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INSTITUTIONAL EQUITY RESEARCH

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BFSI Sector Darkest before the dawn INDIA | Banking

1 September 2015

In this report: (1) Micro analysis of banks’ exposures to stressed corporates (2) outlook on investment/NPA cycle, (3) structural‐cyclical‐tactical plays in BFSI sector Early signs of reversal in the NPA cycle Asset quality in non‐restructured standard books has seen reversal, but headwinds from the restructured pool should persist for some more time. The timeline for reversal in NPA trends would vary based on individual exposure to a stressed corporate/sector. For entities with lower exposure to these, the reversal will be near term (less than a year), but for the rest, it could take more time. Lack of new projects and decline in commodity prices to suppress credit growth Lack of new project initiatives over the last few years has exhausted the pipeline, thus severely affecting corporate credit growth. New project announcements (private and government) in FY13/14 were Rs 5.2/5.8tn, down from the peak of Rs 22tn in FY09. The figure improved in FY15 to Rs 10.2tn. Decline in commodity prices and subdued corporate toplines also impacted working‐capital demand. We expect corporate credit demand to remain subdued at below 5% due to depleted project pipeline and weak working‐capital demand. We foresee overall FY16/17 credit growth at 9%/12%. The discounted money‐market rate is dis‐intermediating large corporate business The discounted money‐market rate (vs. bank lending rate) is dis‐intermediating large corporate credit as top‐rated companies choose the money market for their loan requirements. Loan‐book growth in banks’ industrial segments increased only 6% in FY15; however, adding this credit substitute, growth improves to 9%. On the positive side, NBFCs and HFCs will continue to benefit from tapping into competitive money‐market funds. Digitization — the next structural change in banking A robust and rapidly increasing digital infrastructure is imperative for banks due to (1) regulatory changes becoming more facilitative, (2) rapidly increasing customer readiness, and (3) it is an integral part of the changing competitive context. Innovation, customer convenience, and security will remain a guiding force to attract and retain customers. Digitisation would enable a bank to offer customised products‐based analytics. Positive on IndusInd, Axis, Chola, SCUF, LICHF; downgrade ICICI, upgrade BoB • IndusInd Bank: Rising proportion of consumer finance, declining interest rate and

adequate capital provide comfort in terms of margin. • Axis Bank: Our analysis of its corporate exposure does not suggest any major

headwinds and its contingent provision will provide cushion for any volatility in asset quality.

• ICICI Bank: We downgrade ICICI as it lacks an earnings driver and the slippage guidance does not adequately factor the risk in the bank’s exposure to stressed corporates.

• Bank of Baroda: We believe that the reversal in NPAs is visible and banks with lesser exposure to stressed portfolios will see a faster turnaround. Hence, upgrade to Buy.

• Cholamandalam Finance, Shriram City Union Finance: Favourable liquidity condition and cyclical upturn in commercial vehicle and SME segments. Maintain Buy.

• LIC Housing Finance: We like LICHF due to its superior ROE and strong earnings visibility.

Companies AXIS BANK (BUY) CMP, Rs 481 Target Price, Rs 660 Upside (%) 37 BANK OF BARODA (BUY – UPGRADE) CMP, Rs 172 Target Price, Rs 235 Upside (%) 37 CHOLAMANDALAM FINANCE (BUY) CMP, Rs 600 Target Price, Rs 775 Upside (%) 29 INDUSIND BANK (BUY) CMP, Rs 820 Target Price, Rs 1150 Upside (%) 40 ICICI BANK (NEUTRAL – DOWNGRADE) CMP, Rs 270 Target Price, Rs 314 Upside (%) 16 INDIAN BANK (BUY) CMP, Rs 130 Target Price, Rs 204 Upside (%) 57 LIC HOUSING FINANCE (BUY) CMP, Rs 423 Target Price, Rs 570 Upside (%) 35 STATE BANK OF INDIA (BUY) CMP, Rs 238 Target Price, Rs 305 Upside (%) 28 Manish Agarwalla (+ 9122 6667 9962) [email protected] Pradeep Agrawal (+ 9122 6667 9953) [email protected] Paresh Jain (+ 9122 6667 9948) [email protected]

Investment horizon Top Buy Neutral Structural IndusInd Bank, Axis Bank Cyclical Bank of Baroda (upgrade), Indian Bank, Cholamandalam, SCUF, SBI ICICI Bank (downgrade) Tactical LIC HF, SKS MF


BANKING SECTOR UPDATE

Investment thesis Entities in financial services are influenced by three major forces: 1. Liquidity: The liquidity factor largely affects wholesale borrowers. A benign

liquidity environment brings down costs of funds for wholesale borrowers faster. The difference between re‐pricing of liabilities and assets enables spread expansion.

2. Cyclicality: The business cycle, which reflects fluctuation of activity in an economy, can be a critical factor affecting the performance of entities with an asset‐side focus on the industrial sector.

3. Structural changes: Structural changes create niche strength enabling the entity to overcome cyclical fluctuation.

Private sector banks – focus on product innovation and quality service Over the years, private banks have gained market share in the retail business through superior product offerings and higher quality of services. Private banks initiated digitisation, which brought in structural changes in India’s banking systems. Innovation, customer convenience, and security will remain guiding forces in attracting and retaining customers. • IndusInd Bank: We remain positive on the bank’s superior product

understanding in consumer finance (especially commercial vehicles) and the niche it has created in the corporate segment by offering innovative products and services.

• Axis Bank: It was the largest gainer of CASA market share in the last decade. Its ability to build a strong retail asset franchise manifests in its strong customer relationship and its ability to innovate. Our analysis of Axis Bank’s corporate exposure does not suggest any major headwinds and its contingent provision will provide cushion for any volatility in asset quality. Hence, we remain positive on the bank.

• ICICI Bank: It has been a pioneer in product innovations in the retail segment, but the bank’s hasty growth in the corporate segment will remain an overhang on the stock. We believe that the management’s guidance of moderation in stressed assets does not adequately capture the level of stress that some of its exposure faces. The precarious scenario in the iron & steel industry and stuck

LIC HF

HDFC Bank, IndusInd

SBI, Indian bank, PNB, CANARA,

STRUCTURAL FACTORLIQUIDITY FACTOR

CYCLICAL FACTOR

Red ‐NeutralGreen ‐ Buy



cash flow in infrastructure and construction will continue to exert pressure on the bank’s asset quality.

Public sector banks – a cyclical play These are largely a cyclical play as they lag behind their private peers in terms of innovation and quality of service. The investment climate in the system has deteriorated and chances of improvement in the near future are not visible yet. To add to the woes of public sector banks, the commodity cycle has collapsed, impairing working‐capital demand. Public sector banks have been reeling under NPA pressure since FY12. The cycle was elongated because of reckless restructuring done by these banks in the past. While we expect pain from restructured assets to continue for some more time, a reversal in NPAs is visible (slippages from non‐restructured standard advances has shown a reversal) — banks with lesser exposure to stressed assets will witness a faster turnaround. • Bank of Baroda: BoB’s exposure to stressed corporates (that can be a potential

NPAs) is less mainly due to its diversified portfolio and lower concentration of lending to leveraged corporate groups. Hence, we upgrade BoB to Buy.

• Indian bank and State Bank of India: We continue to like these two banks due to the visible turnaround in their NPA cycles and inexpensive valuations.

Housing finance companies and NBFCs ‐ Abundant money market liquidity, wholesale borrowers to continue to benefit Money market liquidity is dis‐intermediating the large‐corporate business of banks. However, this liquidity abundance does not affect the business of financial intermediaries that cater to the retail and SME loan segments (since their customers do not have access to the money market). The difference between SBI’s base rate and a one‐year AAA‐rated corporate bond is at its peak. Given that the interest rate is expected to remain benign, the lower money‐market rate will continue to benefit wholesale borrowers (such as housing finance companies and non‐banking finance companies). • Cholamandalam Finance and Shriram City Union Finance: We like these two

because they continue to benefit from lower costs of funds and an improvement in credit costs due to better business prospects in commercial vehicles and SME funding.

Micro‐finance and mortgage companies The micro‐finance model is marked by availability of funds and the business sentiment. It has seen a reversal in cycle after the Andhra Pradesh crisis and the current cycle is marked by structural changes including setting up a self‐regulatory body (MFIN), clarity of regulatory authority, and margins caps. • SKS MF: We like this company due to the expansionary phase of micro finance in

the current cycle and its ability to capture growth with better availability of funds.

Mortgage is a secular story with intermittent volatility in spreads. • LIC Housing Finance: Asset quality in this business is largely stable. Lower cost of

money market funding coupled with change in portfolio mix will enable LIC Housing Finance to report stability in spread. We like the company due to its superior ROE and strong earnings visibility.



Private banks: Valuation band

Public banks: Valuation band

Source: Company, PhillipCapital India Research

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Apr‐05 Apr‐06 Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15

P/ABV 1.65sd 1.65sd

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0.5

1.0

1.5

2.0

2.5

Apr‐05 Apr‐06 Apr‐07 Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15

PS Banks (P/ABV) +1.65SD ‐1.65SD



Valuation metrics

MCap ___Gwth (15 17E)___ ___P/Adj. BV___ ___RoE (%)____ ___NII(Rs bn)___ ___NIM(%)___Rs bn Rating TP (Rs) NII % PPP% PAT% FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e

Public Sector Banks Andhra Bank 39 Buy 106 11.1 8.5 39.4 0.71 0.68 0.60 7.1 9.2 11.2 45.4 49.6 56.0 2.6% 2.6% 2.5%Bank of India 89 UR 11.1 10.1 2.8 0.81 0.94 0.79 6.3 2.9 6.3 113.4 123.5 140.0 2.0% 2.0% 2.0%BOB 381 BUY 235 11.7 10.7 29.2 1.44 1.31 1.15 9.2 10.3 11.9 131.9 144.3 164.5 2.0% 1.9% 2.0%Canara Bank 139 Neutral 350 12.6 7.5 13.5 0.99 0.94 0.80 10.7 8.9 11.8 96.6 107.2 122.5 1.9% 1.9% 2.0%Oriental Bank 38 Buy 200 9.8 4.7 76.8 0.56 0.51 0.46 3.8 6.8 10.3 50.8 54.3 61.3 2.3% 2.3% 2.3%PNB 250 Neutral 155 11.1 5.6 25.7 1.19 1.14 1.01 8.5 9.4 11.4 165.6 177.4 204.5 2.9% 2.9% 2.9%SBI 1801 Buy 305 23.0 26.2 50.6 1.69 1.34 1.08 10.6 11.0 12.3 748.0 970.6 1131.7 3.0% 3.5% 3.5%Union Bank 106 Buy 200 11.1 9.7 33.1 1.05 0.95 0.82 10.1 12.1 14.7 84.4 91.5 104.2 2.4% 2.4% 2.4%Indian Bank 62 Buy 204 12.5 6.2 23.2 0.79 0.71 0.64 8.3 8.7 10.9 44.6 48.0 56.4 2.4% 2.4% 2.6%Pvt Sector Banks Axis Bank 1140 Buy 660 16.4 ‐100.0 16.4 3.11 2.70 2.34 17.8 17.7 17.8 142.2 163.3 192.7 3.4% 3.3% 3.4%HDFC Bank 2494 Buy 1225 18.5 18.8 20.3 4.43 3.86 3.33 19.4 18.4 19.2 224.0 263.8 314.6 4.3% 4.2% 4.3%ICICI Bank 1566 Neutral 314 14.2 11.6 12.1 2.31 2.11 1.92 14.5 14.5 14.9 190.4 216.0 248.4 3.2% 3.2% 3.3%IndusInd Bank 436 Buy 1150 24.9 9.8 23.7 5.03 3.32 2.91 18.2 15.7 14.6 34.2 42.5 53.4 3.6% 3.7% 3.8%Dvpt Cr Bank 35 Neutral 130 22.9 14.1 12.7 2.72 2.42 2.14 13.9 11.9 12.7 5.1 6.2 7.7 3.6% 3.5% 3.5%NBFC's HDFC Ltd 1812 Neutral 1373 14.9 14.1 13.9 6.32 5.60 4.90 20.7 21.0 21.1 80.0 92.1 105.5 3.4% 3.5% 3.5%LIC HF 214 Buy 570 20.2 18.9 17.8 2.71 2.32 1.97 18.1 19.2 19.4 22.4 27.0 32.3 2.2% 2.2% 2.2%SKS Microfinance 56 Buy 650 43.3 67.6 48.4 5.55 4.60 3.58 24.8 20.7 22.4 4.0 5.9 8.2 7.9% 8.0% 8.2%CIFC 93 Buy 750 18.8 23.5 29.8 3.24 2.95 2.43 15.9 15.6 18.5 17 20 24 16.8% 18.1% 19.5%MMFS 142 Neutral 250 10.7 9.6 13.0 3.06 2.99 2.52 15.5 14.2 15.9 28 31 35 7.9% 8.1% 8.1%STFC 187 Neutral 1015 22.9 15.5 17.7 2.08 2.07 1.89 14.1 14.0 15.4 11 15 17 6.8% 7.0% 7.2%SCUF 110 Buy 2450 18.0 19.5 24.6 2.77 2.49 2.22 15.9 16.3 17.5 20 24 28 11.7% 12.1% 12.1%

____PAT (Rs bn)____ _____CASA(%)_____ _____EPS (Rs)_____ ____Adj BV (Rs)____ _____GNPA(%)_____ ____NNPA(%)____FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e FY15 FY16e FY17e

Public Sector Banks Andhra Bank 6.4 9.2 12.4 27.3% 27.2% 27.3% 10.6 13.9 18.8 112.3 117.0 133.1 5.4 5.7 5.5 3.0 2.9 2.5Bank of India 17.1 8.0 18.1 21.4% 22.0% 22.0% 25.7 12.0 27.1 224.6 194.4 230.1 3.2 6.6 6.2 3.4 3.9 3.0BOB 34.0 42.8 56.7 26.2% 26.3% 26.3% 15.3 18.4 23.4 148.9 163.5 185.9 3.0 4.0 3.6 1.9 1.9 1.6Canara Bank 27.0 24.4 34.8 23.9% 23.8% 23.8% 56.9 51.3 73.3 356.8 377.4 439.8 2.5 4.1 3.8 2.7 2.7 2.3Oriental Bank 5.0 9.3 15.5 24.2% 23.9% 23.5% 16.6 31.1 51.8 320.5 352.3 394.1 4.0 5.6 5.2 3.4 3.3 3.0PNB 30.6 36.7 48.4 36.6% 34.9% 33.9% 16.5 19.8 26.1 145.1 151.4 170.8 5.4 6.9 6.5 4.2 4.3 3.8SBI 171.4 300.0 388.5 40.2% 39.7% 39.2% 22.9 38.7 50.1 168.1 213.1 262.7 5.1 3.5 2.5 2.3 1.8 1.4Union Bank 17.8 23.3 31.6 29.2% 30.2% 29.8% 28.0 36.6 49.7 208.9 231.3 267.1 4.2 5.3 5.0 2.8 2.8 2.6Indian Bank 10.1 11.3 15.3 28.6% 28.3% 28.3% 20.9 23.6 31.8 205.4 229.2 254.9 4.5 4.4 3.8 2.5 2.5 2.1Pvt Sector Banks Axis Bank 73.6 85.5 99.6 44.5% 45.7% 19.2% 31.0 35.9 41.6 179.2 206.4 238.5 1.4 1.5 1.5 0.5 0.6 0.6HDFC Bank 102.2 122.5 147.8 43.7% 43.0% 42.0% 40.8 48.9 59.0 244.9 281.2 326.1 1.0 0.8 0.7 0.2 0.2 0.2ICICI Bank 111.8 123.3 140.4 44.2% 45.5% 44.9% 19.3 21.2 24.1 130.6 142.9 157.3 3.1 4.2 4.4 1.7 1.9 2.0IndusInd bank 17.9 22.1 27.4 34.1% 36.2% 37.2% 33.9 37.5 46.5 189.7 287.5 327.4 1.0 1.0 1.0 0.3 0.2 0.0Dvpt Cr Bank 1.9 2.0 2.4 23.1% 22.5% 22.0% 6.8 7.1 8.6 50.8 56.9 64.6 1.8 1.6 1.5 1.0 1.0 0.9NBFC's HDFC Ltd 60.90 69.11 79.03 38.7 43.9 50.2 189.9 214.3 245.0 0.7 0.7 0.7 0.5 0.4 0.4LIC HF 13.9 16.3 19.2 27.5 32.2 38.1 150.2 175.8 206.6 0.5 0.4 0.3 0.2 0.2 0.2SKS Microfinance 1.9 2.4 4.1 14.8 19.4 32.7 82.9 100.0 128.6 10.9 0.1 0.8 0.1 0.1 0.1CIFC 4.4 5.3 7.3 30.3 34.1 47.2 184.4 202.9 245.8 3.1 2.8 2.5 2.0 1.7 1.4MMFS 8 8 11 14.7 15.1 18.8 86.0 87.8 104.2 5.9 8.3 6.4 2.4 3.7 3.0STFC 12 14 17 54.6 60.3 75.6 390.4 391.3 430.0 3.8 5.5 6.0 0.8 2.5 2.9SCUF 6 7 9 84.7 107.7 131.4 606.0 673.2 756.9 3.1 3.5 3.2 0.7 1.0 1.3

Source: Company, PhillipCapital India Research Estimates



Table of Contents Liquidity – creating dis‐intermediation ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 7

Corporate credit cycle – Set to improve ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 9

Nonperforming assets – trend reversal in the offing ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 12

Structural force – technology is the next driver ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 18

Companies Section Axis Bank ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 25

Bank of Baroda ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 27

Cholamandalam Finance ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 29

Indian Bank ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 31

ICICI Bank ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 33

IndusInd Bank ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 35

LIC Housing Finance ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 37

Shriram City Union Finance ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 39

SKS Micro Finance ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 41

State Bank of India ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 43



Liquidity – creating dis‐intermediation • The spread between SBI’s base rate and AAA‐rated corporate bonds is as high as

150bps. • The money‐market rate is at a discount to banks’ lending rates – this is dis‐

intermediating large corporate credit as top‐rated companies meet their loan requirements from the money market.

