Axis Enam Merger

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•

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, Enam’s

investment banking and equity franchise will complement the bank’s strengths in

debt capital market, project finance and commercial banking franchise, on the

retail front Axis Bank’s distribution platform (1,100 branches) will complement

Enam’s 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 Bank’s FY11E book value, given the

dilution, will be 1.9%. Impact on earnings will be minuscule—dilution of 0.5%. The

deal values Enam’s 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.

India Equity Research | Banking and Financial Services Company Update

AXIS BANK

Enam deal: value accretive

November 16, 2010

Reuters: AXBK.BO Bloomberg: AXSB IN

EDELWEISS 4D RATINGS

Absolute Rating BUY

Rating Relative to Sector Outperformer

Risk Rating Relative to Sector Medium

Sector Relative to Market Equalweight

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

MARKET DATA

CMP : INR 1,469

52-week range (INR) : 1,609 / 916

Share in issue (mn) : 409.4

M cap (INR bn/USD mn) : 601 /13,293

Avg. Daily Vol. BSE/NSE (‘000) : 1,741.7

SHARE HOLDING PATTERN (%)

Promoters* : 37.5

MFs, FIs & Banks : 5.5

FIIs : 37.2

Others : 19.7

* Promoters pledged shares (% of share in issue) : NIL

PRICE PERFORMANCE (%)

Stock Nifty EW Banks and Financial

Services Index

1 month 1.3 1.0 1.2

3 months 14.6 12.3 15.5

12 months 54.3 22.5 39.0

Nilesh Parikh

+91 22 4063 5470

[email protected]

Kunal Shah

+91 22 4040 7579

[email protected]

Vivek Verma

+91 22 4040 7576

[email protected]

Financials

Year to March FY09 FY10 FY11E FY12E

Net revenues (INR mn) 65,831 89,503 107,669 130,957

Net rev growth (%) 50.3 36.0 20.3 21.6

Net interest income(INR mn) 36,862 50,045 64,569 80,576

Net profit (INR mn) 18,154 25,145 33,007 42,291

Shares outstanding (mn) 360 405 409 409

Diluted EPS (INR) 50.4 62.0 80.7 103.4

EPS growth (%) 69.3 23.1 30.1 28.1

Diluted P/E (x) 29.1 23.6 18.2 14.2

Price to adj. book (x) 5.3 3.8 3.3 2.8

Price to PPOP (x) 15.3 13.1 10.8 8.5

ROAE (%) 19.1 19.2 19.0 20.7

2 Edelweiss Securities Limited

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.

Edelweiss Securities Limited 3

Axis Bank

Table 1: Marginal impact on book value

Source: Company, Edelweiss research

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


Table 3: Comparative multiples


FY11Shares O/S 409

New shares issued 14

Dilution (%) 3.4

Standalone Networth 186,729Add: excess of net asset over the paid value of share

d/ l2,730

Revised networth 189,459

Book value 448

Revised book value 457

Change (%) 1.9

PAT 33,007

Addition 952

Revised PAT 33,959

New EPS 80.3

Earlier EPS 80.7

Change (%) 0.5

(INR mn) FY10 H1FY11

Revenues 2,420 1,820

PBT 920 770

PAT 590 590

CMP Mcap

(INR) (INR bn) FY10 FY11E FY10 FY11E Reco

India Infoline 114 33.6 16.2 15.41 7.1 7.4 Not rated

Motilal Oswal 180 27.5 15.9 15.38 11.3 11.7 Not rated

PE (x) EPS (INR)


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 India’s districts in the next five years. The bank’s 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.


Axis Bank

Financial Statements

Income statement (INR mn)

