Recommendation: Buy
CMP = Rs 815 (as of Monday)
Price target: Rs 1,054
Result highlights:
· Axis Bank's Q2FY2008 numbers are much above the market's and profit after tax (PAT) reporting a growth of 60.4% to Rs 227.8 crore compared to an estimated Rs 199 crore. The high growth was driven by a robust increase in both interest and non-interest income segments. Due to the excellent set of numbers reported during Q2FY2008, the earnings estimates are upgraded to 15.7% and 16.7% for FY2008 and FY2009 respectively.
· The net interest income (NII) was up by 72.9% year on year (yoy) and 39.9% quarter on quarter (qoq) to Rs 588.7 crore. However the bank had raised capital of Rs 4,534 crore during the quarter and excluding the possible interest income earned on such float funds, the quarter-on-quarter (q-o-q) NII growth would moderate to 15.7%.
· The operating profit was up 85.3% yoy and 25.8% qoq to Rs 368 crore while the core operating profit was up 70.8% yoy and 37% qoq to Rs 368 crore. Provisions and contingencies grew by 236.3% yoy and 13.4% qoq to Rs 114.5 crore. Despite the strong asset growth, the asset quality improved with the net non-performing assets (NPAs) at 0.55% of customer assets, down four basis points sequentially.
· Axis Bank raised capital to the tune of Rs 4,534 crore through a combination of GDR, qualified institutional placement (QIP) and preferential allotment during the quarter. This helped to improve its capital adequacy ratio (CAR) to 17.6% (from 11.5% in June 2007) with the Tier-I CAR at 13%. This substantial capital-raising programme (almost 25% of the pre-issue equity) has depressed its return on equity (RoE) to 13.6% from 19%, which is along the expected lines.
· The bank has also recently decided to foray into the mutual fund business. It has already set up its wealth management business and planned a private equity fund to invest in the infrastructure segment. We feel these are the building blocks that the bank management is putting in place and that would adequately complement its banking business. This strategy would also open up a new channel of steady fee income.
· Thus, its robust fee income growth could help in restoring the fall in its RoE much sooner than in the past occasions when it had raised capital. It has been registering a phenomenal asset growth without compromising on its margin and asset quality. All these developments make Axis Bank one of the best growth stories available in the private banking space.
· At the current market price of Rs 815, the stock is quoting at 21.6x its FY2009E earnings per share (EPS), 10.1x its FY2009E pre-provisioning profit (PPP) and 3x its FY2009E book value (BV). I maintain Buy recommendation on the stock with a revised 12-month forward price target of Rs 1,054.
