450 fund schemes own this priciest lender & red flag is up on valuation

Staff reporter, New Delhi
03/04/2019   0 Comments

Bank stocks are hot cakes on Dalal Street these days. Prospects of easing NPA, which can help revive earnings, are making analysts and investors see more value in domestic lenders than elsewhere. One bank has got catapulted from being under-owned to priciest in a matter of months thanks to this extraordinary craze for banking stocks. It’s Axis Bank. With a price-to-earnings ratio of above 200 times, the private lender is now the most expensive stock in the banking space. Others like ICICI Bank, Kotak Mahindra Bank, HDFC Bank and YES Bank are way behind, trading at 75.30, 55.60, 31.60 and 14.50 PEs, respectively. Data available with Reuters on April 2 showed Axis Bank had ‘14’ ‘Buy’, 17 ‘Outperform’, 7 ‘Hold’, 3 ‘Underperform’ and only 2 ‘Sell’ calls. The stock is favourites among both funds managers and market analysts. Some 462 schemes run by 36 fund houses had exposure to the stock at the end of February, 2019. Analysts mostly agree at its current valuation, Axis Bank may disappoint investors. 

Amar Ambani, President, Head of Research, YES Securities, still seeks to justifying the high PE for Axis Bank, saying it does not reflect the correct picture as profits remain depressed. “Don’t look at P/E. Profits are depressed on account of high provisioning. On an adjusted price-to-book value basis, the stock is reasonably placed and still at a discount to HDFC Bank and Kotak Mahindra Bank. One should also focus on the structural changes that will take place with the change of guard at top,” he said. Price-book value of Axis Bank was at 3 times on April 2, whereas Kotak Mahindra Bank and HDFC Bank quoted at 6.2 times and 4.4 times, respectively. It was 2.5 times for ICICI Bank. “Tactically, we place ICICI Bank higher in the pecking order, as its valuation adjusted for subsidiary value is cheaper than Axis,” Ambani said. Axis Bank shares have rallied nearly 32 per cent since October end against as 13 per cent advance in BSE Sensex. Its PE value has risen from 162 times on December 31 to above 200 times on April 2. 

Question is what is driving the stock? 

One trigger is Axis Bank’s asset quality has improved from a peak of 6.8 per cent in FY18 to 5.8 per cent in December quarter and this trend is likely to continue on account of peaking out of corporate non-performing assets, which should result in lower slippages and better recoveries. 

“While peaking of NPAs and the resultant release in profit are known positives for the bank, organisational restructuring with a robust credit and risk framework is a sustainable positive for the bank,” Sharekhan said in a report. 

JM Financial has a ‘buy’ rating on the stock with a price target of Rs 865. “Axis Bank has all the right ingredients to make a franchise with best-in-class return ratios given its granular liabilities base, strong management pedigree and solid distribution network. While the bank is well-positioned in terms of capital for next 12 months, a subsequent BVPS (book value per share) accretive capital raise could drive further upside,” the brokerage said. 


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