INITIATING COVERAGE

BUY
TP: Rs 750 |  20% AXIS BANK | Banking | 22 November 2018

Multiple rerating triggers – initiate with BUY

We initiate coverage on Axis Bank (AXSB) with BUY and a Mar’20 SOTP- BOBCAPS Research
based target price of Rs 750, valuing the core book at 2.1x FY21E P/BV. The +91 22 6138 9300
research@bobcaps.in
stock is ripe for a rerating as key triggers for an earnings resurgence fall into
place – (a) new leadership with a formidable track record, (b) shrinking
stressed assets and slippages amid a tighter recovery climate, (c) credit cost
normalising to <1% over FY20E/FY21E, and (d) loan growth reviving to an 18%
CAGR as AXSB benefits from a turning corporate cycle.

New leadership a welcome change: Amitabh Chaudhry, who had an impeccable Ticker/Price AXSB IN/Rs 627
track record helming HDFC Standard Life, joins AXSB as MD & CEO for Market cap US$ 22.6bn
Shares o/s 2,569mn
three years beginning Jan’19. His proven leadership and strategic skills will do
3M ADV US$ 103.7mn
much to restore investor confidence and repair the bank’s bruised brand image.
52wk high/low Rs 678/Rs 481
Promoter/FPI/DII 26%/50%/24%
Asset quality stress has largely run its course: AXSB has a stressed pool of Source: NSE
~Rs 500bn (~11% of loans), with 60% already booked as NPAs. The residual
non-NPA stressed pool of 2.6% is only likely to decline from hereon. STOCK PERFORMANCE
(Rs) AXSB
Business franchise fortified: AXSB has engineered a structural shift in 700
630
underwriting norms for new loans, resulting in a better rating profile for its 560
corporate portfolio (79% high-rated loans in Q2FY19 vs. 62% in FY16) and a 490
420
shift away from retail home loans. We expect loan growth to return to ~20% 350
Aug-16

Aug-17

Aug-18
Feb-17

Feb-18
Feb-16

May-17

May-18
May-16

Nov-18
Nov-16
Nov-15

Nov-17
from FY21 with ample scope for margin gains (+30bps to 3.7% NIM by FY21E).

Source: NSE
Stage set for profitable growth: Asset quality woes hit return ratios in FY17/FY18.
Ebbing slippages and credit costs now leave the new management free to focus
on profitable growth. We expect earnings to pick up, with ROE/ROA of 16.5%/
1.3% by FY21. Our two-stage Gordon growth model values the core business at
2.1x FY21E P/BV (Rs 700) with subsidiaries forming 7% of our target price. BUY.

KEY FINANCIALS
Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E
Adj. net profit (Rs mn) 36,793 2,757 41,272 1,01,476 1,32,709
EPS (Rs) 15.4 1.1 16.1 39.5 51.7
P/E (x) 40.7 564.1 39.0 15.9 12.1
P/BV (x) 2.7 2.5 2.4 2.2 1.9
ROA (%) 0.7 0.0 0.6 1.2 1.3
ROE (%) 6.8 0.5 6.4 14.4 16.5
Source: Company, BOBCAPS Research

BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda

Important disclosures, including any required research certifications, are provided at the end of this report.
AXIS BANK

Investment rationale
Turnaround specialist to take the helm
AXSB has underperformed peers over the past few years due to a spike in corporate
slippages and divergence in asset quality that has severely eroded its brand image.
The recent appointment of Amitabh Chaudhry as MD & CEO for three years
beginning Jan’19 should help restore investor confidence in the bank, given
Chaudhry’s stellar record as MD & CEO of HDFC Standard Life (HDFCLIFE)
where he is credited with a business turnaround that produced one of India’s leading
insurance players.

Wide breadth of expertise

Prior to HDFCLIFE, Mr. Chaudhry has served as MD and CEO of Infosys BPO.
He has vast experience in banking and finance, having worked in diverse roles
ranging from head of technology and head of investment banking to regional
finance head for wholesale banking and global markets, and CFO of Bank of
America (India). He has also been associated with Calyon Bank (formerly Credit
Lyonnais Securities). Mr. Chaudhry holds a Bachelor’s degree in Engineering
(Electronics and Electrical) from BITS Pilani and a Postgraduate Diploma in
Management from IIM, Ahmedabad.

Proven turnaround track record

Mr. Chaudhry joined HDFCLIFE eight years ago, when the insurance sector was
bleeding from a series of regulatory changes. Despite the challenging environment
and competition from seasoned players, he turned HDFCLIFE around and built
the business into a brand that currently leads in product mix and has one of the
highest margins among life insurance players.

He joins AXSB in similar circumstances where the bank is facing asset quality
travails amid tightening regulations. We believe Mr. Chaudhry’s formidable track
record as a turnaround specialist will do much to revive investor confidence and
repair the bank’s brand image.

