The Axis Bank Q4 results were shocking, to say the least. The net loss for the fourth quarter came in at a perilous level of Rs.2188 crore. This was largely driven by higher provisioning. The Gross NPAs for the quarter went up sharply to a level of 6.77%. However, the markets appeared to see some humor in these numbers as the stock spurted by over 8% during the day before settling at a level 6% higher. Is the stock spurt justified and is it really sustainable?
Bad debts get worse…
Some of the numbers reported by Axis Bank for the fourth quarter were virtually staggering. The company reported a loss of Rs.2188 crore against a net profit of Rs.1225 crore in the corresponding quarter last year. The bank’s provisions for bad loans were up almost 2.55 times from Rs.2811 crore to Rs.7179 crore. Just the slippages during the quarter were in excess of Rs.16,300 crore. The only redeeming feature of the quarter was that the stressed loan pool had fallen to just Rs.11,500 crore on the back of very aggressive provisioning. However, this is just the known stressed loan pool. As we have seen in the past, Axis Bank has managed to surprise on the negative side in terms of quality of assets. That point cannot be overlooked. Some analysts have also opined that this could represent the bottoming of the NPA cycle at Axis since most of the power loans have also been provided for!
Does it look cheap?
One of the reasons proffered for the sharp rise in the stock price is that Axis Bank may have front ended most of the bad loan recognition in this quarter. However, it cannot be denied that in the last 8 years since Shikha Sharma took over at the helm of Axis Bank, the NPAs have really ballooned beyond the wildest imagination. Of course, the stock is currently available at about 1.7 times book but that is not to say much about its undervaluation. Private Banks like HDFC Bank, Kotak Bank and IndusInd Bank get spectacular valuations on P/BV basis largely due to their strong control over the NPA situation. Also their books are predominantly retail whereas Axis still has a very large corporate book. So considering Axis as cheap based on P/BV could almost amount to comparing apples with oranges.
Worries far from over…
The fact that Shikha Sharma will be moving on towards the end of the year is an indication that all is not well at the bank. As a part of the major benchmark indices, Axis Bank, like ICICI Bank, may have an inherent advantage. However, that cannot be a valuation case. CSFB had rightly pointed out that the non-corporate stress will continue to weigh on the asset quality of the bank. The woes may be far from over. It calls for caution before jumping into the stock on a valuation argument!
