Share to buy: Axis Bank can give over 17 pct return; here’s why you should buy now

Stock investment is all about opportunities. By opportunity it means, seeking out a firm that has a good business portfolio going forward and buy the stock when it's trading at lower levels. This applies well to private lender Axis Bank, which is now seen as a hot stock on the exchanges. On Monday, Axis Bank shares ended at Rs 762.85 per piece down by 1.18%. However, the bank clocked intraday high and low of Rs 775.35 per piece and Rs 760.90 per piece. Experts have given a buy rating on Axis Bank, and in fact, if invested at current levels the bank even has a potential to give over 17% return ahead. 

Darpin Shah and Aakash Dattani, analyst at HDFC Securities said, “Over FY19, AXSB has demonstrated meaningful improvement in performance metrics. Profitability improved for the retail and wholesale businesses (loss in FY17 & 18). After growing briskly over FY17- 18, SA traction slowed for the bank and system. With moderating slippages and LLPs, AXSB changed course over FY19 towards normalised earnings and RoAAs. Improving asset quality (with rising coverage), better risk practices, focus on high yielding retail products and cost consciousness will drive earnings.”

The duo listed out 5 important key factors which has made Axis Bank an appealing stock. These are: 

Granularity Improves: While deposits (top 20) remain more concentrated vs. peers, business granularity improved over FY19. With retail deposits constituting ~80.6% of deposits, top 20 deposits contributed ~11.8%.

CASA Loses Steam: At 6%, the share of SA in incremental deposits hit a multi-year low. Systemic challenges in deposit growth, and the rising focus on retail TD + CASA contributed in part. The renewed focus was visible with Retail TDs forming 36.3% vs. 30.4%.

Retail Business Back on Track: After an unimpressive FY18, retail operating metrics improved with a 26/59% NII/PPOP growth. In spite of elevated provisions (1%), PBT doubled with an RoAA of ~1.72% (still lower vs FY16/17). Faster growth in high yielding retail loans and oplev will improve performance hereon.

Asset Quality: After a severe setback in FY17/18, asset quality improved over FY19. Industry GNPAs improved from ~15.2% to ~11.3% led by an improvement in Infra (24% vs. 29% YoY) and Metals (4.9% vs. 17.1% YoY). CRE NPAs are already ~10%+. While agri NPAs increased (5.5% vs. 3.9% YoY), PL NPAs dipped (79bps vs. 1.2% YoY). Moderating slippages and normalization of LLPs will drive earnings hereon.

Other Highlights: (1) After two years of losses, the wholesale business turned profitable, (2) 6.5mn options granted, O/S ESOPs equal 1.2% of capital, (3) Avg. tenure of loans was stable at 3.3 years whereas the avg. tenure of liabilities dipped slightly to 2.2 years, (4) Banca fees grew ~14% to contribute ~14% of overall fees, (5) Dividend from subs halved to ~Rs 1.3bn (7bps vs. 160bps of PPOP) and (6) Overall asset growth outpaced RWA growth and RWA/ Assets dipped to ~69% vs. ~75%.

Considering above, the duo said, “Maintain BUY with SOTP value of Rs 895 (2.8x FY21E ABV of Rs 309 + Rs 30 for subs).”