We maintain our ‘buy’ rating on Axis Bank with a target price of Rs 2,300, based on 2.1x FY16f book. This is higher than the multiples at which Axis has traded in the past two-three years but lower than FY04-07 multiples. While growth over the next two-three years is likely to be lower than the last cycle, ROAs are much more superior now (1.75% vs. 1.2% in FY04-07) and balance sheet and P&L granularity makes the business model less risky. We, thus, expect Axis Bank to close the valuation gap with private peers as risks surrounding large corporate asset quality ebb.
Axis has delivered well on diversifying its asset mix and making its liability more granular. The stock remains our top pick. As some credit concerns ease over the next 12-18 months and corporate growth picks up, we expect further rerating. Current valuations of 1.85x Mar-16 book look reasonable in that context.
Here are the positives from the bank’s Q1FY15. NIMs held up flat at ~3.9% versus our forecast of marginal contraction due to better liability mix (CASA + retail term deposits) and higher LDR. Asset quality was stable with R1,100 crore of slippages + restructuring versus R6,500 crore guided (R1,600 crore per quarter). While restructuring can be lumpy and Axis has maintained its R6,500-crore guidance, we look for asset quality beat with macros to improve in 2HFY15F.