India Equity Research

Banking and Financial Services

Company Update

AXIS BANK
Enam deal: value accretive

Event Axis Bank and Enam Securities (Enam) have decided to merge their Investment Banking and Equities businesses. The deal size stands close to INR 20.6 bn. Brief contours of the deal Axis Bank will set up a wholly owned subsidiary to which Enam Securities will demerge its investment banking, institutional equities, retail equities and financial product distribution (NBFC) businesses. The bank will demerge its investment banking business into the subsidiary. Swap ratio announced is 5.7 Axis Bank shares for one share held in Enam, implying 3.3% equity stake of Axis Bank (on expanded capital). What is in it for Axis Bank Strategic objective is to harp upon synergies between the two entities across products, relationships and geographies. While on the institutional side, Enams investment banking and equity franchise will complement the banks strengths in debt capital market, project finance and commercial banking franchise, on the retail front Axis Banks distribution platform (1,100 branches) will complement Enams retail network. Axis Bank will get the right to use the Enam brand for two years; further, the deal also carries the non-compete clause for (target) businesses for a period of five years. Our view : Value accretive Near term impact of the merger on Axis Banks FY11E book value, given the dilution, will be 1.9%. Impact on earnings will be minusculedilution of 0.5%. The deal values Enams target businesses at around 20x FY11E earnings, a ~25% premium to comparables like Motilal Oswal, among others. However, given the strategic buyout coupled with value accretion expected, given the strong synergies between the two outfits, we believe the premium is well justified. We believe the merger to be value accretive for Axis Bank in the medium to long term as it is a step in the right direction to create a strong Indian financial services powerhouse. With its strong expertise in corporate banking, specifically the infra space, the merger will enable the bank to offer a complete bouquet of financial products and services. The stock currently trades at 2.8x FY12E adjusted book. We maintain 'BUY' recommendation.

November 16, 2010

Reuters: AXBK.BO Bloomberg: AXSB IN

EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Medium Equalweight

Note: Please refer last page of the report for rating explanation

MARKET DATA CMP 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : : INR 1,469 1,609 / 916 409.4 601 /13,293 1,741.7

Avg. Daily Vol. BSE/NSE (000) : SHARE HOLDING PATTERN (%) Promoters* MFs, FIs & Banks FIIs Others * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : : : : :

37.5 5.5 37.2 19.7 NIL

EW Banks and Financial Services Index 1.2 15.5 39.0

1 month 3 months 12 months

1.3 14.6 54.3

1.0 12.3 22.5

Financials Year to March Net revenues (INR mn) Net rev growth (%) Net interest income(INR mn) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) EPS growth (%) Diluted P/E (x) Price to adj. book (x) Price to PPOP (x) ROAE (%) FY09 65,831 50.3 36,862 18,154 360 50.4 69.3 29.1 5.3 15.3 19.1 FY10 89,503 36.0 50,045 25,145 405 62.0 23.1 23.6 3.8 13.1 19.2 FY11E 107,669 20.3 64,569 33,007 409 80.7 30.1 18.2 3.3 10.8 19.0 FY12E 130,957 21.6 80,576 42,291 409 103.4 28.1 14.2 2.8 8.5 20.7
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Nilesh Parikh +91 22 4063 5470 nilesh.parikh@edelcap.com Kunal Shah +91 22 4040 7579 kunal.shah@edelcap.com Vivek Verma +91 22 4040 7576 vivek.verma@edelcap.com

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BFSI
Other highlights: AMC, general insurance, portfolio management and life insurance distribution will remain with Enam, where it will be free to compete with Axis Bank. The deal will need approvals of shareholders, regulators and the High Courts of Gujarat and Mumbai and is expected to be completed in 4-6 months. There will also be a statutory lock-in (to be decided by courts/regulators). The board of Axis Bank has proposed to induct Mr. Vallabh Bhansali (co-founder and Chairman of Enam) as an independent director. Mr. Manish Chokhani, will be the MD & CEO of the newly formed entity. In FY10, Equity capital market contributed 49%, broking 40% and retail 9% to overall revenues of target businesses of Enam. Of the total compensation, only 90% will go to shareholders of Enam, remaining 10% will go to the employees trust. The benefit will accrue to employees only after three years provided they stay in service. Risk for Axis Bank It is a people centric business and attrition of top management of Enam could be key risk; the restrictive clauses including lock-in and non-compete arrangements however dilute the risk. ENAM Securities Ltd: Company description Enam is one of the leading investment banking and securities firms in India with 450 employees and offices in 12 cities. It has deep relationships with marquee list of companies and institutional investors as well as a dominant retail franchise. Enam Investment Banking is a leader in the Indian Equity Capital Markets and has been a lead manager (by value) of ~50% of all new public offerings in equity in India over last decade. It has brought to market more than 75 companies in the last five years alone. It has deep and long lasting relationships with most of the leading business houses in the country even as it has brought to market some of the most innovative and young companies that have grown into sector icons. Enam Institutional Equities is one of the leading institutional brokers with over 200 active clients across the world. It is well regarded for its insightful research and global reach. It leads in QIB mobilization with ~20% share of all institutional demand across all public offerings.

