Buy Axis Bank - Target Price Rs. 1590 - Dolat Capital

- Near term concerns regarding asset qualily is likely to play on Axis Bank's valuations. Positive news flows on power and infrastructure sectors would be key to ease some of the concerns relating to the bank's power and infrastructure exposures.

- While the bank does not see any major asset quality pressure, we believe delinquency rates may remain at around 110bps for FY14 as well. The key concerns generally revolved around Axis Bank's power exposure which forms 5% of loan book and 19% of non-fun based exposure.

- Almost 40% of the power sector loans is for operating plants where the stress is minimal. Though some of the plants are operating at low PLFs, they are still much higher than the minimum levels required for regular debt servicing. On the non funded part also, the obligations are being meet by the clients and the bank does not see any default risk.

- While a reduction in lending rates would exert pressure on NIM, the pressure should only be temporary. Given the shorter duration of its wholesale deposits, the bank stands to gain in 1-2 quarters time as deposit rates decline.

- We expect the retail loan growth to remain high and should comprise 30% of the total loans by March 2014 from 27% in Dec'12. This increase in retail loan proportion should also bode well for NIM when the rate cycle reverses.

- The bank recently raised Rs. 55bn through QIP and preferential allotment to promoters leading to equity dilution of 13% on existing equity. We expect ROEs to start improving FY14E onwards to around 20% by FY15E. Post the capital raise, the bank's Tier I ratio would improve to 11.3% by end of March 2013 and should support the bank's growth plans over the next two years.

- We have a Buy rating on the stock with target price of Rs. 1590 based on PBR of 2x on our FY14E BVPS forecasts.

Source : Equity Bulls

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