RASHTREEYA SIKSHANA SAMITHI TRUST®

RV INSTITUTE OF MANAGEMENT
BANGALURU-5600041
(Autonomous Institution Affiliated to BCU)

A CAPITAL BUDGETING DECISION ON

AXIS BANK LTD.

CAPSTONE PROJECT REPORT SUBMITTED IN PARTIAL FULFILMENT OF

FINANCIAL MANAGEMENT SUBJECT

MASTER OF BUSINESS ADMINISTRATION

Autonomous Institution Affiliated to BCU

By

Gurubasavaraj K M

REG NO: 18FW21M0038

Under the guidance of

Prof. DILEEP S

Assistant Professor

RV INSTITUTE OF MANAGEMENT
2022-23

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 ACKNOWLEDGEMENT

“It is not possible to prepare a project report without the assistance &
encouragement of other people.This one is certainly no exception.”

On the very outset of this report, I would like to extend my sincere & heartfelt
obligation towards all the personages who have helped me in this endeavor.
Without their active guidance, help, cooperation & encouragement, I would not
have made headway in the project based on “The Study of Financial
Performance of AXIS BANK LTD.”

I am extremely thankful and pay my gratitude to my faculty Prof. Dileep for his
valuable guidance and support on completion of this project in it’s presently. I
extend my gratitude to RV Institute of Management for giving me this
opportunity.

I am also very thankful to Dr. PURUSHOTTAM BUNG (Director), who has given
me the opportunity to do this project report. I am also very thankful to my parents,
all my friends, and other sources who gave me their much needed support and
inspiration in preparing this project report.

Thanking You

GURUBASAVARAJ K M

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 TABLE OF CONTENTS

Chapters Particulars Page No.

1 Company Profile 4

Cost of capital 7
2

3 Present value of cash inflow 10

4 Investment decision 13

5 Annexure 19

3
COMPANY PROFILE

Axis Bank Limited, formerly known as UTI Bank (1993–2007), is an

Indian banking and financial services company headquartered in Mumbai, Maharashtra. It
sells financial services to large and mid-size companies, SMEs and retail businesses.

As of 30 June 2016, 30.81% shares are owned by the promoters and the promoter group
(United India Insurance Company Limited, Oriental Insurance Company Limited, National
Insurance Company Limited, New India Assurance Company Ltd, GIC, LIC and UTI). The
remaining 69.19% shares are owned by mutual funds, FIIs, banks, insurance companies,
corporate bodies and individual investors.
Axis Bank is the third largest private sector bank in India. The Bank offers the entire
spectrum of financial services to customer segments covering Large and Mid-Corporates,
MSME, Agriculture and Retail Businesses.
The Bank has a large footprint of 4,594 domestic branches (including extension counters)
with 11,333 ATMs & 5,710 cash recyclers spread across the country as on 31st March, 2021.
The Bank has 6 Virtual Centres and has over 1500 Virtual Relationship Managers as on 31st
March 2021.The Overseas operations of the Bank are spread over eight international offices
with branches at Singapore, Dubai (at DIFC) and Gift City-IBU; representative offices at
Dhaka, Dubai, Abu Dhabi, Sharjah and an Overseas subsidiary at London, UK. The
international offices focus on Corporate Lending, Trade Finance, Syndication, Investment
Banking and Liability Businesses.
Axis Bank is one of the first new generation private sector banks to have begun operations in
1994. The Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of
India (SUUTI) (then known as Unit Trust of India), Life Insurance Corporation of India
(LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., The
New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd. The shareholding of Unit Trust of India was subsequently
transferred to SUUTI, an entity established in 2003.
With a balance sheet size of Rs. 9,96,118 crores as on 31st March 2021, Axis Bank has
achieved consistent growth and with a 5 year CAGR (2015-16 to 2020-21) of 13% each in
Total Assets & Advances and 15% in Deposits.

Axis Bank Products & Services:

Axis Bank Savings Account: Axis Bank provides with 14 types of Savings Accounts with
different features and benefits and discounts on movie tickets, Axis eDGE rewards points and
more.

Axis Bank offers diverse savings accounts to cater to the banking needs of every individual.
With a range of accounts from regular savings accounts to premium accounts, online savings
accounts to offline accounts, the bank ensures that every type of customer is covered. The
minimum balance requirements of Axis Bank differ from one type of savings account to
another. Let us take a look at the various types of Axis Bank savings accounts and the
features offered by each of them.