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Table 1: Marginal impact on book value

Axis Bank

Shares O/S New shares issued Dilution (%) Standalone Networth Add: excess of net asset over the paid value of share d/ l Revised networth Book value Revised book value Change (%) PAT Addition Revised PAT New EPS Earlier EPS Change (%)

FY11 409 14 3.4 186,729 2,730 189,459 448 457 1.9 33,007 952 33,959 80.3 80.7 0.5
Source: Company, Edelweiss research

Table 2: Revenue/PAT contribution of target businesses of Enam Securities

(INR mn) Revenues PBT PAT

FY10 2,420 920 590

H1FY11 1,820 770 590

Source: Company, Edelweiss research

Table 3: Comparative multiples

CMP (INR) India Infoline Motilal Oswal 114 180

Mcap (INR bn) 33.6 27.5

PE (x) FY10 16.2 15.9 FY11E 15.41 15.38

EPS (INR) FY10 7.1 11.3 FY11E 7.4 11.7 Reco Not rated Not rated

Source: Company, Edelweiss research

Edelweiss Securities Limited

BFSI
Company description
Axis Bank is the third-largest private sector bank in India in terms of asset size, with a balance sheet of INR 1.5 tn. It has a network of over 1000 branches and extension counters across the country. The bank earns substantial fee income from transaction and merchant banking activities. The key promoter UTI-I (special undertaking) holds 24%, LIC holds 9.6%, and the rest is widely held by FIIs and public.

Investment theme
Axis Bank has registered buoyant loan growth on a balanced portfolio skewed towards corporate advances than retail (as compared with its private peers). Retail advances contributed 20% to the total loan portfolio. Thus, it has better scope for aggressively expanding across segments where it has a low presence. It is also spreading across geographies and targeting presence in more than 75% of Indias districts in the next five years. The banks loan book is expected to grow at a brisk pace of 25% plus in FY10-12E. Rapidly growing franchise and new product offerings (viz., credit cards) will further drive growth in retail fee income. The bank is also intensifying efforts to penetrate the remittance business by aggressively spreading its international operations. Other key contributors to fee income will be project advisory, debt syndication, and third party distribution of insurance.

Key risks
Change in management may affect the pace of growth and profitability in the near term. Deterioration of macro environment can result in higher slippages and slow down business growth.

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Axis Bank

Financial Statements
Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Diluted EPS DPS Payout ratio (%) Growth ratios (%) Year to March NII growth Fees growth Opex growth PPOP growth PPP growth Provisions growth PAT growth Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY08 9.8 7.3 7.9 2.9 5.2 5.1 8.0 2.8 49.2 34.9 FY09 10.6 7.6 8.7 3.0 6.0 6.1 7.7 2.7 43.4 34.8 FY10 8.6 6.7 7.3 3.1 4.4 4.4 5.6 2.9 41.4 34.7 FY11E 9.5 6.9 8.0 3.3 5.1 5.1 6.4 3.0 43.0 33.6 FY12E 9.6 7.0 8.2 3.3 5.3 5.2 7.0 2.9 42.8 33.5 FY08 65.0 68.8 77.4 54.9 63.4 58.3 62.5 FY09 42.6 65.5 32.6 70.5 67.3 62.1 69.5 FY10 35.8 19.7 29.8 31.5 40.7 56.4 38.5 FY11E 29.0 17.8 24.7 22.2 17.1 (21.2) 31.3 FY12E 24.8 24.1 21.0 27.3 22.1 (1.1) 28.1 FY08 70,053 44,200 25,854 17,955 15,317 588 2,051 43,808 21,549 6,702 14,847 22,259 5,794 4,975 65 754 16,465 5,753 10,712 29.8 6.0 23.5 FY09 108,355 71,493 36,862 28,969 25,348 818 2,802 65,831 28,582 9,977 18,606 37,249 9,394 9,032 1,078 (716) 27,855 9,701 18,154 50.4 10.0 23.2 FY10 116,380 66,335 50,045 39,458 30,334 2,022 7,102 89,503 37,097 12,558 24,539 52,406 13,888 14,126 (222) (15) 38,517 13,372 25,145 62.0 12.0 21.3 FY11E 157,578 93,009 64,569 43,100 35,733 1,328 6,040 107,669 46,279 16,944 29,335 61,391 11,718 11,128 540 50 49,673 16,666 33,007 80.7 15.0 20.5 (INR mn) FY12E 201,099 120,523 80,576 50,381 44,354 1,527 4,500 130,957 56,005 21,015 34,990 74,952 11,355 11,005 250 100 63,597 21,306 42,291 103.4 17.0 18.1

