Sunday, January 24, 2016

Axis Bank: Day's rally, short-covering or transparency?

It is not too often to see a stock witness a fabulous run-up in trade post results that saw the company's management guide for a cautious outlook and that too 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 over five per cent on Thursday. This surge also comes after its under-performance in the last six months-Axis Bank scrip was down nearly 40 per cent versus Sensex's about 14 per cent decline. So, is it short-covering or is it that fundamentals are improving?

Analysts seem a bit mixed even as most of them are positive on the stock from a one-year perspective. Thirty-one of 33 analysts polled on Bloomberg continue to have 'Buy' recommendation on the stock. While many believe that 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, a few others see it as short-covering in the counter.

"The bank has been conservative by providing fully in the third quarter as per the RBI 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, MD of KR Choksey Securities.

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

For instance, analysts say that the management forthrightly stated that loans worth Rs 3,600 crore are under the 5:25 restructuring scheme while guiding for another Rs 1,600 loans to be added in the coming quarters, apart from more accounts to be put under strategic debt restructuring (SDR) and higher credit cost guidance (1.25 per cent) work in favour of the bank.

Nomura, while commenting on the asset quality notes in its report, said, "While we remain cautious on asset quality outlook for FY17, adjusting for Rs 11,500 crore of write offs we expect on restructured book and incremental stress, Axis Bank trades at 1.5 times September 2017 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 yesterday offer optimism to analysts. According Emkay Global, while the bank's corporate asset quality is expected to weigh on valuations in the near term, the firm retains its 'Buy' on Axis Bank, as its retail-asset focus and robust deposit franchise are likely to sustain resilient core earnings and generate 1.7 per cent return on assets (a key valuation metric for financial institutions) over FY15-17.

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