Axis Bank: Buy

Investors with one-two year horizon can consider buying the Axis Bank stock as it is attractively valued. At the current market price of Rs 330, the stock trades at just 1.2 times its December book value of Rs 279 and at a PEM of 7.5. Axis Bank fell on the back of growing concerns over its asset quality due to high exposure to cyclical sectors, slowdown in lending activity and higher vulnerability due to lower provision coverage.

However, asset quality concerns appear overdone as the non-performing assets formed only 0.9 per cent of advances in December. Most of the corporate advances are investment-rated and the bank is adequately capitalised (13.8 per cent) to shelter from the credit risk. Steady fee income (43 per cent) and low-cost deposits (38 per cent) and strong advances growth (45 per cent CAGR for last five years) are the arguments in favour of the bank. Axis Bank has been consciously reducing the proportion of retail advances in its loan book (down to 20.7 per cent).

Axis Bank’s net profit for the nine months ended December 2008 grew by 74 per cent. While a fall in the proportion of low-cost deposits reduced net interest margins (3.36 per cent), exceptional growth in fee income (up 75 per cent), helped manage higher operating profit growth. Going forward, the bank’s cost of funds may decline as rates fall, but the pressure on NIM may continue due to lower lending activity and lower-yielding investments. Fee income from debt syndication may continue to flow in as more companies float debt issues. Though overall net profit growth may not be as high as it was in the preceding quarters, the stock’s valuation seems to capture lower expectations.