FIG 1 – IMPROVEMENT IN HDFCLIFE’S KEY PARAMETERS UNDER AMITABH

CHAUDHRY’S LEADERSHIP
Particulars (Rs bn) FY10 FY11 FY18
EV 33.8 42.1 152.2
Value of new business margin (%) - 18.8 23.2
First year regular premium 24.9 29.0 47.4
Total premium 70.1 90.0 235.6
PAT (2.8) (1.0) 11.1
Share of ULIP (%) 79.0 86.0 57.0
13-month persistency ratio (%) 57.0 81.0 87.0
Source: Company, BOBCAPS Research

EQUITY RESEARCH 2 22 November 2018

AXIS BANK

Asset stress peaking out; credit costs to reduce

AXSB has been among the hardest hit by the RBI-mandated cleanup of stressed
assets, with its slippage ratio surging to 9% and GNPA/NNPA swelling to
7.5%/3.8% in FY18. Now, with close to 60% of the bank’s stressed asset pool
already categorised as NPAs, we expect the pace of incremental slippages to slow.
A shift toward high-rated corporate loans (79% share in Q2FY19 from 62% in
FY16) and lower expected PCR should also rein in credit costs at <100bps in
FY20/FY21.

NPA recognition surged in FY18

Like most corporate lenders, AXSB has faced a challenging business environment
over the last 2-3 years as the central bank moved to tackle burgeoning industry-
wide NPAs. The pace of bad loan recognition at the bank was gradual in
FY16/FY17 but was then aggressively stepped up in FY18. Consequently, its
slippage ratio shot up from 2.6% in FY16 to 9% in FY18, largely dominated by
legacy corporate loans that were classified under its watchlist of stressed assets.

The RBI’s 12 February circular this year further added to slippages as the window
to resolve troubled accounts under various dispensations such as CDR, SDR, S4A
and 5:25 was closed. This resulted in the bank’s GNPA/NNPA increasing to
6.0%/2.5% in Q2FY19 vs. 1.8%/0.7% in FY16.

FIG 2 – SLIPPAGE RATIO PEAKED IN FY18

(%) GNPA NNPA Slippage ratio (R) (%)

8 9.0 10

8
6 6.4

6
4
3.0 4
2.6
1.5
2 1.0
1.2 2

1.4 0.5 1.8 0.7 5.5 2.3 7.5 3.8 5.8 2.1 5.1 1.9 4.2 1.5
0 0
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, BOBCAPS Research

EQUITY RESEARCH 3 22 November 2018

AXIS BANK

Bulk of NPA recognition behind us

Basel-III disclosures made by the bank indicate that a bulk of its loans to stressed
sectors has been classified as NPA and exposure to such sectors has also reduced.
For instance, power sector loans have declined to 2.6% of advances from 3.7% in
FY16, infrastructure exposure has dipped to 5.4% from 7.4% and iron & steel
lending is down to 1.9% from 2.4%.

FIG 3 – BULK OF STRESSED ASSETS MOVED TO NPA FIG 4 – EXPOSURE TO TROUBLED SECTORS CUT
GNPA (%) FY16 FY17 FY18 Q1FY19 Q2FY19 Total exposure (%) FY16 FY17 FY18 Q1FY19 Q2FY19
Power generation & Power generation &
2.5 3.2 47.1 43.9 43.0 3.7 3.6 3.0 2.8 2.6
distribution distribution
Infrastructure (excluding Infrastructure (excluding
2.4 12.6 21.8 20.7 19.5 7.4 6.7 5.6 5.6 5.4
Power) Power)
Engineering 3.4 12.8 14.2 15.3 14.4 Engineering 3.9 3.9 3.8 3.7 3.6
Commercial real estate 0.9 7.7 13.0 10.3 7.1 Commercial real estate 3.1 2.2 2.1 2.4 2.3
Trade 3.7 3.3 4.1 4.3 4.7 Trade 4.0 3.4 3.5 3.4 3.3
Iron and Steel 1.2 36.5 36.0 19.2 9.6 Iron and Steel 2.4 2.1 1.8 1.8 1.9
Cement and cement Cement and cement
- - 9.6 9.6 10.1 0.9 0.9 1.4 1.4 1.3
products products
Chemicals and chemical Chemicals and chemical
0.6 3.4 6.4 5.8 4.1 3.7 2.4 3.7 3.9 4.2
products products
Petroleum coal products and Petroleum coal products and
- 2.5 3.6 16.2 17.9 0.9 2.0 1.3 1.5 1.5
nuclear fuels nuclear fuels
Food processing 0.6 3.9 7.0 8.2 8.2 Food processing 1.3 1.4 1.4 1.1 0.9
Banking and Finance 0.7 0.4 0.3 0.5 0.4 Banking and Finance 8.3 9.5 9.4 9.3 8.9
Other metal and metal Other metal and metal
1.0 0.6 1.9 1.6 1.8 1.8 2.3 1.7 1.6 1.6
products products
Construction 0.3 2.6 4.0 5.7 5.0 Construction 1.1 1.0 1.0 1.0 1.0
Retail, Agri & Other Retail, Agri & Other
1.7 3.6 4.0 4.0 3.7 29.5 32.2 32.7 32.9 33.6
Industries Industries
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