• In FY15, loan‐book growth in the industrial segment increased by a mere 6%. However, if we add the credit substitute, this growth rate improves to 9%.

• NBFCs and HFCs will continue to benefit by tapping competitive money‐market funds.

The money market has been efficient in factoring the interest‐rate trajectory. Usually, in a rising interest rate environment, one‐year AAA‐rated bonds trade at a premium to base rates (at a discount in a falling interest‐rate environment). As interest rates continue to slide downwards, one‐year AAA‐rated corporate bonds are currently trading at discount to the SBI base rate. With the money market rates at a discount to the banks’ lending rates, dis‐intermediation could happen in large corporate credit, as top‐rated corporates opt for the money market to meet their loan requirements. The pickup in non‐convertible debentures and commercial paper issuances confirms this trend. Corporate bond outstanding has increased to Rs 18tn currently from Rs 9tn at the end of FY11 — a CAGR of 19% while commercial paper outstanding increased to Rs 2.7tn from Rs 1tn at the end of FY11 — a CAGR of 27%. The spread between SBI’s base rate and AAA‐rated corporate bond is as high as 150bps. This suggests that either the base rate needs to fall or that bond yields should rise. Moderating inflation and slow economic recovery suggest downward bias for interest rates. We expect a 25‐50bps cut in the policy rate in FY16, which would continue to keep one‐year bond yields at a discount to the base rate. Banks will adjust their base rates in a calibrated manner, which we believe would take time (with re‐pricing of deposits). Until then, the top‐rated corporate credit book will continue to face disintermediation risk. NBFCs and HFCs will continue to benefit from tapping competitive money market funds. The proportion of bond funding in the balance sheets of NBFCs and HFCs has increased significantly in the last few years. Due to re‐pricing benefits (liability vs. asset) margins of NBFCs will improve until we see the asset book getting re‐priced. Money market borrowings of NBFCs as a percentage of their total borrowing FY13 (%) Q1FY16 (%) CAGR (%)MMFS 25.8 34.2 41SHTF 43.6 45.5 12Bajaj Finance 31.9 38.8 49Chola 26.8 22.9 30Source: Company, PhillipCapital India Research



Spread between bond yield and base rate at its peak

Source: Bloomberg, PhillipCapital India Research Segment wise credit growth CP & NCD outstanding (Rs bn)

Source: Bloomberg, SEBI, PhillipCapital India Research

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Spread, % (rhs) SBI 1yr deposit rate (%)AAA corp. bond yield (%)

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Corporate credit cycle – Set to improve with lag • Usually, new projects (announced) have a positive impact on credit growth,

albeit with a lag. Lack of new project initiatives over the last few years have exhausted the pipeline, thus severely impacting corporate credit growth even after factoring credit substitutes such as bonds and commercial paper.

• New project announcements (private and government) in FY13/14 were Rs 5.2/5.8tn down from a peak of Rs 22tn in FY09. The figure saw some improvement in FY15 to Rs 10.2tn.

• Decline in commodity prices and subdued growth in corporate toplines impacted working‐capital demand.

• We expect corporate credit demand to remain subdued (sub 5%) with depleted project pipeline and weak working capital demand. We see credit growth in the system for FY16/17 at 9%/12%.

Decline in GCF led by private & public sector investment: Gross capital formation‐to‐GDP ratio declined to 30.5% in FY15 from a peak of 38% in FY08. The decline was more acute in the private‐and‐public segment, which declined to 17% in FY13 from 26% in FY08 while GCF in household improved to 15.8% from 10.8% — the decline in the former can be attributed to a fall in new projects by the private/government sectors. In FY08‐13 credit growth (term loans) in the household segment averaged 25% while credit growth in private + public segment averaged 18% due to a slowdown in new projects. Components of GCF vs. term loan

Source: RBI, PhillipCapital India Research The decline in GCF in the private and public sector was more acute in electricity, roads, and ports. New projects announced in electricity declined from a peak of Rs 6.7tn in FY09 to Rs 0.9tn in FY13. Similarly, new projects announced in roads declined to Rs 0.2tn from Rs 1.2tn, while ports to Rs 0.023tn from Rs 0.5tn.

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Industry‐wise new project announcement (Rs bn)

Source: CMIE, PhillipCapital India Research Decline in new projects more in electricity and services sector: New projects announced have a positive impact on credit growth albeit with a lag. This growth in FY12‐14 has been at decadal lows due to policy logjam and low capacity utilisation. New project announcements (private and government) in FY13/14 were Rs 5.2/5.8tn down from a peak of Rs 22tn in FY09. The figure saw some improvement in FY15 to Rs 10.2tn but the impact of this on credit growth will be visible only from the second half of FY17, assuming stability in commodity prices. The government has taken steps to review stalled projects that were under implementation. These projects, amounting to Rs 3.5tn, were reviewed in last two years — assuming these kick start, the impact will not be enough to push credit growth before FY18. New project announcements vs. credit growth

Source: CMIE, PhillipCapital India Research Falling commodity price a drag on working capital growth: Working capital loans constitute 47% of total industrial credit demand. The growth of these loans depends on commodity inflation and business growth. Decline in commodity prices and moderation in turnover is adding to the woes of the corporate‐credit cycle. The CRB CMDT Index corrected by 30% since its peak in Oct 2011 leading to decline in input costs for industries. Corporate topline growth has moderated — net sales of top‐500 corporates grew just 6%/2% in FY14/15. Considering weak outlook for commodity prices and business growth, working capital demand should remain weak.

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Working capital loan vs. commodity price

Source: Bloomberg, PhillipCapital India Research Credit growth pick up expected in FY17: We expect credit growth in the system to remain at 9% for FY16 and 12% for FY17. Within the four broad classifications of credit, the industry segment is impacted by slowing capex and declining commodity prices — we expect this to see below‐5% growth in FY16. However, retail should continue to see buoyant credit demand led by home/vehicle/personal loans. Retail credit growth should remain strongest at 16%. Services and agriculture should see 9% and 15% growth.

Forecast of credit growth % Sector‐wise credit growth (%)

Segment contributing Segment FY15 FY16e FY17e

12.9 Agriculture 15 15 15

23.8 Services 6 9 12

19.8 Retail 16 16 17

43.6 Industry 6 4 9

100.0 Total non food credit 9 9 12

Source: RBI, PhillipCapital India Research

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Nonperforming assets – trend reversal in the offing The asset quality in the non‐restructured standard book has seen a reversal. The deterioration in asset quality is not only due to the deceleration in the country’s growth rate, but is also attributable to rapid credit growth during the boom period of FY05‐10 (CAGR of 24%). The ill effects of a rapid credit expansion are reflected in the rise in GNPAs (albeit with a lag period). The situation exacerbated during decelerating economic growth resulting into an increase in GNPA, which saw a 33% CAGR in FY11‐15. Ill effects of rapid credit growth in FY07‐10 should have been captured in the GNPA number by now (considering the lag impact of 3‐4 years), but because of factors such as restructuring and long‐gestation infrastructure projects, the pain was drawn out. Credit vs. NPA cycle

Source: RBI, PhillipCapital Research The stress in the banking system has been increasing since FY11. Data shows that the system‐wide slippage increased to 2.7% at the end of FY15 from 1.7% in FY11. The increase has been sharp in FY13‐15 due to high slippage from the restructured pool while slippage from non‐restructured standard assets has started receding (moderated to 1.9% in FY15 from 2.1% in FY14) suggesting that the GNPA cycle for this pool has reversed. Slippage from restructured assets has increased


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Headwinds from the restructured pool to persist for some more time: The outstanding restructured assets in the system are Rs 4tn (6.7% of loan book) and gross non‐performing assets are Rs 2.4bn (4.02% of loan book). Industries contribute to 74% of the restructured pool and 63% of GNPA. Within industries, stressed segments are iron and steel, textile, power, other infrastructure, engineering, and construction — these contribute almost 40% of gross non‐performing assets. These segments also contributed the most to fresh addition of bad loans in FY15, thus adding 60‐65% of slippages. Stock of stressed assets and key contributors loan book Proportion (%) Restructured book Proportion (%) GNPA Proportion (%) Industries 44.3 Industries 74.1 Industries 63.2 Services 23.5 Services 18.0 Services 14.0 Retail 19.4 Retail 0.7 Retail 8.5 Agriculture 12.8 Agriculture 7.2 Agriculture 14.3

Industrial loan book loan book (%) Restructured book Proportion (%) GNPA Proportion (%) Iron & steel 4.7 Iron & steel 11.0 Iron & steel 7.9 Textile 3.4 Textile 6.9 Textile 8.3 Power 9.3 Power 23.9 Power 3.6 Other infra 6.1 Other infra 16.5 Other infra 8.0 Engineering & construction 3.8 Engineering & construction 5.1 Engineering & construction 10.4 Source: RBI, PhillipCapital India Research Cumulative slippage from the restructured category has been ~25%, of which majority slipped in FY15. Analysis of the restructured portfolio suggests that 76% of restructured loan in iron and steel segment can turn into NPAs, as their interest coverage ratio has dropped to less than 1x. Similarly, slippage from the restructured power segment can be around 5.7%. Other infra, engineering, and construction (combined) can see a slippage of 39% from its restructured pool. For the overall portfolio, we expect 18‐20% additional slippage from existing standard restructured assets amounting to Rs 732bn, which translates into 1.1‐1.2% of the system‐wide outstanding loan book.



Potential threat from the restructured portfolio (Rs bn) Slippage as a % of standing restructured book

Sector

Likely NPAs

from

restructured

portfolio

% of

restructured loan

Iron and steel 301 68.1

Power 55 5.7

Other infra, engineering,

construction 341 39.3

Likely slippage from

restructured asset 697 17.4Source: RBI, PhillipCapital India Research Micro‐analysis (individual company/project) suggests that worst is behind us: After analysing credit vs. GNPA, we tried to look at the potential NPAs in the stressed sectors (iron and steel, power, other infra, engineering, textiles, and construction). These sectors represent 63% of the restructured book, 40% of GNPA, and ~60% of slippages. We analysed individual companies/projects in each of these segments and our sample of companies represents 80% of the banking system’s loans to iron and steel sector, 85% of loans to the power sector, and 60% of loans to other infra, construction, textile, and engineering. Our criteria of potential NPAs are: 1. Inability to service interest (interest coverage ratio <1x for operational projects) 2. Unviable projects considering current industry dynamics (especially for power

projects). Our micro‐analysis suggests that 11% of loans to the iron & steel sector (amounting to Rs 309bn) are under chronic stress, which can translate into non‐performing loans. Similarly, 4% of power exposure (Rs 224bn), 10% of exposure to other infra, engineering, construction (Rs 511bn), and 5% of exposure to textiles (Rs 106bn) has interest coverage ratio of less than 1x. Cumulatively, these put together can add fresh NPAs worth Rs 1.15tn (1.75% of loan book over the next 1‐2 years) — however, this number is relatively better vs. the system‐wide annual slippage numbers in FY14/15 of 2.7%, even considering that ~60% of stress is contributed by the sectors that we have detailed above. Potential NPAs from key sectors

Iron & steel power

engineering, construction & other infra project Textile Total

Outstanding loan to the sector, Rs bn 2834 5674 4982 2019 15510Exposure under stress (having interest coverage of <1x / unviable), Rs bn 1198 1146 954 286 3467of which already NPA, Rs bn 190 91 443 180 904Balance stress exposure, Rs bn 1009 1055 511 106 2563Percent to advances to the sector (%) 35.59 18.59 10.25 5.26 17Stress loan which can be made viable by refinance under 5/25, Rs bn 700 831 0 0 1414Portfolio with high probability of slippage in near term, Rs bn 309 224 511 106 1150Percent to systemic loan book (%) 0.47 0.3 0.8 0.2 1.75Source: RBI, PhillipCapital India Research Stress in iron & steel remains high due to declining international prices of steel and cheap imports. The power segment is riddled with bottlenecks such as lack of feedstock, the inability of discoms to sign fresh PPAs, and cost overruns due to project delays — making some projects unviable. Recent government measures to turnaround the fortunes of the power sector seem small steps, but in the right direction. We expect government’s intervention by way of safeguard duties on cheap imports to save the ailing domestic steel industry. The

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refinancing facility extended by banks under the 5/25 scheme will increase the repayment cycle in line with the cash flow for infrastructure and core sectors — this could help some viable but stressed projects to turn around. In iron & steel, around 76% of restructured loans can turn bad due to poor interest‐servicing capability. We understand some of the leveraged companies in this sector (Essar Steel, Bhushan Steel, and Bhushan Power and Steel) either have undergone refinancing under 5/25 or are on the verge of completing it. The elongation of the repayment period and expected safeguard duty would make these projects viable and hence we do not see an immediate threat of these exposures slipping. Some of the potential NPAs in the iron and steel segment Current status Company Exposure to the banking sector (Rs bn)Standard ISMT Ltd. 19Standard OCL Iron and Steel Ltd. 11Standard restructured Jindal stainless 112Standard restructured Mukand Ltd. 7Standard restructured Tulsyan NEC Ltd. 6Standard restructured Adhunik Metaliks Ltd. 26Standard restructured Concast Steel 58Standard restructured Monnet Ispat 91Standard restructured MSP Steel & Power Ltd. 13Standard restructured Visa Steel Ltd. 23Source: Company, PhillipCapital India Research In the power segment, gas‐based power projects are at risk due to non‐availability of feedstock. Imported gas works out to be expensive, thus raising questions on the viability of these projects. The government mechanism to import gas and supply to stranded assets to ensure 30% PLF is temporary, not a viable long‐term solution. As per our utility research team, the cost per unit of power based on imported re‐gasified liquefied natural gas (RLNG) works out to Rs 6.2/Kwh (variable cost of Rs 4.5/kwh + fixed cost of Rs 1.7/kwh at 30% PLF), which is uneconomical even vs. 100% imported coal (variable cost of Rs 2/Kwh). Weak discom finances make absorption of such expensive power difficult. Hence, we believe that the gas‐based projects of Lanco, GMR, GVK, Ratnagiri Power and stranded projects can be a potential NPA. Coal‐based projects still stand a chance of turnaround with the availability of coal (which the government is trying to resolve). The 5/25 scheme will provide breathing space to some coal‐based projects until issues are sorted out. Essar Power and Adani Power (Maharashtra and Rajasthan) have undergone refinance under the 5/25 scheme. We expect some of the stressed coal‐based power projects of entities such as Jaiprakash Power Venture and KSK Energy Venture to follow suit. Restructured power project (such as Abhijeet Group) could be potential NPAs. Some of the potential NPA in the power sector current status Company Exposure to banking

sector Rs bnStandard Lanco ‐ gas power project (Kondapali) 21Standard GMR ‐ Gas (Vimagiri, Rajahmundry, Kakinada) 35Standard GVK power ‐ gas and coal Exposure (Gautami & Goindwal sahib) 28Standard Stranded gas – others 38Standard Ratnagiri gas 85Standard & restructured

Abhijeet MADC 10

Standard & restructured

Corporate power 45




In the ‘engineering, construction, and other infra’ segment, around 39% of the restructured loan book can be potential non‐performing assets, due to overleveraged position and weak cash flow. This segment can add around 0.8% to fresh NPAs in the system. Leveraged entities such as JP Associate and Lanco Infratech are potential NPA candidates. Some of the potential NPAs in engineering, construction, and other infra Current status Company Exposure to banking

sector, Rs bnStandard JP Associate ‐ parent 285Standard restructure B L Kashyap 5Standard restructure Shriram EPC ltd 22Standard restructured Lanco Infratech Ltd ‐ parent co into EPC 74Standard restructured Era Infra Engineering 72Standard restructured GTL Group 105Standard restructured IVRCL 70Standard restructured RAMKY INFRA 28Standard restructured Tecpro Systems 33Standard restructured Unity Infra Projects 18Standard restructured Consolidated Construction Consortium Ltd. 9Standard restructured Tantia Constructions Ltd. 7Source: Company, PhillipCapital India Research Bank wise potential NPAs from stress exposure Stress as % of loan book Iron & steel Power Engineering, construction

& other infra projectTextile Total

Industry 0.47 0.34 0.78 0.16 1.75SBI 0.69 0.30 0.46 0.24 1.72PNB 1.01 0.21 0.71 0.15 2.08AB 0.58 0.77 1.48 0.18 3.00OBC 0.96 0.20 1.07 0.28 2.50BOB 0.33 0.14 0.32 0.22 1.01Canara 0.50 0.32 1.09 0.24 2.15BOI 0.26 0.16 0.59 0.09 1.09UBI 0.30 0.43 0.84 0.08 1.64IOB 0.79 0.20 0.77 0.15 1.91Corporation 0.19 0.13 1.14 0.43 1.89Allahabad bank 0.97 0.36 0.76 0.41 2.51Indian 0.26 0.36 0.62 0.21 1.44ICICI Bank 0.14 0.43 2.53 0.10 3.20Axis 0.10 0.47 1.00 0.08 1.66yes 0.02 0.06 1.55 0.02 1.64IndusInd 0.00 0.01 0.66 0.02 0.70IDBI 0.51 1.69 3.15 0.12 5.49Source: Company, PhillipCapital India Research Our analysis suggests that potential NPAs in the next 1‐2 years in the system from stressed sectors such as iron & steel, power, and the engineering, construction & other infra segments can be around 1.75% vs. 1.6% for FY15 — this suggests that the worst is behind us. Within the industry, there is a stark difference between the numbers for various banks. Potential NPAs for Bank of Baroda is just 1% vs. 5.5% for IDBI Bank. ICICI’s potential slippage is higher at 3.2% vs. its FY15 slippage of 2.1%. The number appears higher for Axis Bank, but the bank carries a contingent provision to the tune of 45bps — so its stress seems comfortable. State Bank of India’s exposure to potential NPAs does not seem alarming.



