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Axis Bank Ltd Research Report - 06th Oct 2016

Banking | Published on Oct 06th 2016


Despite slow down in the industry, Axis Bank continues to deliver strong business growth: Axis Bank has been able to outpace the industry growth delivering 19% CAGR in loan book over FY12-16. The key driving force has been the retail business (39% CAGR), whose share has gone up to 41% from 21% during the same period. The management has been reiterating its stand on pick up in retail loans, which is visible from the 24.3% growth during Q1FY17. Corporate loans also witnessed strong growth during Q1FY17 by 21%. Hence, we believe the bank has potential to deliver 20% CAGR in loan for next 2-3 years & sharp moderation in growth is unlikely. Asset quality woes restricted to the watch list: Axis bank came out with a watch list of Rs22,628cr worth of loans at the end of Q4FY16, estimating 60% of that could fall into NPA over the next 2 years with a bias towards higher slippages in FY17. Accordingly, the bank saw slippages of Rs3,638cr in Q1FY17, reducing the watch list amount by 10.3%. Almost 74% of the slippages (`2,680cr) came from the watch list, while slippages from non watch list corporate book accounted for 6% of the gross slippages. Balance 20% 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. We expect RoE to bounce back in FY18: Axis Bank has maintained RoE of 16- 17% over the last 3 years. Their ability to contain credit cost and higher traction in fee income were the driving forces behind the strong RoE. However, the management has already come out with a watch list and 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% vs 16.8% in FY16, we expect the same to bounce back to 16.5% by FY18. Ability to grow retail loans would be one of the keys for maintaining strong RoE & we believe the bank will be able to sustain RoE of 16-17% in the medium term. Outlook and valuation: 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, we can expect RoE rebounding and Axis Bank can be a re-rating candidate. At the current levels, the stock trades at 2x its FY18E Adj BV of Rs268. Thus, we believe the current corrections in the stock gives long term investors an opportunity to enter the stock. We upgrade the stock to a BUY with a target price of Rs630.

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CMP 536
Target Price 630
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others2.0
Grand Total100.0

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