Pace of incremental slippages to decline

One might argue that AXSB could undergo an accelerated cleanup for one or two
quarters under the new leadership that may further weaken its asset quality.
However, we expect the pace of incremental slippages to decline from hereon as
~60% of the bank’s stressed asset pool totalling ~Rs 500bn is already classified as
NPA. This apart, the non-NPA pool of stressed loans has dropped to <3%
currently from ~7% two years ago. An increasing pace of NPA resolution coupled
with a rising share of high-rated corporate loans (up from 62% in FY16 to 79% in
Q2FY19) lends comfort on the bank’s asset quality.

EQUITY RESEARCH 4 22 November 2018

AXIS BANK

FIG 5 – NON-NPA POOL OF STRESSED LOANS HAS DECLINED TO <3% OF LOANS

Particulars (Rs bn) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
Loan book 3,388 3,449 3,532 3,472 3,731 3,855 4,102 4,209 4,397 4,411 4,561
Break-up of stressed pool
Gross NPA 61 96 164 205 213 220 274 250 342 327 309
Fund based BB & below book 194 274 219 208 197 195 158 161 90 104 89
Non-fund-based exposures - - - - - - 40 50 24 62 56
Other restructuring
110 61 49 28 11 21 16 13 1 18 21
dispensations adj. for overlaps
Security receipts - - 14 14 15 30 30 30 30 30 30
Total stressed pool 365 430 446 454 435 466 518 505 488 541 505
Stressed pool to loans (%) 10.8 12.5 12.6 13.1 11.7 12.1 12.6 12.0 11.1 12.3 11.1
Stressed pool declared as
16.7 22.2 36.7 45.1 48.9 47.3 52.9 49.5 70.2 60.4 61.3
NPA (%)
Non-NPA pool of stressed
5.7 7.9 6.6 6.4 5.7 5.8 4.6 4.5 2.7 3.0 2.6
loans (%)
Source: Company, BOBCAPS Research

Credit costs expected to come off highs

AXSB’s long-term, annualised credit cost has averaged 110bps while net credit
cost (net of recoveries) has averaged ~97bps. The bank currently has an
accumulated prudentially written-off portfolio worth Rs 165bn, ~81% of which
was written down in the last six quarters.

The provision coverage ratio (PCR) has increased to 73% in Q2FY19, causing
credit costs to stay elevated at 224bps for H1FY19. However, management has
guided for a steady-state PCR of 60-65% given that loss on default of assets has
remained in that range for the bank over the longer run. With no major additions
expected to the ‘BB and below’ rated book, reduction in slippages, and PCR
declining to 60-65%, we believe credit costs should normalise to <100bps in
FY20/FY21.

FIG 6 – AXSB’S LONG TERM AVERAGE CREDIT COST HAS BEEN 100-110 BPS

(%) Credit costs Net credit costs Avg. credit costs Avg. net credit costs
4 3.6

2.8
3 2.3 3.5 2.2

2 2.8
1.4 2.0
1.1 1.0 1.1
1.9 0.5 0.6 0.7 0.5 0.6 0.6 0.6 Credit Costs (Avg)* = 110 bps
1
0.2 1.2
1.0 0.0 1.1 Net Credit Costs (Avg)* = 97 bps
0.9
0 0.5 0.5
0.3 0.5 0.4 0.5 0.6
0.1
(0.1) * For the period from FY03 to FY18
(1)
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 H1FY19
Source: Company, BOBCAPS Research | Note: Figures as reported by the bank

EQUITY RESEARCH 5 22 November 2018

AXIS BANK

FIG 7 – CREDIT COSTS TO NORMALISE AHEAD

(%)
4.5 4.1
4.0
3.5 3.1
3.0
2.3
2.5
2.0
1.5 1.0 1.0 0.9
0.8
1.0
0.5
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, BOBCAPS Research | Note: Figures are calculated

Lending business reshaped for stronger growth

AXSB has spent the last few years altering the characteristics of its lending profile
to capture benefits of the lending cycle upturn and mitigate risks. The bank now
has (a) a favourable mix of retail and corporate loans (49% retail share in Q2FY19
vs. 41% in FY16), (b) a retail book geared towards higher risk-adjusted return
segments (personal loans, credit cards, auto loans) rather than home loans, and
(c) stricter underwriting norms and lower concentration risk in the corporate book.
We expect these measures to support 18%/20% loan growth for FY20/FY21.

