Financial Analysis of Axis Bank

CORPORATE FINANCE END TERM PROJECT To chew over the Financials of ICICI banking company, HDFC bank and axis vertebra bank and to conduct Comparative Financial epitome among them. UNDER THE GUIDANCE Dr. ASHISH GARG PROGRAM COORDINATOR PGDM (FINANCE) Submitted byJanmey Patel (202) Nikhil Arora (206) Shashank Mohore (228) Aniket Gupta (229) Parandeep Singh Chawla (231) TABLE OF CONTENTS Overview of Indian desireing manufacture4 Types of Commercial curse4 Public heavens marge4 Private Sector margin4 Foreign brim4 regional Rural bounds4 Overview of ICICI stick 5Overview of axis of rotation imprecate 5 Overview of HDFC Bank 5 dribble Analysis6 contain & jeopardy Analysis7 Calculations7 term7 risk of exposure7 output7 adventure & Returns Figures8 Covariance & coefficient of correlations8 Terms8 correlational statistics Effect8 Covariance & Correlation Figures8 Portfolio Variance & measuring stick diversionary attack9 Portfolio Return Figures9 Portfolio Risk Figu res9 woo of nifty10 speak to of Debt10 hail of comeliness10 hail of Debt & integrity Figures10 Weighted Average approach of capital letter Calculations11Comparative Analysis11 Leverages11 Leverage Figures12 Graphical Representation for Leverages12 P/E symmetry Analysis13 P/E proportionality Figures13 Dividend Policy Analysis13 Dividend profess and Dividend Payout symmetry14 Conclusions and inference14 Return14 Risk15 Choice found upon Risk and Return15 Cost of great(p)16 Choice Based on Cost of jacket crown16 PE Ratio Analysis17 Leverage17 Dividend Policy18 Overview of Indian Banking Industry Types of Commercial Bank Public Sector Bank In case of Public Sector banks the major shargonholders is Government of India.For congresswoman dry land Bank of India, Punjab National Bank, Bank of India etc. Private Sector Bank In case of Private Sector Banks the major assignholders are Private Individuals. For example ICICI Bank, bloc Bank, HDFC Bank etc. Foreign Bank In cas e of Foreign Bank the major Shareholders are the outside entities. For example Standard Chartered Bank, Citi Bank, HSBC etc. Regional Rural Banks In case of Regional Banks the major dowerholders are Central Government, Concerned State Government and Sponsor Bank in the ratio of 501535.For example Andhra Pradesh Grameena Vikas Bank etc. Overview of ICICI Bank ICICI (Industrial Credit and Investment potbelly of India) Bank offers a wide range of banking products and financial services to bodied and retail customers through with(predicate) a variety of delivery channels and through its specialized subsidiaries in the areas of investment banking, life and non-life insurance, venture crownwork and asset management. ICICI bank is the 2nd largest bank in India by assets and 3rd largest bymarket capitalization.Overview of axis Bank axis vertebra Bank was begun its operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted c onjointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI), action Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and former(a) quartet PSU insurance companies, i. e. National Insurance caller Ltd. , The New India Assurance order Ltd. , The Oriental Insurance Company Ltd. nd United India Insurance Company Ltd. Overview of HDFC Bank HDFC (Housing Development Finance Corporation Limited) bank was amongst the first to own an approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBIs liberalization of the Indian Banking Industry in 1994. HDFC Bank is the fifth largest bank in India by assets and the bite largest bank bymarket capitalizationas of march 31, 2012. Stock AnalysisBankex (Index tracking the performance of leading banking sector airs) has grown at a compounded annual prize of about 31%. Indias rude domestic product (GDP) growth give make the Indian banking persistence the third largest in the world by 2025. In coming age with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the circulating(prenominal) asset size of USD 1,350 billion. Return Risk Analysis Calculations 1) The effortless stock prices for the 3 banks for the duration of 5 years are taken from Nifty. 2) For the daily stock prices of the market we took the figures for 5 years of Nifty Bank. ) verbal expression for cursory Return Current Stock Price-Previous Stock PricePrevious Stock Prices 4) Average periodic Return is calculated by taking the average of Daily Returns. 5) Formula for Annualized Daily Return (1+Average Daily Return)249 1 6) Formula for important Covariance(Market, XYZ Bank)Standard DeviationMarket*Standard Deviation(XYZ Bank) 7) Formula for Annualized Standard Deviation (1+Variance(XYZ))249 1 8) Formula for Correlation Covariance(X, Y)Standard DeviationX*Standard Deviation(Y) Terms Risk 1) Risk is the chance that aninvestments actualreturnwill bedifferentthan stocked. 