Sucheta Dalal :'Bringing the axe down on Axis Bank': Spark Capital's way
Sucheta Dalal

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'Bringing the axe down on Axis Bank': Spark Capital's way  

March 10, 2010

Over the years, Axis Bank has earned wide admiration for performance, service quality and its governance standards. But for Spark Capital, a Chennai-based brokerage firm, this is just a lot of hot air. A recent newsletter released by the firm is an unusually vicious indictment of the bank's operations. Using the ruse of a chance encounter in a temple in southern India, Spark Capital deals one sledgehammer blow after another to the bank, ending with its own 'sell' recommendation. This is fairly extraordinary, because brokerage firms rarely rip apart even the most badly managed companies, far less one that has made waves for its performance and governance standards.


Spark's report is in the form of a chatty description or an encounter with an "accomplished internal auditor of banks" in a "crisp white dhoti", who is quoted "near verbatim".  The source is strangely described as a Marauder of Banks (MOB).


Here is a sample of MOB's alleged insights for Spark's team after declaring he has an "axe" against Axis. “A Bank is known by the assets it lays out—a clear signal to its risk-reward approach and operational prudence. (Are) you chaps aware of the Rs10 billion plus exposures that AXIS has?” Without waiting for us to respond, MOB went on, rubbing his hands with glee, “Lavasa, Aban, Suzlon, GMR, to name a few… see what I am saying? Nothing wrong with the names per se, but (I) am circumspect about the industry exposure-risk-reward-tenor equation.”


Of course, it does not hit Spark that one would have to be a bit loony if something that is "nothing wrong" but only inspires circumspection leads one to rub “hands with glee".


MOB goes on to tell them, "What do you make of AXIS lending to Megasoft, Omaxe with no clear strategy to take-outs?” At this stage, the Spark people claim to be at the feet of the 'guru' lapping up his 'gyaan'—or rather a hit job at the temple. So here is more. “AXIS must thank their Chairman’s directorship at Subhiksha—for conflict reasons, they cut their about Rs200 crore exposure to Subhiksha in time—else they would have been in a mess with that account alone! Banks are supposed to do banking, i.e., raising monies from depositors and lending to corporate and retail borrowers after properly assessing and pricing risk.”


The rant continues: “Be very wary of bankers like AXIS who rush into the aggressive end of high-risk banking, i.e. overseas, cash-guzzling businesses like insurance and AMCs, acquisition financing and through overseas vehicles.”


There’s more: “Did you realize AXIS has among the worst ALM (Asset Liability Match) mismatch possible—21% on the < 1 year tenor and 22% on the < 3 year tenor? Am sure you understand the implications of this aggressive yield-curve play in a rising-interest rate scenario? And here’s the other thing—26% of his advances are directed at corporate and SME names with ratings of BBB or below. AXIS will have more stressed-asset worries than the market will be happy handling, guys!” (Spark adds that when a foreign bank exited 15 accounts from the South on risk concerns, they were quickly substituted by Axis). "AXIS has an abnormal about 60% of his Net Worth coming out of share premium. I typically feel more comfortable with business conduct being reflected as retained earnings building out Net Worth!”


On provisioning, MOB allegedly says, “Transparency in provisioning should bother investors more than the provisioning itself! Will you not rather know client-wise exposures than speculate on the likelihood? Do you think AXIS is transparent? Do you know Aban has its loans restructured at Singapore? Any idea how AXIS has provided for the moratorium and tenor-extension? Give me a break!”


“While you and your investors get down to some serious analysis, also ask questions on their Forex-derivative sales and positions there, that could go sour for AXIS. How do the listed markets tolerate a QIP-raise where proceeds are pushed to buying corporate offices? Does anybody realize that between April and December 2009, the loan book at AXIS grew by a paltry 4.5%? That’s lower than most peers—banks are to push monies into creating loan-books, I say! AXIS has a Rs200 Cr equity position in Lavasa, right? God!”


The hit job doesn't stop at the Bank's lending and performance. Sample this aside: "AXIS, AXIS…was that not what the Imperial Japan-Mussolini-Hitler combine (was) called? Whoever gave UTI Bank this name thought tongue-in-cheek.