Ideal mix of retail and corporate loans

Following a thrust on retail loans, which have grown at >20% over the last few
years, AXSB now has an ideal mix of retail and corporate loans. The share of retail
loans has increased to 49% in Q2FY19 vs. 41% in FY16 – we expect this
proportion to stabilise at ~50% given that a seasoning of the portfolio and base
effect could lead to some moderation in growth.

FIG 8 – RETAIL LOAN SHARE HAS INCREASED TO ~49%

(%) Retail Corporate SME

100
15 13 13 13 13 13
80

42 40 39 38
60 45 46

40

20 45 47 48 49
40 41

0
FY15 FY16 FY17 FY18 Q1FY19 Q2FY19
Source: Company, BOBCAPS Research

EQUITY RESEARCH 6 22 November 2018

AXIS BANK

Retail portfolio has turned granular

The bank has diversified its retail portfolio in favour of products that offer higher
risk-adjusted returns. The share of home loans has declined to <40% from ~45%
in FY16 while that of granular products such as personal loans, credit cards and
auto loans has been gradually rising. AXSB’s new engines of growth such as small
business lending and education loans also continue to see strong momentum,
further diversifying the retail loan mix.

FIG 9 – IMPROVING RETAIL LOAN MIX

Particulars (%) FY15 FY16 FY17 FY18 Q1FY19 Q2FY19
Home loans 48 45 44 40 40 39
Rural lending 16 17 16 15 14 13
Auto loans 8 9 10 11 11 11
Personal loans 7 8 8 10 10 11
LAP 7 8 8 8 8 9
Credit cards 2 3 4 4 4 4
Small business banking 0 1 2 3 3 3
Others 12 9 8 9 10 10
Source: Company, BOBCAPS Research

Corrective measures taken in corporate portfolio

Taking cues from past lapses, a series of corrective measures have been
implemented in the corporate portfolio as well:

 Incremental credit underwriting has been gradually tilted in favour of lower risk
businesses – as on H1FY19, 95% of new sanctions were to clients rated
‘A or above’.

 The share of companies rated ‘A or above’ in outstanding standard (ex-NPA)

corporate exposure has thus increased to 79% vs. 62% in FY16.

 Concentration risk has been curbed markedly, with AXSB’s exposure to the top
20 single borrowers pared to 120% of tier-1 capital vs. ~300% a few years ago.

 The corporate book has been gradually shifting towards domestic working
capital loans vs. a term loan-heavy book a few years ago.

EQUITY RESEARCH 7 22 November 2018

AXIS BANK

FIG 10 – AXSB HAS BEEN INCREMENTALLY LENDING FIG 11 – …LEADING TO IMPROVEMENT IN RATING
TO BETTER RATED CORPORATES… PROFILE OF THE PORTFOLIO

(%) Share of sanctions rated A & above (%) Exposure to corporates rated A or above
79
100 80 78
95 77
94
95
75
90 86
85 70
85 66
79 79 65
80 62 62

75 60
FY15 FY16 FY17 FY18 Q1FY19 H1FY19 FY15 FY16 FY17 FY18 Q1FY19 H1FY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

FIG 12 – CONCENTRATION RISK REDUCING FIG 13 – TERM LOAN SHARE ON THE DECLINE
(%) Exposure to top 20 single borrowers as a % of tier-1 capital (%) Term loans Working capital loans
300 100
287 20 21 23 22 24 26 30 32 29 31
80
250
209
60
200 162
155 154 40 80 79 77 78 76
142 74 70 68 71 69
150 124 121 118 120 20

100 0
Q4FY17

Q4FY18
Q1FY17

Q1FY18

Q1FY19

Q2FY19
Q2FY17

Q2FY18

Q3FY18
Q3FY17
FY13

FY15

FY17

FY18
FY11

FY12

FY14

FY16

Q1FY19

H1FY19

Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

Loan growth on track to retrace to 20% levels

AXSB has witnessed a structural shift in underwriting new loans, whether for
higher rated corporates or granular retail loans. In our view, loan growth should
return to 20% levels going forward as retail loan growth momentum sustains while
corporate growth picks up with the turning cycle. We model for 18%/20% loan
growth for FY20/FY21.

FIG 14 – EXPECT ~18% CAGR IN LOANS OVER FY18-FY21

(%)
22.2
23
20.5
19.7
21
17.8 18.2
18 16.2

16

13
10.1
11

8
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, BOBCAPS Research

EQUITY RESEARCH 8 22 November 2018

AXIS BANK

Multiple tailwinds to aid margin expansion

AXSB’s NIM has been on a downtrend over the last couple of years undermined
by higher slippages. Now that most of the asset quality woes have been dealt with,
we expect margins to bottom out in FY19 and start improving in FY20. We pencil
in ~30bps expansion to 3.7% over FY19-FY21.

