published by Axis Bank Ltd. and keeping in view the recent action by the RBI, which has started to take preemptive action to alleviate liquidity crunch and promote growth mainly through OMO and the recent CRR cut, we initiate coverage on the company with a BUY recommendation with a target price of Rs.1586. The bank is currently trading at a price to book value of 2.22 (which is at a 35% discount to the average price to book value of the last 8 years of 2.99). Though the bank has considerable exposure to power and infrastructure space and the possibility that some portion of this exposure might have to be restructured, but we feel with the signs of new initiatives taken up by the government to address the stalemate existing in the power and infra sector augers well for the Indian banking sector in general. This would also mean that the possibilities of loans turning bad or the quantum of restructuring would be contained. Considering the conservative nature of the bank and its high quality management, we expect the bank to emerge as an outperformer in the banking sector. Quarterly Result Contrary to the market expectation, Axis Bank came out with a 3rd quarter earning which has been much better than the market expectation, especially on the asset quality front. The bank posted a NII (net interest income) of Rs. 2,140 crores, which is an increase of 23.5% on YoY basis and 6.6% on QoQ basis. However, Net Interest Margin of the bank declined marginally to 3.75% in Q3FY12 compared to 3.78% in Q2FY12 and 3.81% in Q3FY11. As we know, the RBI increased the signaling rate, aka, the repo and reverse repo rate 13 consecutive times. In response the banking sector as a whole had to raise both deposit rates and the benchmark lending rate, however, the pace of deposit rate growth outstripped the lending rate considering the poor liquidity in the market and waning demand for bank funding, especially by the corporate. Despite the difficult situation, the bank has managed to increase its net profit, fee income, operating revenue, and operating profit by 24%, 26%, 24% and 24% respectively on YoY basis.

SHARE HOLDING PATTERN Foreign Institutions Non-Promoter Corp Holding Promoters Public & Others TOTAL

% 40.6 6.72 8.713 7.55 6.42 100

ANALYST KINGSHUK ACHARYA

kinshuk@eurekasecurities.com 0 96814 78735 / 91-33-3918 0386 - 87

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Conference Call Highlights The company has been able to report a healthy net profit growth on the back of robust 32% growth in the core fee income at Rs 1120.67 crore coupled with flat cost to income ratio at 42.3% has boosted growth in the Net Profit. Against Industry growth of 16%, the bank has reported advances growth of 20% to Rs 148739 crore at end of December 11, thanks to healthy growth in major segments like Large & Mid, SME and Retail. With the existing sanctions off take, buoyant working capital credit, Large and Mid corporate advances grew 19% y-o-y and 6% q-o-q to Rs 84083 crore. Strong 48% y-o-y and 12% q-o-q growth in housing loans at Rs 24948 crore and 56% y-o-y and 13% q-oq rise in the auto loans has led retail loans up 32% y-o-y and 13% q-o-q to Rs 33264 crore in the quarter under review. SME advances grew 21% y-o-y and remained flat at Rs 20692 crore while that of Agri loans growth was muted at Rs 10700 crore. Top five sector exposure was as follows: Power Generation 10.29%, Infrastructure construction 9.24%, Financial Companies 8.92%, Engineering and Electronics 6.34% and Metals and metal products 5.79%. Management expects credit growth of 21% for FY12 and noted that the Q4FY12 would essentially work on to meet the priority sector targets across all the segments. It also expects to focus on its Retail products going forward. The Share of retail loans in the total advances grew to 22.4% in quarter under review against 20.4% a year ago and 20.9% a quarter ago. Deposits grew 34% y-o-y and 7% q-o-q to Rs 208693 crore in quarter under review. Growth in the demand deposits by 32% y-o-y and 6% q-o-q at Rs 86756 crore was on the back of strong CA deposits growth by 47% y-o-y and 12% q-o-q to Rs 39459 crore. On the other hand savings bank deposits grew 21% y-o-y and 1% q-o-q to Rs 47297 crore. The bank has witnessed pressure on accretion of savings bank deposits in the quarter under review. CASA ratio stood at 41.6% in quarter under review against 42.3% in the corresponding previous year. On the other hand, Demand deposits constituted 37% of aggregate daily average deposits during quarter under review, against 38% in the previous quarter. Strong growth in the retail term deposits by 48% to Rs 44586 crore has led growth in the term deposits at Rs 121937 crore. Share of bulk deposits in total retail deposits has declined to 63.4% against 66.5% a year ago. Cost of Funds moved up from 4.79% in Q3FY11 and 6.19% in Q2FY12 to 6.34% in Q3FY12. NIM was at 3.75% compared to 3.81% in Q3FY11 and 3.78% in Q2FY12. The management expects NIM to be in the range of 3.25-3.50% for the coming quarters. The Capital Adequacy ratio stood at 11.78% with Tier I capital of 8.25% at end of December 11 against 12.46% with tier I capital of 8.86% at end of December 10 and 11.35% with tier I capital of 8.48% at end of September 11. Including the 9MFY12 profits, CRAR would have been 13.11% with Tier I of 9.58% at end of December 11. Risk weighted assets stand at Rs 2.24 lakh crore at end of December 11. The management has no plans to raise capital in near term. The investment book grew strong 51% y-o-y and 6% q-o-q to Rs 90263 crore at end of December 11. Of this HTM book constituted 56.43% with Rs 55919 crore in G secs and Rs 34344 crore in the other securities; with duration of 5.2 years. AFS book constituted 37.38% of the book with duration of 2.9 years and HFT at 6.19% with duration of 4 years. Roughly 82% of the G secs are classified in HTM while that of 96% if bonds and debentures are under AFS category. Total assets of the bank stands at Rs 269310 crore, up 30% y-o-y and 70% q-o-q. Total assets under overseas operations

