Maintain BUY on Axis Bank - Superior Asset Quality & Business Growth - Karvy

Axis Bank is currently trading at 15% discount to its five year average valuation. However, the stock has outperformed the Bankex by 6% over last one year on account of superior asset quality, management efficiency and earning momentum.

Business Growth above Industry: Credit growth has slightly slowed down as against its earlier trends; still it continues to grow above industry. We believe it has rightly slowed down to support any asset quality pressures in tough times. The Bank's majority of the growth has come from retail segment and large corporates, while the composition of SME loans has come down over 500bps in last three years to 14%.

Stable NIMs: Despite volatile interest rate movement, the Bank's NIMs remain stable at ~3.3% over past three years. We expect the ability to maintain its CASA ratio of >40% would enable it to prevent any major erosion in NIMs.

Strong Non-Interest Income: Axis Bank is a very strong player in debt capital markets including placement and syndication of bonds. Post-acquisition of Enam, the Bank has positioned itself to offer equity products. Higher growth in retail fee income has offset lackluster performance in corporate segment.

Resilience in Asset Quality: The Bank has displayed decent resilience in its asset quality as against market expectations of sharp deterioration. Though the market is concerned over its larger infrastructure book, its Management is confident of its quality. We have conservatively built in slightly higher credit cost, going ahead.

Outlook & Valuation

At the CMP, the stock trades at 10.3x & 8.9x FY14E & FY15E earnings, and at 1.9x & 1.6x P/ABV FY13E & FY14E, respectively. Based on 10% discount to its historical mean valuation implying 2.0x P/ABV FY15E, we reiterate our "BUY" recommendation on Axis Bank with unrevised target price of Rs. 1725 per share.

Source : Equity Bulls

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