Year to March FY08 FY09 FY10 FY11E FY12E

Interest income 70,053 108,355 116,380 157,578 201,099

Interest expenses 44,200 71,493 66,335 93,009 120,523

Net interest income 25,854 36,862 50,045 64,569 80,576

Non interest income 17,955 28,969 39,458 43,100 50,381

- Fee & forex income 15,317 25,348 30,334 35,733 44,354

- Misc. income 588 818 2,022 1,328 1,527

- Investment profits 2,051 2,802 7,102 6,040 4,500

Net revenues 43,808 65,831 89,503 107,669 130,957

Operating expense 21,549 28,582 37,097 46,279 56,005

- Employee exp 6,702 9,977 12,558 16,944 21,015

- Other opex 14,847 18,606 24,539 29,335 34,990

Preprovision profit 22,259 37,249 52,406 61,391 74,952

Provisions 5,794 9,394 13,888 11,718 11,355

- Loan loss provisions 4,975 9,032 14,126 11,128 11,005

- Investment depreciation 65 1,078 (222) 540 250

- Other provisions 754 (716) (15) 50 100

PBT 16,465 27,855 38,517 49,673 63,597

Taxes 5,753 9,701 13,372 16,666 21,306

PAT 10,712 18,154 25,145 33,007 42,291

Diluted EPS 29.8 50.4 62.0 80.7 103.4

DPS 6.0 10.0 12.0 15.0 17.0

Payout ratio (%) 23.5 23.2 21.3 20.5 18.1

Growth ratios (%)


NII growth 65.0 42.6 35.8 29.0 24.8

Fees growth 68.8 65.5 19.7 17.8 24.1

Opex growth 77.4 32.6 29.8 24.7 21.0

PPOP growth 54.9 70.5 31.5 22.2 27.3

PPP growth 63.4 67.3 40.7 17.1 22.1

Provisions growth 58.3 62.1 56.4 (21.2) (1.1)

PAT growth 62.5 69.5 38.5 31.3 28.1

Operating ratios (%)


Yield on advances 9.8 10.6 8.6 9.5 9.6

Yield on investments 7.3 7.6 6.7 6.9 7.0

Yield on assets 7.9 8.7 7.3 8.0 8.2

Net interest margins 2.9 3.0 3.1 3.3 3.3

Cost of funds 5.2 6.0 4.4 5.1 5.3

Cost of deposits 5.1 6.1 4.4 5.1 5.2

Cost of borrowings 8.0 7.7 5.6 6.4 7.0

Spread 2.8 2.7 2.9 3.0 2.9

Cost-income 49.2 43.4 41.4 43.0 42.8

Tax rate 34.9 34.8 34.7 33.6 33.5


BFSI

Balance sheet (INR mn)

As on 31st March FY08 FY09 FY10E FY11E FY12E

Liabilities

Equity capital 3,599 3,602 4,053 4,090 4,090

Reserves 84,108 98,546 156,393 182,638 217,267

Net worth 87,707 102,148 160,446 186,729 221,358

Sub bonds/pref cap 34,293 53,344 71,558 78,558 98,558

Deposits 876,262 1,173,741 1,413,002 1,783,019 2,249,711

Borrowings 56,240 101,855 100,137 117,637 139,637

Other liabilities 41,276 46,133 61,335 51,948 35,705

Total 1,095,778 1,477,220 1,806,479 2,217,892 2,744,969

Assets

Loans 596,610 815,567 1,043,431 1,314,723 1,656,551

Investments

Gilts 201,788 277,272 341,959 433,350 549,550

Others 135,263 186,031 217,789 269,511 334,062

Cash & equi 125,042 150,709 152,064 158,661 175,400

Fixed assets 9,230 10,729 12,224 12,068 12,092

Other assets 27,845 36,912 39,011 29,579 17,314

Total 1,095,778 1,477,220 1,806,479 2,217,893 2,744,969

Balance sheet ratios (%)

Credit growth 60.6 35.7 23.7 25.9 25.9

Deposit growth 49.1 33.9 20.4 26.2 26.2

EA growth 49.8 35.0 22.8 24.0 24.8

SLR ratio 21.6 21.7 22.6 22.8 23.0

C-D ratio 80.3 81.4 83.7 83.5 83.3

Low-cost deposits 45.7 43.1 46.7 47.2 47.8

Gross NPA ratio 0.7 0.9 1.1 1.1 0.9

Net NPA ratio 0.4 0.4 0.4 0.4 0.3

Provision coverage 49.8 63.6 68.2 72.0 69.1

Incremental slippage 0.9 1.3 1.9 1.3 1.2

Net NPA / Equity 2.8 3.2 2.6 2.5 2.5

Capital adequacy 13.7 13.7 15.8 17.3 16.5

- Tier 1 10.2 9.3 11.2 13.1 12.3

Book value 243.7 283.6 395.8 456.5 541.2

ROA decomposition (%)

