We maintain buy on Axis Bank Ltd and value the stock on a two-stage residual income model. Assumptions for the model: Income CAGR of 15%, dividend payout of 20%, cost of equity at 14.94% (Deutsche Bank estimate), terminal growth rate of 5% (nominal growth rate for developed countries). This gives us a March 2015-based target price of Rs 1,520, which results in a target P/BV of 1.7x. We find the current valuations attractive at 1.3x FY15e P/B with FY15e RoE of 17%.
In Q3 FY14, Axis did well to keep NIM contraction to only 8 bps q-o-q and also report q-o-q decline in slippages and restructuring. Net profit was ~8% ahead of our estimates due to write-back of investment provisions. The bank mobilised $1.57 billion of FCNR deposits which helped in boosting loan and deposit growth. Fee income remains muted given the slowdown in corporate loan demand. While the environment remains challenging and the bank remains conservative in its asset quality guidance, thus far it has done better than the guidance.
PAT at Rs 1,604 crore was up 19% y-o-y and 18% q-o-q. There was reversal of mark-to-market (MTM) provisions of ~Rs 173 crore — most of it from equity investments; this lowered the overall provisions which boosted PAT. Loan growth at 18% y-o-y was largely driven by retail loans (44% y-o-y) — helped partly by FCNR related lending. While gross NPL were up 10% q-o-q, fresh slippages (-5% q-o-q) and restructuring (-35% q-o-q) were down. Outstanding restructured loans are 2.6% of loans.