Buy stocks of Axis Bank target of Rs 1380

“Axis Bank’s Q4FY12 NII grew by 26.2%yoy to Rs21.5bn, inline with consensus expectations. However driven by lower provisions, net profit at Rs12.8bn was ahead of consensus/our expectations. While advances grew by a strong 19.2% yoy (14.1%qoq), deposit growth was relatively lower at 16.3% yoy (5.5% qoq). Resultantly CD ratio increased significantly from 71.3% in Q3FY12 to 77.1% in Q4FY12helping the contraction in NIM’s remain limited to 20bps qoq to 3.1%, inline with our expectations. The bank surprised positively on the balance sheet front as GNPA declined by 5.7%qoq. Stable slippages at Rs5.1bn and substantially higher recoveries at Rs5.9bn (Rs1.3bn avg rec/upgradation in earlier two quarters) led to the improvement in asset quality. Resultantly the provision cover also improved to 80.2% from 75.3% (incl tech write off) in previous quarter. However the restructuring during the quarter was slightly on the higher side at Rs5.9bn, as against the run rate of Rs3bn in last two quarters.”

“The bank’s advances grew by a strong 19.2%yoy to Rs1.7tn led by strong growth in Retail and large corporate book. While retail book grew by a stellar 35.3%yoy to Rs376bn, large corporate book grew by a healthy 19.9%yoy to Rs911bn. The growth in retail book was driven by strong growth in all the segments (ex personal loans); mortgages which constitute 75% of the total retail book grew by 49.3%yoy to Rs282bn. The large spike in the agriculture loans was more seasonal in nature for meeting year end PSL targets. However, since as % of last year’s loan book the agricultural loans stood at 12.2% vs 16% last year, we believe that PSL targets are still way off the norm and may continue to put pressure on NIMs next year.”

“While Axis Bank’s performance for Q4FY12 was robust and also positively surprised on NPLs, we are still factoring in lower 13.4% growth in earnings next year for few reasons (1) NIMs may continue to remain under pressure due to shortfall on PSL requirements which may be substituted with RIDF bonds and (2) the downgrading in the loan rating profiles may spike up restructuring and consequently provisions. We believe that these two can pose further risks to our earnings estimates. But still valuations at 1.7x/1.4x FY13E/FY14E are not unreasonable. Maintain accumulate with TP of Rs 1380,” says Emkay Global Financial Services research report