>Axis Bank (UBS)

Stock trading at attractive valuations
AXIS bank stock has corrected 35%, and has underperformed the Sensex by 26% in the last 3 months. We find value in the stock at current valuations (upside of 65% to our target price), despite long-term concerns and are upgrading to Buy from Neutral. We remain wary of: 1) the exit of its dynamic CEO in July 2009; and 2) the equity overhang as SUTI, a key shareholder plans to offload its stake.

Aggressive growth in advances may lead to asset deterioration
Total advances grew 55% and retail by 30% in the face of a slowing economy. While net NPL ratio of 0.4% is not a concern for now, we expect the growth in SME advances (57%), unsecured personal loan (41%) and credit cards (30%) may lead to pressure on asset quality in coming quarters. Our valuations assume a 200% increase in NPLs and a provision coverage ratio of 80%.

Earnings growth could remain strong because of expansion
We expect 18% growth in earnings and an average ROE of 17-18% in FY09-11 against a 3 year earnings growth of 31%. Risks to our earnings could come from change in strategy from new management, impacting continuity and thus operations. In the short term higher NPL provisions could put pose risk to earnings.

Valuation: Buy rating and Rs 540 target price
AXIS Bank is trading at a PE of 7.3x and 1.2x PBR FY09E EPS and BVPS. We base our price target of Rs 540 on a residual income model, assuming cost of equity of 12.5%, long-term sustainable ROE of 16% and terminal growth of 5%. We estimate a BVPS of Rs.280 and ABVPS of Rs.255 for FY09.

To see full report: AXIS BANK