Axis Bank - Retail build up overshadows asset quality issues - BRICS

AXSB reported a mixed quarter with core-PPoP (ex trading income) coming in a mere 1.7% ahead of our estimate, marred by higher provisioning, which was up 26%. After adjusting for trading income, MTM on investments and at a constant PCR of 70%, the PAT (on an operating basis) was up only 4.5% yoy (9% below expectation). However, the earnings weakness was overshadowed by the progress made in both retail assets and liabilities. We believe that investors who are willing to own AXSB (and we are in this camp) will have to overlook its asset quality numbers for the next few quarters, which could be very volatile and lumpy, and buy the turnaround in its retail franchise and vice-versa. Retain Add, while upping target price to Rs1,180.

Retail build up the key highlight in Q2FY13: AXSB's branch roll out continues at a faster pace, with 41% of its total network of 1741 branches being added in the last two and half years across about 470 new geographies. The share of retail assets stands at 26% v/s 22% in FY12 and is well on track to reach 30% by FY15. The share of mortgage within retail assets now stands at 68% v/s 75% in FY12 and is well on track to reach 60% by FY15. The growth in retail assets will translate into better floating balances as well over time. CASA has improved 155bps qoq to 40.6%, while the share of individual deposits (SA+retail term) is about 48% v/s 45% in FY12 and 39% in FY11.

Tweaking estimates: Raise FY13-14 EPS estimate by 2% and 4% to Rs111.9 and Rs133 respectively. We increase NIM to 3.4% (up 5bps) for FY13 and to 3.3% (down 4bps) for FY14. We expect fee income to gain traction in FY14. We expect loan growth to slow down to 20% in FY13 and pick up pace in FY14. AXSB's asset quality will continue to be lumpy and tough to project, and we estimate provision cost of 101bps over FY13-14, which is much higher than management's guidance. We see a CAGR of 14% in PAT over FY12-14.

Valuation factor in concerns over asset quality to some extent: The stock trades at 1.68x 12-month forward book and 9.6x forward rolling earnings, which is much lower than the 2-year average of 2.2x and 12.7x respectively. We value the stock using blended methodology at a target price of Rs1,180 (1.72x forward book and 9.9x forward rolling earnings).

Source : Equity Bulls

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