Angel Broking upgrades Axis Bank to ‘Buy’, raises target price to Rs 630; 5 reasons why

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New Delhi | Updated: October 6, 2016 1:40:24 PM

Axis Bank has been able to outpace the industry growth delivering 19 per cent CAGR in loan book over FY12-16.

Axis Bank sharesShares of Axis Bank can touch Rs 630 in the next 12 months, according to Angel Broking. (Source: Reuters)

Shares of Axis Bank can touch Rs 630 in the next 12 months, according to brokerage firm Angel Broking. In the past one year, shares of the bank have underperformed the benchmark index BSE Bankex. The scrip has risen 4.6 per cent to Rs 535.70 till October 5 from Rs 512.05 on the same day a year ago, whereas BSE Bankex jumped 10.71 per cent during the same period. The bank is promoted by government institutions led by UTI (SUUTI currently holds 12 per cent stake in the bank). It has an extensive network of 3,006 branches and 12,871 ATMs spread across 1,882 centers.

For the latest quarter ended June 30, 2016, Axis Bank reported a net profit of Rs 1,555.53 crore, down 21.38 per cent, against Rs 1,978.44 crore in the same quarter last year. Total income of the bank increased by 13.22 per cent year-on-year to Rs 13,852.18 crore for the quarter under review. It had reported a total income of Rs 12,234.41 crore in the same quarter last year.

Below are five reason why Angel Broking is bullish on Axis Bank:

1) According to the brokerage house, Axis Bank has been able to outpace the industry growth delivering 19 per cent CAGR in loan book over FY12-16. The key driving force has been the retail business (39 per cent CAGR), whose share has gone up to 41 per cent from 21 per cent during the same period. The management has been reiterating its stand on pick up in retail loans, which is visible from the 24.3 per cent growth during Q1FY17. Corporate loans also witnessed strong growth during Q1FY17 by 21 per cent. The bank has potential to deliver 20 per cent CAGR in loan for next 2-3 years and sharp moderation in growth is unlikely.

2) Axis bank came out with a watch list of Rs 22,628 cr worth of loans at the end of Q4FY16, estimating 60 per cent of that could fall into non-performing assets (NPA) over the next 2 years with a bias towards higher slippages in FY17. Accordingly, the bank saw slippages of Rs 3,638cr in Q1FY17, reducing the watch list amount by 10.3 per cent. Almost 74 per cent of the slippages (Rs 2,680 cr) came from the watch list, while slippages from non watch list corporate book accounted for 6 per cent of the gross slippages. Balance 20 per cent slippages came from Non Corporate book. As expected, large part of the slippages came from the corporate loans within the watch list. While, it is a known fact that in absolute terms there would be a rise in NPA and their ratio will go up. However, there is low probability of negative surprise from the non watch list accounts turning into large scale NPAs.

3) The private sector lender has maintained return on equity (RoE) of 16-17 per cent over the past 3 years. Their ability to contain credit cost and higher traction in fee income were the driving forces behind the strong RoE.

4) The management has given a higher credit cost guidance of 125-150 bps for FY17 vs 92 bps/ 83 bps/110 bps in FY14/FY15/16, respectively. This indicates that bottom-line will be under pressure. While, FY17 will see RoE falling to 13.6 per cent vs 16.8 per cent in FY16, Angel Broking expects the same to bounce back to 16.5 per cent by FY18. Ability to grow retail loans would be one of the keys for maintaining strong RoE and the bank will be able to sustain RoE of 16-17 per cent in the medium term.

5) Declaring the watch list gave the much required clarity on the book for the Bank. While credit cost will remain high and in turn RoE will be under pressure for FY17. Once the cleaning up process is over, RoE of the bank may rebound and the bank can be a re-rating candidate. At the current levels, the stock trades at 2 times its FY18E Adj BV of Rs 268. Thus, the current corrections in the stock gives long term investors an opportunity to enter the stock. Angel Broking upgrade the stock to a ‘Buy’ with a target price of Rs 630.

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