Digital Expansion And Green Projects Will Support Future Competitiveness

Key Takeaways

• Strategic focus on deposit quality and loan growth in specific segments aims to stabilize margins and diversify revenue.
  
• Investments in technology and operations optimization are poised to enhance growth and improve net margins.
  
• Lagging deposit growth, increasing loan slippages, and economic uncertainties could pressure revenue growth and asset quality, impacting Axis Bank's financial performance.

Catalysts

Engages in the provision of various banking and financial products and services.

• Axis Bank is focusing on becoming a resilient all-weather franchise by improving deposit quality, which should help stabilize and potentially increase net interest margins due to a better deposit cost structure.
  
• Loan growth in focused segments like small businesses, SME, and mid-corporate sectors is expected to drive revenue growth, providing a diversification in income streams and reducing reliance on retail lending.
  
• The bank's GPS strategy focuses on building competitive advantages for sustainable growth, which could lead to improved earnings as strategic objectives align with operational efficiencies.
  
• The bank's investments in new technologies and partnerships, like the digital expansion and collaboration with IFC for green projects, could boost growth in high-margin business areas, enhancing future earnings.
  
• Axis Bank is making strategic management choices to optimize operating expenses, which should help improve net margins by aligning cost structures with revenue growth.

Axis Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Axis Bank's revenue will grow by 17.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.9% today to 33.4% in 3 years time.
• Analysts expect earnings to reach ₹366.2 billion (and earnings per share of ₹118.22) by about January 2028, up from ₹281.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2028 earnings, up from 10.8x today. This future PE is greater than the current PE for the GB Banks industry at 9.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.22%, as per the Simply Wall St company report.

Axis Bank Future Earnings Per Share Growth

Risks

• Axis Bank's deposit growth has been lagging behind some of its private sector peers, which could put pressure on future revenue growth if they are unable to compete effectively on deposit pricing or acquisition.
  
• The bank is experiencing increased slippages in unsecured retail loans, such as personal loans and credit cards, indicating potential risk to asset quality, which can elevate provisioning costs and impact net margins.
  
• The broad economic environment, including inflation and macroeconomic uncertainties, is challenging and might impact the bank's cost of funds, consequently affecting earnings.
  
• A cautious stance adopted due to heightened industry delinquencies, particularly in sectors like microfinance, can slow down loan book growth, potentially impacting revenue streams.
  
• Operating expenses have been subjected to rigorous control, but further efficiency gains might be challenging in the near term, potentially constraining improvements in net margins.

Valuation

• The analysts have a consensus price target of ₹1292.29 for Axis Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1590.0, and the most bearish reporting a price target of just ₹1042.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹1097.2 billion, earnings will come to ₹366.2 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹983.3, the analyst's price target of ₹1292.29 is 23.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.