Key margin levers

 NPAs are at peak levels and the interest income reversal cycle is behind us.
Improvement in NPA levels coupled with stressed asset resolution should aid
margin expansion given that interest reversals will be lower.

 Yields are expected to improve as AXSB has increased its MCLR by 50bps in
the last three quarters and 54% of loans are now linked to MCLR, even as
existing MCLR accounts get reset at a higher rate.

 AXSB has opened ~400 branches in FY18, ~180 in H1FY19 and intends to
add another 170-220 branches in H2FY19. In our view, a steady branch
expansion strategy has helped the bank not only on the assets side but also on
liabilities. A strong liability franchise with a retail deposit share of >80% lends
AXSB a cost-of-funds advantage, in line with larger peers.

 The pricing power of banks has improved over the past couple of months in
the wake of the recent NBFC scare, which should aid yields.

FIG 15 – SHARE OF LOANS LINKED TO MCLR ON FIG 16 – STRONG LIABILITY FRANCHISE LENDS COST
THE RISE OF FUNDS ADVANTAGE
(%) (%) Share of retail deposits
60 54
49 50 100
81 80 81 81 81 83 83 84 84 81 82
50 43
40
36 75
40
29
30 50
18
20 11
25
10 4
0
0 0
Q4FY17

Q4FY18
Q4FY16

Q1FY18

Q1FY19
Q1FY17

Q2FY18

Q2FY19
Q2FY17

Q3FY17

Q3FY18
Q4FY17

Q4FY18
Q4FY16

Q1FY18

Q1FY19
Q1FY17

Q2FY18

Q2FY19
Q2FY17

Q3FY17

Q3FY18

Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

EQUITY RESEARCH 9 22 November 2018

AXIS BANK

FIG 17 – QUARTERLY TREND IN NIM FIG 18 – EXPECT 30BPS NIM IMPROVEMENT BY FY21E
(%) (%)
4.0 3.9 3.9
4.0 4.0 3.7
3.8 3.7 3.6
3.8
3.4 3.4
3.8 3.5
3.6 3.6
3.6 3.5 3.0
3.4 3.5
3.4 3.4
3.3
3.4 2.5

3.2
2.0
Q4FY18
Q4FY16

Q4FY17

Q1FY19
Q1FY17

Q1FY18

Q2FY19
Q2FY17

Q2FY18
Q3FY17

Q3FY18

FY15

FY17

FY18
FY16

FY20E

FY21E
FY19E
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

Upside potential for subsidiaries

As on FY18, AXSB had 11 unlisted subsidiaries and one stepdown subsidiary. These
have enabled the bank to offer a strong value proposition to clients and have
played a meaningful role in building the AXSB franchise. In our view, their
contribution to overall value can only increase.

Growing contribution from key subsidiaries

 Axis Finance is an NBFC with a loan book of Rs 73.3bn. It is primarily engaged

in wholesale lending (80% of loans) but has been gradually shifting its focus to
the retail business. Its loan book has posted a CAGR of 57% over FY14-FY18
and PAT has increased at around the same levels. This business has generated
ROE of >20% over the last two years and has had no NPAs so far.

FIG 19 – STEADY GROWTH IN INCOME AND PAT FIG 20 – LOAN BOOK CAGR AT 57% OVER FY14-FY18

(Rs bn) Income PAT (Rs bn)

8 7.2 8 7.3
6.6
5.8
6 6
4.1 4.3
3.7
4 4 3.1
2.2 2.1 2.1
1.7
2 1.1 1.0 2 1.1
0.8 0.8
0.3
0 0
FY14 FY15 FY16 FY17 FY18 H1FY19 FY14 FY15 FY16 FY17 FY18 H1FY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

EQUITY RESEARCH 10 22 November 2018

AXIS BANK

 Axis AMC manages the mutual fund business for the bank and has an AUM
of Rs 876.3bn as on Q2FY19. AXSB owns ~75% stake in this business while
Schroder Singapore Holdings owns 25%. Axis AMC’s AUM has recorded a
CAGR of ~50% over FY14-FY18, higher than the industry average, given the
strong performance of its flagship products. It has 3.3mn investor folios and
market share of 3.6% as on H1FY19.