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3RD FEBRUARY, 2012

were USD 5.42 billion at end of December 11 against USD 4.99 billion in the corresponding previous year, up by 9%. During the quarter, the bank has added 47 branches and 730 ATM's taking total count to 1493 branches and 8324 ATM's at end of December 11. Currently, the mix of Metro and Urban branches was 60% (423 Metro and 467 urban branches) and that of Semi Urban and Rural was 40% (Semi Urban 480, Rural 123). The Management expects the mix would change in favor of semi urban and rural centers in the coming quarters. Management expects run rate of 250 branches per year to be reasonable going forward. No of employees stand at around 31000. GNPA inched up to 1.1% against 1.09% a year ago and 1.08% a quarter ago. NNPA also increased to 0.39% against 0.29% a year ago and 0.34% a quarter ago. Nearly 70% of the corporate advances have rating of at least 'A' and 80% of SME advances have ratings of atleast SME 3 at end of December 11. The ratings on these loan books are revised and updated atleast once in a year. The management expects no big asset quality pressure currently, but expects restructuring in large and mid corporate may happen in FY13. Cumulative restructured loans aggregated to Rs 2701 crore constituting 1.55% of the gross customer assets; of which Rs 1876 crore of assets were restructured up to December 11. The bank has restructured loans amounting to Rs 295 crore in the quarter under review against Rs 312 crore in quarter ended September 11 (Rs 230 crore was on account of MFI accounts in Q2FY12). Major restructuring happened in the corporate accounts only. Rs 7 crore of restructured assets turned to NPA's in the quarter under review. Management has marginally revised credit cost upwards to be around 80 bps for FY12 (against pervious guidance of 75 bps). ROE stands at 20.04% while that of ROA was at 1.61% at end of December 11. Gross and Net Non Performing Loans Off late the main concern for the banking sector is that what would be the extent of the bad loans or non performing loans that the bank would have to deal with on their exposure to the infrastructure, power, airline, telecom and textile sector. In that context, the breakup of the top 10 sectoral exposure of the bank has been presented below:

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

As can be seen from the above graph, the gross non performing loan increased to Rs. 1,915 crore in Q3FY'12 from Rs. 1,744 crore in Q2FY'12, an increase of 9.8% sequentially. While the increase is quite significant, it is however, better than the general expectation and our forecasted figure of 15%. Net NPL ratios increased by 5bsp to 0.39%. There was an addition of Rs. 295 crore (Rs. 310 crore added in the Sep11 quarter) to restructured loans. Restructured loans as a percentage of loans increased to 1.82% of total loans at end Dec'11. The following graph depicts the movement of restructured loan over the last one year.

