We have come out positive on Axis bank after our recent management meeting, and believe that concerns on the bank’s credit quality have been overdone.
A large part of Axis’ loans to property developers are in the form of lease rental discounting, backed by lien on property.
Cash margins - used for leveraging cheaper interest rates on ECBs - back ~65% of loans to gems and jewellery.
The decline in interest rate arbitrage will lead to a decline in most non-fund based exposures, minimizing default chances. However, exposure to metals, shipping and SME sectors could lead to potential defaults.
At Rs322, the stock is quoting at 6.6x FY09E earnings and 1.2x FY09E book value.
We are reversing our short position in our ’long short portfolio’ and increasing the weight in our ’long only portfolio’, as we believe that current valuations have already factored in risks of higher defaults - a concern for the bank.
We initiate a tactical BUY call with a target price of Rs400 in the short-term.