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Axis Bank Current Account: Axis Bank Current Accounts come with features like
“Anywhere Banking”. Users can also avail digital services as SMS alerts and NEFT/RTGS
transactions for free.

Axis Bank Debit Card: Axis Bank has a wide array of products and services to cater to the
banking needs of all its customers. The bank provides its customers the convenience of
cashless transactions through Axis Bank Debit Cards. Axis Bank offers 22 types of debit
cards to cater to the banking needs of all its customers. It helps all the customers to choose
from a series of debit cards that are in line with their needs and requirements.

Axis Bank Credit Card: Axis Bank is among the leading credit card issuers in India and
offers credit cards that cater to individuals with varied spending preferences. Axis Bank
offers a wide range of credit cards that are suitable for all kinds of financial needs. From Flip
kart gift vouchers to Axis eDGE reward points, customer can earn a host of rewards.

Axis Bank Business Loan: Axis Bank offers collateral free business loans from Rs. 50000
to Rs. 50 lakh for expansion, purchase of machinery & much more. Business loans for
existing and new businesses at an interest rate starting from as low as 14.25% p.a.
with flexible repayment options.

Axis Bank Home Loan: Axis Bank offers home loans @ 6.75% p.a. onwards for
tenures of up to 30 years and for loan amounts of up to Rs. 5 crores. It also offers
home loans for affordable housing and special home loan products offering reducing
EMIs, EMI waivers, home loan overdraft facility and home loans with mixed interest
rates (fixed for 2 years and then floating interest rates)

Axis Bank Car Loan: Axis Bank offers car loans from Rs.1 lakh up to 100% on-road price
along with benefits. Customers have the option to choose from 4 different types of car loans.

Axis Bank Gold Loan: Axis Bank offers gold loan starting from Rs. 25,001 up to Rs. 20
lakh with tenure ranging from 6 to 36 months. Users can use their gold ornaments & gold
coins to avail the same. Gold loan can be availed to meet an urgent need for cash by pledging
your gold ornaments or gold coins as collateral. Gold loan is one of the quickest forms of
borrowing and can be availed by existing customers of Axis Bank as well as new borrowers.
With Axis Bank, you will not only avail the gold loan easily but also at an interest rate
of 12.50% onwards.

Axis Bank Education Loan: Axis Bank offers education loan from Rs. 50000 to Rs. 75 lakh
at affordable interest rates. Axis Bank Education Loan offers simple documentation, quick
loan disbursal & more.

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 Loan Amount Rate of Interest
Up to 4 Lakhs 15.2%
Between 4 and 7.5 Lakhs 14.7%
Greater than 7.5 Lakhs 13.7%

Axis Bank Personal Loan: Axis Bank offers personal loan ranging from Rs. 50000 to Rs. 15
lakh with tenure ranging from 12 to 60 months. It comes with minimal documentation and
quick approval.
Axis Bank offers personal loan at fixed interest rates of 10.25% p.a. onwards, for a
loan amount of up to Rs 15 lakh, and for tenures of up to 5 years. Axis Bank also
offer pre-approved instant personal loan with digital processing and without any
paperwork.

6
 COST OF CAPITAL

Cost of Equity
The cost of equity is the return required by a company to determine whether an investment
meets capital return requirements. It is frequently used as a capital budgeting threshold for
the required rate of return by businesses. The cost of equity of a firm represents the
compensation demanded by the market in exchange for owning the asset and bearing the risk
of ownership.

Different methods used in calculating Cost of Equity:

COST OF EQUITY

DIVIDEND EARNINGS CAPM

GROWTH APPROACH
APPROACH APPROACH (CAPITAL ASSET
PRICING MODEL)

There are four methods which are used to calculate cost of equity, i.e., dividend approach,
earnings approach, CAPM, and, growth approach. Out of these four methods CAPM method
is most commonly and widely used method.

CAPM APPROACH:

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between
the expected return and risk of investing in a security. It shows that the expected return on a
security is equal to the risk-free return plus a risk premium, which is based on the beta of that
security.

Formulae for calculating cost of equity using CAPM approach:

Ke = Rf + [β (Rm- Rf)]

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RISK FREE RATE (Rf): Risk-Free Rate of Return is the value assigned to an investment
that guarantees a return with zero risks. Generally, the value of the risk-free return is
equivalent to the yield on a 10-year RBI bond.

MARKET RETURN (Rm): It is denoted as expected return of the market.

