Event update: Axis Bank (Upgrade to Outperformer) - Leadership matters a lot

RBI has approved the appointment of Mr Amitabh Chaudhry as MD & CEO of AXIS Bank for three years starting Jan-1, 2019. Mr Chaudhry is currently the CEO of HDFC Life Insurance. We believe this is a game changer for AXIS Bank. Mr Chaudhry has a varied and successful background in retail (through life insurance), technology and corporate banking.

AXIS Bank’s brand image weakened over the last few years: A sharp rise in corporate NPLs, issues relating to demonetization and divergence were three key issues that impacted AXIS bank’s brand image and valuations over the last few years. AXIS Bank needs a strong leader to improve profitability and market positioning. We believe AXIS Bank now has the necessary leadership to reclaim its lost market position.

Mr Chaudhry is a turnaround expert:  We would describe Mr Chaudhry as a turnaround expert. He did not have an insurance background when he joined HDFC Life in Jan 2010. At that time, life insurers were going through a tough phase of regulatory changes which impacted their profitability. Moreover, Mr Chaudhry’s competitors were seasoned insurers. Despite a challenging environment, no insurance background and seasoned competition, Mr Chaudhary innovated a whole new segment of credit protection in which the company still has a lead. Under his leadership HDFC Life has a lead in technology, product mix and has amongst the highest margins in life insurance. He is joining AXIS in similar circumstances when the bank is coping with tightening regulation (divergence and Feb 12 circular) like the other corporate banks. We believe AXIS needs a CEO like him to tighten processes, enhance its brand equity and move on to the next stage of growth.

Valuation

The stock has already re-rated in anticipation of this announcement. Since mid-July the stock has delivered an absolute return of 25%. We do not expect earnings upgrades for FY19/20E as high provisioning and slower corporate growth will continue. However, there is a strong case for longer term profitability (FY21E and beyond) to  improve strongly with top quality leadership. While FY20E RoA will likely remain at 1-1.2%, we expect longer term RoA to move back to the 1.7-1.8% range. We also expect Mr Chaudhary to use his insurance expertise to extract more value out of life insurance for AXIS. We raise our target multiple to 2.4x from 1.9x. With subsidiary value of Rs38(unchanged), our new TP is Rs750. We upgrade the stock to Outperformer.