FIG 21 – AXIS AMC HAS A MARKET SHARE OF 3.6% FIG 22 – TREND IN PAT

(Rs bn) Avg. AUM (Rs mn)

570
1,000 876 600

800 709 500 430

400
600 320
488
300
400 332
235 200 150
200 139 80
100
20
0 0
FY14 FY15 FY16 FY17 FY18 H1FY19 FY14 FY15 FY16 FY17 FY18 H1FY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

 Axis Capital houses the investment banking and institutional broking business
of the erstwhile Enam Securities. It has maintained its leadership position in
volatile capital markets and been ranked No. 1 in equity and equity-linked
deals over the last decade. Axis Capital successfully closed 15 investment
banking transactions in H1FY19, including 7 equity capital market (1 QIP, 2
IPOs, 3 OFS deals) and 4 M&A advisory deals. Its PAT has logged a CAGR
of 9% over FY15-FY18.

FIG 23 – H1FY19 RANKING BASED ON IPO, QIP, FIG 24 – TREND IN INCOME & PAT
RIGHTS, OFS & IPP
Rank Banker No. of deals (Rs bn) Revenue from operations PAT
5
1 Axis Capital 7 4.0
4
3.1 3.2
2 Peer 1 7 2.9
3

3 Peer 2 6 2
1.3 1.4
1.1 1.1 1.1
4 Peer 3 6 1
0.3

5 Peer 4 5
0
FY15 FY16 FY17 FY18 H1FY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

EQUITY RESEARCH 11 22 November 2018

AXIS BANK

 Axis Securities is involved in (a) third-party product distribution and retail

asset origination for the bank and (b) retail broking services. However, it earns
a chunk of its revenues from non-broking avenues (~80%) and has played an
important role in AXSB’s retail loan growth story. The company had a
customer base of 1.96mn as on Q2FY19. Non-broking/broking revenues have
clocked a CAGR of 31%/35% over FY14-FY18.

FIG 25 – CUSTOMER BASE FIG 26 – INCOME AVENUES

(Mn) (Rs bn) Broking Non-broking

2.0
2.0 1.8 10

1.4 8
1.5

1.0 6 7.4
1.0
0.7 5.9
4
0.4 4.3
0.5 3.3 3.9
2 2.5
1.3 1.7 2.1
0.6 1.2 1.0
0.0 0
FY14 FY15 FY16 FY17 FY18 H1FY19 FY14 FY15 FY16 FY17 FY18 H1FY19
Source: Company, BOBCAPS Research Source: Company, BOBCAPS Research

Return ratios set to normalise

Asset quality woes took a toll on AXSB’s return ratios which declined substantially
in FY18. With falling credit costs, higher loan growth and room for margin
expansion, we believe return ratios should normalise to the bank’s long-term
average. We build in ROE/ROA of 16.5%/1.3% by FY21.

FIG 27 – ROE TO REBOUND TO 16.5% BY FY21E… FIG 28 – …AND ROA TO 1.3%

(%) ROE Avg. ROE* (%) ROA Avg. ROA*
20 17.8 2.0
16.8 1.7 1.7
16.5
14.4
15 1.5 1.3
1.2

10 1.0
6.8 6.4 0.7
0.6
5 0.5
0.5 0.0
0 0.0
FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, BOBCAPS Research | Note * is average over FY09-18 Source: Company, BOBCAPS Research | Note * is average over FY09-18

EQUITY RESEARCH 12 22 November 2018

AXIS BANK

Valuation methodology
AXSB is currently trading at 1.9x FY21E P/BV. We expect the stock to rerate as
several key growth triggers fall into place, viz.: (a) new leadership with a formidable
track record, (b) a shrinking stressed book and lower fresh slippages, (c) higher
return ratios as credit costs likely abate, (d) revival in loan growth (18% CAGR,
FY18-FY21E) backed by a revamped lending business, and (e) a stronger liability
franchise marked by a larger share of low-cost deposits.

We expect earnings to rebound, with ROE/ROA of 16.5%/1.3% by FY21. Initiate

coverage with BUY and a Mar’20 target price of Rs 750, arrived at using the
sum-of-the-parts (SOTP) method outlined below:

 Core lending business valued at 2.1x FY21E P/BV using the two-stage
Gordon growth model which captures valuations in a high-growth stage, as we
expect AXSB to beat system-level growth in the near-to-medium term;

 Axis Finance (NBFC business) valued at 2.5x FY21E P/BV;

 Axis AMC valued at 6% of Q2FY19 AAUM; and

 Axis Capital and Axis Securities valued at 12x FY21E P/E.

