Why Axis Bank PE Ratio(199) is Misguiding?

Axis Bank Stock Analysis

Company Overview

Axis Bank Ltd. established in 1993, has been promoted by the largest and the best financial institutiion of the country, UTI. Axis Bank is the third-largest of the private-sector banks in India offering a comprehensive suite of financial products. The Bank has strengths in both retail and corporate banking. Services offered by bank include Personal Banking, Corporate Banking, NRI banking, Priority banking etc. It has its head office in Mumbai, Maharashtra.

Repo Rate Cut ADVANTAGE

• The Repo rate cut which was declared on 4^th April 2019, is going to have positive impacts on some business sectors. One of these business sectors is banks, specifically corporate banks, which can be benefited from increase in their profitability.
• Banks whose business is more corporate focused, that is they service more and earn more revenue from corporates, are termed as corporate banks.
• Thus, there are high chances of corporates banking benefiting from this rate cut in Repo rate. And Axis bank could be one of the beneficiary.

Axis Bank Stock Analysis

Let’s analyse the various aspects of this bank:

P/E Ratio of Axis Bank

• The stock of Axis bank is having the trailing P/E ratio of around 199 (As on Dec-2018) That is for an earning of Rs. 1, an investor is paying Rs. 199.
• Doesn’t that look too costly? Well, this P/E ratio of Axis bank can be misguiding and there are some reasons behind this high P/E ratio. One cannot just analyse this PE ratio so simply.

What is P/E Ratio?

• P/E ratio i.e., Price-to-Earnings Ratio = Current share price ÷ Earnings per share
• If current share price of a stock is 20 and earnings per share is 5. then, P/E ratio would be 4. It means to own this particular stock an investor is willing to pay 4 rupees for every rupee the stock is earning.
• The PE ratio of Axis Bank cam be calculated as follows:
• PE ratio can also be looked at in a different way,
• Trailing PE Ratio = Market Capitalization ÷ Net Profit (TTM)
• Here, Market Capitalization = Number of Shares × Current Market price of the company and, Net Profit is of the Trailing Twelve Months (TTM), that is last 12 months (till December-2018 as March-2019 numbers haven’t been released yet).
• Trailing PE ratio = Rs. 1,96,000 Cr ÷ Rs. 983 Cr = ~199

Why is this PE ratio of Axis Bank Misguiding?

One shouldn’t look at the current PE ratio of Axis bank in isolation. There are some few factors that should be studied along with and they are as follows:

1. Net Profit

• In March 2016 (FY15-16), the bank reported net profit of Rs. 8,224 Cr. This was the peak point. And after this point the problem of NPA’s started.
• In March 2017 (FY16-17), after the start of NPA problems, the bank had to do provisioning. Provisioning means when a loan becomes a Non-Performing Asset (NPA), the bank has to provision for a part of the loan amount (generally 20% of the loan) from their net profits. This why, that year, the Net profit of the bank came down till Rs. 3,600 Cr.
• FY17-18, was even worse for the bank. In this year, in the January to March quarter, the bank had reported a net loss of Rs. (-2,189) Cr. This made a huge dent on the net profits of the bank. The net profit of the bank was just Rs. 276 Cr at the end of March 2018.
• After the March 2018, things again started to take a turn for the good.
• In Q1FY18-19, the net profits pf the bank were reported as Rs. 701 Cr.
• In Q2FY18-19, July to September quarter, the net profits pf the bank were reported as Rs. 790 Cr.
• And in the last quarter, that is October to December quarter, the net profits of the bank were reported around Rs. 1,681 Cr.
• One can see that the profits of the bank are again growing and are normalizing.
• As the net profits came down, the PE ratio of the bank went up.

2. CEO of Axis Bank

• During all these happening, the RBI took objections against Shikha Sharma, ex-CEO & MD of Axis bank. The RBI pointed out some observations in the audit they had conducted and give clear order to Shikha Sharma to resign from her position in the bank.
• Now Mr. Amitabh Chaudhary has been appointed as the new CEO and MD of Axis bank for a period of 3 years from 1^st April 2019 till 31^st December 2021. Earlier, Amitabh Chaudhary was the MD of HDFC Life.

3. Non-Performing Assets (NPA’s)

The NPA’s of the banks have now come under control.

Stock Performance of Axis Bank

• In the last 4 months, the share price of Axis bank, from around Rs. 500 has come up till Rs. 760. In just 4 months, there has been a rise of 50% in the share price of Axis bank.
• The reason behind this could be net profits coming back to the positive side and growing steadily. Also, the new CEO Mr. Amitabh Chaudhary will also add value with his strategies and the company can get a new direction.
• Currently, the share price of Axis bank is around Rs. 755 (as on 8^th April 2019).

Future Outlook of Axis Bank

• The bank has a quarterly peak profit point of close to Rs. 2,100 Cr and has the ability of rising this quarterly peak net profit point to Rs. 2,500. The company has a very wide base and very deep penetration.
• The bank is in the position to go past its March 2016 peak point of Rs. 8,224 Cr net profit in the future. Axis bank has the capacity to earn profits around Rs. 10,000 Cr in the coming couple of years.
• Their business model looks quite strong currently.
• With the new CEO in charge there is a new perspective in the company and a new positivity.
• Now, Taking into consideration the expected profits Rs. 10,000 Cr,
• Forward P/E ratio would be = Rs. 1,96,000 Cr ÷ Rs. 10,000 Cr = 19.6 (~20)

Summary

1. Don’t just analyze the bank based on the PE ratio of Axis bank. Similar should be done as well with SBI and ICICI.
2. There are other factors such as the increasing net profits and a new CEO in charge that play role in the analysis of the bank.
3. Axis bank has passed the rough phase and now looks ready to grown from this point forward.
4. The future of the bank looks very strong in terms of both, bank’s financial performance as well as bank’s stock performance.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that this is a bad company, or the stock of this company is bad.
• We are also not suggesting anyone to immediately go and buy this stock or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.