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Plugging the portfolio gaps while scaling up

Post-acquisition of Citi’s consumer business and a stake in Max life, Axis Bank (Axis) is now gearing to scale up its business operations by filing the gap in its portfolio, given that most of the asset quality issues are now behind it and its provision coverage ratio (FY22 at >70%) has already been shored up. We initiate coverage on Axis with a BUY, with a PT of INR 901.1 (based on SoTP valuation) over a period of 24 months.

Our conviction stems from the following:

* 12.5% CAGR of net advances over FY21-24, with retail/SME/corporate growing at a CAGR of 14.9/15.8/7.4%, respectively.

* Asset quality is expected to improve with GNPA and NNPA forecast to fall by 138 and 52bps over FY21-24E to 2.3% and 0.5%, respectively, in FY24.

* NII is expected to grow at 16.1% CAGR with yields and cost of funds expected at 7.5% and 4.0%, respectively, in FY24.

* We have modeled the NIMs to grow by 12bps to 3.7% while other income is expected to grow at a 6.2% CAGR over the same period.

* PPoP is expected to grow at a 9.9% CAGR over FY21-24. Axis Bank is now expected to slow down provisioning, given the already high PCR and no major expectation of slippage in asset quality. This should lead to faster growth in PAT (36.0% CAGR) over FY21-24.

* Expected improvement in return ratios- RoAA to 1.2% (+50bps) & RoAE to 12.0% (+495bps).

We have valued the core domestic operations at 1.0 FY24 P/B while the other verticals, namely insurance, AMC, broking, institutional broking, investment banking, represent ~5.8% of our target price. We have applied a 20% holding discount while valuing the subsidiary businesses.

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