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Expect incremental NPL to be lower for the Full Year 2012 Considering the better than expectation performance by the bank on the NPL front and also taking cognizance of the management guidance, we lower our expectation for the incremental NPL for the bank for the financial year 2012 by 0.2% to around 45-50 basis point increment. However, considering the fact that the bank has significant exposure to the power and infrastructure space, where there can be high possibility of NPL we expect that the incremental NPL for the bank could go up to 55-60 basis points in FY'13 and by another 50 basis points in FY'14. Despite that, it will be below the average of 0.62% in the past three years and the peak of 0.83% in FY10. The gross NPL ratio is estimated to rise to 1.25% by the end of FY12 (compared to the expected figure of 1.47-1.5%). Despite lowering our assumption for incremental NPL, we expect Rs. 482 crore additions to outstanding gross NPL in the 4th quarter of the financial year of 2012, compared to Rs. 316 crore in 9 month ended of the FY'12. Recommendation At the current market price of 1076, the stock is trading at 1.99, 1.71 and 1.45 Price to Book Value, which, as has been pointed out, is at significant discount to the historical averages. Considering an average Price to Book value of last 8 years of 2.9, we arrive at a target price of 1,586 based on FY'12 book value of Rs. 547/share. Considering the improving macro economic situation and the easing monetary stance adopted by the RBI and the expected improving fundamental of the bank in terms of lower incremental non performing and restructured asset we recommend investors to buy the shares of the bank at current market price. Valuation Parameters
Key Market Ratio (Consolidated) Latest EPS (Rs) Latest CEPS (Rs) Price/TTM CEPS(x) TTM PE (x) Price/BV(x) EV/TTM EBIDTA(x) EV/TTM Sales(x) Dividend Yield% MCap/TTM Sales(x) Latest Book Value (Rs) Historical Valuation DESCRIPTION Adjusted PE (x) PCE(x) Price / Book Value(x) Dividend Yield(%) EV/Net Sales(x) EV/EBITDA(x) EV/EBIT(x) EV/CE(x) M Cap / Sales High PE Low PE Mar-11 17.25 15.84 3.05 1.00 5.54 13.16 6.13 0.35 3.80 26.21 17.25 Mar-10 19.11 17.44 2.96 1.03 5.54 12.39 6.17 0.36 4.07 26.81 8.27 Mar-09 8.21 7.43 1.46 2.41 2.81 8.17 3.06 0.21 1.37 32.02 8.21 Mar-08 26.38 22.93 3.19 0.77 4.79 15.16 5.54 0.31 3.99 69.13 19.43 Mar-07 21.10 18.01 4.07 0.92 4.26 15.09 4.77 0.26 3.09 80.93 88.16 12.2 13.29 2.35 8.9 3.75 1.3 2.93 457.89

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Peer Group Comparison (Consolidated) Company Name Federal Bank HDFC Bank ICICI Bank Axis Bank Kotak Mahindra Bank Year End 201103 201103 201103 201103 201103 Net Sales 4052.03 20043.33 30081.4 15154.86 6141.44 PBIDT 903.2 5957.83 8389.7 5097.65 2247.4 PAT 588.47 4017.69 6318.19 3344.67 1569.24 Adj. EPS(Rs) 32.53 17.16 52.9 81.35 21.26 PBIDTM% 22.29 29.72 27.89 33.64 36.59 PATM% 14.52 20.05 21 22.07 25.55