2) Riskis ordinarily measured by calculating he exemplar deviationof the historical returnsoraverage returnsof a specific investment. 3) A high standard deviations indicates a high degree of risk. Return 1. The gain or damageof a security in a particular period. 2. The return consists of theincomeand thecapital gains relativeon aninvestment. 3. It is usually quoted as a percentage. Risk Returns Figures Particulars ICICI Bank Axis Bank HDFC Bank Average Daily Return 0. 001 0. 001 0. 00031 Standard Deviation 0. 034 0. 032 0. 03393 Covariance (Nifty Bank, X) 0. 001 0. 001 0. 00048 Standard Deviation (Nifty Bank) 0. 025 0. 025 0. 02454 Beta 1. 53 1. 077 0. 80000 Annualised Daily Return 0. 159 0. 331 0. 08 Annualised Standard Deviation 0. 580 0. 545 0. 58 Annualised Standard Deviation (Nifty Bank) 0. 402 0. 402 0. 40 Covariance Correlations Terms Correlation Effect 1. Relationship depends on correlation coefficient 2 . -1. 0 r +1. 0 3. The smaller the correlation, the greater the risk reduction potential 4. If r = +1. 0, no risk reduction is possible Covariance Correlation Figures Covariance ICICI Bank Axis Bank HDFC Bank ICICI Bank 1. 00000 0. 00081 0. 00058 Axis Bank 0. 00081 1. 00000 0. 00052 HDFC Bank 0. 00058 0. 0052 1. 00000 Correlation ICICI Bank Axis Bank HDFC Bank ICICI Bank NA 0. 00255 0. 00174 Axis Bank 0. 00255 NA 0. 00167 HDFC Bank 0. 00174 0. 00167 NA Portfolio Variance Standard Deviation Portfolio Return Figures Equal Weight Portfolio Return Particulars Return Weight Portfolio Return ICICI 16 0. 33 5. 333 HDFC 8 0. 33 2. 667 AXIS 33. 07 0. 33 11. 023 constitutional 19. 023 Portfolio Risk Figures RISK (%) ICICI 0. 58 HDFC 0. 58 AXIS 0. 55 Portfolio 0. 3278 Cost of upper-case letter It is the minimum place of return the suppliers of capital would expect to become if the capital were invested.Cost of Debt Cost of debt is calculated using the approach pattern cost of debt kd= care X (1-t)debt 1) Interest is the tot paid by the company as a interest on the Debt in the current year. It is taken from the emolument Loss statement of the company. 2) Debt is commodious term debt which we have taken from the ease Sheet of the Company. 3) The tax rank t is the corporate tax rate and is compeer to the 33. 9%. Cost of Equity The Cost of Equity in this case has been calculated with the help of Gordan Dividend Model. Cost of Equity ke=Proposed DividendMarket Price per Share* figure Of Shares+Dividend Growth roam Cost of Debt Equity FiguresParticulars ICICI Bank Axis Bank HDFC Bank Interest (Interest Expenses) Rs. 8,50,44,350. 00 Rs. 1,79,32,646. 00 Rs. 2,29,99,060. 00 Total Debt Rs. 1,40,16,49,073. 00 Rs. 34,07,16,721. 00 Rs. 23,84,65,086. 00 Corporate Tax Rate 30. 00% 30. 00% 30. 00% Cost of Debt (kd) 4. 25% 3. 68% 6. 75% Equity Capital Rs. 1,15,27,683. 00 Rs. 41,32,039. 00 Rs. 46,93,377. 00 Proposed Equity Share Dividend Rs. 1,90,20,400. 00 Rs . 77,00,725. 00 Rs. 1,17,27,733. 00 Number of Shares 13565154 41,32,03,952 23,36,704 Dividend Growth Rate (g) 17. 95% 14. 87% 30. 06% Cost of Equity (ke) 18. 11% 14. 87% 31. 02%Weighted Average Cost of Capital Calculations Comparative Analysis Leverages The supplement analytic thinking consists of 1) Operational Leverage outlined by stratum of Operational Leverage. 2) Financial Leverage defined by Degree of Financial Leverage. 3) Total leverage defined by Degree of Combined Leverage. Operational Leverage (DOL) = % change in EBIT % change in gross sales Financial Leverage (DFL) =% change in EPS% change in EBIT Total Leverage (DCL) = % change in EPS% change in Sales = DOL* DFL Leverage Figures Graphical Representation for Leverages P/E Ratio Analysis P/E ratio is calculated using the formula P/E RATIO=Current market price of share EPSP/E Ratio Figures Dividend Policy Analysis Dividends paid by a firm are measured using one of two measures. 1) Dividend dampen Which relates the di vidend paid to the price of the stock. Dividend Yield=Annual Dividend per Share Market rate per Share 2) Dividend Payout Ratio Relates dividend paid to the earning of the Firms. Dividend Payout Ratio=Dividend Distributed Total Earnings Dividend Yield and Dividend Payout Ratio Particulars ICICI Bank Axis Bank HDFC Bank Dividend Paid (000s) Rs. 19,013,434 Rs. 6,697,611 Rs. 7,695,463 Number of shares 13,565,154 413,203,952 2,336,704 Dividend per share 1. 402 0. 016 3. 293Intrinsic value per share 890. 2 1146. 2 519. 85 Dividend Yield 0. 157% 0. 001% 0. 