Year to March FY08 FY09 FY10E FY11E FY12E

Net interest income/Assets 2.9 3.0 3.1 3.3 3.3

Fees/Assets 1.8 2.1 2.0 1.9 1.9

Investment profits/Assets 0.2 0.2 0.4 0.3 0.2

Net revenues/Assets 5.0 5.3 5.6 5.5 5.4

Operating expense/Assets (2.4) (2.3) (2.3) (2.4) (2.3)

Provisions/Assets (0.7) (0.8) (0.9) (0.6) (0.5)

Taxes/Assets (0.7) (0.8) (0.8) (0.8) (0.9)

Total costs/Assets (3.7) (3.8) (4.0) (3.8) (3.6)

ROA 1.2 1.5 1.6 1.7 1.7

Equity/Assets 6.9 7.6 8.2 8.8 8.3

ROAE 17.6 19.1 19.2 19.0 20.7


Axis Bank

Valuation metrics

Year to March FY08 FY09 FY10E FY11E FY12E

Diluted EPS (INR) 29.8 50.4 62.0 80.7 103.4

EPS growth (%) 31.2 69.3 23.1 30.1 28.1

Book value per share (INR) 243.7 283.6 395.8 456.5 541.2

Adjusted book value/share (INR) 238.9 277.2 388.6 448.5 531.9

Diluted P/E (x) 49.3 29.1 23.6 18.2 14.2

Price/ BV (x) 6.0 5.2 3.7 3.2 2.7

Price/ ABV (x) 6.1 5.3 3.8 3.3 2.8

Dividend yield (%) 0.4 0.7 0.8 1.0 1.2

Price to income (x) 17.2 11.8 10.4 9.0 7.4

Price to PPOP (x) 26.1 15.3 13.1 10.8 8.5

No of shares (mn) 360 360 405 409 409


BFSI

Company Absolute

reco

Relative

reco

Relative

risk

Company Absolute

reco

Relative

reco

Relative

Risk

Allahabad Bank BUY SO H Axis Bank BUY SO M

Bank of Baroda BUY SO L Federal Bank BUY SO M

HDFC HOLD SU L HDFC Bank HOLD SP L

ICICI Bank BUY SO L Indian Overseas Bank HOLD SU H

Infrastructure Development

Finance Co Ltd

HOLD SU M ING Vysya BUY SP H

Karnataka Bank BUY SO L Kotak Mahindra Bank BUY SP L

LIC Housing Finance BUY SP M Manappuram General

Finance

HOLD SU M

Oriental Bank Of Commerce BUY SU H Power Finance Corp BUY SO L

Punjab National Bank BUY SO L Reliance Capital HOLD SP M

Rural Electrification Corporation BUY SO L Shriram City Union Finance BUY SO H

South Indian Bank BUY SO H SREI Infrastructure Finance UNDER

REVIEW

SO L

State Bank of India BUY SP L Syndicate Bank BUY SP H

Union Bank Of India BUY SO L Yes Bank BUY SO M

RATING & INTERPRETATION

ABSOLUTE RATING

Ratings Expected absolute returns over 12 months

Buy More than 15%

Hold Between 15% and - 5%

Reduce Less than -5%

RELATIVE RETURNS RATING

Ratings Criteria

Sector Outperformer (SO) Stock return > 1.25 x Sector return

Sector Performer (SP) 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 Criteria

Low (L) Bottom 1/3rd percentile in the sector

Medium (M) Middle 1/3rd percentile in the sector

High (H) Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING

Ratings Criteria

Overweight (OW) Sector return > 1.25 x Nifty return

Equalweight (EW) Sector return > 0.75 x Nifty return

Sector return < 1.25 x Nifty return

Underweight (UW) Sector return < 0.75 x Nifty return


Axis Bank

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021. Board: (91-22) 2286 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Head Research [email protected] +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

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 116 45 12 176 * 3 stocks under review

Market Cap (INR) 110 53 13

> 50bn Between 10bn and 50 bn < 10bn

Date Company Title Price (INR) Recos

Buy Hold Reduce Total

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Axis Enam Merger

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