Axis Bank rallies 230% under Shikha Sharma; markets see exit as positive

Axis Bank rallied 2.4 per cent at Rs 531 on Tuesday in intra-day deals, extending its Monday’s 3.4 per cent gain on the Bombay Stock Exchange (BSE), after Shikha Sharma, the bank’s managing director and chief executive officer (MD & CEO), decided to step down with effect from December 2018.

Sharma took charge as the MD & CEO of the Bank on June 01, 2009, after her stints with ICICI Bank and ICICI Prudential Life Insurance. During her tenure (2009 – 2018), Axis Bank stock has gained around 230 per cent on the BSE, (compounded annual growth rate of 16 per cent) – outperforming the S&P BSE Sensex that moved up 130 per cent during this period, ACE Equity data show. The S&P BSE Bankex – a gauge of banking stocks on the exchange has rallied a tad higher at 240 per cent since then.

Over the past one year, however, the stock has underperformed the markets by falling nearly a per cent, as compared to the S&P BSE Bankex and S&P BSE Sensex that have gained nearly 14 per cent and 13 per cent, respectively during this period.

The underperformance over the last one year, analysts say, has been on account of the Bank's worsening asset quality led by its corporate loan portfolio.

Large non-performing loan (NPL) divergences for FY2016 and FY2017 further accentuated this issue while its watchlist was not as exhaustive as previously envisaged leading to higher and faster deterioration of its asset book, reports suggest.

“Markets are viewing Shikha Sharma’s exit as a positive. In the last few years, there was no major development, except for acquisition of Enam Securities in 2010. The Bank did not create much wealth for the shareholders in her tenure. That apart, there was stress on asset quality,” says AK Prabhakar, head of research at IDBI Capital.

While the board has not identified a successor yet, analysts expect the bank to continue its journey towards de-risking the business by strengthening the liability franchise and increasing the share of retail and better-rated corporates.

Analysts at Kotak Institutional Equities have maintained an ‘Add’ rating on the stock given its underperformance in the past one year, with a target price of Rs 600, translating into a gain of nearly 13 per cent from the current levels. 

“While there could be short-term pressure on asset quality and provisions we believe that the risk should be lower as there would be acceleration in recognition of the balance of bad loans as per the new RBI directive in the next few quarters. A successor with established credentials in retail will be positive,” writes M B Mahesh of Kotak Institutional Equities in a co-authored report with Nischint Chawathe, Abhijeet Sakhare and Dipanjan Ghosh.

Prabhakar, on the other hand, remains cautious and advises investors wait till there is more clarity on who the successor will be and the strategy roadmap. The upcoming results season, he says, will provide a better entry point, as the bank is likely to report a sub-par performance.

Kunal Shah, an analyst tracking the sector with Edelweiss Research expects the asset quality of the bank to remain under pressure for the March 2018 quarter with the RBI's dispensation on NPA recognition being a dampener to the overall headline numbers.

He pegs the core profit after tax (PAT) in Q4FY18 at Rs 4,906 million, a fall of 60 per cent over the previous corresponding period, and 33.5 per cent lower quarter-on-quarter (q-o-q) basis.

Macquarie has maintained an outperform rating on Axis Bank with a target of Rs 651. The management transition needs to now be managed well and appointment of credible successor will be critical for bank’s performance, their analysts said.