Bank wise exposure to potential stressed corporate (percent to loan book)

Slippage FY14 Slippage FY15

Potential slippage from sector like iron & steel, infra,

engineering & construction Stress exposure subjected to

refinance under 5/25 Potential stress

exposure Industry 2.6 2.7 1.8 2.2 3.9 SBI 3.4 2.5 1.7 1.5 3.3 PNB 3.1 3.9 2.1 2.3 4.4 AB 2.6 3.8 3.0 1.5 4.5 OBC 2.9 3.4 2.5 2.3 4.8 BOB 1.7 2.3 1.0 1.0 2.0 Canara 2.8 3.0 2.2 1.5 3.6 BOI 2.4 2.4 1.1 1.2 2.3 UBI 2.4 2.5 1.6 1.2 2.8 IOB 3.5 2.9 1.9 1.2 3.2 Corporation 2.6 2.8 1.9 1.0 2.9 Allahabad bank 3.7 5.4 2.5 2.0 4.6 Indian 2.3 2.3 1.4 1.2 2.6 ICICI Bank 1.4 2.1 3.2 1.0 4.2 Axis 1.0 1.0 1.7 1.5 3.2 yes 0.7 0.5 1.6 0.0 1.6 indusind 1.1 1.3 0.7 0.2 0.9 IDBI 2.9 2.9 5.5 1.2 6.6 Source: Company, PhillipCapital India Research Stock of stressed assets for various banks (percent to loan book)

GNPA – FY15Standard restructured asset

(ex discom & Air India) – FY15 Total stress book (FY15)SBI 5.0 4.1 9.1PNB 6.5 8.0 14.5AB 5.3 6.5 11.8OBC 5.2 8.8 14.0BOB 3.8 4.8 8.6Canara 4.0 4.7 8.7BOI 5.4 4.0 9.4UBI 5.0 3.0 8.0IOB 5.5 9.2 14.7Corporation 4.8 5.2 10.0Allahabad bank 5.5 8.6 14.1Indian 4.4 4.1 8.5ICICI Bank 3.8 3.0 6.8Axis 1.3 2.9 4.2yes 0.41 0.5 0.9indusind 0.81 0.53 1.3IDBI 5.88 8.0 13.9Source: Company, PhillipCapital India Research



Structural force – technology is the next driver Liability franchisee Geographical reach: The geographical reach of banks increased tremendously between 2011‐14 due to factors such as improved business prospects in urban and semi‐urban areas, the central bank’s rationing of branch licenses, and thrust on financial inclusion by the government. Today, a bank branch is available virtually in all villages with a population of at least 2,000. Between FY03 and FY14, private banks increased their presence to 18,393 branches from 5,531 branches and constituted 15% of total branches from 8%. Bank category wise saving deposit franchisee

FY03 FY07 FY11 FY14 FY03‐07 FY07‐11 FY11‐14SCBs cagr cagr cagr Branch 68078 73199 92117 120965 1.8 5.9 9.5Savings Deposit (Rs mn) 3189457 6790708 14662117 21043499 20.8 21.2 12.8Retail loan (Rs mn) 1139417 4335620 6701345 8712905 39.7 11.5 9.1No. of savings account (000) 289211 373511 623997 977755 6.6 13.7 16.1Savings per account 11028 18181 23497 21522 13.3 6.6 ‐2.9 Private bank FY03 FY07 FY11 FY14 Branch 5531 7228 11764 18393 6.9 12.9 16.1Savings Deposit (Rs mn) 260491 882698 2290516 3874853 35.7 26.9 19.2Retail loan (Rs mn) 117428 1453309 1554433 2360338 87.6 1.7 14.9No. of savings account (000) 21383 34540 57838 107506 12.7 13.8 23.0Savings per account 12182 25556 39602 36043 20.3 11.6 ‐3.1SA Market share 6.19 12.73 15.72 18.00 6.5 3.0 2.3 SBI FY03 FY07 FY11 FY14 Branch 13700 14388 18704 22893 1.2 6.8 7.0Savings Deposit (Rs mn) 867012 1777123 4033059 5795864 19.7 22.7 12.8Retail loan (Rs mn) 314260 987885 2125695 2795872 33.2 21.1 9.6No. of savings account (000) 65048 82406 165421 263898 6.1 19.0 16.8Savings per account 13329 21565 24381 21963 12.8 3.1 ‐3.4SA Market share 27.45 25.49 28.84 28.52 ‐2.0 3.3 ‐0.3 Nationalised bank FY03 FY07 FY11 FY14 Branch 33979 36673 45450 60825 1.9 5.5 10.2Savings Deposit (Rs mn) 1763708 3465851 7037605 9724024 18.4 19.4 11.4Retail loan (Rs mn) 493872 1461805 2491653 3003876 31.2 14.3 6.4No. of savings account (000) 161226 201235 304959 470902 5.7 11.0 15.6Savings per account 10939 17223 23077 20650 12.0 7.6 ‐3.6SA Market share 57.01 52 47 46 ‐5.0 ‐5.4 ‐0.9Source: RBI, PhillipCapital Research



Bank category wise current deposit franchisee CAGR

FY03 FY07 FY11 FY14 FY03‐07 FY07‐11 FY11‐14Schedule Commercial Banks current Deposit (Rs mn) 1392407 3218340 6701266 7145669 23.3 20.1 2.2No. of current account (000) 15552 20768 39161 48368 7.5 17.2 7.3balance per account 89532 154965 171119 147735 14.7 2.5 ‐4.8Private Banks current Deposit (Rs mn) 243847 778928 1520148 2012590 33.7 18.2 9.8No. of current account (000) 2230 4004 11555 8615 15.8 30.3 ‐9.3balance per account 109349 194516 131556 233618 15.5 ‐9.3 21.1SA Market share 10.82 19.46 24.38 27.61 8.6 4.9 3.2State Bank Group current Deposit (Rs mn) 368329 646334 1218711 1414701 15.1 17.2 5.1No. of current account (000) 2375 3460 3833 4299 9.9 2.6 3.9balance per account 155086 186795 317962 329089 4.8 14.2 1.2SA Market share 34.11 27.71 24.38 18.82 ‐6.4 ‐3.3 ‐5.6Nationalised Bank current Deposit (Rs mn) 619081 1317227 3168200 2862977 20.8 24.5 ‐3.3No. of current account (000) 9873 11967 21776 33239 4.9 16.1 15.1balance per account 62704 110068 145491 86133 15.1 7.2 ‐16.0SA Market share 43.49 38.04 39.39 41.60 ‐5.5 1.3 2.2Source: RBI, PhillipCapital Research Low‐cost deposits: Granular low‐cost funds are the key ingredient in creating a sound business model in banking. These provide a competitive advantage over peers. Key success factors in creating retail low‐cost deposit include strong outreach, suitable product offering, quality services, and superior brand name. Top private banks (Axis Bank, HDFC Bank and ICICI Bank) have been able to gain sizeable market share in CASA deposits whereas banks such as SBI, PNB, Canara, and Central Bank lost this share. In fact, dissecting the CASA deposit share further reveals that the largest market share gains for private banks have been in the current‐account segment due to factors such as increased outreach, strong corporate client acquisitions, and increased share of government/semi‐government businesses such as tax collection. The private sector’s gain comes with a loss of market share by State Bank of India, which lost ~13% market share in current account business over FY03‐14. However, the saving deposit segment has different story to narrate. Despite incumbent being more aggressive on growth, SBI and other public sector counterpart managed to withstand the competition. Hence, the market share decline in saving deposit is not very meaningful barring few banks. Cost of deposits of various banks (%)

Source: company, PhillipCapital Research

5.6 5.7 5.7 5.7 5.86.7 6.9 6.9 7.0 7.2 7.2 7.3 7.4 7.4

8.0

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2

3

4

5

6

7

8

9



Low‐cost deposit market share (%)

Gain/(loss) in market share between FY03‐15 CASA CA SA CASA market

share AB ‐0.01 0.18 ‐0.13 1.37Allahabad Bank ‐0.25 ‐0.32 ‐0.38 2.10Axis 3.84 5.28 3.43 4.67BOB 0.48 2.71 ‐0.50 5.28BOI ‐0.61 ‐0.92 ‐0.65 3.82CANARA ‐1.70 ‐2.47 ‐1.50 3.67Central Bank ‐1.66 ‐1.82 ‐1.77 2.82City Union Bank 0.05 0.07 0.05 0.15CORP ‐0.06 ‐0.24 0.09 1.27DCB ‐0.04 ‐0.04 ‐0.03 0.09Dena Bank ‐0.42 ‐0.26 ‐0.53 0.99Federal Bank 0.21 0.13 0.22 0.71HDFC Bank 4.36 5.87 3.99 6.43ICICI 3.75 3.73 3.87 5.36IDBI Bank 2.11 3.71 1.53 2.11Indian Bnk ‐0.29 ‐0.30 ‐0.37 1.58IndusInd 0.59 0.99 0.50 0.82ING Vysya Bank 0.06 0.38 ‐0.04 0.47IOB ‐0.34 ‐0.49 ‐0.33 2.19jammu & kashmir bank ‐0.16 ‐0.51 0.01 0.89Karnataka Bank 0.03 0.06 0.01 0.36Karur Vysya Bank 0.08 0.07 0.10 0.32KMB 0.87 1.58 0.62 0.88OBC ‐0.22 ‐0.15 ‐0.27 1.60PNB ‐1.67 ‐2.08 ‐1.75 5.95Punjab & Sind bank ‐0.87 ‐0.86 ‐0.88 0.60S B T ‐0.19 ‐0.34 ‐0.19 0.88SBI ‐4.47 ‐12.76 ‐0.78 19.22South Ind.Bank 0.06 0.02 0.07 0.35St Bk of Bikaner ‐0.31 ‐0.95 ‐0.06 1.03St Bk of Hyderab ‐0.08 ‐0.37 0.08 1.40St Bk of Mysore 0.02 ‐0.17 0.07 0.72St Bk of Patiala ‐0.57 ‐0.90 ‐0.43 0.89Syndicate Bank ‐0.53 ‐0.04 ‐0.77 2.06UBI ‐0.47 ‐0.57 ‐0.49 3.00UCO Bank ‐0.32 1.32 ‐0.97 2.04United Bank (I) ‐0.44 ‐0.15 ‐0.66 1.48Vijaya Bank ‐0.34 ‐0.41 ‐0.31 0.83YES 0.96 1.04 0.93 0.96FOREIGN ‐0.97 0.20 ‐0.78 4.11RRB ‐0.47 ‐0.20 ‐0.96 4.48Source: RBI, PhillipCapital Research



Operating efficiency Business establishments usually continuously try to gain operational efficiency without compromising on quality. The advent of core‐banking solution was one such instance — it enabled PSBs to reduce operating costs. Their cost‐to‐asset ratio declined to 0.24% in FY15 from 0.4% in FY04. However, for private banks the cost‐to‐asset ratio remained stable at 0.2%, as most of them continued to expand delivery channels and add resources. Cost‐to‐asset ratio (%)

Source: company, PhillipCapital Research For public‐sector banks, establishment cost and cost associated with retirement benefits has been an area of concern. However, with higher retirement, we expect the cost structure to rationalise. The basic salary of a public sector employee has increased at a CAGR of 15% between FY11‐15 due to high dearness allowance. Factors such as completion of second pension amortisation and moderate growth in dearness allowances (due to moderate inflation) should keep establishment expenses growth under 10% for FY16. Digitization – the next structural change in banking The banking business migrated from papers to plastics and card/electronic transactions constitute 65% of total banking transaction by volume while paper transactions declined to a mere 25%. The next transformation would be from physical to digital. The transaction volume through the digital platform has been increasing at a rapid pace. Digital channel accounts for 63% of total transactions for HDFC bank and 47% for Axis bank. Increased usage of the digital platform would change banks’ branch expansion strategy in terms of size of the branches or new branch additions. A robust and rapidly increasing digital infrastructure is imperative for banks due to (1) regulatory changes becoming more facilitative, (2) rapidly increasing customer readiness, and (3) integral part of the changing competitive context. Innovation, customer convenience, and security will remain a guiding force to attract and retain customers. Digitisation would enable a bank to offer customised products‐based analytics.

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FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

PSB Private



Payment systems (% market share in value)

Loan Products Mobile wallet

Deposit Share Credit card Debit card RTGS NEFT

Mobile transaction

Axis Bank Yes 3.0 7.1 6.4 7.2 5.9 12.4ICICI Bank Yes 4.0 11.2 9.1 6.0 7.2 17.5HDFC Bank Yes 5.0 30.0 8.4 20.4 12.5 33.8IndusInd Bank Yes 1.0 1.5 0.4 0.9 1.0 0.1BoB No 6.0 0.2 2.9 1.2 2.1 0.5SBI No 17.0 11.1 31.8 8.9 15.8 11.4

Payment systems (% market share in volume)

Loan Products Mobile wallet

Deposit Share Credit card Debit card RTGS NEFT

Mobile transaction

Axis Bank Yes 3.0 6.6 4.8 6.0 5.9 12.7ICICI Bank Yes 4.0 14.6 7.0 6.0 7.8 18.5HDFC Bank Yes 5.0 32.0 6.5 14.7 10.0 6.5IndusInd Bank Yes 1.0 1.2 0.3 1.1 0.7 0.1BoB No 6.0 0.3 2.3 3.7 3.0 0.7SBI No 17.0 12.6 39.5 8.0 19.3 45.0Source: RBI, PhillipCapital Research Electronic payments gaining momentum The RBI has been putting lot of effort over the last several years to move towards electronic payments. These efforts have borne fruits as paper‐based clearing systems have shown a continuous decline over the years, both in volume and value terms. The volume/value share of paper‐based in overall payment systems has come down to 25%/5% in FY15 from 67%/25% in FY07. Correspondingly, growth in retail electronic payments has been encouraging both in terms of volume/value share, which increased to 35%/4% in FY15 from 16%/2% in FY07. Share of card transactions also increased significantly to 30% in FY15 from 17% in FY07. While 808mn transactions valued at Rs 1.2tn were made through debit cards, 615mn transactions valued at around Rs 1.9tn were done through credit cards in FY15. Transactions through prepaid payment instruments (PPIs) also grew substantially, recording 314mn transactions valued at Rs 212bn. Mobile banking service, which is a relatively newer entrant among payment options, has shown encouraging growth and handled 171mn transactions valued at Rs 1tn in FY15. Payment system indicators Volume (Mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15RTGS (Customer + Interbank) 4 6 13 33 49 55 69 81 93CCIL Operated Systems 1 1 1 1 2 2 2 3 3Paper Clearing 1367 1461 1397 1380 1387 1342 1314 1257 1197Retail Electronic Clearing (ECS + NEFT + IMPS) 325 304 281 314 406 512 694 1108 1687Cards ‐ Usage at POS (Debit + Credit card) 352 384 387 404 502 648 864 1128 1423Prepaid Payment Instruments (PPIs) 0 0 0 0 0 31 67 134 315Total 2049 2156 2080 2133 2347 2589 3009 3711 4717yoy change 30 5 ‐4 3 10 10 16 23 27

% share in payment systems RTGS 0 0 1 2 2 2 2 2 2CCIL Operated Systems 0 0 0 0 0 0 0 0 0Paper Clearing 67 68 67 65 59 52 44 34 25Retail Electronic Clearing 16 14 14 15 17 20 23 30 36Cards 17 18 19 19 21 25 29 30 30Prepaid Payment Instruments (PPIs) 0 0 0 0 0 1 2 4 7Total 100 100 100 100 100 100 100 100 100Source: RBI, PhillipCapital India Research



Payment System indicators Value (Rs tn) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15RTGS (Customer + Interbank) 184.8 273.2 322.8 394.5 394.5 539.3 676.8 734.3 754.0CCIL Operated Systems 163.3 264.4 320.2 387.4 383.9 406.1 501.6 621.6 752.0Paper Clearing 120.4 134.0 124.7 104.1 101.3 99.0 100.2 93.3 85.4Retail Electronic Clearing 8.6 14.9 4.2 6.0 11.9 20.6 31.9 47.9 65.4Cards ‐ Usage at POS 0.7 0.8 0.8 0.9 1.1 1.5 2.0 2.5 3.1Prepaid Payment Instruments 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2Total 478 687 773 893 893 1,067 1,313 1,500 1,660yoy change 55 44 12 16 0 19 23 14 11

% share in payment systems RTGS 38.7 39.7 41.8 44.2 44.2 50.6 51.6 49.0 45.4CCIL Operated Systems 34.2 38.5 41.4 43.4 43.0 38.1 38.2 41.4 45.3Paper Clearing 25.2 19.5 16.1 11.7 11.4 9.3 7.6 6.2 5.1Retail Electronic Clearing 1.8 2.2 0.5 0.7 1.3 1.9 2.4 3.2 3.9Cards 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2Prepaid Payment Instruments (PPIs) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Source: RBI, PhillipCapital India Research

The data above clearly shows that the private peers score the most in terms of digitization initiative. Despite high market share in deposits, the market share of PSBs in electronic mode of transaction is much lower. Private banks have been much ahead in terms of innovation and convenience. If the PSBs do not catch up in terms of product offering, they would continue to lose market share. New vertical in the banking value chain called ‘payment bank’ In order to provide ubiquitous access to payment services and deposit products to small businesses and low‐income households, the central bank initiated a new vertical in the banking value chain called payment bank. This vertical will include a large section of the population, especially low‐income households, migrant labour, and economically weaker sections under the net of basic banking services and financial products. Along with financial inclusion, the primary objective of payment banks will also be to facilitate high‐volume and low‐value transactions in deposits, remittances, and payments — this will be driven through cost efficient technology. The payment bank’s business model would evolve around payment solutions as the restriction on lending activity would put a cap on its intermediation business. The payment bank’s business model would evolve around payment solution. The total market opportunity in remittance and cash ins‐cash outs is pegged at Rs100bn. The margin from intermediation business will remain narrow ranging from 50bps to 100bps. Despite this, the level of participation for payment‐bank license is immense. The advent of a new vertical in the financial value chain would complement commercial banks’ presence in the market.



