The acquisition provides Axis Bank a strong footing in the equity capital market arena and should prove to be earnings accretive in the long term.
While the stock fell 2.72 per cent on Thursday, as against the BSE Bankex’s 1.6 per cent, most analysts are bullish on the bank’s future prospects.
One-stop shop
As per the deal, Enam would de-merge its investment banking, institutional equities, retail equities and financial product distribution businesses to Axis Securities—a subsidiary of Axis Bank. Equity capital market contributed 49 per cent, broking 40 per cent and retail 9 per cent to overall revenues of the acquired businesses of Enam, says an Edelweiss Securities report.
Enam brings strong investment banking and institutional brokerage franchise, complementing the debt market, commercial banking and project finance franchise of Axis Bank. This deal will bring about 400 talented personnel from Enam, along with its large institutional client base of nearly 200. The latter has been built over a number of years and is very valuable. Its significance can be gauged from the fact that it takes significant amount of credibility, hard work and time to secure good clients in the institutional space, indicating high entry barriers. Corporate relationships of Enam will also help Axis increase its penetration levels across its businesses. On the other hand, the acquired businesses will be a part of a larger banking franchise and benefit from the balance sheet strength of Axis Bank.
Axis Bank’s PE fund and an AMC (Axis MF) will also complement Enam’s business, while the bank’s distribution network of 1,100 branches should help enhance Enam’s retail broking network. The deal offers tremendous cross selling opportunities and will enable the bank to offer a larger bouquet of financial products and services.
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Some challenges
Broking and investment banking are people centric businesses and attrition in the top management of Enam’s acquired businesses are among key risks facing Axis Bank. However, the restrictive clauses, including lock-in of shares allotted to Enam promoters and non-compete clause (for five year period), dilute this risk to some extent. Of the total compensation, 90 per cent will go to shareholders of Enam, while the remaining 10 per cent will go to the employees trust. The benefit will accrue to employees only after three years provided they stay in service.
That apart there are other tools as well including stock options, which Axis can use to retain talent.
Says Jagannadham Thunuguntla , strategist and head of research, SMC Global, “Since Axis Bank does not have a big scale equity business, integrating Enam people will not be too difficult. I believe human resources will not be a big challenge in this case”.
While integration is one part, extracting synergies and scaling up the acquired businesses and the supplementary businesses where Axis itself has limited presence (like retail broking) will determine how good the deal has been for the bank.
Valuations
For now, the deal valuations look reasonable, says Thunuguntla. Prabhudas Lilladher’s analyst, too, say the deal valuations are reasonable.
The numbers are also supportive. Enam reported revenues of Rs 240 crore and pre-tax profit of Rs 92 crore in FY10. For the period between April 1 and October 20, revenues stood at Rs 180 crore and pre-tax profit of Rs 77 crore (estimated net profit of Rs 60 crore). Assuming that FY11 net profit works out to Rs 100 crore, the deal values Enam’s target businesses at around 20 times earnings, a 20-25 per cent premium to peers (which trade at 15-17 times).
However, net profit margins of Enam are superior at 33-35 per cent vis-a-vis about 25 per cent for peers. On the other hand, adjusted for net current assets (mainly cash equivalents) worth Rs 300 crore which are a part of the deal, the PE multiple drops to about 17 times.
Meanwhile, analysts expect Axis Bank’s EPS to grow at a robust pace in FY11 and FY12 on the back of its banking business. While the earnings accretion due to the deal is almost neutral for now, it is expected to accelerate in 2-3 years.
| IMPACT ON BOOK VALUE, EPS | |
| in Rs crore | FY11 |
| Standalone Networth | 18,673 |
| Add: excess of net asset over paid value of share | 273 |
| Revised networth | 18,946 |
| Book value | 448 |
| Revised book value | 457 |
| Change (%) | 1.9 |
| PAT | 3,301 |
| Addition | 95.2 |
| Revised PAT | 3,396 |
| New EPS | 80.3 |
| Earlier EPS | 80.7 |
| Change (%) | 0.5 |
| Source: Edelweiss | |
Most analysts have a ‘buy’ on the stock with price targets ranging Rs 1,600-1,800.
| ON FIRM GROUND | ||
| in Rs crore | FY11E | FY12E |
| Net revenues | 10,767 | 13,096 |
| growth (%) | 20.3 | 21.6 |
| Net int. income | 6,457 | 8,058 |
| Net profit | 3,301 | 4,229 |
| EPS (Rs) | 80.7 | 103.4 |
| growth (%) | 30.1 | 28.1 |
| P/E (x) | 18.2 | 14.2 |
| Price/ad. book (x) | 3.3 | 2.8 |
| E: Estimates Source: Edelweiss | ||