FIG 29 – SOTP VALUATION

Company Value for
Stake in Per share Contribution
Sum of parts value AXSB Comments
company (%) (Rs) to TP (%)
(Rs bn) (Rs bn)
Core Business 1,796 100 1,796 700 93 Valued at 2.1x FY21E P/BV on residual income model
Axis AMC 53 75 39 15 2 6% of Q2FY19 AAUM
Axis Finance 51 100 51 20 3 2.5x FY21E P/BV
Axis Capital 28 100 28 11 1 12x FY21E P/E
Axis Securities 11 100 11 4 1 12x FY21E P/E
Sum of Parts 1,926 750
Source: Company, BOBCAPS Research

FIG 30 – ONE-YEAR FORWARD P/BV

(x) PBV +1 Sd Mean -1 Sd

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14 Nov-16 Nov-18
Source: Company, BOBCAPS Research

EQUITY RESEARCH 13 22 November 2018

AXIS BANK

FIG 31 – BOBCAPS VS. CONSENSUS ESTIMATES

Particulars (Rs mn) FY19E FY20E FY21E
Net interest income
BOBCAPS estimates 2,13,237 2,59,456 3,16,560
Consensus estimates 2,17,083 2,60,008 3,11,199
BOBCAPS vs. Consensus (%) (1.8) (0.2) 1.7
Pre-provisioning profit
BOBCAPS estimates 1,76,071 2,10,659 2,57,689
Consensus estimates 1,61,120 2,10,908 2,42,698
BOBCAPS vs. Consensus (%) 9.3 (0.1) 6.2
Net profit
BOBCAPS estimates 41,272 1,01,476 1,32,709
Consensus estimates 50,053 1,02,089 1,35,364
BOBCAPS vs. Consensus (%) (17.5) (0.6) (2.0)
Source: Bloomberg, BOBCAPS Research

FIG 32 – RELATIVE STOCK PERFORMANCE

AXSB NSE Nifty

150

130

110

90

70
Aug-17

Aug-18
Aug-16

Feb-18
Feb-16

Feb-17

May-18
May-16

May-17
Nov-15

Nov-17

Nov-18
Nov-16

Source: NSE

Key risks
 The new management may recalibrate its growth strategy across segments
which could lead to near-term pressure on earnings.

 Potential senior management exits are a risk to our positive view on AXSB.

 Slippages could increase in case of delays in resolution of stressed assets or if

economic conditions worsen.

EQUITY RESEARCH 14 22 November 2018

AXIS BANK

FINANCIALS

Income Statement
Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E
Net interest income 1,80,931 1,86,177 2,13,237 2,59,456 3,16,560
NII growth (%) 7.5 2.9 14.5 21.7 22.0
Non-interest income 1,16,913 1,09,671 1,19,431 1,32,223 1,49,453
Total income 2,97,844 2,95,848 3,32,668 3,91,678 4,66,013
Operating expenses (1,21,999) (1,39,903) (1,56,597) (1,81,020) (2,08,324)
Operating profit 1,75,845 1,55,945 1,76,071 2,10,659 2,57,689
Operating profit growth (%) 9.2 (11.3) 12.9 19.6 22.3
Provisions (1,21,170) (1,54,729) (1,14,472) (59,202) (59,616)
PBT 54,676 1,216 61,599 1,51,457 1,98,072
Tax (17,883) 1,541 (20,328) (49,981) (65,364)
Reported net profit 36,793 2,757 41,272 1,01,476 1,32,709
Adjustments 0 0 0 0 0
Adjusted net profit 36,793 2,757 41,272 1,01,476 1,32,709

Balance Sheet
Y/E 31 Mar (Rs mn) FY17A FY18A FY19E FY20E FY21E
Equity capital 4,790 5,133 5,133 5,133 5,133
Reserves & surplus 5,52,835 6,29,320 6,54,781 7,40,447 8,57,346
Net worth 5,57,625 6,34,453 6,59,914 7,45,581 8,62,479
Deposits 41,43,788 45,36,227 51,87,966 60,16,298 70,85,759
Borrowings 10,15,309 14,10,661 15,87,968 17,95,706 20,40,732
Other liabilities & provisions 2,97,955 3,31,955 4,31,541 5,61,003 7,29,304
Total liabilities and equities 60,14,677 69,13,296 78,67,389 91,18,588 1,07,18,274
Cash & bank balance 5,02,562 4,34,549 4,76,429 5,22,497 5,73,171
Investments 12,87,934 15,38,761 17,69,041 20,51,881 24,03,416
Advances 37,30,693 43,96,503 51,06,850 60,34,130 72,21,886
Fixed & Other assets 4,93,488 5,43,483 5,15,069 5,10,081 5,19,801
Total assets 60,14,677 69,13,296 78,67,389 91,18,588 1,07,18,274
Deposit growth (%) 15.8 9.5 14.4 16.0 17.8
Advances growth (%) 10.1 17.8 16.2 18.2 19.7

Per Share
Y/E 31 Mar (Rs) FY17A FY18A FY19E FY20E FY21E
EPS 15.4 1.1 16.1 39.5 51.7
Dividend per share 5.9 5.5 6.2 6.2 6.2
Book value per share 232.8 247.2 257.1 290.5 336.0
Source: Company, BOBCAPS Research