Government’s initiatives to turnaround public banks The government recently unveiled a seven‐point plan to revamp ailing public sector banks, which focuses on most of the key problem areas of PSU banks. Two key areas: • Appointment: The government announced that it will split the post of Chairman

and Managing Director into two separate post (MD & CEO, Non‐Executive Chairman). Accordingly, it appointed MD & CEOs for five large banks ( BoB, BOI, Canara bank, IDBI Bank, and PNB ).

The appointments included two names from the private sector (P S Jayakumar for BOB and Mr Rakesh Sharma for Canara Bank). The appointment in BOB is quite positive as Mr Jayakumar has an impeccable track record and will be at the helm of affairs for five years vs. three years for the other appointments.

• Bank Board Bureau: The government announced formation of a Bank Board Bureau, which will act as a link between banks and the government. The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for appointing Whole‐time Directors and non‐Executive Chairman of PSBs. BBB will also constantly engage with the boards of all PSBs to formulate appropriate strategies for their growth and development and help them develop differentiated strategies —capital raising plans to innovative financial methods and instruments. BBB will also steer strategy discussions on consolidation, based on requirement. The government wants to encourage BBB to restructure their business strategy and suggest a way forward for their consolidation and merger with other banks if it is win‐win for both. While formation of BBB is important because of its twin roles, it is also of great importance as the government showed its intention towards forming a holding company structure, which has been discussed for many years. Once the holding company structure is in place, it would become very easy for banks to raise capital as the entire government holding of all PSU banks will be transferred to the holding company.



Axis Bank (AXSB IN) No major asset quality headwinds INDIA | BANKING | Company Update

1 September 2015

Credit growth higher than systemic average We expect Axis’ credit growth to be ~5% higher than the systemic growth. Retail/MSME will drive credit with around 25%/20% growth. Corporate credit will remain sluggish due to lack of private investment, but the bank is well placed to participate in any opportunity that arises due to public investment. Margin slightly under pressure Decline in interest rate will impact net interest margin in the short term due to time lag in re‐pricing of liabilities vs. assets. However, we don’t expect the decline to be significant. The bank maintains its full‐year NIM guidance of 3.5%‐3.8% (margin guidance has been wide). We expect NIM compression of ~10‐15bps in the near term. Moderate growth in corporate book to keep fee income subdued Corporate fee income continues to remain subdued due to slow business momentum. Retail fee growth will remain the key driver, which we believe should grow at +25% during FY16 — while this growth is faster than FY15, it is lower than balance‐sheet growth. Operating expenses undeterred by business slowdown Calibrated growth in operating expenses to help the bank maintain its cost‐to‐income ratio, which currently stands at 43%. The bank expects to add 200‐250 branches, largely in metro and urban centres and also expects head count to increase in FY16 vs. the decline in FY15. Stressed‐assets under control The bank has not given any stressed‐asset guidance for FY16 unlike Rs 65bn for FY15, which included slippages and fresh restructuring. The end of asset‐quality forbearance on restructuring increased pressure on slippages. The bank expects stressed assets in FY16 to be lower than FY15. Barring some spill over of restructuring pertaining to Q4FY15 (amounting to Rs 4bn), all the indicated stressed assets in FY16 will be slippages, which should be higher than FY15’s Rs 28.5bn. Hence, the bank has guided for slightly higher credit cost of ~80‐85bps compared to 75bps in FY15. As per our analysis, its exposure to stressed corporates in sectors such as iron & steel, power, engineering, construction & other infrastructure, and textile sectors is 3.2% compared to the banking sector’s exposure of 4%. Within its total exposure, potential NPAs can be around 1.7%. The bank carries a contingent provision of Rs 12.5bn (0.45% of loan book). Its slippage expectation of FY16 fairly captures the inherent risk in the portfolio. Valuation and recommendation. Incremental stress in FY16 should be lower than Rs 57bn, whereas credit‐cost guidance stands at 80‐90bps vs. 75bps in FY15. Hence, we expect slippages to increase due to end‐of‐asset‐quality forbearance on restructuring. However, outstanding contingent provision of Rs 12.5bn can provide cushion to earnings from any major asset‐quality shocks. For FY16, we foresee ~18% credit growth with NIMs at ~3.75%. Fee income should increase by ~15% with stable C/E ratio, which will drive PAT CAGR of 16% and return ratios of 1.75% over FY15‐17. At the CMP of Rs 481, the stock trades at 2x our FY17 adjusted book value per share of Rs 239. We maintain Buy with a price target of Rs 660.

BUY (Maintain) CMP RS 481 TARGET RS 660 (+37%) COMPANY DATA O/S SHARES (MN) : 2377MARKET CAP (RSBN) : 1204MARKET CAP (USDBN) : 18.152 ‐ WK HI/LO (RS) : 655 / 370LIQUIDITY 3M (USDMN) : 60.6PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 27.9FII / NRI : 46.6FI / MF : 12.7NON PROMOTER CORP. HOLDINGS : 3.4PUBLIC & OTHERS : 9.3 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐11.5 ‐13.3 27.8REL TO BSE ‐5.0 ‐7.7 29.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 32.3 32.0 31.5Pre‐prov ROA (%) 3.2 3.1 3.1Net Profit 73,584 85,465 99,622% growth 18.3 16.1 16.6EPS (Rs) 31.0 35.9 41.6Adj BVPS (Rs) 179.2 206.4 238.5ROE (%) 17.8 17.7 17.8 P/E (x) 15.5 13.4 11.6Adj P/BV (x) 2.7 2.3 2.0

Source: PhillipCapital India Research Est.

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Apr‐13 Apr‐14 Apr‐15AXIS Bank BSE Sensex


AXIS BANK COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eInterest on Loans 2,19,504 2,58,678 3,02,653 3,58,644Interest on Investments 83,431 91,171 1,00,288 1,10,317Others 3,476 4,937 5,184 5,961Total Interest Earned 3,06,412 3,54,786 4,08,125 4,74,922Total Interest Expended 1,86,895 2,12,545 2,44,870 2,82,224Net Interest Income 1,19,516 1,42,241 1,63,255 1,92,698Total non interest income 74,052 83,650 96,216 1,05,493Total Income 1,93,569 2,25,892 2,59,472 2,98,191Personnel Expenses 26,013 31,150 35,511 41,547Other Expenses 52,994 60,888 69,543 80,275Total Op expenses 79,008 92,037 1,05,053 1,21,822Net Inc (Loss) before prov 1,14,561 1,33,854 1,54,418 1,76,369Provision and contingencies 21,075 23,280 26,859 27,679Net Inc (Loss) before tax 93,486 1,10,574 1,27,560 1,48,690Provision for Income Tax 31,310 36,990 42,095 49,068Net Profit 62,177 73,584 85,465 99,622

Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 2,82,387 3,60,990 3,88,949 4,19,297

Loans, Adv & Int accrued 23,00,668 28,10,830 33,74,037 40,50,114

Investments 11,69,339 13,64,933 15,16,070 16,87,197

Fixed Assets (Net) 24,102 25,143 27,143 29,143

Other assets 55,953 57,427 66,041 75,947

Total Assets 38,32,449 46,19,324 53,72,250 62,61,709

Liabilities Share capital 4,698 4,741 4,765 4,789

Reserves and Surplus 3,77,506 4,42,024 5,13,553 5,96,368

Hybrid Capital 12,574 13,120 18,120 23,120

Debt 1,07,403 1,16,322 1,56,322 1,96,322

Borrowing 3,82,932 6,68,141 7,34,955 7,79,052

Total Deposits 28,20,874 32,44,966 37,90,671 44,96,304

Other liab incld prov 1,26,461 1,30,010 1,53,865 1,65,754

Total Liabilities 38,32,449 46,19,324 53,72,250 62,61,709


Valuation Ratios FY14 FY15 FY16e FY17e

Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 32.1 32.3 32.0 31.5RoAE (%) 17.4 17.8 17.7 17.8 Pre‐provision Operating ROA (%) 3.2 3.2 3.1 3.0 RoAB (%) 1.8 1.78 1.74 1.74EPS (Rs.) 26.5 31.0 35.9 41.6 Dividend per share (Rs.) 3.6 4.6 5.0 6.0 Book Value (Rs.) 162.7 188.5 217.6 251.1 Adj BV (Rs.) 154.2 179.2 206.4 238.5 Revenue Analysis Interest income on IBA (%) 8.6 8.6 8.3 8.3 Interest cost on IBL (%) 5.9 5.8 5.6 5.5 NIM on IBA / AWF (%) 3.4 3.4 3.3 3.4 Core fee Inc / AWF (%) 1.9 1.7 1.7 1.6 Portfolio gains / Total Inc (%) 1.6 4.6 4.2 2.4 Op.Exp / TI (%) 41.5 42.6 42.2 41.8 Op.Exp / AWF (%) 2.2 2.2 2.1 2.1 Employee exps / Op exps (%) 32.9 33.8 33.8 34.1 Tax / Pre‐tax earnings (%) 33.5 33.5 33.0 33.0 Asset Quality 1.4 1.5 1.5 1.6 GNPAs / Gr Adv (%) 0.4 0.5 0.6 0.6 NNPAs / Net Adv (%) Growth Ratio 16.8 22.2 20.0 20.0 Loans (%) 0.5 16.7 11.1 11.3 Investments (%) 11.5 15.0 16.8 18.6 Deposits (%) 15.4 16.9 16.0 16.0 Networth (%) 23.6 19.0 14.8 18.0 Net Int Income (%) 22.3 4.0 16.2 14.9 Non‐fund based income (%) 14.3 16.5 14.1 16.0 Non‐Int Exp (%) 23.8 18.3 15.4 16.6 Profit Before Tax (%) 20.0 18.3 16.1 16.6 Net profit (%) Asset / Liability Profile 44.6 44.7 45.0 45.6 Avg CASA/ Deposits (%) 78.8 83.1 86.6 88.2 Avg Adv / Avg Dep (%) 43.6 41.8 40.9 38.7 Avg Invst / Avg Dep (%) 113.4 120.3 103.2 95.8 Incr Adv / Deposits (%) 9.1 10.6 10.7 9.8 Avg Cash / Avg Dep (%) 1.4 1.5 1.5 1.6 Capital Adequacy Ratio: 16.1 15.1 15.6 15.9Tier I (%) 12.6 12.1 12.1 12.1 Internal Capital Generation rate (%) 16.2 16.4 16.5 16.4 NNPAs to Equity (%) 2.7 2.9 3.8 4.1



Bank of Baroda (BOB IN) Visible reversal in NPA cycle INDIA | BANKING | Company Update

1 September 2015

To see early reversal in asset quality amongst PSBs BOB was able to moderate its incremental stress in the last two quarters. Its exposure to sector such as iron & steel, power, infra, engineering, construction, and textiles is 24% — well diversified across segments. Our analysis reveals that its exposure to stressed corporates in these sectors is 2% vs. the banking sector’s exposure of 4%. Within total exposure, potential NPAs can be around 1%, which is more than reasonably captured in its annual slippage assumption for FY16/17 of ~1.6%/1.3%. See lower delinquency (0.6%) from restructured portfolio (ex‐discom and Air India) BOB’s outstanding restructured portfolio is Rs 206bn (4.8% of loan book) and its exposure to stressed companies within the restructured segment is much lower vs. peers, primary due to its diversified portfolio and lower concentrated lending to corporate groups. Hence, the slippage from this segment is expected to be much lower at ~0.6% out of total restructured loan book of 4.8%. Business growth to remain benign Credit growth will be benign due to only moderate growth in the corporate segment with lack of new projects and no uptick in demand for working capital. We expect FY16/17 credit growth of 12%/15%. NIM to remain stable at current levels The bank’s margin has been under pressure due to (1) declining NIMs in the overseas business with increased competition in the buyer’s credit business (53% of overseas business), (2) downward re‐pricing in the SME portfolio, and (3) lack of growth in domestic loan book resulting in decline in credit‐deposit ratio to 68%. We believe that a pickup in the bank’s credit and shift from the buyer’s credit business will aid overall NIM. However, we haven’t factored this in our projection — we assume stable FY16 NIMs at 2.3%. Moderate growth in employee cost to lower cost‐to‐income ratio to 45% (‐140bps) in FY17 The bank expects 3,500 employees to retire and an addition of 9,500 at lower levels. Factors such as completion of second pension amortization and moderate growth in dearness allowances (due to moderate inflation) should keep establishment expenses growth under 10% for FY16. The base salary for most PSBs increased ~15% between FY11‐15 driven by high dearness allowance. This increase is expected to remain subdued in FY16 due to moderate growth in Consumer Price Index (CPI). Valuation and recommendation. We expected BOB to deliver strong earnings at a CAGR of 30% over FY15‐17 because of decline in credit cost translating into an improvement in RoE to 12% from current levels of 9%, after factoring preferential allotment to the government in FY16/17. Strong coverage ratio of 65% will provide cushion to earnings. After the government’s capital infusion, capital adequacy ratio should improve to +10%. At CMP of Rs 172, the stock trades at 0.9x our FY17 ABVPS of Rs 186. We upgrade the stock to Buy (from Neutral) with a revised PT of Rs 235 (Rs 180 earlier).

BUY (Upgrade) CMP RS 172 TARGET RS 235 (+37%) COMPANY DATA O/S SHARES (MN) : 2211MARKET CAP (RSBN) : 408MARKET CAP (USDBN) : 6.152 ‐ WK HI/LO (RS) : 229 / 138LIQUIDITY 3M (USDMN) : 22.2PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 57.5FII / NRI : 13.6FI / MF : 20.7NON PROMOTER CORP. HOLDINGS : 1.0PUBLIC & OTHERS : 7.2 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 4.1 13.6 6.0REL TO BSE 10.6 19.2 7.3 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rsmn FY15 FY16E FY17EPre‐prov ROE (%) 26.9 25.2 25.4Pre‐prov ROA (%) 1.5 1.4 1.4Net Profit 34 43 57% growth ‐24.1 26.1 32.4EPS (Rs) 15.3 18.4 23.4Adj BVPS (Rs) 148.9 163.5 185.9ROE (%) 9.2 10.3 11.9 P/E (x) 11.2 9.4 7.4Adj P/BV (x) 1.2 1.05 0.93


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BANK OF BARODA COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rsbn FY14 FY15 FY16e FY17eInterest on Loans 279 308 337 378Interest on Investments 87 97 101 109Others 24 25 27 30Total Interest Earned 389 430 465 516Total Interest Expended 270 298 321 352Net Interest Income 120 132 144 164Total non‐interest income 45 44 45 50Total Income 164 176 189 214Personnel Expenses 41 43 47 52Other Expenses 30 34 37 41Total Op expenses 71 77 84 93Net Inc (Loss) before prov 93 99 105 122Provision and contingencies 38 45 44 40Net Inc (Loss) before tax 2 ‐1 1 2Provision for Income Tax 55 54 61 81Net Profit 10 20 18 24 Balance Sheet Y/E Mar, Rsbn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 1,309 1,484 1,649 1,824Loans, Adv & Int accrued 3,970 4,281 4,836 5,562Investments 1,207 1,266 1,380 1,560Fixed Assets (Net) 27 29 31 34Other assets 81 91 95 100Total Assets 6,595 7,150 7,992 9,079

Liabilities Share capital 4 4 5 5Reserves and Surplus 345 384 440 508Hybrid Capital 19 19 21 23Debt 105 102 107 112Borrowing 244 232 255 280Total Deposits 5,726 6,222 6,974 7,952Other liab incld prov 141 177 181 191Total Liabilities 6,595 7,150 7,992 9,079 Source: Company, PhillipCapital India Research Estimates


Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 28.2 26.9 25.2 25.4RoAE (%) 13.8 9.2 10.3 11.9 Pre‐provision Operating ROA (%) 1.5 1.4 1.4 1.4 RoAB (%) 0.8 0.5 0.58 0.68 EPS (Rs.) 20.8 15.3 18.4 23.4 Dividend per share (Rs.) 4.8 3.2 3.5 4.0 Book Value (Rs.) 167.1 179.6 194.8 214.6 Adj BV (Rs.) 141.8 148.9 163.5 185.9 Revenue Analysis 6.6 6.4 6.2 6.1 Interest income on IBA (%) 4.8 4.7 4.6 4.5 Interest cost on IBL (%) 2.0 2.0 1.9 2.0 NIM on IBA / AWF (%) 0.4 0.4 0.4 0.4 Core fee Inc / AWF (%) 4.7 6.1 4.1 3.8 Portfolio gains / Total Inc (%) 45.5 46.3 46.4 44.9 Op.Exp / TI (%) 1.2 1.1 1.1 1.1 Op.Exp / AWF (%) 58.0 55.5 55.6 55.6 Employee exps / Op exps (%) 17.4 37.3 30.0 30.0 Tax / Pre‐tax earnings (%) Asset Quality 3.0 3.8 4.0 3.6 GNPAs / Gr Adv (%) 1.5 1.9 1.9 1.6 NNPAs / Net Adv (%) Growth Ratio 21.0 7.8 13.0 15.0 Loans (%) (3.4) 4.9 9.0 13.0 Investments (%) 20.0 8.7 12.1 14.0 Deposits (%) 12.6 10.7 13.9 14.8 Networth (%) 5.7 10.2 9.4 13.9 Net Int Income (%) 23.4 (8.7) 10.1 11.9 Non‐fund based income (%) 21.5 7.5 9.8 10.0 Non‐Int Exp (%) 12.1 (1.4) 12.9 32.4 Profit Before Tax (%) (0.0) (24.1) 26.1 32.4 Net profit (%) Asset / Liability Profile 25.4 25.9 26.2 26.3 Avg CASA/ Deposits (%) 67.2 66.7 66.4 67.0 AvgAdv / AvgDep (%) 23.4 20.7 20.1 19.7 AvgInvst / AvgDep (%) 72.1 62.6 73.8 74.2 IncrAdv / Deposits (%) 20.6 23.4 23.7 23.3 Avg Cash / AvgDep (%)

12.3 12.6 12.5 12.4Capital Adequacy Ratio: 9.3 9.9 10.1 10.2 Tier I (%) 11.2 7.7 8.9 10.6 Internal Capital Generation rate (%) 16.8 20.3 19.6 16.4 NNPAs to Equity (%) 28.2 26.9 25.2 25.4



Cholamandalam Investment & Finance (CIFC IN) Optimised product mix and CV cycle recovery to drive RoA INDIA | BANKING | Company Update

1 September 2015

Optimised product mix and economies of scale to boost profitability ratios. The company is in a sweet spot, as the confluence of several levers will drive RoA to the next level. Factors such as a rising share of the LAP book, recovery in the CV cycle, and a decline in opex ratio will boost RoA by about 50bps to 2.4% over the next two years. With a recovery in the CV cycle, credit cost in the vehicle‐finance segment will moderate to 1.5% by FY17 from 2% in FY15. Investment in technology and economies of scale will drive a 30bps cut in opex/asset ratio. As LAP share (higher RoA business) increases in the portfolio, it will have a positive impact on aggregate RoA. All these factors will drive RoA to 2.4% by FY17 from 1.9% in FY15. Under‐penetration, structural factors to drive medium to long‐term growth. Recovery of the CV cycle augurs well for CV financiers such as Cholamandalam, which has almost 35% of its AUMs in the new CV segment and 15‐20% in the used‐CV segment. M&HCV growth is on the uptrend and growth in the LCV segment is likely to pick up by H2FY16/ FY17. The long‐term growth potential for the LCV segment is intact given (1) the low penetration of LCVs, (2) emergence of a hub‐and‐spoke model for transport, and (3) increased urbanisation. These factors will drive 17% CAGR in vehicle finance over FY14‐17. Sticky LAP book offers stability to the balance sheet. CIFC’s home‐equity portfolio (LAP), is its second‐largest product segment after vehicle finance, accounting for 29% of assets under management. While CIFC’s overall disbursement CAGR over FY12‐15 was 13%, LAP CAGR was a higher 26% due to longer‐tenure loans. The home‐equity portfolio has lent stability to the balance sheet, with average tenure of 4‐5 years vs. 2 years in vehicle finance. Average ticket size is also higher at Rs 5mn vs. Rs 0.4‐0.5mn in vehicle finance. We expect AUMs under LAP to post 26% CAGR over FY15‐17. Strong risk management limits asset‐quality deterioration. With GNPA ratio of 3.3% (150 days past due) CIFC’s asset quality compares favourably with most peers. Companies like Mahindra Finance and Shriram Transport Finance, which operate mainly in the vehicle‐finance space, have a significantly higher GNPA ratios of 8% and 4.1% respectively. Strong understating of borrowers’ cash flow and robust credit appraisal systems underpin the company’s better asset quality. Although the downtrend in the CV cycle contributed to a gradual rise in the GNPA ratio over the past two years, its deterioration has been lesser than peers. With the start of the uptrend in the CV cycle, asset‐quality pressure will subside gradually. By FY17, we expect GNPA ratio to ease to 2.5%. Valuation and recommendation While MHCV is clearly showing pickup in growth over the last four quarters, CIFC’s LCV portfolio has also seen double‐digit growth in Q1FY16 after many quarters of decline. With a pick up in the LCV segment, we expect its overall AUM growth to improve in FY16/17. Asset quality has been stable (on steady state basis and adjusted for seasonality). We believe that credit costs in the vehicle‐finance segment seem to have peaked out and should see some moderation as growth picks up. With improvement in the CV cycle, Cholamandalam should deliver strong earnings CAGR of 29% over FY15‐17, driving sharp improvement in RoAs and RoEs. RoA will improve by 50 bps to 2.4% and RoE to 18.5% by FY17. Improving operating matrix and profitability ratios will result in further re‐rating of the stock. At its CMP of Rs 600 the stock trades at 2.9x our FY16 ABVPS of Rs 203 and 2.45x our FY17 ABVPS of Rs 246. We maintain our rating/TP at Buy/Rs 775.


1MTH 3MTH 1YRABS ‐12.3 4.3 48.7REL TO BSE ‐5.8 9.8 50.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Income 17,308 20,449 24,415% growth 16 18 19Net Profit 4,356 5,304 7,337% growth 19.5 21.9 38.3EPS (Rs) 30.3 34.1 47.2PER (x) 19.8 17.6 12.7Book value (Rs) 220.8 233.8 276.4P/BV (Rs) 2.7 2.6 2.2Adj. book value (Rs) 184.4 202.9 245.8P/ABV (Rs) 3.3 3.0 2.4


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Apr‐13 Apr‐14 Apr‐15CholamandalamBSE Sensex


CHOLAMANDALAM INVESTMENT AND FINANCE LTD COMPANY UPDATE

Financials Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet interest income 14,587 17,036 20,114 24,026Other income 331 272 335 389Net Income 14,918 17,308 20,449 24,415Operating expenses 6,582 7,483 8,400 9,440Pre provision profit 8,335 9,825 12,049 14,975Provisions 2,833 3,247 4,031 4,132Profit before tax 5,502 6,572 8,017 10,843Tax 1,862 2,221 2,713 3,507Tax rate 33.8 33.8 33.8 32.3Adjusted Profit after tax 3,640 4,356 5,304 7,337 Dupont (as % of Assets) Y/E Mar, Rs mn FY14 FY15e FY16e FY17eInterest Income 16.3 16.1 16.1 16.0Interest Expense 8.9 8.6 8.4 8.3Net Interest Income 7.3 7.5 7.7 7.7Other income total 0.2 0.1 0.1 0.1Net Income total 7.5 7.6 7.8 7.8Operating expenses total 3.3 3.3 3.2 3.0Preprovision profit 4.2 4.3 4.6 4.8Provisions 1.4 1.4 1.5 1.3Profit before tax and exceptional items 2.8 2.9 3.1 3.5Profit before tax 2.8 2.9 3.1 3.5Tax total 0.9 1.0 1.0 1.1Profit after tax 1.8 1.9 2.0 2.4 Growth

FY14 FY15e FY16e FY17eNet interest income 31.7 16.8 18.1 19.5Net Income total 30.3 16.0 18.1 19.4Preprovision profit 44.9 17.9 22.6 24.3Profit before tax 22.1 19.4 22.0 35.2Profit after tax 18.7 19.5 21.9 38.3Loan 16.9 14.2 17.9 21.9Disbursement 8.2 ‐2.3 15.8 22.0AUM 22.4 9.5 23.1 28.3


Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eEquity 1,433 1,437 1,555 1,555Reserves 21,515 30,296 34,807 41,433Net worth 22,947 31,733 36,362 42,989Borrowings 180,932 194,752 233,636 284,569Current liabilities & others 11,589 12,247 12,738 12,784Total liabilities 215,468 238,732 282,735 340,341Net block 729 683 584 492Investments 824 675 640 640Loans 194,281 221,835 261,590 318,799Current assets & others 19,634 15,539 19,921 20,410Total assets 215,468 238,732 282,735 340,341 Key ratios

FY14 FY15e FY16e FY17eNIM (%) 7.3 7.5 7.7 7.7NIM (%) ‐ on AUM 6.9 7.0 7.1 6.7Cost/ Income (%) 44.1 43.2 41.1 38.7Credit cost (%) 1.4 1.4 1.5 1.3RoA(%) 1.8 1.9 2.0 2.4RoE (%) 17.1 15.9 15.6 18.5Leverage (x) 9.3 8.3 7.7 7.8Tier I (%) 10.5 13.0 12.8 12.0CAR (%) 17.2 20.9 19.0 17.9No of shares (mn) 143.3 143.7 155.5 155.5Gross NPA (%) 1.9 3.1 2.8 2.5Net NPA (%) 0.8 2.0 1.7 1.4Provision coverage (%) 60.1 34.8 39.3 44.0 Valuation ratios

FY14 FY15e FY16e FY17eFDEPS (Rs) 25.4 30.3 34.1 47.2PER (x) 24.0 20.1 17.9 12.9Book value (Rs) 160.2 220.8 233.8 276.4P/BV (Rs) 3.8 2.8 2.6 2.2Adjusted book value (Rs) 148.1 184.4 202.9 245.8P/ABV (Rs) 4.1 3.3 3.0 2.5P/ PPP 2.8 3.2 3.0 2.9Dividend yield (%) 0.6 0.6 0.6 0.6



Indian Bank (INBK IN) Worst of asset quality is behind INDIA | BANKING | Company Update

1 September 2015

Visible improvement in asset quality, management hopeful of recovery from NPA account The slippages trend for the bank has been improving and remains better than most public‐sector banks. Management is hopeful of strong recovery and upgrades from the NPA account, which will contain credit costs and help maintain asset quality. In the restructuring segment, most of the loans are out of either interest moratorium or principal moratorium, barring some discom exposures. Hence, slippage from the restructured segment should remain under control. Expect lower delinquency from exposure to stressed sectors The bank’s exposure to infra, iron & steel, engineering, construction and textile is around 28%. As per our analysis, its exposure to stressed corporates in these sectors is 2.6% vs. the banking sector’s exposure of 4%. Within the total exposure, potential NPAs could be around 1.4%. The bank may surprise positively in terms of slippage as the market expectation remains above +2% for FY16. Business growth to remain benign Advances growth will continue to remain below industry trend due to weak growth in corporate loan book (4% yoy) and decline in overseas loan book by 9% yoy. Loan book is likely to grow 12‐14% yoy driven by retail, SME, and agriculture segments. NIM to remain stable at current level The bank’s margin has been under pressure due to downward re‐pricing of the SME portfolio and no growth in domestic loan book resulting in a lower credit‐deposit ratio of 68%. We expect NIM to remain weak (2.30‐2.35%) because of a decline in yields on advances. Valuation and recommendation. At CAR of 12.1% (tier‐1 at 10%) Indian Bank is sufficiently capitalized to fund its near‐term growth vs. PSU banks. We see an earnings CAGR of 23% over FY15‐17, largely driven by lower credit cost, which should translate into a 14bps improvement in ROA to 0.69%. At CMP of Rs 130, the stock trades at 0.6x our FY16 ABVPS of Rs 230 and 0.5x FY17 ABVPS of Rs 254. We have a Buy rating with a PT of Rs 204 (0.8x FY17 ABVPS of Rs 255).


1MTH 3MTH 1YRABS 0.4 ‐19.3 ‐2.4REL TO BSE 6.9 ‐13.8 ‐1.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 25.0 24.5 26.3Pre‐prov ROA (%) 1.6 1.6 1.7Net Profit 10,052 11,319 15,260% growth ‐13.3 12.6 34.8EPS (Rs) 20.9 23.6 31.8Adj BVPS (Rs) 205.4 229.2 254.9ROE (%) 8.3 8.7 10.9 P/E (x) 6.2 5.5 4.1Adj P/BV (x) 0.63 0.57 0.51


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INDIAN BANK COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17e

Interest on Loans 1,14,171 1,20,745 1,28,593 1,46,596

Interest on Investments 37,281 36,229 38,040 42,605

Others 1,039 1,556 1,711 1,882

Total Interest Earned 1,52,492 1,58,529 1,68,345 1,91,084

Total Interest Expended 1,08,888 1,13,917 1,20,331 1,34,646

Net Interest Income 43,604 44,613 48,014 56,438

Total non interest income 13,717 13,634 15,024 15,075

Total Income 57,321 58,246 63,038 71,513

Personnel Expenses 19,268 17,426 19,168 21,277

Other Expenses 9,047 10,683 12,004 13,361

Total Op expenses 28,315 28,109 31,172 34,638

Net Inc (Loss) before prov 29,006 30,137 31,866 36,875

Provision and contingencies 14,249 15,451 15,695 15,076

Net Inc (Loss) before tax 14,757 14,686 16,171 21,800

Provision for Income Tax 3,167 4,635 4,851 6,540

Net Profit 11,589 10,052 11,319 15,260

Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 104,905 130,812 138,057 151,862Loans, Adv & Int accrued 1,222,090 1,258,635 1,403,831 1,606,698Investments 476,542 467,891 523,637 600,504Fixed Assets (Net) 29,322 29,687 32,656 36,575Other assets 39,404 41,334 43,401 48,609Total Assets 1,872,262 1,928,360 2,141,582 2,444,248

Liabilities Share capital 4,648 4,803 5,136 5,386Reserves and Surplus 110,707 120,774 133,757 149,985Hybrid Capital 23,355 22,755 22,755 22,755Debt 10,901 10,000 11,000 12,000Borrowing 38,738 16,461 18,107 20,461Total Deposits 1,632,289 1,701,149 1,894,925 2,178,230Other liab incld prov 51,625 52,418 55,902 55,431Total Liabilities 1,872,262 1,928,360 2,141,582 2,444,248 Source: Company, PhillipCapital India Research Estimates


Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 26.4 25.0 24.1 25.1RoAE (%) 10.5 8.3 8.6 10.4 Pre‐provision Operating ROA (%) 1.7 1.6 1.6 1.6 RoAB (%) 0.7 0.5 0.6 0.7 EPS (Rs.) 24.9 20.9 22.0 28.3 Dividend per share (Rs.) 7.5 4.2 5.0 6.0 Book Value (Rs.) 298.4 308.8 314.7 330.7 Adj BV (Rs.) 206.5 205.4 223.7 244.8

Revenue Analysis Interest income on IBA (%) 9.0 8.7 8.6 8.6 Interest cost on IBL (%) 6.9 6.7 6.6 6.5 NIM on IBA / AWF (%) 2.6 2.4 2.4 2.6 Core fee Inc / AWF (%) 0.2 0.3 0.3 0.3 Portfolio gains / Total Inc (%) 7.0 3.7 4.5 2.9 Op.Exp / TI (%) 52.9 50.1 51.7 49.8 Op.Exp / AWF (%) 1.7 1.5 1.6 1.6 Employee exps / Op exps (%) 68.0 62.0 61.5 61.4 Tax / Pre‐tax earnings (%) 21.5 31.6 30.0 30.0 Asset Quality GNPAs / Gr Adv (%) 3.7 4.5 4.4 3.8 NNPAs / Net Adv (%) 2.3 2.5 2.5 2.1 Growth Ratio Loans (%) 15.7 3.0 11.5 14.5 Investments (%) 12.1 (1.8) 11.9 14.7 Deposits (%) 14.2 4.2 11.4 15.0 Networth (%) 15.9 6.9 9.0 10.2 Net Int Income (%) (3.7) 2.3 7.6 17.5 Non‐fund based income (%) (7.1) 16.1 6.8 6.1 Non‐Int Exp (%) 2.9 (0.7) 10.9 11.1 Profit Before Tax (%) (19.2) (0.5) 10.1 34.8 Net profit (%) (26.7) (13.3) 12.6 34.8 Asset / Liability Profile Avg CASA/ Deposits (%) 27.2 27.8 28.4 28.3 Avg Adv / Avg Dep (%) 71.8 71.3 70.7 70.9 Avg Invst / Avg Dep (%) 29.5 28.3 27.6 27.6 Incr Adv / Deposits (%) 81.4 53.1 74.9 71.6 Avg Cash / Avg Dep (%) 6.6 7.1 7.5 7.1 Capital Adequacy Ratio: 12.9 13.0 12.6 12.2Tier I (%) 10.2 10.8 10.7 10.5 Internal Capital Generation rate (%) 7.8 7.0 7.0 8.7 NNPAs to Equity (%) 19.9 21.2 21.2 18.9



