| Recommendation: Buy CMP = Rs 716 (at the time of recommendation) Price target: Rs 1,150 Key points: - The financial year 2008 was a roller-coaster year for the banking industry, with the outlook very positive at the beginning of the fiscal but clouded by multiple macro-concerns in the second half of the fiscal. Amidst all this, Axis Bank churned out an impressive earnings growth on the back of an aggressive business growth and capital infusion.
- The retail banking operations of Axis Bank contribute about 20% to the bank's total income and only 8% to its bottom line, making it the least profitable segment. Wholesale banking is most lucrative business for the bank owing to its strong position in the loan syndication business. However, significant focus on strengthening the current account and savings account (CASA) should drive Axis Bank's profitability going forward.
- The restructuring of the corporate banking business has helped the segment achieve a strong growth (a 68.3% growth in corporate advances). A leadership position in the loan syndication business provides further impetus to the corporate banking business.
- The concentration of the bank's exposure to certain industries is a cause for concern with gems and jewelry forming 39.5% of the non-fund exposure, and non-banking finance companies & trading companies forming 13.6% of the fund based exposure. Also, a higher off-balance sheet exposure may require increased provisioning considering the Reserve Bank of India's tough stance and revised guidelines on the subject.
- The bank's management believes that the operating environment for banks would get tougher owing to further possible monetary tightening, marginal deterioration in credit quality and valuation losses due to the widening of spreads.
- At the current market price of Rs 716, the stock trades at 18.1x 2009E earnings per share, 8.6x 2009E pre-provisioning profit per share and 2.7x 2009E adjusted book value per share.
- I maintain a very strong Buy recommendation on the stock with a price target of Rs 1,150 over next 6-8 month time frame.
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