EQUITY RESEARCH 15 22 November 2018

AXIS BANK

Valuations Ratios
Y/E 31 Mar (x) FY17A FY18A FY19E FY20E FY21E
P/E 40.7 564.1 39.0 15.9 12.1
P/BV 2.7 2.5 2.4 2.2 1.9
Dividend yield (%) 0.9 0.9 1.0 1.0 1.0

DuPont Analysis
Y/E 31 Mar (%) FY17A FY18A FY19E FY20E FY21E
Net interest income 3.2 2.9 2.9 3.1 3.2
Non-interest income 2.1 1.7 1.6 1.6 1.5
Operating expenses 2.2 2.2 2.1 2.1 2.1
Pre-provisioning profit 3.1 2.4 2.4 2.5 2.6
Provisions 2.2 2.4 1.5 0.7 0.6
PBT 1.0 0.0 0.8 1.8 2.0
Tax 0.3 0.0 0.3 0.6 0.7
ROA 0.7 0.0 0.6 1.2 1.3
Leverage (x) 10.3 10.8 11.4 12.1 12.3
ROE 6.8 0.5 6.4 14.4 16.5

Ratio Analysis
Y/E 31 Mar FY17A FY18A FY19E FY20E FY21E
YoY growth (%)
Net interest income 7.5 2.9 14.5 21.7 22.0
Pre-provisioning profit 9.2 (11.3) 12.9 19.6 22.3
EPS (55.5) (92.8) 1347.1 145.9 30.8
Profitability & Return ratios (%)
Net interest margin 3.5 3.1 3.1 3.3 3.4
Fees / Avg. assets 1.2 1.2 1.2 1.1 1.1
Cost-Income 41.0 47.3 47.1 46.2 44.7
ROE 6.8 0.5 6.4 14.4 16.5
ROA 0.7 0.0 0.6 1.2 1.3
Asset quality (%)
GNPA 5.5 7.5 5.8 5.1 4.2
NNPA 2.3 3.8 2.1 1.9 1.5
Provision coverage 59.5 51.6 65.5 63.8 65.1
Ratios (%)
Credit-Deposit 90.0 96.9 98.4 100.3 101.9
Investment-Deposit 31.1 33.9 34.1 34.1 33.9
CAR 14.9 16.6 16.0 15.3 14.9
Tier-1 11.9 13.0 12.6 12.1 12.0
Source: Company, BOBCAPS Research

EQUITY RESEARCH 16 22 November 2018

AXIS BANK

Disclaimer

Recommendations and Absolute returns (%) over 12 months

BUY – Expected return >+15%

ADD – Expected return from >+5% to +15%

REDUCE – Expected return from -5% to +5%

SELL – Expected return <-5%

Note: Recommendation structure changed with effect from 1 January 2018 (Hold rating discontinued and replaced by Add / Reduce)

Rating distribution
As of 22 November 2018, out of 64 rated stocks in the BOB Capital Markets Limited (BOBCAPS) coverage universe, 38 have BUY ratings, 16 are rated ADD, 6 are
rated REDUCE and 4 are rated SELL. None of these companies have been investment banking clients in the last 12 months.

Analyst certification
The research analyst(s) authoring this report hereby certifies that (1) all of the views expressed in this research report accurately reflect his/her personal views about the
subject company or companies and its or their securities, and (2) no part of his/her compensation was, is, or will be, directly or indirectly, related to the specific
recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of BOBCAPS.

General disclaimers
BOBCAPS is engaged in the business of Institutional Stock Broking and Investment Banking. BOBCAPS is a member of the National Stock Exchange of India Limited
and BSE Limited and is also a SEBI-registered Category I Merchant Banker. BOBCAPS is a wholly owned subsidiary of Bank of Baroda which has its various subsidiaries
engaged in the businesses of stock broking, lending, asset management, life insurance, health insurance, wealth management and portfolio management, among others.

BOBCAPS’s activities have neither been suspended nor has it defaulted with any stock exchange authority with whom it has been registered in the last five years.
BOBCAPS has not been debarred from doing business by any stock exchange or SEBI or any other authority. No disciplinary action has been taken by any regulatory
authority against BOBCAPS affecting its equity research analysis activities.

BOBCAPS has obtained registration as a Research Entity under SEBI (Research Analysts) Regulations, 2014, having registration No.: INH000000040 valid till
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20 November 2017.

BOBCAPS generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or
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This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
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of any such securities (or investment). We and our affiliates may act as market makers or assume an underwriting commitment in the securities of companies discussed

EQUITY RESEARCH 17 22 November 2018

AXIS BANK

in this document (or in related investments), may sell them to or buy them from customers on a principal basis, and may also perform or seek to perform investment
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EQUITY RESEARCH 18 22 November 2018