Axis Bank to focus on subsidiaries for growth, analysts cheer strategy

Subsidiaries together account for at least 5 per cent of the bank's valuations from nearly zero a few years back.

Axis Bank recent analysts’ meeting has drawn a lot of attention from investors and the Street. An 18 per cent return on equity target by FY22, top management changes, and a new strategy for profitability and sustainability were key takeaways from the meeting and they went down well with investors. Analysts believe a lot of these positives, including expectations of steep improvement in asset quality, are adequately baked into Axis Bank’s stock valuations.

The stock needs fresh triggers for re-rating to progress. A critical aspect, which could secure a steady upward movement, will be improved value addition from Axis Bank’s subsidiaries.

Axis Bank, which has subsidiaries for non-banking finance, asset management, capital market operations, trade receivable discounting system and digital finance, took to quarterly reporting of subsidiaries’ financials from mid-FY18.

The subsidiaries contributed little in valuations till two years ago, but now account for 5 per cent to 6 per cent of the bank’s valuations. Yet, there is ample scope for improvement. As part of its three-year growth strategy, the bank aims to "scale up subsidiaries materially", said its analyst presentation.

Analysts at Motilal Oswal Financial Services said that the bank aims to scale up its subsidiaries before focusing on profitability, but it will not pursue opportunities if better returns are not on the horizon. “Eventually, the bank aims to be ranked among the top-5 across (non-bank) business segments without listing any of its subsidiaries in the near- to medium–term,” the brokerage said.

Compared to its immediate peer ICICI Bank (where subsidiaries form nearly 20 per cent of its stock valuation), Axis Bank has some gaps to fill as well, particularly in the life insurance and general insurance businesses. Investors could look forward to some inorganic moves in the life insurance sector, given that its management is awaiting clarity from the regulator on structuring of a life insurance company.

Therefore, in the coming years, each of these opportunities will play a critical role in lifting Axis Bank’s valuation. This is why with the core banking business adequately priced, IIFL Institutional Equities says further re-rating of the stock will go hand-in-hand with delivery of stated targets.

Trading at 2.6x FY20 book, analysts rule out steep stock price gains in the medium-term and expect a gradual rerating in the next 2-3 years.