BETA (β): The Beta is a measure of the volatility of a stock concerning the market in
general. The fluctuations that will cause in the stock due to a change in market conditions are
denoted by Beta.

CAPM
Rf (As per RBI for less than 1 year risk free rate) 6.1
Rm per month 0.97
Rm per annum 11.64
Beta 1.62

Ke (CAPM)- 15.07 %

The Cost of Equity value of Axis Bank is 15.07 % which indicates that to raise equity capital of Rs. 1
the company will incur a cost of Rs 0.1507 in other words the company should earn a minimum or
more than Rs. 0.1507 to get into profit zone after raising an amount of Rs. 1 from equity.

Cost of Debt
The cost of debt can be defined as the effective rate of interest the firm pays on its debts such
as loans, bonds etc.

As the loan period is not specified we are considering it to be irredeemable.

The interest amount, tax rate are taken from the company’s Profit and Loss statement and
Loan amount is taken from the Balance sheet.

Kd = (I*(1-t))/NP

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 Kd (Cost of Debt)

Interest amount 34,923

Loan Amount 10,20,692
Tax rate 25%

Interest rate 3.4215

Kd=I(1-t) 2.566 %

The Cost of Debt value of Axis Bank is 2.566% which indicates that to raise any loans or bonds of
Rs. 1 the company will incur a cost of Rs. 0.02566 after a tax of 25%i n other words the company
should earn a minimum or more than Rs. 0.02566 to get into profit zone after raising an amount of
Rs. 1 through loans or bonds after deducting a tax rate of 25%.

Cost of Capital by WACC Method

The Cost of Capital will tell you the total measure of cost the company will incur to finance
its operations. It can also be defined as the minimum income a company should earn before
getting into a profit zone.

In the Weighted Average Cost of Capital (WACC) all sources of financing are included in
calculation, and each source is given a weight relative to its proportion in the company’s
capital structure. We have considered 2 sources of finance Equity Share Capital and Debts.

Cost of Capital by WACC

Source of Finance Amount Weightage SC(%) WC

Equity Share Capital 1 0.40 15.075 5.9821

Debt 1.52 0.60 2.566 1.5477

Total 2.52 1.00

WACC 7.5299

The total Cost of Capital that Axis bank as incurred to raise a finance of Rs. 1from all sources is Rs.
0.075299 i.e., the Cost of Capital of Axis Bank is 7.5299%. Axis bank should earn a minimum income
of Rs. 0.075299 for a Rs. 1 raised through different source of finance after deducting all the taxes to
get into a profit zone.

9
 PRESENT VALUE OF CASH INFLOW

Growth rate
In order to predict the cash inflow for the next 5 years we need to calculate the growth rate of
cash inflow of Axis Bank over the past years. We have considered the data of past 10 years.

Growth Rate
2013 0.4
2014 2.2
2015 -
2016 -
2017 7.95
2018 -
2019 7.19
2020 15.82
2021 1.63
2022 1.89

TTM 1.89

Growth rate 0.2484

The growth rate of Cash Inflow of Axis Bank over the past 10 years is 0.2484.

The cash inflow for the next 5 years is calculated by taking TTM value as the inflow for year
2023 and the remaining years are calculated by multiplying growth rate with the previous
year Cash Inflow.

Cash Inflow = Growth rate * Previous year Cash Inflow

The Discounting Factor can be defined as the multiplying factor that will yield Present value
when multiplied with cash inflow of particular year.

Discounting factor (for initial year) = 1/ Cost of Capital.

Discounting factor (for next years) = Previous year value / Cost of Capital.

The present value is defined as the value of an expected cash income determined to the
today’s valuation.

Present Value = Expected Cash Inflow * Discounting Factor

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A - Cash Outflow at 75%

FCFF/CIF (Rs. In
Year DF (7.5299%) PV
billions)

2023 1.8900 0.9300 1.7577

2024 2.3594 0.8649 2.0405
2025 2.9454 0.8043 2.3690
2026 3.6770 0.7480 2.7503
2027 4.5902 0.6956 3.1929

PVCIF 12.1104
PVCOF (75%) 9.0828

The Expected Cash Inflow, Discounting Factor and Present value for Axis Bank is calculated
by using the before mentioned formulas.

The total Present Value of Cash Inflow for next 5 years from 2023 to 2027 is Rs. 12.1104 by
taking the initial cash inflow of Rs. 1.89 with Discount Factor (DF) of 7.5299%.

