There is no reason why one should not grab Axis Bank at the current levels, suggests Dipen Sheth of HDFC Securities. He urges investors to look at all parameters like NIM, loan growth etc and not agonise over NPAs. Sheth calls the private lender responsible for admitting its September quarter asset quality concerns.
He is also bullish on ICICI Bank , which also has stressed assets, and advises to own the two stocks with a 2-year time horizon. “We remain buyers,” he told CNBC-TV18.
On the broader picture of the corporates which are reporting mixed numbers in the second quarter, Sheth said earnings are not a barometer for markets any longer. Despite the ho-hum results, the market’s long-term uptrend is intact. If the World Bank report says Ease of doing business has improved, it goes on to show the governance is improving, he said adding “the direction has evidently changed”.
Sonia: Earnings season has not gotten off to the best start but how have you read into it?
A: The numbers are all over the place so the good, the bad, the ugly, you can see them all. However, the bigger thing that I would want to say is that you are not going to look at this earnings season as kind of barometer to tell you where to drive and how to drive in this market. It has been that way for the last one or two earnings seasons and it will be that way for maybe another one at least if not more. The broader thesis of climate change should not get overshadowed by the weather; let us look at it that way.
Sonia: You are saying the long-term upside is still intact for the market?
A: Absolutely intact. There is news flow all over the place and if you look at the news headlines, media headlines are worried about the Bihar election outcome. We are slicing and dicing the result season right now as it were and with some justification I can say that we are agonising over the non-performing assets (NPA) problems. For example, yesterday with Axis Bank and now more with some of the PSU guys and so on and I don’t think that is unfair.
However, the larger thing is going to sound like a stuck record and I have been saying it for a year and even maybe a bit more than that, that we are in the throes of remarkable healing, something that happens once in maybe two, three or five decades. All this is old stuff, I am just repeating what I have said earlier, you have got a right off center government, you have got improving governance, you have jumped 12 places. Now let us look at that part of the news, you have jumped 12 places on the ease of doing business in the World Bank’s database and even that is based on assessments made out of two large metros in the country and not the rest of country. So, there are clearly things that are changing here. The two big weaknesses you have had and again this is old hat, is your excessive reliance on imported and costly fuel and poor governance mix. So, the fuel bit is happened, the governance bit is happening now.
I am not looking at company numbers so closely anymore. I am meeting governments, I am meeting bureaucrats, I am trying to understand how goods ad service tax (GST) will work out, I am trying to figure out how sate electricity boards (SEB) or discom dues will get cleared up. The person to research is Piyush Goyal for example.
Latha: Not to throw cold water on your enthusiasm but the previous year’s global ranking has gotten revised so we have been moved up to 130 so we have actually moved 4 points but the point is direction is up.
A: Direction is up after four or five years or I don’t know how many, it is 22 years or something.
Latha: We have to talk stocks and there the point is the reality on the ground is not changing, it is not changing with ferocity, it is not changing at all in some cases like in the case of Axis Bank. One had got the impression that some people have been smarter in dealing with lousy assets. We didn’t get confirmation of that when the results came in so what would you do with Axis Bank right now?
A: As analysts we were very clear that Axis does have exposure stressed sectors; a whole lot of banks do. It is a question of which bank is mature to accept, admit, recognise, classify and then provide for. If you are going to award marks for these virtues then Axis comes out top. Is there pain? Yes there is. Is there lots of pain? They took it on the chest or chin or whatever you want to call it yesterday or the day before.
However, look at this bank, when they had extraordinary or non-recurring profits coming from overseas or treasury activities and so on, they created a contingency reserve. They are using that headroom to absorb three fourths of a large asset, lumpy delinquency that happened in the quarter. I think they are behaving like extremely responsible bankers.
Latha: Are you buying it right away or would you wait to buy it?
A: Can you time these things, you tell me? It was down 7 percent. We haven’t changed our stance. We are buyers here. It sounds completely counter-intuitive but like I said the weather is bad, the climate is going to improve from here. Look at the virtues of the bank, in their peer set, they are at 78 percent provision coverage ratio (PCR) which is the highest.
Their domestic net interest margins (NIMs) are string at 4 percent plus, loan growth is over 2x industry and valuations have now fallen to less than 2x FY17 adjusted book value and I am giving you consensus numbers. I am not even giving you mine. So, what is wrong here? All that is wrong is known and is baked into the numbers which have been reported and all that can go right is what we will play for now.
Sonia: Would you worry about the fact that Axis has reported higher stressed assets addition so that could perhaps translate or could be reflective of what other private banks are going through?
A: Of course.
Sonia: Would you worry that there could be further downsides in names like ICICI Bank, etc and would you use that as an opportunity to buy?
A: With an ICICI Bank let me tell you that the relative intensity of exposure to these sectors is probably higher at ICICI Bank. Our slicing and dicing tells us that net-net maybe there are more virtues to back at Axis at this point of time but it doesn’t take away anything from the fact that ICICI Bank has also got a great retail franchise. It has got very strong NIMs, very strong return ratios, very well capitalised, no risk of dilution. There is a context in which you have to love or hate these banks.
Latha: The intensity of exposure to stressed assets is discounted by the market to the extent that year-to-date (YTD) ICICI Bank is down 24 percent; Axis is down 4-5 percent.
A: Headline valuations are also 15-20 percent lower.
Latha: Are you a buyer on both?
A: We have got big overweight positions on both of them in our model portfolio which is underperforming and we are not rattled, which is underperforming relative to where it was say 9-12 months ago. Latha:
Axis has about 8 percent of its total book exposed to the stressed groups, overleveraged groups, companies and all those are still standard in the books of Axis. Axis said that they will do 5,700 in terms of stressed assets incremental; in the first half they have already done 5,000. So the chances are they will increase therefore I am asking you should you buy right away or will the market still discount that there could be further NPL recognition or stressed recognition in some fashion, 5:25 or some other fashion and therefore would there be a more attractive space to buy?
A: I do not have access to Axis’s loan books and I can’t look at every single let us say SMA2 account that they are sitting on right now. I don’t have it for ICICI Bank, I don’t have it for Yes Bank, you can name them all and I will say I don’t have access to this information. However, the fact is that if you are going to bet on the longer term trajectory of corporate health in this country improving over two years, then you should be doing an Systematic Investment Plan (SIP) in these guys; they are great banks.