“AXIS is where ICICI was a few years ago, with their asset woes being the most poorly kept secret and their aggression with high-risk assets showing up negatively. It has taken ICICI two years of Vratham (religious fasting, for the uninitiated) on asset-growth and now their books are back to order… I like the changes I see. Bought some ICICI stock for myself too!”


On the Axis QIP placement: “Call it the investor curse. When you lend to somebody, you pray for his good health till he returns the money, right? The investors have to pray that AXIS’ results are good for the next three quarters till they get off, the management has to play along with meeting expectations and both have to look away and believe everything’s OK with the business. Sadly, the truth could be so different and difficult to digest! Sure you guys price these risks in?”


The tirade ends with Spark Capital chiming in: "We opined we will be happy buying AXIS at Rs 800, a good 25% below CMP and a nice entry price for a long-term play, perhaps… But SELL AXIS today!” It then quotes its own analyst as saying, "If the QIP fund-raise was treated as cash, the stock trades at 3.3x ABV, on par with HDFC Bank and at the highest end of its P/ABV band! SELL AXIS is his recommendation too."


And if you still didn't get the real message of Spark Capital, here is the closing: "Before we sign off, here is the disclaimer—most of the contents in this mail are views and observations expressed by MOB. It is coincidental that we share his concerns about AXIS and are recommending a SELL at these prices!"


A nice touch, which blames the nastiest bit on some unknown, faceless, probably non-existent person whose credibility is sought to be established by Spark's alleged background check on this man with a claimed experience of 35 years. If the circulation of the letter to a bunch of foreign institutional heavyweights does trigger a 25% price correction, it may provide a big buying opportunity for a few clever people. But even if one or two FIIs are induced to panic, there could be a nice large block of shares available on the market for someone to snap up.


On asking Spark Capital about the letter, its executive director for investment banking K Ramakrishnan wrote: "The mail was sent to a specified closed user group—our institutional investor clients and prospects, for their reference. As a corporate policy we respond and clarify to that user group only. Hence, we regret to inform you that we have no further comments or clarifications to offer on this subject.”


When asked, Shikha Sharma, managing director and chief executive of Axis Bank said that a senior executive took up the issue with Spark Capital, which had apologised, but said that it would stand by its research report. She also said the bank cannot discuss individual cases because of confidentiality issues, but plans to write to the Securities and Exchange Board of India (SEBI) about the report.


Interestingly, the charges mainly pertain to the tenure of Dr PJ Nayak, who was recently awarded "Banker of the Year" by Business Standard. Axis Bank sources from those days said: "The letter mentions four exposures: Lavasa, Aban, Suzlon and GMR are mentioned. The Bank had a pretty strong focus on infrastructure, choosing projects where an execution track record had been demonstrated. Thus, the Lavasa risk appeared worth taking partly because Hindustan Construction's record over the years was good, or GMR because of the tight execution of Hyderabad airport. Detailed due diligence followed. Of course, if one believes that infrastructure is a risky asset class or if one has strong views about these companies, then the critique gains credibility."


On the other exposures our source says, "By hindsight, some exposures of banks can always be critiqued, but if credit processes are strong, overall portfolio quality does improve, as I think Axis demonstrated." On Subhiksha, we are told that Dr Nayak was never on the Subhiksha board (in fact Rama Bijapurkar, who is on the Axis Bank board was an independent director on Subhiksha Trading Servcies). “Axis managed to ‘successfully’ get out of the exposure after it saw an RBI report sent to bankers, which cast doubt on some of the company's banking transactions. And getting out was not easy, it required great perseverance on our part.”


Our sources are "puzzled about the bit on the asset-liability mismatch being poor" but do not want to refute it without access to numbers Spark was referring to. On the share premium constituting a large part of the net worth, our sources say, "It is surely an indication of the credibility of the Bank. Would it also not be true of HDFC Bank?"


Will Spark Capital's ploy of axing Axis through a possibly fictitious character become the template of negative reports in the future? — Sucheta Dalal


-- Sucheta Dalal