Axis Bank - Pressure All Around; Reiterate "SELL" - Karvy

Management Upwardly Revises Impairment Guidance: The Management of Axis Bank has recently revised its total impairment (slippage + incremental restructuring) guidance upwardly by 20% to Rs. 60 bn for FY14E. We expect slippage to increase to 2.1% in H2FY14E from 1.3% in H1FY14. We believe that the bank would remain vulnerable to defaults from its mid-corporate and SME portfolio. We estimate GNPA to increase to 2% from current levels of 1.2%.

Ratings Deteriorate in Large & Mid-Corporate Book: Axis Bank gives rating break-up of its corporate and SME book. Corporate book in "BBB" and below "BBB" has increased from 19% in FY08 to 25% in FY11 and further surging to 39% as on H1FY14. On the other hand rating of its SME book below SME 4 has slightly declined from 10% in FY10 to 7% in H1FY14.

Recent Pick-up in Retail Segment - May Prove to be Fatal: Axis Bank's retail segment expanded to 30% of its overall book from just 19% in FY11. Its Management wants to continue to expand its retail share. Though the retail portfolio of overall industry in terms of delinquencies has so far done well, it also means that portfolio is unseasoned. With tremendous slowdown across the economy, the retail segment is expected to track corporate segment to some extent.

Danger of NIMs Compression Abated: With significant easing of bulk rates, the market's concern of any likely compression in NIMs is now abated for time being.

Outlook & Valuation

We downgrade our ABV by 5% for FY15E as we increase our slippages by 60bps to 2.2% for FY15E. We reiterate our "SELL" recommendation on Axis Bank with revised target price of Rs. 1,245 per share valuing it at 1.5x P/ABV FY15E.

Source : Equity Bulls

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