(Rs. in Crore) ROCE% 6.76 6.14 5.42 6.47 7.58 ROE% 12.21 17.02 11.85 19.18 16.63

Disclosure as Per RBI Rules Mar-2011 Gross Non-Performing Assets (Rs. Cr) Net Non Performing Assets (Rs. Cr) % of Net Non-Performing Assets to Net Advance Capital Adequacy Ratio (%) Tier I Capital (%) Tier II Capital (%) Interest Income % Average Working Fund Non Interest Income % Average Working Fund Operating Profit % Average Working Fund Return on Assets (%) Business Per Employee (Rs. Cr) Profit Per Employee (Rs. Cr) Advance to Capital Market Sector(Rs. Cr) Advance to Real Estate Sector(Rs. Cr) Advance to Commodities Sector (Rs. Cr) Movement of NPAs - Gross Opening Balance of Gross NPAs Additions of Gross NPAs Reductions of Gross NPAs Closing Balance of Gross NPAs Movement of NPAs - Net Opening Balance of Net NPAs Additions of Net NPAs Reductions of Net NPAs Closing Balance of Net NPAs Movememnt of Provisions for NPAs Opening Balance Provisions made during the Year Write-off/write-back of excess provisions Closing Balance 899 995.26 -707.52 1186.74 570.64 1373.21 -1044.85 899 246.32 690.32 -366 570.64 152.34 248.43 -154.45 246.32 419 453.05 -461.7 410.35 327.13 427.49 -335.62 419 248.29 202.3 -123.46 327.13 266.33 135.78 -153.82 248.29 1318 1448.31 -1166.89 1599.42 897.77 1800.7 -1380.47 1318 494.61 1033.51 -630.35 897.77 418.67 384.21 -308.27 494.61 1599.42 410.35 0.29 12.65 9.41 3.24 7.49 2.29 3.17 1.68 13.66 0.14 3541.75 39401.32 0 Mar-2010 1318 419 0.4 15.8 11.18 4.62 7.73 2.62 3.48 1.67 11.11 0.12 3006.29 26674.33 0 Mar-2009 897.77 327.13 0.4 13.69 9.26 4.43 8.59 2.3 2.95 1.44 10.6 0.1 2331.05 19190.74 0 Mar-2008 494.61 248.29 0.42 13.73 10.17 3.56 8.08 2.07 2.57 1.24 11.17 0.08 1850.68 15202.05 0

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Financial Ratios Key Ratios Credit-Deposit(%) Investment / Deposit (%) Cash / Deposit (%) Interest Expended / Interest Earned (%) Other Income / Total Income (%) Operating Expenses / Total Income (%) Interest Income / Total Funds (%) Interest Expended / Total Funds (%) Net Interest Income / Total Funds (%) Non Interest Income / Total Funds (%) Operating Expenses / Total Funds (%) Profit before Provisions / Total Funds (%) Net Profit / Total funds (%) RONW (%) Mar-2011 74.67 38.63 7.07 56.67 23.56 24.52 7.16 4.06 3.1 2.21 2.3 3.01 1.58 19.18 Mar-2010 71.88 39.49 7.31 56.99 25.41 24.11 7.09 4.04 3.05 2.41 2.29 3.17 1.51 18.93 Mar-2009 68.8 39.1 8.16 66.02 21.67 20.85 8.42 5.56 2.86 2.33 2.24 2.95 1.41 19.14 Mar-2008 65.81 41.5 8.17 63.09 20.54 24.75 7.66 4.83 2.83 1.98 2.39 2.42 1.16 17.45 Mar-2007 62.73 45.74 7.93 67.09 18.5 22.33 6.09 4.08 2 1.38 1.67 1.72 0.89 19.31

Financial Overview Historical

Consolidated P&L (in Rs. Cr) DESCRIPTION I. INCOME Interest Earned Other Income Total Income II. EXPENDITURE Interest Expended Operating Expenses Provisions and Contingencies Profit Before Tax Taxes Total III. PROFIT AND LOSS Profit After Tax Share of Associate Consolidated Net Profit Adjustments to PAT Profit brought forward Total Profit & Loss IV. APPROPRIATIONS Equity Dividend % Earnings Per Share Adjusted EPS 3371.63 6711.54 6711.54 140.00 81.35 81.35 2328.95 4807.10 4807.10 120.00 61.16 61.16 1537.20 3350.13 3350.13 100.00 50.50 50.50 1024.29 2083.44 2083.44 60.00 29.61 29.61 3344.67 -4.77 3339.91 2478.14 1812.93 1059.14 654.25 -31.80 731.04 1353.48 1353.48 45.00 23.23 23.23 2478.14 1812.93 1059.14 654.25 8588.61 4860.47 1279.57 5097.65 1752.98 16481.63 6632.63 3762.39 1388.84 3819.40 1341.26 13125.12 7148.92 2873.80 939.40 2782.92 969.99 11932.11 4419.84 2166.71 579.42 1635.03 575.89 7741.86 2993.18 1219.36 267.36 991.66 337.41 4817.30 15154.86 4671.45 19826.31 11639.05 3964.21 15603.27 10829.11 2915.93 13745.04 7005.08 1795.92 8801.00 4461.65 1009.91 5471.55 Mar-11 Mar-10 Mar-09 Mar-08 Mar-07

