Axis Bank's re-rating 'imminent' provided it manages one operational metric

On the back of this consistent beat on earnings, analysts believe Axis Bank's stock is set to re-rate. They see up to 53 per cent upside in the stock

Axis Bank is gradually narrowing its valuation gap with private peers, ICICI and HDFC Bank, as it continues to positively surprise the Street with its strong quarterly financial result.
 

On Monday, Axis Bank reported a strong operating performance with better-than-expected net profit growth and improved asset quality. The company reported PAT of Rs 3,614 crore, primarily on account of lower-than-expected provisions at Rs 1,337 crore – down 64.4 per cent YoY and 23 per cent QoQ. 
 

Net interest income (NII) grew by 17 per cent YoY and 10 per cent QoQ at Rs 8,653 crore, aided by strong loan book growth (14 per cent YoY). Net interest margin (NIM) improved by 14 bps sequentially and 2 bps YoY to 3.53 per cent in Q3FY22. 

Reacting to the results, the shares surged 6.5 per cent to Rs 755 apiece on the BSE. In comparison, the BSE Sensex ended 0.6 per cent higher on the BSE. 
 

Now, on the back of this consistent beat on earnings, analysts believe the lender’s stock is set to re-rate. 

"The results for the quarter give comfort that the re-rating of the bank is imminent. The contingent buffer implies lower negative surprise from an earnings perspective. We have seen a similar outcome in ICICI Bank and believe that the thesis is likely to play out for Axis Bank as well," said analysts at Kotak Institutional Equities. 
 

Analysts at Sharekhan, too, have confidence that the bank’s reasonable valuation and strong growth outlook makes it a candidate for potential re-rating.

"With strong performance on all parameters – loan book, operating performance, and improvement in asset quality, the bank is poised for robust growth going ahead. Further, its BB and below book have remained stable (~0.9 per cent of the book) with higher recoveries. We believe as the economic scenario normalises, the bank has the potential to recover sharply, led by lower credit cost and margin improvement. We expect its credit cost to normalise and deliver return on assets (RoA) of 1.5 per cent in FY23," they said.
 

Axis Bank’s total slippages were moderately lower at Rs 4,100 crore compared with Rs 5,400 crore in the previous quarter. The up-gradation and recovery stood lower at Rs 3,300 crore, down from Rs 4,800 crore in Q2FY22. The write-offs were Rs 1,700 crore which resulted in 36bps sequential reduction in gross non-performing asset (GNPA) ratio to 3.17 per cent. 
 

Alike other banks, the restructured pool was sequentially higher at Rs 4,640 crore vs Rs 4,340 crore in the previous quarter. The bank carries a provision of ~24 per cent on restructured loans, which is in excess of regulatory limits. Restructuring, however, is unlikely to exceed current levels (in terms of percentage) going forward. 
 

"In the interim, the bank continued to follow prudent provisioning norms and did not utilise the buffer created earlier. We believe the bank's high provisioning buffer and lower incremental stress will seed the possibility of material write-backs. This renders Axis as one of the likely earnings growth leaders as unwind of excess provisioning starts," said Edelweiss Securities’ report.
 

That said, the lender's high-cost structure needs immediate attention, analysts suggested. Operating cost surprised negatively, rising 25 per cent YoY and 10 per cent QoQ primarily due to elevated overhead costs (up 30 per cent YoY / 15 per cent QoQ). 
 

"Similarly, on incremental QoQ cost, contributions of each of these elements would be 21 per cent, 50 per cent, 8 per cent, and 21 per cent, respectively… The management, however, expects it to get back to 2 per cent by exit quarter of FY23," said analysts at ICICI Securities. 
 

Kotak Institutional Equities added: The bank's return on equity (RoE) was impacted by a higher cost structure, but we believe that this would grow at a lower level than revenue growth from here. We believe this could be addressed over the next few quarters. 
 

"The medium-term issue is normalization of RoEs or business performance on most metrics with the other frontline banks. Our earnings suggest that this is still a few years away, which would imply that the discount in valuation is likely to remain although not at these levels that we are witnessing currently," they pointed out.

Source: Brokerage Reports