Axis Bank: Highly leveraged to economic recovery, reforms

Axis Bank's scrip is the top performer in 2014 in the Nify 50 universe and has grown almost 100% in the calendar year.

Notably, the stock was under pressure in the beginning of the year due to asset quality concerns given that its exposure to the troubled infrastructure sector and highly leveraged corporates was on the higher side when compared to other private banks. This, alongwith high interest rates and slowing economy (both corporate capex and on consumption side) weighed on the stock, which fell 4.2% in 2013.

Formation of a reforms-oriented government at the centre, kick starting of coal/power sector reforms and Axis' sustained improvement on the asset quality front were key catalysts for the stock, which started gaining traction in March 2014 and has not looked back so far.

Infrastructure and small and mid enterprises (SME) sector form about 25% of Axis' books. These sectors stand to gain from potential reforms as well as economic revival. Some brokerages such as Macquarie even have Axis Bank amongst their top large cap picks for 2015.

"Axis Bank is well leveraged to the corporate cycle recovery due to its large infrastructure as well as SME sector exposure. The bank is well capitalised with Tier 1 capital adequacy ratio of 12% plus. So there is very little risk of equity dilution over the next two years and Axis can capitalise on growth opportunities", says Rakesh Arora, MD and Head of Research, Macquarie Capital.

Despite the high risk, Axis has done well to keep both gross and net non-performing assets (NPA) ratios in a tight range of 1.2-1.3% and 0.4-0.44% respectively in the past five quarters. Its margins too have remained stable in this period due to increased focus on retail segment and stronger liability franchise. While the low cost retail deposits and CASA together form about 75% of Axis's total deposits, retail contribution to total loans has gone up from 20% two years back to 31% currently.

Going forward, analysts expect the bank's gross NPA ratio to inch up a marginal 10 basis points in FY15. Its Net interest margins (NIMs) are likely to be largely stable. RBI's recent flexible restructuring norms will be another positive on the asset quality front.

Axis' loan growth is expected to improve from 17% in FY14 to 18% this fiscal and 20% in FY16 on the back of continued traction in retail segment and likely pick up in project loans.

In this backdrop, most analysts remain positive on Axis Bank. At Wednesday's closing price, the stock is trading at 2.4 times FY16 estimated book value, closer to its historical average one-year forward price/book value ratio.

"We believe Axis Bank is well poised for robust growth on the back of its franchise strength. The bank’s retail business continues to provide adequate earnings support along with lower concern on asset quality, which is a key positive", says Divyanshi Dayanand of SBICap Securities.