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Consolidated Balance Sheet (In Rs. Cr) DESCRIPTION SOURCES OF FUNDS: Share Capital Share warrants & Outstandings Total Reserves Minority Interest Deposits Borrowings Other Liabilities & Provisions Total Liabilities APPLICATION OF FUNDS : Cash and balance with Reserve Bank of India Balances with banks and money at call Investments Advances Gross block Less: Accumulated Depreciation Less: Impairment of Assets Net Block Lease Adjustment Capital Work in Progress Other Assets Total Assets Contingent Liabilities Bills for collection Book Value Adjusted Book Value 22.96 4669.70 242566.65 453998.76 32473.11 460.23 460.23 57.38 3927.30 180586.67 318281.38 19292.87 394.62 394.62 57.51 3766.86 147697.16 209260.32 13957.31 283.97 283.97 128.48 2787.31 109566.38 258895.66 8323.39 244.66 244.66 25.22 1896.22 73255.98 184165.35 6274.63 120.32 120.32 2269.96 1178.61 1024.87 13886.16 7522.49 71787.55 142407.83 3455.94 1185.99 9482.05 5723.84 55876.55 104340.95 2127.60 948.99 9419.21 5600.19 46271.75 81556.77 1754.18 729.31 7305.66 5199.86 33865.10 59475.99 1395.65 579.22 12.44 803.99 652.61 4661.03 2257.27 26887.16 36876.46 1103.31 450.70 189166.43 26267.88 8237.73 242566.65 141278.66 17169.55 6149.35 180586.67 117357.66 15519.87 4623.93 147697.16 87619.35 5624.04 7568.97 109566.38 58785.02 5195.60 5877.93 73255.98 410.55 0.00 18484.06 405.17 0.17 15583.76 359.01 1.21 9835.49 357.71 2.19 8394.13 281.63 8.98 3106.82 Mar-11 Mar-10 Mar-09 Mar-08 Mar-07

Projected Financials
P&L Description Net interest income Fee income Trading profit Other income Total operating income Total operating expense Operating profit Provision for bad debt Other provision PBT Total taxes PAT Shares outstanding EPS FY12 E 7900 4940 410 240 13490 5900 7590 1220 270 6100 2013 4087 41.1 99.44 FY13 E 9500 5970 470 290 16230 6990 9240 1800 330 7110 2346.3 4763.7 41.1 115.91 FY14 E 12300 7260 580 360 20500 8800 11700 2600 380 8720 2877.6 5842.4 41.1 142.15

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AXIS BANK LIMITED

3RD FEBRUARY, 2012

Balance Sheet Description Equity capital Reserves and surplus Net worth Deposits Total borrowings Other liabilities and provisions Total liabilities Cash and bank balances Investments Loans Fixed assets Other assets Total assets BV/Share FY12 E 410 22100 22510 230000 27670 17450 297,630 26600 91260 171000 2730 6040 297630 547.7 FY13 E 410 25800 26210 276900 36200 20890 360,200 29200 109500 210100 3400 8000 360200 637.7 FY14 E 410 30500 30910 337900 46100 25090 440,000 35400 133900 257500 4100 9100 440000 752.1

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, but we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our judgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequence of reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID. Analyst Email Ph. : : : Kingshuk Acharya kinshuk@eurekasecurities.com 0 96814 78735 / 91-33-3918 0386 - 87

Registered Office : 7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001 Corporate Office : B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001 Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184 e: helpdesk@eurekasecurities.com Mumbai Office : 909 Raheja Chamber, 213 Nariman Point, Mumbai-400021 Phone : 91-22-2202 5941 / 5942 e: mumbai@eurekasecurities.com

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