IIP growth at 7% in April 2008, above expectations
STOCK UPDATE
Axis Bank Cluster: Emerging Star Recommendation: Buy Price target: Rs1,150 Current market price: Rs716
Annual report review
The financial year 2008 was a roller-coaster year for the banking industry, with the outlook very positive at the beginning of the fiscal but clouded by multiple macro-concerns in the second half of the fiscal. Amidst all this, Axis Bank churned out an impressive earnings growth on the back of an aggressive business growth and capital infusion. We went through the recently released annual report of Axis Bank and present the highlights of the same below.
Key points
The retail banking operations of Axis Bank contribute about 20% to the bank's total income and only 8% to its bottom line, making it the least profitable segment. Wholesale banking is most lucrative business for the bank owing to its strong position in the loan syndication business. However, significant focus on strengthening the current account and savings account (CASA) should drive Axis Bank's profitability going forward.
The restructuring of the corporate banking business has helped the segment achieve a strong growth (a 68.3% growth in corporate advances). A leadership position in the loan syndication business provides further impetus to the corporate banking business.
The concentration of the bank's exposure to certain industries is a cause for concern with gems and jewellery forming 39.5% of the non-fund exposure, and non-banking finance companies (NBFCs) and trading companies forming 13.6% of the fund based exposure. Also, a higher off-balance sheet exposure may require increased provisioning considering the Reserve Bank of India's (RBI) tough stance and revised guidelines on the subject.
The bank's management believes that the operating environment for banks would get tougher owing to further possible monetary tightening, marginal deterioration in credit quality and valuation losses due to the widening of spreads.
At the current market price of Rs716, the stock trades at 18.1x 2009E earnings per share, 8.6x 2009E pre-provisioning profit per share and 2.7x 2009E adjusted book value per share. At the current valuations, the stock looks attractive considering the bank's strengths. We maintain our Buy recommendation on the stock with a price target of Rs1,150.
SECTOR UPDATE
Capital goods
Power T&DOpportunity galore In the recent past, there has been growing concerns about the possible moderation in the investment upcycle in the backdrop of deterioration in the macro-economic scenario. The lower than expected performance by some large capital goods players due to execution delays and other company specific issues have only added to the growing pessimism. The sudden dip in the capital goods segment in the index of industrial production (IIP) figures for January also jolted investor sentiments.
Telecommunications
Consolidation to improve sector's valuation Idea Cellular is reportedly looking to acquire Spice Communications (Spice). Spice is a two-circle (Punjab and Karnataka) GSM operator with 4.4 million subscribers. For Q1FY2008 Spice reported revenues of Rs300 crore; earnings before interest, tax, depreciation and amortisation (EBITDA) of Rs81 crore; and a net loss of Rs36 crore. Considering its subscriber base and profitability, Idea Cellular may not offer a premium to acquire Spice. However, Idea Cellular could seek a premium from Telekom Malyasia, which currently holds a 39.2% stake in Spice, for a stake in Idea Cellular.