By considering 75% of the total PVCIF as the expected Cash Outflow, the total Present Value
of Cash Outflow for next 5 years from 2023 to 2027 is Rs. 9.0828

B - Cash Outflow at 125%

FCFF/CIF
Year (Rs. In DF (10.795%) PV
billions)

2023 1.8900 0.9300 1.7577

2024 2.3594 0.8649 2.0405

2025 2.9454 0.8043 2.3690

2026 3.6770 0.7480 2.7503

2027 4.5902 0.6956 3.1929

PVCIF 12.1104

PVCOF (125%) 15.1380

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By considering 125% of the total PVCIF as the expected Cash Outflow, the total Present
Value of Cash Outflow for next 5 years from 2023 to 2027 is Rs. 15.1380.

C - Cash Outflow at 100%, Salvage Value – 15 %

FCFF/CIF (Rs. In
Year DF (7.5299%) PV
billions)

2023 1.8900 0.9300 1.7577

2024 2.3594 0.8649 2.0405
2025 2.9454 0.8043 2.3690
2026 3.6770 0.7480 2.7503
2027 4.5902 0.6956 3.1929
SV @ 15% 1.8166 0.6956 1.2636
PVCIF 13.3740
PVCOF (100%) 12.1104

By considering the 100% of PVCIF the value of PVCOF will remain same as total cash
inflow but whereas an additional Salvage value of 15% on the total PVCOF will lead to an
increase in PVCIF which is Rs. 13.3740 whereas the PVCOF remains same.

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 INVESTMENT DECISION

Net Present Value (NPV) – The Net Present Value is the difference between the Total
Present Value of Expected Cash Inflow and Total Present Value of Expected Cash Outflow
for the given period of time. This will give you the total profit of the company foe a given
period of the company in a given period of time to its todays value.

Profitability Index (PI) – The Present Value is calculated by dividing the Total Expected
Cash Inflow by Total Expected Cash Outflow for the given period of time. It tells the value of
profit the company is going to earn in a given period of time for any investment made.

Internal Rate of Return (IRR) – The Internal Rate of Return is the tool used to estimate the
profitability potential of investments. As the name itself suggests IRR considers only internal
factors excluding the external factors such as risk free rate, inflation rate etc.

Pay Back Period (PBP) – The Pay Back Period can be defined as the number of years
required for the company to recover or get back the Total Investment made by the company.
It disregards the concept of Time Value of Money and is usually calculated by the Expected
Cash Inflows.

Discounted Pay Back Period (DPBP) – The Discounted Pay Back Period is defined as the
number of years the company required to recover its initial investments by considering the
present value of expected future Cash Inflow. It considers the concept of Time Value of
Money.

A - Cash Outflow at 75%

FCFF/CIF (Rs.
Year DF (7.5299%) PV
In billions)

2023 1.8900 0.9300 1.7577

2024 2.3594 0.8649 2.0405
2025 2.9454 0.8043 2.3690
2026 3.6770 0.7480 2.7503
2027 4.5902 0.6956 3.1929

PVCIF 12.1104
PVCOF (75%) 9.0828

NPV 3.0276
PI 1.3333
IRR 9.3831%

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 Year CIF PVCOF (75%) 9.0828
2023 1.8900 Sum of 3 years 7.1948
2024 2.3594
2025 2.9454
2026 3.6770
2027 4.5902

PBP 3.5134

Year PV PVCOF (75%) 9.0828

2023 1.7577 Sum of 4 years 8.9174
2024 2.0405
2025 2.3690
2026 2.7503
2027 3.1929

DPBP 4.0518

Considering the value of Total PVCOF as 75% of Total PVCIF,

Net Present Value (NPV) = Rs. 3.0276.

The company is going to earn a total profit of Rs. 3.0276 in the next 5 years with respect to
the present value.

Profitability Index (PI) = 1.3333.

The company has a profit ratio of 1.3333 in other words the company will have a 33.33% of
profit in the next 5 years.

Internal Rate of Return (IRR) = 9.3831%.

The company can expect a return of 9.3831% in the next 5 years considering only the internal
factors that affect the company.

Pay Back Period (PBP) = 3.5134 years.

The company is going to get back its investments back in next 3.5134 years considering the
expected future Cash Inflow.

Discounted Pay Back Period (DPBP) = 4.0518 years.

The company is going to get back its investment in 4.0518 years considering the expected
present value of future Cash Inflow.

