Behind the Axis Bank surge

Was the day's rally short-covering or a reward for transparency? Most observers say it's the latter

It is not often one sees a stock's fabulous run-up in trade after results that see the company's management forecast a cautious outlook. And, on a day when the S&P BSE Sensex was back to its pre-Modi levels. This stock is none other than Axis Bank, which gained a little over five per cent on Thursday. This surge also comes after its under-performance in the past six months, the scrip was down nearly 40 per cent versus the benchmark Sensex's 14 per cent decline.

Is it short-covering or are the fundamentals improving? Analysts seem a bit mixed, even as most are positive on the stock from a one-year perspective. As many as 31 of 33 analysts polled on Bloomberg continue to have a 'Buy' recommendation on the stock. While many believe the reward is on the back of transparency and clarity provided by its management, despite maintaining a cautious outlook in the near to medium term, some do see it as short-covering in the counter.

"The bank has been conservative by providing (making provisions) fully in the third quarter in line with Reserve Bank norms. Therefore, it has been transparent and also conveyed that in subsequent quarters, the company on a standalone basis will not have any overhang of the provisioning requirement of RBI. The market is rewarding the company for its transparency and conservativeness. Some part of buying can also be because of short covering but the spike is largely because of the transparency," said Deven Choksey, managing director of KR Choksey Securities.

Another analyst with a domestic brokerage said this was the first time Axis had come out with clarity on its asset quality and had recognised its stressed assets, in line with RBI guidelines. Nitin Kumar of Prabhudas Lilladher adds the Street can now expect some idea on how much pain there will be and work around those numbers. Such transparency helps the Street better predict the future earnings, which is positive.

For instance, analysts say, the management forthrightly stated that loans worth Rs 3,600 crore are under the '5:25' restructuring scheme, while saying they expected another Rs 1,600 crore of loans to be added in the coming quarters. Apart from more to be put under strategic debt restructuring and higher credit cost (1.25 per cent). All these work in favour of the bank.

Nomura, while commenting on the asset quality, notes in its report: "While we remain cautious on the asset quality outlook for FY17, adjusting for Rs 11,500 crore of write-offs we expect on the restructured book and incremental stress, Axis trades at 1.5 times the September '17 quarter book, which we believe is very comforting."

That apart, though the management is a bit wary about near-term performance, the better-than-anticipated results posted on Wednesday offer optimism to analysts. According to Emkay Global, while the bank's corporate asset quality is expected to weigh on valuations in the near term, they retains a 'Buy' rating on the Axis scrip, as its retail-asset focus and robust deposit franchise are likely to sustain resilient core earnings and generate a 1.7 per cent annual return on assets (a key valuation metric for financial institutions) over FY15-17.