Maintain ‘Buy’ with TP of Rs 830 on Axis Bank

Published: September 28, 2019 7:21:58 AM

Tax cuts would lead to an EPS upgrade in FY21/22ii: We build in the impact of the lower ETR going forward, i.e. 25.6% versus 34.9% earlier.

AXSB would not require fresh capital until end-FY22ii and is comparable to large peers like ICICIBC and KMB in terms of capitalisation now.

By IIFL Institutional Equities

AXSB announced the closure of its QIP yesterday, which has led to 7% dilution in equity capital and Rs 125bn addition to net worth. The QIP dilutes AXSB’s EPS (4-5%), while BVPS increases (5-8%). This adds ~200bps to CET 1 ratio and offsets the impact of higher provisions in FY20ii. We also build in the impact of the lower effective tax rate (ETR) and the one-time charge on account adjustment to deferred tax assets (DTAs) into our estimates. This restores the RoE to 17.8% by FY22ii, which would have been diluted to 15.9% after the QIP. We remain constructive on AXSB, given its strong liability franchise, capital position, brand and reach versus competition. We value AXSB at 2.25x FY21ii BVPS and maintain our TP at Rs830/share.

QIP to be BVPS-accretive, EPS-dilutive: AXSB has raised Rs125bn of Tier-1 capital through the QIP. It has allotted 198.7mn equity shares, with face value of Rs2/share, at a price of Rs629/share or 1.8x FY21ii BVPS (pre-money). This capital infusion would dilute EPS (by 4-5%) and increase BVPS (by 5-8%) over FY20-22ii. AXSB would not require fresh capital until end-FY22ii and is comparable to large peers like ICICIBC and KMB in terms of capitalisation now.

Tax cuts would lead to an EPS upgrade in FY21/22ii: We build in the impact of the lower ETR going forward, i.e. 25.6% versus 34.9% earlier. This would also necessitate a one-time charge, as the DTA would be recalculated at the new ETR. AXSB had a DTA of Rs76.4bn (FY19), leading to a one-time impact of ~Rs20.4bn in FY20ii, which would outweigh the impact of the lower ETR, leading to an EPS cut of ~14% in FY20ii. EPS for FY21/22ii would increase by ~9% each.

Long term outlook strong; maintain BUY: On a post-money basis, AXSB trades at 1.9x FY21ii BVPS.

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