Is Axis Bank a good investment ?

Axis Bank Analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/2/20233 min read

Axis Bank
Axis Bank


1.What is a good investment?

2.What are the factors to be considered while analyzing banks?

3. How does Axis Bank perform on these factors?

4. Is Axis Bank a good investment?


1. What is a good investment?


Ben Graham defined investment as below:


“An investment operation is one which, on thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”


If I had to invest any amount I would look at the following criteria.


What’s the current rate of inflation?

How much are the bonds yielding, especially the 10Y?

Are there any investments which can give me more return than the bonds above?


The answers currently as on 24-06-2023 according to me would be as follows:


Around 4-5%

Around 7%

Investing in an index ETF has returned over 7% in the last 10 years if I am not wrong.


From the above it seems that at a minimum we should target a return of more than 7% for any investment that we make at present considering the data points above.


But how do we know if Axis Bank can give us more than 7% returns in the upcoming period?


2. What are the factors to be considered while analyzing banks?


The following ratios can help us to know if a bank is a good investment.


a. ROE over the last 10 years

b. Net Interest Margins over the last 10 years

c. Non Performing Assets Ratios over the last 10 years

d. Leverage (Debt / Equity) over the last 10 years

e. Coverage ratios over the last 10 years



3. How has Axis Bank performed on these factors over the last 10 years?


a. ROE over the last 10 years


ROE has been between 0.5% and 18% in the last 10 years.


b. Net Interest Margins over the last 10 years


NIMs have been in the range of 3.5% to 4% in the last 10 years.


c. Non Performing Assets Ratios over the last 10 years


NPAs have been in the range of 0.7% to 3.4% in the last 10 years.


d. Leverage (Debt / Equity) over the last 10 years


Leverage has been between 133% and 242% over the last 10 years.


e. Coverage ratios over the last 10 years


Provision Coverage Ratio has been between 52% and 75%.


Capital Adequacy Ratio has been between 15% and 20%.


4. Is Axis Bank a good investment?


Based on the above factors Axis Bank seems to be satisfying the criteria of safety of principal.


Now let's look if it can provide a satisfactory return. Based on the CMP of 958 and EPS of 35 its yield is less than 4% which is not a satisfactory return.


Even if we consider that sales and profits have grown at more than 12% compounded for the last 10 years it means its sales and earnings could double every 6 years if it continues at the same pace.


Current earnings - say x

Earnings in 6 years - 2x

Earnings in 12 years - 4x

Earnings in 18 years - 8x

Earnings in 24 years - 16x

Earnings in 30 years - 32x


At the end of Mar 2023 , EPS was around Rs.30 and price was around Rs.800 giving a P/E of 800/30 which is approx. 26.66 and a bit on the higher side than normal.


If the above assumptions are correct the EPS in March 2053 would be 30 * 32 = Rs.640.


Assuming a P/E of 20 the price would be 640*20 = Rs.12,800 which is 16 times the price of Rs. 800 at the end of March 2023.


If we consider a price increase of 16 times in 30 years it indicates a growth of less than 10% which is not a very good return.


Assuming a P/E of 30 the price would be 640*30 = Rs.19,200 which is 24 times the price of Rs.800 at the end of March 2023.


If we consider a price increase of 24 times in 30 years it indicates a growth of around 11% which is a decent return but we could get a better return by investing in an index ETF/fund.


If you would like to know more about growth investing by which we assumed the returns and prices above, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw



Conclusion


Although Axis Bank is a good quality business the price at which it is available does not promise a satisfactory return from these levels. I think an index ETF like SensexETF would give a better return than Axis Bank from these price levels.