ICICI Bank (ICICIBC IN) Exposure to stressed corporates to remain an overhang INDIA | BANKING | Company Update

1 September 2015

Bank’s exposure to stressed sectors can throw negative surprises The bank’s exposure to infra, iron & steel, engineering, construction, and textile sectors is around 26%. As per our analysis, its exposure to stressed corporates in these sectors is 4.2% vs. the banking sector’s exposure of 4%. Within the total exposure, potential NPAs can be around 3.2%. The bank’s guidance for a slippage of less than Rs 80bn in FY16 does not adequately capture the risk in the portfolio. We believe the slippage for FY17 may remain elevated, thus putting pressure on the credit cost. ICICI’s credit cost guidance for FY16 is ~95bps vs. 105bps in FY15. The decline is based on factors such as lower provision on un‐hedged currency exposure and lower standard provision on restructured book (as fresh restructuring is not permitted). We do not expect credit cost to decline meaningfully over the next two years, which would keep earnings growth moderate. Credit growth seen at ~15% driven by retail segment Domestic credit which is 76% of total credit should grow at ~18‐20% in FY16, driven by the retail segment. Loan book of overseas branches should see moderate growth of ~8%. Within domestic loan book, retail credit book should grow ~25% while non‐retail credit is likely to remain muted at 10‐15%. No scope of NIM improvement beyond ~3.5% Reduction in the base rate will impact domestic NIMs by ~10‐15bps; however, increased proportion of domestic loans will insulate overall NIMs at ~3.5%. Around 70% of the bank’s domestic loans are floating. It reported domestic NIM of 3.9% and overseas NIM of 1.9% in Q1FY16. Operating leverage played‐out Operating expenses moderated in the last few financial years, which resulted in lower cost‐to‐income ratio (39% vs. 43% in FY12). Operating expenses growth is likely to be higher in FY16 vs. FY15 as the bank intends to add work force (compared to decline in FY15). It also plans to add 350‐400 branches in FY16. Hence, cost‐to‐income ratio does not have scope for further reduction and is expected to remain stable at 39%. Subdued earnings growth to compress return on assets The bank does not have many avenues for earnings growth except for loan book growth. Given weak investment sentiment and subdued demand for working capital, loan book growth will remain under pressure. Unlikely NIM expansion, increasing operating expenditure, and elevated credit cost owing to asset‐quality headwinds will keep profit growth subdued at a CAGR of 12% over the next two years. Valuation and recommendation. We expect the bank to deliver earnings CAGR of 12% over FY15‐17. We cut our FY16/17 earnings estimate by 2%/4%. Exposure to some of the leveraged entities may continue to remain an overhang for the stock. Although current valuations factor in some of the concerns, we believe that a delayed resolution of the exposure to stressed corporates may extend the underperformance of the stock. At CMP of Rs 270, the bank trades at 1.5x FY17 core adjusted BVPS of Rs 137 (net of investment in subsidiaries and valuing subsidiaries at Rs 63 per share). We downgrade the stock to Neutral (from Buy) with revised PT of Rs 314 (Rs 380 earlier), thus valuing the stock at 1.85x our FY17 core book and assigning Rs 63 per share for subsidiaries.

Neutral (Downgrade) CMP RS 270 TARGET RS 314 (+16%) COMPANY DATA O/S SHARES (MN) : 5805MARKET CAP (RSBN) : 1615MARKET CAP (USDBN) : 24.352 ‐ WK HI/LO (RS) : 393 / 267LIQUIDITY 3M (USDMN) : 66.4PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % FII / NRI : 41.3FI / MF : 21.6NON PROMOTER CORP. HOLDINGS : 1.5PUBLIC & OTHERS : 35.7 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐8.1 ‐12.4 ‐10.7REL TO BSE ‐1.6 ‐6.9 ‐9.4 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 25.7 25.9 26.1Pre‐prov ROA (%) 3.3 3.3 3.2Net Profit 111,754 123,255 140,435% growth 13.9 10.3 13.9EPS (Rs) 19.3 21.2 24.1Adj BVPS (Rs) 131 143 157ROE (%) 14.5 14.5 14.9 P/E (x) 14.0 12.7 11.2Adj P/BV (x) 2.1 1.9 1.7


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ICICI Bank BSE Sensex


ICICI BANK COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eInterest on Loans 314,279 356,311 402,631 459,000Interest on Investments 115,571 119,446 126,612 139,274Others 11,932 15,155 15,458 16,076Total Interest Earned 441,782 490,911 544,702 614,350Total Interest Expended 277,026 300,515 328,732 365,947Net Interest Income 164,756 190,396 215,970 248,403Total non‐interest income 104,279 121,761 132,970 145,476Total Income 269,034 312,157 348,939 393,879Personnel Expenses 42,201 47,499 54,624 62,817Other Expenses 60,888 67,460 74,877 85,633Total Op expenses 103,089 114,958 129,500 148,450Net Inc (Loss) before prov 165,946 197,199 219,439 245,429Provision & contingencies 26,264 39,000 45,840 47,633Net Inc (Loss) before tax 139,682 158,199 173,599 197,795Provision for Income Tax 41,577 46,446 50,344 57,361Net Profit 98,105 111,754 123,255 140,435 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 415,296 423,046 452,524 487,972Loans, Adv & Int accrued 3,387,026 3,875,221 4,489,211 5,259,279Investments 1,817,377 1,922,886 2,141,754 2,420,246Fixed Assets (Net) 46,781 47,255 54,343 62,495Other assets 279,935 192,885 218,268 220,778Total Assets 5,946,416 6,461,293 7,356,101 8,450,771

Liabilities Share capital 11,550 11,597 11,620 11,643Reserves and Surplus 720,583 792,696 878,567 978,136Preference capital 3,500 3,500 3,500 3,500Hybrid Capital 33,346 34,238 40,390 44,684Debt 368,502 371,154 389,711 428,682Borrowing 1,142,242 1,315,282 1,381,046 1,574,393Total Deposits 3,357,832 3,900,576 4,361,284 5,105,249Other liab incld prov 308,860 276,175 289,984 304,483Total Liabilities 5,946,416 6,705,218 7,356,101 8,450,771 Source: Company, PhillipCapital India Research Estimates


Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 23.7 25.7 25.9 26.1RoAE (%) 14.0 14.5 14.5 14.9 Pre‐provision Operating ROA (%) 2.9 3.2 3.2 3.1 RoAB (%) 1.84 1.9 1.9 1.8 EPS (Rs.) 17.0 19.3 21.2 24.1 Dividend per share (Rs.) 4.5 5.0 5.5 6.0 Book Value (Rs.) 127 139 153 170Adj BV (Rs.) 122 131 143 157 RoE of banking business 14.7 14.7 14.3 14.5 Revenue Analysis Interest income on IBA (%) 8.3 8.3 8.2 8.1 Interest cost on IBL (%) 6.0 5.7 5.6 5.5 NIM on IBA / AWF (%) 3.1 3.2 3.2 3.3 Core fee Inc / AWF (%) 1.8 1.8 1.8 1.8 Portfolio gains / Total Inc (%) 3.5 5.7 4.3 2.6 Op.Exp / TI (%) 39.6 38.9 38.7 38.7 Op.Exp / AWF (%) 1.9 1.9 1.9 1.9 Employee exps / Op exps (%) 40.9 41.3 42.2 42.3 Tax / Pre‐tax earnings (%) 29.8 29.4 29.0 29.0 Asset Quality GNPAs / Gr Adv (%) 3.1 3.9 4.2 4.4 NNPAs / Net Adv (%) 1.0 1.7 1.9 2.0 Growth Ratio Loans (%) 16.7 14.4 15.8 17.2 Investments (%) 3.8 5.8 11.4 13.0 Deposits (%) 13.6 16.2 11.8 17.1 Networth (%) 9.7 9.8 10.6 11.1 Net Int Income (%) 18.8 15.6 13.4 15.0 Non‐fund based income (%) 21.0 10.0 13.0 14.4 Non‐Int Exp (%) 14.4 11.5 12.6 14.6 Profit Before Tax (%) 22.6 13.3 9.7 13.9 Net profit (%) 17.8 13.9 10.3 13.9 Asset / Liability Profile Avg CASA/ Deposits (%) 42.0 43.4 44.9 45.2 Avg Adv / Avg Dep (%) 96.4 96.5 97.1 98.5 Avg Invst / Avg Dep (%) 56.5 51.5 49.2 48.2 Incr Adv / Deposits (%) 120.4 89.9 133.3 103.5 Avg Cash / Avg Dep (%) 13.1 11.5 10.6 9.9 Capital Adequacy Ratio: 17.7 17.0 16.0 15.4Tier I (%) 12.8 12.8 12.2 11.7 Internal Capital Generation rate (%) 10.8 11.3 11.4 11.9 NNPAs to Equity (%) 4.5 7.7 9.1 10.2



IndusInd Bank (IIB IN) Superior earnings growth warrants premium INDIA | BANKING | Company Update

1 September 2015

Profitability to be driven by growth and margins IIB’s profitability continues to be driven by stupendous growth in its balance sheet coupled with improvement in NIM. Given the small base, IIB’s loan book has been growing at a CAGR of 25% over FY12‐15 — its loan book comprises 58% large and mid‐corporates (31% CAGR) while the higher yielding consumer finance book grew relatively at a slower 18% CAGR due to slowdown in commercial‐vehicle and commercial‐equipment demand. The bank has been successful in improving its liability franchise by increasing its CASA share to 35% from 27% in FY12 and improving the granularity of retail term deposits, thus reducing cost of funds and improving margins. We expect profitability to be driven by growth in the consumer loan book — this will not only cushion loan growth but also increase the share of higher‐yielding loans, thus improving margins. Multi‐factor reason for improvement in margins IIB has seen steady improvement in margins driven by improvement in its liability franchise. The bank also has a good chunk of wholesale liabilities that should benefit from declining rates. It has a good presence in high‐yielding consumer‐finance loans (CV and CE), which should benefit from an economic recovery. Currently, its share of consumer‐finance loans is 42% with average yields of 16% — management aims at increasing this share to 50%, which will roughly improve yields by 30bps. Therefore, a judicious mix of assets and liabilities will help the bank to improve margins. It has 811 branches, which it aims to expand to 1,200 by FY17 — this will add granularity to retail deposits. In FY15, the bank had approximately 40% share of wholesale deposits, which should come down gradually due to branch rollouts. The bank raised Rs 51bn through QIP and preferential allotment to promoters — this additional liquidity will prop up IIB’s NIM in the very near term. Well managed asset quality Despite significant share of CV and CE loans, IIB’s asset quality has remained stable. In the corporate segment, exposure towards troubled sectors (power, infra and iron & steel) has been small and restricted to those corporates with ability to generate cashflows, which reflects in the overall asset quality. IIB’s GNPA/NNPA is 0.8%/0.3% and restructured loan book is 0.6% of advances. Its consumer finance division (CV & CE) GNPA (where stress is higher) was 1.14% and provision coverage ratio is 61%. Valuation and recommendation. The bank is well poised to gain from the benefits of falling interest rate and recovery in consumer loans especially in the commercial‐vehicle segment. Increase in consumer finance proportion, declining interest rates, and adequate capital will provide comfort in terms of margin. Additionally, the receding stress in the consumer segment will contain credit cost and boost return ratios. We expect RoA to improve to 2%. Given the favourable operating environment, we maintain our rating/TP at Buy/Rs 1,150. At CMP of Rs 820, the stock trades at 2.5x our FY17 adjusted book value per share (ABVPS) of Rs 327.


1MTH 3MTH 1YRABS ‐12.3 ‐2.0 46.8REL TO BSE ‐5.8 3.5 48.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 31.5 27.1 25.2Pre‐prov ROA (%) 3.3 3.3 3.4Net Profit 17,937 22,094 27,426% growth 27.4 23.2 24.1EPS (Rs) 33.9 37.5 46.5Adj BVPS (Rs) 189.7 287.5 327.4ROE (%) 18.2 15.7 14.6 P/E (x) 24.2 21.9 17.6Adj P/BV (x) 4.3 2.9 2.5


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Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eInterest on Loans 66,274 77,169 93,760 115,794Interest on Investments 14,770 16,804 18,485 20,703Others 1,492 2,946 3,506 4,032Total Interest Earned 82,535 96,920 115,751 140,529Total Interest Expended 53,628 62,717 73,267 87,135Net Interest Income 28,907 34,203 42,485 53,394Total non interest income 18,905 24,039 29,117 34,698Total Income 47,812 58,242 71,601 88,092Personnel Expenses 8,093 9,805 11,962 14,952Other Expenses 13,760 17,455 21,363 25,845Total Op expenses 21,853 27,259 33,325 40,798Net Inc (Loss) before prov 25,960 30,982 38,277 47,294Provision and contingencies 4,676 3,891 4,800 5,740Net Inc (Loss) before tax 21,283 27,092 33,476 41,554Provision for Income Tax 7,203 9,155 11,382 14,128Net Profit 14,080 17,937 22,094 27,426 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 67,694 107,791 123,960 142,554Loans, Adv & Int accrued 551,018 687,882 859,853 1,073,228Investments 221,923 248,594 281,523 319,172Fixed Assets (Net) 10,164 11,576 12,965 14,910Other assets 19,459 35,316 50,423 45,016Total Assets 870,259 1,091,159 1,328,723 1,594,881

Liabilities Share capital 5,256 5,295 5,895 5,895Reserves and Surplus 81,201 97,228 166,085 189,375

76,010 83,010 91,010 99,010Debt 71,610 123,171 129,329 152,608Borrowing 610,353 741,344 887,904 1,090,617Total Deposits 21,857 37,190 44,628 53,553Other liab incld prov 870,259 1,091,159 1,328,723 1,594,881Total Liabilities 5,256 5,295 5,895 5,895



Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 31.1 31.5 27.1 25.2RoAE (%) 16.9 18.2 15.7 14.6 Pre‐provision Operating ROA (%) 3.2 3.2 3.2 3.2 RoAB (%) 1.81 1.90 1.91 1.96 EPS (Rs.) 26.8 33.9 37.5 46.5 Dividend per share (Rs.) 3.5 4.0 5.0 6.0 Book Value (Rs.) 172.0 201.0 298.3 337.7 Adj BV (Rs.) 161.0 189.7 287.5 327.4 Revenue Analysis Interest income on IBA (%) 10.6 10.3 10.0 10.0 Interest cost on IBL (%) 7.7 7.4 7.1 7.1 NIM on IBA / AWF (%) 3.7 3.6 3.7 3.8 Core fee Inc / AWF (%) 2.4 2.2 2.3 2.3 Portfolio gains / Total Inc (%) 1.1 5.8 4.4 2.8 Op.Exp / TI (%) 46.2 49.5 48.6 47.6 Op.Exp / AWF (%) 2.8 2.9 2.9 2.9 Employee exps / Op exps (%) 37.0 36.0 35.9 36.7 Tax / Pre‐tax earnings (%) 33.8 33.8 34.0 34.0 Asset Quality GNPAs / Gr Adv (%) 1.1 0.8 0.8 0.8 NNPAs / Net Adv (%) 0.3 0.3 0.3 0.2 Growth Ratio Loans (%) 24.3 24.8 25.0 24.8 Investments (%) 10.3 12.0 13.2 13.4 Deposits (%) 12.0 21.5 19.8 22.8 Networth (%) 18.5 17.7 65.2 13.2 Net Int Income (%) 29.5 18.3 24.2 25.7 Non‐fund based income (%) 41.6 13.5 25.1 23.7 Non‐Int Exp (%) 24.4 24.7 22.3 22.4 Profit Before Tax (%) 35.0 27.3 23.6 24.1 Net profit (%) 32.7 27.4 23.2 24.1 Asset / Liability Profile Avg CASA/ Deposits (%) 30.8 33.3 35.3 36.8 Avg Adv / Avg Dep (%) 85.1 90.8 94.2 96.9 Avg Invst / Avg Dep (%) 36.6 34.8 32.5 30.4 Incr Adv / Deposits (%) 165.4 104.5 117.3 105.3 Avg Cash / Avg Dep (%) 11.8 13.0 14.2 13.5 Capital Adequacy Ratio: 13.8 12.1 16.2 15.3Tier I (%) 12.7 11.2 15.5 14.6 Internal Capital Generation rate (%) 16.5 18.3 18.7 13.9 NNPAs to Equity (%) 2.0 2.0 1.4 1.1



LIC Housing Finance (LICHF IN) Strong return ratio INDIA | FINANCIALS | Company Update

1 September 2015

Change in funding mix to keep cost of funds low LIC Housing Finance has been a major beneficiary of the reversal in the interest‐rate cycle. Wholesale cost of funding has been declining faster than the base rate, which continues to remain sticky. Given 73% share of NCDs in overall borrowing, LICHF stands to benefits directly as costs of NCDs have declined to 9.2% in Q1FY16 from 9.46%. Consequently, blended costs of funds have also come off to 9.36% in Q1FY16 from 9.74% in FY14. The management has indicated that the current share of bank borrowings (currently 17% @10.3%) would come down to 11‐12%. We expect a judicious mix of borrowings and further decline in interest rates to drive cost of funds lower. Traction in LAP/project loan book to keep spread stable in a competitive mortgage market LICHF’s outstanding loan book comprises of 93% individual loans, 2.5% developers loans, and 5% loans against property (LAP). The blended yield of the loan book has remained stable at 10.84%, despite base rates coming off. This is largely due to higher share of fixed‐rate loans (above 50%). We expect improvement in yields to be driven by an increase in the share of LAP and developers loan book. Consequently, favourable composition of asset‐liability mix will keep spread stable. Asset quality to remain stable LICHF’s asset quality has been holding well — GNPA/NNPA was lower in FY15 at 0.60%/0.33% vs. 0.67%/0.39% in FY14, primarily due to recovery of loans from the developers‐loan portfolio. The asset quality of the individual loan book continues to remain healthy; given past experience of turbulent asset‐quality pressure on the developers loan book, LICHF has become risk averse and selective in choosing projects. Provision coverage ratio is 45%, while provision cover considering teaser‐rate provisions and standard provisions is at 113.5%. Valuation and recommendation. We believe LICHF is well poised to deliver stable business growth, healthier spreads, strong asset quality, and lower credit costs. Declining interest rate and change in liability mix towards NCDs will bring down funding cost. Although declining interest‐rate scenario will lead to a cut in lending rate, we believe that judicious loan mix in favour of high‐yielding builder and LAP segments and higher re‐pricing of fixed‐rate loans amounting to Rs 230bn will enable LICHF to improve its NIMs in the medium term. We see earnings CAGR of 18% over FY15‐17, resulting in an ROA of 1.35% for FY16/17 and healthy ROE of +19%. At the CMP of Rs 423, LICHF trades at 2x our FY17 adjusted BV of Rs 207. Given strong earnings visibility and superior return ratios, we maintain our Buy rating with a PT of Rs 570 (2.75x FY17 adjusted BV).



Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 27.5 29.7 30.1Pre‐prov ROA (%) 2.0 2.1 2.0Net Profit (Rs mn) 13,862 16,280 19,248% growth 5.2 17.4 18.2EPS (Rs) 27.5 32.2 38.1Adj BVPS (Rs) 150.2 175.8 206.6ROE (%) 18.1 19.2 19.4 P/E (x) 16.1 13.7 11.6Adj P/BV (x) 2.9 2.5 2.1


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Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16E FY17EInterest on individual housing loans 87,338 101,876 117,412 138,253Interest on developer loans 3,395 3,590 4,129 5,781Total Interest earned 90,903 105,467 121,771 144,264Interest expended 71,744 83,102 94,786 111,956Net Interest Income 19,158 22,364 26,985 32,308Total non‐interest income 2,444 2,520 2,718 2,883Total Income 21,602 24,884 29,703 35,191Personnel Expenses 1,038 1,293 1,552 1,862Other Expenses 2,094 2,499 2,966 3,522Total Op expenses 3,133 3,792 4,518 5,384Net Inc (Loss) before prov 18,470 21,092 25,186 29,807Provision 93 73 519 644Net Inc (Loss) before tax 18,255 21,019 24,667 29,163Provision for Income Tax 5,083 7,158 8,387 9,915Net Profit 13,172 13,862 16,280 19,248 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16E FY17E

Assets Cash & Bal with RBI 30,224 29,331 33,730 38,790Loans, Adv & Int accrued 913,409 1,083,607 1,291,056 1,548,784Investments 1,993 2,371 2,716 3,143Fixed Assets (Net) 756 797 876 964Other assets 8,823 9,345 10,279 11,307Total Assets 957,770 1,125,451 1,338,657 1,602,988

Liabilities Share capital 1,010 1,010 1,010 1,010Reserves and Surplus 74,319 77,174 90,205 105,908Subordinated Debt 30,000 29,929 35,000 35,000Borrowing 790,356 935,541 1,127,495 1,373,355Other liabilities 51,319 71,099 73,731 75,854Provision for contingencies 10,766 10,698 11,216 11,861Total Liabilities 957,770 1,125,451 1,338,657 1,602,988 Source: Company, PhillipCapital India Research Estimates

Valuation Ratios FY14 FY15 FY16E FY17EEarnings and Valuation Ratios Pre‐provision Operating RoAE (%) 26.4 27.5 29.7 30.1RoAE (%) 18.8 18.1 19.2 19.4 Pre‐provision Operating ROA (%) 2.1 2.0 2.0 2.0 RoAB (%) 1.5 1.3 1.3 1.3 EPS (Rs.) 26.1 27.5 32.2 38.1 Dividend per share (Rs.) 4.5 5.0 5.5 6.0 Book Value (Rs.) 149.2 154.8 180.6 211.7 Adj BV (Rs.) 142.2 150.2 175.8 206.6 Revenue Analysis Interest income on IBA (%) 10.4 10.2 10.0 9.9 Interest cost on IBL (%) 9.5 9.3 8.9 8.7 NIM on IBA / AWF (%) 2.2 2.2 2.2 2.2 Core fee Inc / AWF (%) 0.1 0.1 0.1 0.1 Portfolio gains / Total Inc (%) 4.9 5.3 4.6 3.8 Op.Exp / TI (%) 15.2 16.0 15.9 15.9 Op.Exp / AWF (%) 0.4 0.4 0.4 0.4 Employee exps / Op exps (%) 33.1 34.1 34.3 34.6 Tax / Pre‐tax earnings (%) 27.8 34.1 34.0 34.0 Asset Quality GNPAs / Gross Adv (%) 0.7 0.5 0.4 0.3 NNPAs / Net Adv (%) 0.4 0.2 0.2 0.2 Growth Ratio Loans (%) 17.4 18.6 19.1 20.0 Investments (%) 8.0 19.0 14.5 15.7 Deposits (%) 20.2 18.4 20.5 21.8 Net worth (%) 16.2 3.8 16.7 17.2 Net Int Income (%) 23.9 16.7 20.7 19.7 Non‐fund based income (%) 30.0 3.1 7.9 6.1 Non‐Int Exp (%) 11.1 21.1 19.1 19.2 Profit Before Tax (%) 32.9 15.1 17.4 18.2 Net profit (%) 28.7 5.2 17.4 18.2 Capital Adequacy Ratio: 16.4 16.4 15.3 14.5Tier I (%) 12.2 12.4 12.0 11.7 Internal Capital Generation rate (%) 23.8 21.8 24.4 24.4 NNPAs to Equity (%) 4.7 3.0 2.7 2.4



Shriram City Union Finance (SCUF IN) Leading player in SME lending, huge opportunity INDIA | BANKING | Company Update

1 September 2015

Grossly under‐penetrated SME segment offers huge opportunity. There are about 26mn operational SMEs in India, out of which only 5% avail of finance from formal institutions. The others either have no access to finance or depend on non‐institutional finance. This translates into an overall untapped market opportunity of Rs 24tn for organised players. Not surprisingly, this segment offers many opportunities for NBFCs such as SCUF, whose core business is lending to SMEs. With 40% market share, SCUFis the leading player in the SME segment. With the SME book accounting for almost 54% of its portfolio, SCUF is the leading player in this segment with over 40% market share. Bajaj Finance is the second largest player with a market share of 13%, followed by Magma, Intec Capital, AU Financier, and Cholamandalam. In the long term, SCUF’s management intends to increase its SME book proportion to 70% as it expands into new geographies and taps customers outside the Shriram chit‐fund ecosystem. High duration SME book to bring stability to the balance sheet. As SMEs remain a focus area for the company, we expect their share to increase to 60% by FY17 from current 54%. With an average tenure of about three years, the increase in the SME segment’s share will lend the balance sheet more stability. Auto, two‐wheeler, and personal loans have an average tenure of 24‐30 months while gold loans have four months. Two wheelers act as a tool to gauge new market potential. With AUM of ~Rs 30bn, SCUF is one of the largest financiers of two wheelers in India — this product segment is of strategic importance to the company as it uses its products to enter new markets and appraise them. The company has been opening branches in the northern and western regions with an aim to strengthen its presence in this segment. The management sees ample scope for growth in these regions — 50‐60 newer branches in these regions disburse only two‐wheeler loans, but they will gradually roll out other products, such as SME loans, which will support growth in the SME segment. Strong customer understanding helps to control asset quality. The company’s asset quality is one of the best among peers, despite operating in an SME segment (perceived as highly delinquent). The company’s GNPA has been below 3.25% over the past eight years. In fact, its SME portfolio is one of the least delinquent with 2.5% GNPA ratio, against 2.3% for gold loans, 4.7% for two wheelers, and 4.6% for auto loans. Almost 60% of SCUF’s SME customers are Shriram chit‐fund members, which helps in better credit underwriting and appraisals. The company has managed its asset quality well due to its long‐standing relationships with customers with dependable track records. However, with SCUF moving to non‐chit regions, its ability to manage NPAs will be tested. Valuation and recommendation. SCUF is a niche play in the retail NBFC space, as it is the only financier for which SME lending is part of the core business. We believe that with its strong credit‐appraisal skills (gathered over the years) the company is well placed to benefit from huge untapped potential in the SME space. Over FY15‐17, AUMs will grow at a CAGR of 22% with disbursement CAGR of 21%, strong balance sheet growth with 40bps improvement in NIMs will drive strong earnings CAGR of 25% with superior returns on assets of 3.7% and RoE of 17.5%. SCUF is consistently delivering 3%+ RoAs over the last six years. At CMP of Rs 1,666, the stock trades at 2.5x/2.2 our FY16/17 ABV of Rs673 / Rs757. We maintain our rating/TP at Buy/Rs2,450.


1MTH 3MTH 1YRABS ‐7.2 ‐2.8 ‐5.0REL TO BSE ‐0.6 2.8 ‐3.7 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Income 21,885 25,153 29,732% growth 16 15 18Net Profit 5,581 7,095 8,660% growth 7.1 27.1 22.1EPS (Rs) 84.7 107.7 131.4PER (x) 19.7 15.5 12.7Book value (Rs) 622 702 803P/BV (Rs) 2.7 2.4 2.1Adj. book value (Rs) 606 673 757P/ABV (Rs) 2.7 2.5 2.2


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SHRIRAM CITY UNION FINANCE COMPANY UPDATE

Financials Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eNet interest income 17,848 20,170 23,595 28,070Other income 1,031 1,715 1,558 1,662Net Income 18,879 21,885 25,153 29,732Operating expenses 7,239 8,936 9,660 11,246Pre provision profit 11,641 12,949 15,493 18,486Provisions 3,842 4,538 4,875 5,526Profit before tax 7,799 8,411 10,618 12,960Tax 2,587 2,830 3,523 4,299Tax rate 33.2 33.2 33.2 33.2Adjusted Profit after tax 5,211 5,581 7,095 8,660

Dupont (as % of Assets) Y/E Mar, Rs mn FY14 FY15 FY16e FY17eInterest Income 19.3 19.5 19.7 19.7Interest Expense 8.3 7.8 7.5 7.6Net Interest Income 11.0 11.7 12.1 12.1Other income total 0.6 1.0 0.8 0.7Net Income total 11.6 12.7 12.9 12.8Operating expenses total 4.4 5.2 5.0 4.8Preprovision profit 7.1 7.5 8.0 8.0Provisions 2.4 2.6 2.5 2.4Profit before tax and exceptional items 4.8 4.9 5.5 5.6Profit before tax 4.8 4.9 5.5 5.6Tax total 1.6 1.6 1.8 1.9Profit after tax 3.2 3.2 3.6 3.7

Growth

FY14 FY15 FY16e FY17eNet interest income 9.3 13.0 17.0 19.0Net Income total 12.9 15.9 14.9 18.2Preprovision profit 10.9 11.2 19.6 19.3Profit before tax 17.2 7.9 26.2 22.1Profit after tax 15.9 7.1 27.1 22.1Loan ‐3.8 23.6 17.9 24.8Disbursement ‐11.3 11.4 18.0 25.0AUM ‐7.3 14.0 20.4 24.5


Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eEquity 593 659 659 659Reserves 28,390 40,352 45,584 52,265Net worth 28,983 41,011 46,243 52,925Borrowings 120,491 124,021 146,797 186,277Current liabilities & others 14,357 15,347 15,885 16,367Total liabilities 163,831 180,380 208,926 255,569Net block 1,014 823 650 474Investments 6,276 9,817 10,035 10,260Loans 128,545 158,865 187,280 233,735Current assets & others 27,997 10,876 10,961 11,100Total assets 163,831 180,380 208,926 255,569

Key ratios

FY14 FY15 FY16e FY17eNIM (%) 11.0 11.7 12.1 12.1NIM (%) ‐ on AUM 11.7 12.9 12.8 12.4Cost/ Income (%) 38.3 40.8 38.4 37.8Credit cost (%) 2.4 2.6 2.5 2.4RoA(%) 3.2 3.2 3.6 3.7RoE (%) 20.2 15.9 16.3 17.5Leverage (x) 6.3 4.9 4.5 4.7Tier I (%) 20.2 24.0 25.2 25.5CAR (%) 25.6 29.7 28.1 26.1No of shares (mn) 59.3 65.9 65.9 65.9Gross NPA (%) 2.7 3.1 3.5 3.2Net NPA (%) 0.6 0.7 1.0 1.3Provision coverage (%) 77.6 78.2 71.4 59.4

Valuation ratios

FY14 FY15 FY16e FY17eFDEPS (Rs) 87.9 84.7 107.7 131.4PER (x) 19.2 19.9 15.7 12.8Book value (Rs) 488.9 622.3 701.7 803.0P/BV (Rs) 3.5 2.7 2.4 2.1Adjusted book value (Rs) 476.1 606.0 673.2 756.9P/ABV (Rs) 3.5 2.8 2.5 2.2P/ PPP 2.5 3.2 3.0 2.9Dividend yield (%) 0.6 0.9 0.7 0.7



SKS Micro Finance (SKSM IN)

Strong player in fast‐growing industry INDIA | BANKING | Company Update

1 September 2015

Market share to rise in the fast‐growing microfinance industry The microfinance industry will grow at a CAGR of 20% over the next 4‐5 years to touch Rs 1.83tn from its current size of Rs 763bn. NBFC‐MFIs’ market share should rise to 60% from current 40% over the same period. Since SKS Micro Finance is the largest NBFC MFI, it tends to grow at an accelerated pace — we see 35% compounded annual growth rate over the next 4‐5 years, translating into a higher market share of 4% from its current 2.25%. Fast revenue growth and cross selling to drive earnings Its loan portfolio will see a robust 70% CAGR over FY15‐17 given the favourable operating environment and its topline growth will mirror this growth because margins are regulated. Cross‐selling of various products and services will aid return ratios. Scalable model + technology to provide operating leverage SKS intends to implement its growth objectives without adding too many new branches or incurring additional capital expenditure. Fresh additions will be mostly in the form of loan officers (will add 1,500 such loan officers annually). It continues to focus on optimising its cost structure by enhancing the productivity of its employees, introducing technology for expedient reporting, and re‐engineering its internal processes. The cost‐to‐AUM ratio should decline further to 7% by FY17 from the current 9%. Risk management tools: business model, geography, monitoring Under its JLG model, peer pressure acts as a biggest deterrent against group members defaulting. Additionally, establishment of credit bureaus has enabled SKS to check the credit history of micro‐credit borrowers. Wider geographical spread of its portfolios will also keep political risk low. Political risk and natural disaster pose a biggest risk to the sector We have not factored an Andhra Pradesh‐like crisis into our estimates, considering various developments such as a strong regulator, self‐imposed credit discipline, efficient credit monitoring, and geographically diversified loan portfolio. Empowering state legislation to override the RBI directive to NBFC‐MFIs may impact business prospects. Valuation and Recommendation. SKS’ topline growth will mirror its loan‐portfolio growth (70% CAGR over FY15‐17), driven by a rise in the proportion of long‐term loans. Given the margin cap, net interest income growth will reflect the growth in AUM. However, the rise in asset duration (to optimize operating cost on a portfolio basis) and initiatives such as cross selling will translate into a robust 66% CAGR in PBT. PAT is likely to see 48% CAGR (as the company will have to pay MAT from FY16). We have raised our PAT estimate for FY17 by 27% to Rs 4.1bn based on higher loan book growth and cross‐selling income. We expect SKS to maintain an RoA of +4% and RoE of +20% on a sustainable basis. At its CMP of Rs 441, the stock trades at 4.4x FY16 ABVPS of Rs 100 and 3.4x FY17 ABVPS of Rs 129. A favourable operating environment, strong business and earnings, and a superior returns ratio warrant a premium valuation. We believe that high operating cost and regulated margin will restrict new entrants. Due to the unsecured nature of the business, only a diversified portfolio can sustain any credit risk. As SKS is an established player with a well diversified presence, sizeable loan portfolio, and is the largest NBFC MFI, it is in a sweet spot to ride the microfinance growth cycle. We maintain our BUY rating with a price target of Rs 650 per share.



Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15 FY16E FY17ENet Profit 1867 2438 4117% growth 166.6 30.5 68.8EPS (Rs) 14.8 19.4 32.7Adj BVPS (Rs) 82.9 100.0 128.6ROE (%) 24.8 20.9 27.6ROA (%) 5.2 4.0 4.2P/E (x) 29.7 22.7 13.5Adj P/BV (x) 5.3 4.4 3.4


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Apr‐13 Apr‐14 Apr‐15SKS Finance BSE Sensex


SKS MICRO FINANCE COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15 FY16e FY17eInterest income on portfolio loans 3930 5660 9339 15409Income from assigned loans 557 670 609 833loan processing fee 338 460 672 767Income from Operations 4825 6790 10620 17010Other Income 623 1228 1692 2115Total revenue 5448 8018 12311 19124Financial expenses 2142 2790 4464 7500Net Interest Income 2683 4000 6156 9510Personnel expenses 1656 2320 3289 4500Operating and other expenses 766 836 1045 1359Depreciation and ammort 41 46 47 70Total operating cost 2462 3202 4381 5928Pre‐provision profit 844 2026 3467 5697Provision and write‐offs 146 100 300 350Profit before tax 699 1926 3167 5347Tax expense 0 59 729 1230Profit after tax 699 1867 2438 4117 Balance Sheet Y/E Mar, Rs mn FY14 FY15 FY16e FY17eLIABILITIES Equity share capital 1082 1260 1260 1260Reserves and surplus 3510 9200 11587 15716Networth 4592 10460 12847 16976Borrowing from banks 13212 17175 29198 40877Borrowing from financial institution 1646 2370 3555 5333Borrowing from NBFCs 455 13255 23663 50826Total Borrowings 15313 32800 56416 97036Current Liabilities & Provisions 5068 3721 4747 6172Total Liabilities 24973 46981 74010 120184

ASSETS Total Fixed assets 112 98 108 119Portfolio loans 17207 29230 52414 87749Advances 321 340 345 350Other assets 614 722 818 1010Cash and bank balances 6710 16588 20323 30953Total Assets 24973 46981 74010 120184 Source: Company, PhillipCapital India Research Estimates


RoAE (%) 16.5 24.8 20.9 27.6RoAA (%) 2.8 5.2 4.0 4.2EPS (Rs.) 6.5 14.8 19.4 32.7Dividend per share (Rs.) 0.0 1.0 2.0 3.0Book Value (Rs.) 42.4 83.0 102.0 134.7Adj BV (Rs.) 42.3 82.9 100.0 128.6Revenue Analysis : Interest income on IBA (%) 29.7 29.3 26.0 24.3Interest cost on IBL (%) 13.6 11.6 10.0 9.8NIM on IBA / AWF (%) 11.0 11.4 10.3 9.9Net interest income to AUM (%) 7.5 7.9 7.8 7.8Other income / AWF (%) 2.6 3.5 2.8 2.2Op.Exp / TI (%) 74.4 61.2 55.8 51.0Op.Exp / AWF (%) 15.1 13.8 10.7 8.5Op. Exp / AUM (%) 9.0 8.3 7.3 6.2Employee exps / Op exps (%) 67.3 72.5 75.1 75.9Tax / Pre‐tax earnings (%) 0.0 3.1 23.0 23.0 Asset Quality : GNPAs / Gr Adv (%) 17.7 10.9 0.1 0.9NNPAs / Net Adv (%) 0.1 0.0 0.5 0.9Provision & contingencies / Gr Adv (%) 99.1 4.2 44.9 36.8 Growth Ratio : Advances (%) 12.4 69.9 79.3 67.4Borrowings (%) ‐5.4 114.2 72.0 72.0Networth (%) 17.6 127.8 22.8 32.1Net Int Income (%) 69.2 49.0 53.8 54.5Other income (%) 21.4 97.0 37.8 25.0Non‐Int Exp (%) ‐6.2 30.1 36.8 35.3Profit Before Tax (%) ‐123.6 175.0 64.3 68.8Net profit (%) ‐123.6 166.6 30.5 68.8 Capital Adequacy Ratio: CRAR (%) 27.2 31.8 21.1 16.7Tier I (%) 27.2 31.8 21.1 16.7NNPAs to Equity (%) 0.3 0.1 1.9 4.6



State Bank of India (UBI IN) Risk‐reward trade off favourable INDIA | BANKING | Company Update

1 September 2015

The slippage of FY16 and FY17 fairly captures the risk in asset quality The stress in mid corporates and SMEs has subsided. We believe that as economic recovery progresses, asset quality concerns pertaining to mid‐corporate segment will be allayed. The bank’s exposure to sectors such as iron & steel, power, Infra, engineering, construction and textile is 26%. As per our analysis, its exposure to stressed corporates in these sectors is 3.3% vs. banking sector’s exposure of 4%. Within the total exposure, its potential NPAs can be around 2.1%, which is more than reasonably captured in its annual slippage assumptions — 2.7% for FY16 and 2.5% for FY17. See lower delinquency (1.1%) from its restructured portfolio (4.1%) ex‐discom/Air India The outstanding restructured portfolio of the bank stands at Rs 674bn (4.1% of loan book) and its exposure to stressed companies within the restructured segment is much lower compared to its peers. We expect the slippage from this segment to be much lower at ~1.1% of total restructured loan book of 4.1%. NIMs under pressure In a declining interest rate environment, deposit re‐pricing for the bank happens with a lag primarily due to retail liabilities. However, loan book is largely (~75%) linked to the base rate. Hence, its NIMs may remain under pressure due to asset re‐pricing faster than its deposit. We expect NIMs to remain under pressure in the next two quarters until deposits get re‐priced at lower rates and credit growth picks up, which is likely to happen in Q4FY16. Moderate growth in employee cost to bring down cost‐to‐asset ratio in FY17 The bank expects 12,000 retirements and additions of over 10,000 employees at the lower levels. Factors such as completion of second pension amortization and moderate growth in dearness allowances (due to moderate inflation) will keep establishment expenses growth under 10% for FY16. Base salaries for most PSBs increased by ~15% between FY11‐15 driven by high dearness allowance — but this is expected to remain subdued in FY16 due to moderate growth in CPI. The cost‐to‐asset ratio should fall to less than 2% in FY17 from 2.1% in FY15. Valuation and recommendation. At CMP, the bank trades at 1.13x FY16 core ABVPS (consolidated) of Rs 187 (non‐bank subsidiary value of Rs 30/share) and 1x FY17 ABVPS of Rs 222. The recovery in economy will improve operational efficiency and reduce credit cost translating into earnings CAGR of 17% over FY15‐17 and RoA improvement of ~20bps to 0.75%. We have cut our earnings for FY16/17 by 6.5%/11% due to lower credit growth assumptions and NIMs contraction. We maintain Buy with a revised TP of Rs 305 (Rs 364 earlier) implying a valuation of 1.3x FY17 ABVPS for its banking business of Rs 212 and valuing the non‐banking subsidiaries at Rs 30/ share.

BUY (Maintain) CMP RS 238 TARGET RS 305 (+28%) COMPANY DATA O/S SHARES (MN) : 7566MARKET CAP (RSBN) : 1870MARKET CAP (USDBN) : 2852 ‐ WK HI/LO (RS) : 336 / 235LIQUIDITY 3M (USDMN) : 65.0PAR VALUE (RS) : 1 SHARE HOLDING PATTERN, % PROMOTERS : 58.6FII / NRI : 11.7FI / MF : 18.7NON PROMOTER CORP. HOLDINGS : 0.8PUBLIC & OTHERS : 10.1 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS ‐8.4 ‐11.1 0.5REL TO BSE ‐1.9 ‐5.5 1.9 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS ‐ CONSOLIDATED Rs mn FY15 FY16E FY17EPre‐prov ROE (%) 31.5 26.4 25.0Pre‐prov ROA (%) 2.0 1.7 1.6Net Profit 170 182 214% growth 19.9 7.1 17.8EPS (Rs) 227.6 237.1 273.0Adj BVPS (Rs) 188.1 208.7 233.6ROE (%) 10.6 10.3 10.7 P/E (x) 1.0 1.0 0.9Adj P/BV (x) 1.3 1.1 1.0


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Apr‐13 Apr‐14 Apr‐15SBI BSE Sensex


STATE BANK OF INDIA COMPANY UPDATE

Financials‐ Standalone

Income Statement Y/E Mar, Rs bn FY14 FY15 FY16e FY17eInterest on Loans 1,025 1,123 1,205 1,337Interest on Investments 324 376 432 489Others 15 25 28 30Total Interest Earned 1,364 1,524 1,665 1,856Total Interest Expended 871 974 1,065 1,176Net Interest Income 493 550 600 680Total non interest income 186 226 230 241Total Income 678 776 829 921Personnel Expenses 225 235 259 290Other Expenses 132 151 165 183Total Op expenses 357 387 424 473Net Inc (Loss) before prov 321 389 405 448Provision and contingencies 159 196 191 189Net Inc (Loss) before tax 21,283 27,092 33,476 41,554Provision for Income Tax 53 62 71 85Net Profit 109 131 144 174 Balance Sheet Y/E Mar, Rs bn FY14 FY15 FY16e FY17e

Assets Cash & Bal with RBI 1,325 1,749 1,866 2,052Loans, Adv & Int accrued 12,098 13,000 14,234 16,145Investments 4,122 5,100 5,832 6,673Fixed Assets (Net) 80 93 101 108Other assets 296 538 303 262Total Assets 17,922 20,481 22,335 25,240

Liabilities Share capital 7 7 8 8Reserves and Surplus 1,175 1,277 1,447 1,643

59 61 61 67Debt 367 365 370 390Borrowing 1,405 1,626 1,707 1,912Total Deposits 14,102 15,974 17,45319,804Other liab incld prov 806 1,171 1,289 1,417Total Liabilities 17,922 20,481 22,33525,240



Earnings and Valuation Ratios Pre‐provision Operating RoAE (%) 29.6 31.5 29.6 28.8RoAE (%) 10.0 10.6 10.5 11.2 Pre‐provision Operating ROA (%) 1.9 2.0 1.9 1.9 RoAB (%) 0.7 0.7 0.7 0.7 EPS (Rs.) 15 18 19 22 Dividend per share (Rs.) 3 4 3 4 Book Value (Rs.) 158 172 190 210 Adj BV (Rs.) 129 146 167 190 Revenue Analysis Interest income on IBA (%) 8.3 8.2 8.0 7.9 Interest cost on IBL (%) 5.8 5.7 5.7 5.6 NIM on IBA / AWF (%) 3.0 2.9 2.9 2.9 Core fee Inc / AWF (%) 0.9 0.8 0.8 0.7 Portfolio gains / Total Inc (%) 3.2 4.9 3.1 2.2 Op.Exp / TI (%) 54.3 52.3 52.7 52.5 Op.Exp / AWF (%) 2.2 2.1 2.0 2.0 Employee exps / Op exps (%) 63.0 60.9 61.1 61.3 Tax / Pre‐tax earnings (%) 32.7 32.2 33.0 33.0 Asset Quality GNPAs / Gr Adv (%) 4.97 4.27 4.32 4.33 NNPAs / Net Adv (%) 2.64 2.17 1.79 1.48 Growth Ratio Loans (%) 15.7 7.5 9.5 13.4 Investments (%) 13.6 23.7 14.3 14.4 Deposits (%) 16.0 13.3 9.3 13.5 Networth (%) 19.6 8.6 13.3 13.4 Net Int Income (%) 11.2 11.6 9.0 13.4 Non‐fund based income (%) 9.8 4.5 10.0 12.0 Non‐Int Exp (%) 22.0 8.3 9.6 11.6 Profit Before Tax (%) (18.9) 19.4 11.0 20.8 Net profit (%) (22.8) 20.3 9.6 20.8 Asset / Liability Profile Avg CASA/ Deposits (%) 43.3 41.6 40.9 40.3 Avg Adv / Avg Dep (%) 81.6 79.5 77.9 77.9 Avg Invst / Avg Dep (%) 29.5 30.7 32.7 33.6 Incr Adv / Deposits (%) 84.6 48.2 83.3 81.3 Avg Cash / Avg Dep (%) 9.4 10.2 10.8 10.5 Capital Adequacy Ratio: 12.4 12.0 12.2 12.0Tier I (%) 9.7 9.6 9.9 9.9 Internal Capital Generation rate (%) 8.7 8.8 9.4 10.0 NNPAs to Equity (%) 26.3 21.5 17.1 14.0


BANKING SECTOR UDPATE

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL ‐15% > to < +15% Target price is less than +15% but more than ‐15%

SELL <= ‐15% Target price is less than or equal to ‐15%.

Axis Bank: Stock price, price target, and rating history

Bank of Baroda: Stock price, price target, and rating history

Cholamandalam Invest: Stock price, price target, and rating history

B (TP 1560)

B (TP 1600)

B (TP 1360)

B (TP 1500)

B (TP 1360)

B (TP 1770)B (TP 1800)

B (TP 478)B (TP 478)

B (TP 610)

B (TP 660)

B (TP 660)

B (TP 660)

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700

J‐13 F‐13 M‐13 M‐13 J‐13 A‐13 S‐13 N‐13 D‐13 J‐14 M‐14 A‐14 J‐14 J‐14 S‐14 O‐14 D‐14 J‐15 M‐15 A‐15 J‐15 J‐15 A‐15

B (TP 140)

B (TP 156)

B (TP 147)

N (TP 164)

N (TP 177)

N (TP 190)

N (TP 190) N (TP 215)N (TP 180)

N (TP 180)

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250


B (TP 750)

B (TP 775)

150200250300350400450500550600650700750

A‐15 M‐15 J‐15 A‐15



ICICI Bank: Stock price, price target, and rating history

Indian Bank: Stock price, price target, and rating history

IndusInd Bank: Stock price, price target, and rating history)

B (TP 236) B (TP 234)

N (TP 258)

N (TP 260) N (TP 296)

N (TP 331)N (TP 400)

B (TP 380)

B (TP 380)

B (TP 380)

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450


B (TP 140)

B (TP 170)

B (TP 200)B (TP 223)

B (TP 270)B (TP 204)

B (TP 204)

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250


B (TP 510) B (TP 510)N (TP 509)

N (TP 510)

N (TP 540) N (TP 650)

B (TP 950)B (TP 1150)

B (TP 1150)

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1100

S‐13 O‐13 N‐13 J‐14 F‐14 A‐14 M‐14 J‐14 A‐14 O‐14 N‐14 J‐15 F‐15 A‐15 M‐15 J‐15 A‐15



LIC Housing Finance: Stock price, price target, and rating history

Shriram City Union Fin: Stock price, price target, and rating history

SKS Micro Finance: Stock price, price target, and rating history

B (TP 295) B (TP 340)

B (TP 390)

B (TP 570) B (TP 520)

B (TP 570)

150

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300

350

400

450

500

550

J‐14 F‐14 M‐14 M‐14 J‐14 A‐14 S‐14 N‐14 D‐14 F‐15 M‐15 M‐15 J‐15 A‐15

B (TP 2450)B (TP 2450)

B (TP 2450)

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J‐15 F‐15 M‐15 M‐15 J‐15 A‐15

B (TP 500)

B (TP 540)

B (TP 650)

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450

500

550

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650

J‐15 F‐15 M‐15 M‐15 J‐15 A‐15



State Bank of India: Stock price, price target, and rating history

B (TP 253)

B (TP 185)

B (TP 190)

B (TP 170)

S (TP 178)

S (TP 236)

B (TP 297)

N (TP 312)

B (TP 364)B (TP 364)B (TP 364)

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Contact Information (Regional Member Companies)

SINGAPORE Phillip Securities Pte Ltd

250 North Bridge Road, #06‐00 Raffles City Tower, Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834 www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

Management(91 22) 2300 2999

Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946(91 22) 6667 9735

Research Engineering, Capital Goods Midcap

Dhawal Doshi (9122) 6667 9769 Hrishikesh Bhagat (9122) 6667 9986 Amol Rao (9122) 6667 9952Nitesh Sharma, CFA (9122) 6667 9965

Portfolio StrategyAgri Inputs Infrastructure & IT Services Anindya Bhowmik (9122) 6667 9764Gauri Anand (9122) 6667 9943 Vibhor Singhal (9122) 6667 9949

Deepan Kapadia (9122) 6667 9992 TechnicalsBanking, NBFCs Subodh Gupta, CMT (9122) 6667 9762Manish Agarwalla (9122) 6667 9962 Logistics, Transportation & MidcapPradeep Agrawal (9122) 6667 9953 Vikram Suryavanshi (9122) 6667 9951 Production ManagerParesh Jain (9122) 6667 9948 Ganesh Deorukhkar (9122) 6667 9966

MetalsConsumer, Media, Telecom Dhawal Doshi (9122) 6667 9769 Database ManagerNaveen Kulkarni, CFA, FRM (9122) 6667 9947 Yash Doshi (9122) 6667 9987 Deepak Agarwal (9122) 6667 9944Jubil Jain (9122) 6667 9766Manoj Behera (9122) 6667 9973 Oil & Gas Editor

Sabri Hazarika (9122) 6667 9756 Roshan Sony 98199 72726CementVaibhav Agarwal (9122) 6667 9967 Pharma Sr. Manager – Equities Support

Surya Patra (9122) 6667 9768 Rosie Ferns (9122) 6667 9971Economics Mehul Sheth (9122) 6667 9996Anjali Verma (9122) 6667 9969

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles



Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co‐managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report: Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No4 PCIL or its affiliates have managed or co‐managed in the previous twelve months a private or public offering of securities for the

company(ies) covered in the Research report No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.



Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. The recipient should carefully consider whether trading/investment is appropriate for the recipient in light of the recipient’s experience, objectives, financial resources and other relevant circumstances. PCIPL and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by the recipient. The recipient is further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek trading/investment advice before investing. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PCIPL and any of its employees, directors, associates, group entities, affiliates are not inducing the recipient for trading/investing in the financial market(s). Trading/Investment decision is the sole responsibility of the recipient.

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.‐regulated broker‐dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker‐dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a‐6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a‐6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker‐dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker dealer PhillipCapital (India) Pvt. Ltd. Registered office: No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013

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