AT FIRST glance, the deal between Axis bank and Enam Securities appears very expensive,
considering that the bank is paying nearly 16 times Enam's annualized FY11 profit before
tax (PBT). However, given Enam's major strengths in the investment banking and
institutional broking business and higher profitability compared to its peers, the deal should
pay off for Axis bank in the long term.
The acquisition would enable Axis Bank to enter the league of one-stop-shop financial
institutions, currently dominated by ICICI Bank and HDFC Bank. For Axis Bank's
shareholders, earnings upside following the deal will be limited in the short run, given the
bank's much bigger balance sheet size. But the deal fills in the strategic gap in the bank's
service offerings.
While the deal appears to be on the expensive side, it needs to be noted that it is purely
stock based, which means no cash will change hands. This also means Enam's promoters
would hold on to the equity of Axis Bank for at least one year. Given this restriction and the
recent volatility in stock markets, it is perhaps appropriate that Enam has managed to
attract a premium valuation.
For instance, Enam's closest peer Edelweiss Capital trades at over 12 times its annualized
FY11 PBT. Compared to this, Enam's valuation seems way high. But in the event of a further
decline in emerging stock markets, Axis Bank's stock price may also slide, going forward.
Assuming that it declines by over 10%, Enam's valuations would come in line with those of
its peers.
Another compelling factor is Enam's operations are yielding far superior margins at over
40% compared to 25-30% margins of its peers. Axis Bank would also get access to Enam's
experienced team, which includes over 400 professionals. This is crucial since the
investment banking business is purely relationship driven.
One concern for Axis Bank is the duplication of services. A few analysts point out that the
bank already has an investment banking licence and a broking subsidiary. Given this, it will
be critical to see how well the bank identifies synergies with Enam's acquired operations.
As part of the deal, the bank would issue fresh equity to Enam's promoters, which would
form over 3.3% of the enlarged equity base, post deal. The resulting dilution in the bank's
earnings per share in the short term would be less than 0.5%, which need not stoke
concerns. The bank has most of its fundamentals in place with a healthy growth in the loan
book and a robust asset quality. Its current stock price is 3.4 times its book value, lower
compared to HDFC Bank's 4.7. The bank's stock might see a small dip in the near term,
given the market's perception of steeper valuation of Enam. However, the valuations would
be justified once the acquired businesses start contributing to the bottom-line.
Equity Diversified 
