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Buy Axis Bank Ltd For Target Rs.960

Capital/provision buffers in place; ready for take-off once environment normalizes

* With capital/provisioning buffers in place and credit underwriting/risk/tech systems reoriented over the past 3yrs, the bank is ready for a profitable growth led by Retail/SME/midcorporates in a post-Covid era. Change in portfolio mix toward retail/SME and unsecured retail (25% vs. ~18-20%) should be key NIM/core-PPoP driver (FY21-24E CAGR@20%).

* The bank’s net stressed loans in FY21 was the lowest at 3% of loans vs. peers (3.4-6.5%). Covid 2.0 has impacted retail collections in April/May, but normalization has begun in June. Without severe Covid 3.0 or protracted Covid 2.0, NPA formation should be lower in FY22. We believe well-provisioned back-book (72%) and contingent buffer (80bps of loans) should limit LLP in FY22-24E (150-110bps), driving RoA/RoRWA to 1.6%/2.4% by FY24E.

* The bank has meaningfully revamped its subsidiaries (mainly Axis Cap/Axis Sec/Axis Fin) over past 3 yrs and made strategic investments in insurance (Maxlife)/fintech (Freecharge) as a part of its ‘One Axis’ strategy to become a financial super-store. We believe there is huge scope to scale up subsidiaries in line with peers and drive up value for shareholders.

* The bank has undergone a major transformational journey, fortified B/S and is now ready to re-accelerate growth, delivering better return ratios (RoA/RoE at 1.5-1.6%/15-16% in FY23-24E). Retain Buy with a TP of Rs960 (Rs850 earlier), rolling fwd core bank valuation to Jun’23E ABV (now at 2x vs. 1.9x) and subs/investment value now at Rs75 (from Rs56).

* Ready to accelerate growth but focus remains on RARoC-based lending:

Notwithstanding near-term Covid-led disruption, the bank claims to be ready for accelerated growth with clear focus on RARoC (Risk-Adjusted Return on Capital)-based lending, mainly driven by retail/SME. The bank claims that lower ECLGS disbursement among peers corroborates better-quality SME back-book and plans to re-accelerate growth (partly gaining market share from PSBs). On the corporate front, focus will be on building granular working capital and mid-corporate book. We build in 15-22% growth for FY22-24E.

* Lower stress, higher provisioning buffer to limit incremental LLP:

The bank’s sustained focus on portfolio quality and aggressive provisioning policy has manifested in one of the lowest net stressed/deferred loans (incl. NNPA/RSA/ECLGS) at 3% of loans. Without a severe Covid 3.0 or protracted Covid 2.0, the bank expects NPA formation to be lower in FY22 vs. FY21 (<2.7%), which coupled with healthy contingent buffer (80bps), should limit LLP over FY22-24E at 150-110bps vs. 380-250bps over FY18-21.

* Subsidiaries gradually turning value driver:

Apart from core-bank, the subsidiaries (Axis Cap/Axis Sec/Axis Fin) too have undergone a major transformation, while Axis AMC has improved ranks. Amid regulatory hurdles, the bank acquired 12.99% stake in rejuvenated Max Life Insurance to tap distribution/manufacturing gains. Acquired Fintech - Freecharge - too has turned profitable and is emerging as a Digital Acquisition Engine for the bank to onboard retail/business customers. We now value subsidiaries/investments at Rs75 vs. Rs56 earlier, factoring in better scale and profitability.

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