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BFSI
Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios (%) Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Incremental slippage Net NPA / Equity Capital adequacy - Tier 1 Book value ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROAE FY08 2.9 1.8 0.2 5.0 (2.4) (0.7) (0.7) (3.7) 1.2 6.9 17.6 FY09 3.0 2.1 0.2 5.3 (2.3) (0.8) (0.8) (3.8) 1.5 7.6 19.1 FY10E 3.1 2.0 0.4 5.6 (2.3) (0.9) (0.8) (4.0) 1.6 8.2 19.2 FY11E 3.3 1.9 0.3 5.5 (2.4) (0.6) (0.8) (3.8) 1.7 8.8 19.0 FY12E 3.3 1.9 0.2 5.4 (2.3) (0.5) (0.9) (3.6) 1.7 8.3 20.7 60.6 49.1 49.8 21.6 80.3 45.7 0.7 0.4 49.8 0.9 2.8 13.7 10.2 243.7 35.7 33.9 35.0 21.7 81.4 43.1 0.9 0.4 63.6 1.3 3.2 13.7 9.3 283.6 23.7 20.4 22.8 22.6 83.7 46.7 1.1 0.4 68.2 1.9 2.6 15.8 11.2 395.8 25.9 26.2 24.0 22.8 83.5 47.2 1.1 0.4 72.0 1.3 2.5 17.3 13.1 456.5 25.9 26.2 24.8 23.0 83.3 47.8 0.9 0.3 69.1 1.2 2.5 16.5 12.3 541.2 201,788 135,263 125,042 9,230 27,845 1,095,778 277,272 186,031 150,709 10,729 36,912 1,477,220 341,959 217,789 152,064 12,224 39,011 1,806,479 433,350 269,511 158,661 12,068 29,579 2,217,893 549,550 334,062 175,400 12,092 17,314 2,744,969 596,610 815,567 1,043,431 1,314,723 1,656,551 3,599 84,108 87,707 34,293 876,262 56,240 41,276 1,095,778 3,602 98,546 102,148 53,344 1,173,741 101,855 46,133 1,477,220 4,053 156,393 160,446 71,558 1,413,002 100,137 61,335 1,806,479 4,090 182,638 186,729 78,558 1,783,019 117,637 51,948 2,217,892 4,090 217,267 221,358 98,558 2,249,711 139,637 35,705 2,744,969 FY08 FY09 FY10E FY11E (INR mn) FY12E

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Valuation metrics Year to March Diluted EPS (INR) EPS growth (%) Book value per share (INR) Adjusted book value/share (INR) Diluted P/E (x) Price/ BV (x) Price/ ABV (x) Dividend yield (%) Price to income (x) Price to PPOP (x) No of shares (mn) FY08 29.8 31.2 243.7 238.9 49.3 6.0 6.1 0.4 17.2 26.1 360 FY09 50.4 69.3 283.6 277.2 29.1 5.2 5.3 0.7 11.8 15.3 360 FY10E 62.0 23.1 395.8 388.6 23.6 3.7 3.8 0.8 10.4 13.1 405 FY11E 80.7 30.1 456.5 448.5 18.2 3.2 3.3 1.0 9.0 10.8 409

Axis Bank

FY12E 103.4 28.1 541.2 531.9 14.2 2.7 2.8 1.2 7.4 8.5 409

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BFSI

RATING & INTERPRETATION

Company Allahabad Bank Bank of Baroda HDFC ICICI Bank Infrastructure Development Finance Co Ltd Karnataka Bank LIC Housing Finance Oriental Bank Of Commerce Punjab National Bank Rural Electrification Corporation South Indian Bank State Bank of India Union Bank Of India

Absolute reco BUY BUY HOLD BUY HOLD BUY BUY BUY BUY BUY BUY BUY BUY

Relative reco SO SO SU SO SU SO SP SU SO SO SO SP SO

Relative risk H L L L M L M H L L H L L

Company Axis Bank Federal Bank HDFC Bank Indian Overseas Bank ING Vysya Kotak Mahindra Bank Manappuram General Finance Power Finance Corp Reliance Capital Shriram City Union Finance SREI Infrastructure Finance Syndicate Bank Yes Bank

Absolute reco BUY BUY HOLD HOLD BUY BUY HOLD BUY HOLD BUY UNDER REVIEW BUY BUY

Relative reco SO SO SP SU SP SP SU SO SP SO SO SP SO

Relative Risk M M L H H L M L M H L H M

ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%

RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return

Edelweiss Securities Limited

Axis Bank

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai 400 021. Board: (91-22) 2286 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Head Institutional Equities Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd, Indian Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Manappuram General Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, State Bank of India, Shriram City Union Finance, South Indian Bank, Syndicate Bank, SREI Infrastructure Finance, Union Bank Of India, ING Vysya, Yes Bank Axis Bank EW Indices

1,600 1,325 (INR) 1,050 775 500 Buy Buy

2,000

Buy Buy

1,600 1,200 800 400

Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10

13-Nov-09

13-May-10

13-Nov-10

Axis Bank Ltd. EW Banks and Financial Services Index Nifty

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 3 stocks under review > 50bn Market Cap (INR) 110 116 Hold 45 Reduce 12 Total 176 < 10bn 13

Recent Research Date Company Title Price (INR) Recos 368 Buy

10-Nov-10

Power Core performance intact ; Result Update Finance Corporation IDFC SBI Strong growth traction ; Result Update Impressive margins but slippages running high; Result Update

Between 10bn and 50 bn 53

10-Nov-10 08-Nov-10

203 3,425

Hold Hold

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