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B - Cash Outflow at 125%

FCFF/CIF
Year (Rs. In DF (10.795%) PV
billions)
2023 1.8900 0.9300 1.7577
2024 2.3594 0.8649 2.0405
2025 2.9454 0.8043 2.3690
2026 3.6770 0.7480 2.7503
2027 4.5902 0.6956 3.1929
2028 5.7303 0.6469 3.7068
PVCIF 12.1104
PVCOF (125%) 15.1380

NPV -3.0276
PI 0.8000
IRR -6.4262%

Year CIF PVCOF (125%) 15.1380

2023 1.8900 Sum of 4 years 10.8718
2024 2.3594
2025 2.9454
2026 3.6770
2027 4.5902

PBP 4.9294

Year PV PVCOF (125%) 15.1380

2023 1.7577 Sum of 5 years 12.1104
2024 2.0405
2025 2.3690
2026 2.7503
2027 3.1929
2028 3.7068
DPBP 5.8168

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Considering the value of Total PVCOF as 125% of Total PVCIF,

Net Present Value (NPV) = Rs. -3.0276.

The company is going to incur a total loss of Rs. 3.0276 in the next 5 years with respect to the
present value.

Profitability Index (PI) = 0.8.

As the PI of company has gone below the company will have a loss. The company will incur
a loss of 20% in the next 5 years.

Internal Rate of Return (IRR) = -6.4262%.

The company will face a negative return to the investment indicating that company will loose
its capital by 6.4262%.

Pay Back Period (PBP) = 4.9294 years.

The company is going to get back its investments back in next 4.9294 years considering the
expected future Cash Inflow.

Discounted Pay Back Period (DPBP) = 5.8168 years.

The company is going to get back its investment in 5.8168 years considering the expected
present value of future Cash Inflow.

C - Cash Outflow at 100%, Salvage Value – 15 %

FCFF/CIF (Rs.
Year DF (7.5299%) PV
In billions)

2023 1.8900 0.9300 1.7577

2024 2.3594 0.8649 2.0405
2025 2.9454 0.8043 2.3690
2026 3.6770 0.7480 2.7503
2027 4.5902 0.6956 3.1929
SV @
1.8166 0.6956 1.2636
15%
PVCIF 13.3740
PVCOF (100%) 12.1104

NPV 1.2636
PI 1.1043
IRR 2.4960%

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 Year CIF PVCOF (100%) 12.1104
2023 1.8900 Sum of 4 years 10.8718
2024 2.3594
2025 2.9454
2026 3.6770
2027 6.4068

PBP 4.1933

Year PV PVCOF (100%) 12.1104

2023 1.7577 Sum of 4 years 8.9174
2024 2.0405
2025 2.3690
2026 2.7503
2027 4.4565

DPBP 4.7165

Considering the value of Total PVCOF as 100% of Total PVCIF and a Salvage Value of
15%,

Net Present Value (NPV) = Rs. 1.2636.

The company is going to earn a total profit of Rs. 1.2636 in the next 5 years with respect to
the present value.

Profitability Index (PI) = 1.1043.

The company has a profit ratio of 1.1043 in other words the company will have a 10.43% of
profit in the next 5 years.

Internal Rate of Return (IRR) = 2.4960%.

The company can expect a return of 2.4960% in the next 5 years considering only the internal
factors that affect the company.

Pay Back Period (PBP) = 4.1933 years.

The company is going to get back its investments back in next 4.1933 years considering the
expected future Cash Inflow.

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Discounted Pay Back Period (DPBP) = 4.7165 years.

The company is going to get back its investment in 4.7165 years considering the expected
present value of future Cash Inflow.

Investment Decision

PVCOF At 75% PVCOF At 125% of PVCOF At 1005% of PVCIF

Particular
of PVCIF PVCIF & salvage value - 15%
NPV Rs. 3.0276 Rs. -3.0276 Rs. 1.2636
PI 1.3333 0.8000 1.1043
IRR 9.3831% -6.4262% 2.4960%
PBP 3.5134 years 4.9294 years 4.1933 years
DPBP 4.0158 years 5.8168 years 4.7165 years

Comparing the different financial parameters with the given scenario I conclude that the
Option A with PVCOF at 75% of PVCIF is best investment decision because of following
reasons,

 The NPV is highest among the 3 Scenario indicating highest profit.

 With PI being highest indicating highest profit ratio.
 The IRR being highest indicating maximum return possible among 3 scenarios.
 The PBP being lowest indicates lesser time period required to recover the investment.
 The DPBP also being indicates lesser time period required to recover the investment.

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ANNEXURES

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