634% Earnings (000s) Rs. 103,860,000 Rs. 74,308,700 Rs. 89,504,000 DP Ratio 0. 183 0. 090 0. 086 Retention Ratio 0. 817 0. 910 0. 914 Conclusions and Inference Return As one piece of ass see from the to a higher place graph , Axis Bank offers the highest returns per annum at 33% , followed up by ICICI and HDFC Bank at 16% and 8% respectively. It can be safely cerebrate that Axis Bank is the best option to invest in. Let us now have a look at the Risk abstract before we go any further. Risk The following chart depicts the Risk witnessed by each of the Banks.As one will notice, each of the three Banks i. e. ICICI , Axis and HDFC Bank belong to the same risk class. Risk of ICICI and HDFC Bank is equal at 58%, while that of Axis Bank is little disdain at 54%. There is not much to have amongst the Banks when it boils down to Risk. Choice based upon Risk and Return Based upon Risk and Return Assessment Axis Bank stands out to be a excrete choice. On one business deal it offers returns which are twice that of ICICI Bank and four times in comparison to HDFC Bank, on the other hand, its risk is marginally lower than that of the other two Banks, which makes AXIS Bank to be the standout choice.Cost of Capital The Cost of Capital of each Bank is depicted in the following chart As one can see from the above chart The total cost of Capital for ICICI Bank averages out to be 8. 42%, Whereas Axis Bank has a WACC of 8. 1 5 % and HDFC bank has its cost of capital in excess of 20%. HDFC Bank needs to rest period its Equity and reserves with more(prenominal) of Debt, if it wants to lower down its WACC. Cost of Capital for HDFC Bank is high primarily owing to its huge Cost of Equity which is more than 30%. It needs to substitute more of debt in its Capital Structure if it wants to reduce its hurdle rate.Choice Based on Cost of Capital If one is viewing the affairs og the company based on the Cost of Capital, HDFC gets eliminated without any second thought. It needs to bring down its Cost of Capital if it wants to sustain in the long run. While on the other hand there is not much to spot between ICICI and Axis Bank , as both of them have almost the same hurdle rate close to 8%. PE Ratio Analysis The PE Ratio of ICICI and Axis Bank is very much comparable. ICICI Bank has a PE ratio of around 15 , whereas, the same for Axis Bank Hovers around at 11.One can considerably draw a conclusion that investors are willing to pay more for ICICI Bank and also expect a higher growth rate in its earnings in the future. Following Chart depicts the comparative analysis of ICICI Bank along with HDFC Bank and ICICI Bank. It can be clearly seen that the PE ratio of ICICI Bank and Axis Bank are Comparable. But, the PE Ratio of HDFC exceeds 120. One can safely draw a conclusion that the Market Price of HDFC Bank is highly overpriced compared with the Industry average and one can expect a downfall in its share prices in the near future, because such(prenominal) high level of PE Ratio cannot be sustained in the long run.Leverage The Position of Leverages for each of the Banks depict the same story. Following chart will substantiate it Each of the Banks has a operating leverage lower than 1 , which implies that EBIT is not increasing in the same proportion as the sales of these Banks. Even the degree of financial leverage and the degree of combined leverage of each of these three Banks is comparable an d there is not much to choose from when it comes to leverages. Dividend Policy When it comes to total dividend Paid by the Bank, ICICI Bank exceeds the two other Banks with quite a margin.The following Chart depicts the situation more comprehensively As one can see from the Chart ICICI Bank is the clear leader when it comes to the amount of dividend paid, while there is not much to choose between Axis Bank and HDFC Bank. Total Amount of Dividend Paid doesnt show the true picture as , it has not been adjusted for turn of withalts of shares. In other words , Dividend per share will show the impound picture. Following chart will depict the amount of dividend paid by each bank per share.As one can see clearly from the graph above , it is the HDFC Bank which is more liberal while declaring the dividend vis-a-vis ICICI and Axis Bank. HDFC pays dividend in excess of Rs 3 per share. ICICI pays a dividend just exceeding a rupee on a share. While, Axis Bank doesnt even pay 50 paisa on a sh are. From Investors point of view who wants a steady flow of Income, HDFC stands out to be the most logical choice of Investment. Such an Investor should obviously resist and desist from investing any amount of money in AXIS Bank.