Axis Bank: Moving fast

A significant jump in its net interest income drives bank's profit growth

Axis Bank continued its robust growth in the December 2007 quarter and has once again beaten analysts' expectations on all parameters.

However, the difference this quarter is that the growth in profitability has been driven more by a significant jump in the net interest income (core business) rather than non-interest income unlike in last several quarters.

Net interest income leaped by 91 per cent y-o-y to Rs 747 crore""the highest in the past four quarters""as advances and deposits grew by 50 per cent and 35 per cent respectively and also there was an increase in net interest margin (NIM).

Its NIM went up by 63 basis points q-o-q and 91 basis points y-o-y to 3.91 per cent. This was because of a jump in yield on advances while CASA (current and savings account) was maintained at 45 per cent sequentially.

Though other income went up 74 per cent y-o-y to Rs 488 crore, it was still lower than the 87 per cent growth reported in the September 2007 quarter.

The bank's fee income increased by 81 per cent to Rs 348 crore and trading profits were up 65 per cent to Rs 131 crore in Q3. All these factors led to doubling of operating profit to Rs 672 crore while operating expenses went up 67 per cent.

However, its net profit grew relatively slower at 66 per cent to Rs 307 crore as provisions and contingencies went up 290 per cent and a 68 per cent jump was recorded in tax provisioning. However, growth in net profit is still higher than previous three quarters and has been higher than expectations.

Axis Bank is relatively immune to the slowdown in the retail credit and high cost of funding. This is because retail credit's share of 25 per cent has gone down from 28 per cent last year and other advances like corporate, SME (small and medium enterprises) and agriculture loans have grown faster than retail advances.

The stock closed 2.5 per cent higher on the bourses on Wednesday. However, at Rs 1,096, the stock has risen nearly 50 per cent in the last three months and trades at 4.2 times its FY09 estimated adjusted book value, and looks fairly valued.

iGate: Check on operating costs pays

iGate was able to offset the 1.5 per cent q-o-q rupee appreciation in the December 2007 quarter through a tight check on its operating costs and enhanced volume and billing rates in areas such as ERP and data warehousing.

The US mortgage servicing business, which has been a drain on the company since the fourth quarter of last year, continued to do badly.

As a result, its operating profit grew 15.8 per cent q-o-q in Q3 FY08, while its operating revenues rose 4.3 per cent q-o-q to Rs 209.3 crore. The rupee appreciation affected the top line growth by 2.2 per cent.

Nevertheless, iGate's operating profit margin rose 170 basis points q-o-q to 17.5 per cent in the last quarter. The stock gained about 1 per cent to Rs 401 on Wednesday.

In the September 2007 quarter too, the company had reported a 260 basis points q-o-q growth in its operating profit margin. Meanwhile, in Q3 FY08, iGate expanded its revenues from North America and Asia Pacific on a sequential basis, which helped overall IT services revenues rise by 3.7 per cent q-o-q.

Also, the company was able to leverage a 6.1 per cent q-o-q growth in onsite volumes, coupled with a 3.5 per cent q-o-q growth in onsite billing rates.

No doubt the company's offshore volumes declined 100 basis points q-o-q in the last quarter, but senior management officials pointed out that increased use of relatively less experienced employees helped keep direct costs under check.

The company management is optimistic about the pricing environment and expects to grow revenues by 5-6 per cent sequentially over the next few quarters.

iGate promoters made an open offer through reverse book building at Rs 410 and now own 93.4 per cent in the company. The stock is expected to be delisted. Existing shareholders who have not participated in the offer could do so at the same price.

With contributions from Priya Kansara and Amriteshwar Mathur