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Financials Strategy
Financials Sector Strategy – FY17
March 2016
A year of Atonement
ABHINESH VIJAYARAJ abhinesh@sparkcapital.in +91 44 4344 0006
GAUTAM SINGH gautam@sparkcapital.in +91 22 4228 8152
NAVIN BABU E S navin@Sparkcapital.in +91 44 4344 0065
NISHANT RUNGTA nishant@sparkcapital.in +91 44 4344 0033
Financials Strategy
Page 2
Financials Sector Strategy – FY17
A year of Atonement
Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
ABHINESH VIJAYARAJ abhinesh@sparkcapital.in +91 44 4344 0006
GAUTAM SINGH gautam@sparkcapital.in +91 22 4228 8152
NAVIN BABU E S navin@Sparkcapital.in +91 44 4344 0065
NISHANT RUNGTA nishant@sparkcapital.in +91 44 4344 0033
Performance (%)
1m 3m 12m
Bankex -11% -19% -28%
Sensex -6% -10% -20%
Date 14 Mar, 2015
Market Data
Sensex Index 24623
BANKEX Index 17279
NIFTY Index 7486
We approach FY17 with a continued ‘safe asset quality, strong earnings visibility’ driven mindset - on the one hand an
adverse regulatory environment resulting in an accelerated recognition of stress in the banking system, lower margins post
the transition to a Marginal Cost of Fund based lending rate, a further weakening of the real estate cycle and another year of
subdued <10% credit growth looms large; on the other hand we see slippages heading lower, further scope for policy rate
cuts, a comfortable liquidity scenario, a steepening yield curve, a healthy CV cycle and importantly, rural Indian bottoming
out. The juxtaposition of these two factors warrants a calibrated approach, with a portfolio positioned on ‘defensives’, yet
nimble enough to take advantage of the changing macro. In line with this thought process, our top picks would be HDFCB, IIB,
KMB, YES and SBIN amongst the large caps followed by CUBK, KVB and CIFC amongst the mid caps. We see a prolonged
period of underperformance for PSU banks, MMFS, SHTF, HDFC, AXSB, and DCBB.
Key thoughts on FY17 Strategy
Slippages to head lower: Post the asset quality review related GNPA spike in FY16, we believe slippages in FY17 will head lower –
our stress tests suggest a 20% drop in slippages for FY17 assuming a normal run rate of slippages to resume on the standard book and
a high 50% slippage on the restructured portfolio. Importantly, FY16 marks the first year without spending cuts on the fiscal front while
total government expenditure is estimated to increase by 10.8% to Rs. 19.8tn in FY17BE, the fastest growth since FY11. The lag effect
of higher government expenditure, we believe will start percolating from 2HFY17 and should positively impact slippages. However,
given the continuing weakness in the real estate cycle and the structurally deficient NPA recovery infrastructure, we do not see higher
recoveries kicking in, leading to a largely sticky NPA cycle.
Subdued (~10%) credit growth likely: Inflation & capital expenditure that were accounting for ~70% of incremental systemic credit
growth over FY07 - FY13 have now fallen to ~36% and with inflation (CPI) likely to settle at ~5% vis a vis an average of 10% over
FY09-FY14, a revival in the private sector capex cycle is imperative for a rebound in credit growth. However, new investment proposals
of the private sector remain subdued, with projects sanctioned in FY15 at a 10 year low of Rs.1460bn; we believe that FY17 is likely to
be a year of sub 10% credit growth.
Expect 25-50bps cut in repo rate in 1HFY17: Post the announcement of Budget FY17, we revise our CPI inflation estimate
downwards to 5% for Mar’17 from 5.6% earlier on account of postponement of the 7th Pay Commission recommendations and no sharp
increase in service tax rate. Assuming a normal monsoon in 2016, CPI inflation is likely to fall to 4.5% by Jun'16, we believe that the
high real interest rate would provide enough room to the RBI to cut repo rate by 25-50 bps in 1HFY17.
Sub 7% bond yields, steepening yield curve remains our call: Demand for bonds is set to be higher than supply in FY17; this
realignment is set to drive yields lower, we see 10 year G-Sec yields at sub 7%.
Rural India bottoming out: After evaluating ten non-monsoon related factors that led to the buoyancy of Rural India between FY09
and FY14 as well as the slowdown of the rural economy during FY15 and FY16, we conclude that FY17 should see bottoming out of
rural India. While lead indicators should start showing improvement, its impact on the ground and on corporate performance should
show up with a few quarters lag.
Price correction likely in housing: With sales stalling, unsold inventory build up at life time highs, large discounts/freebies on offer, we
expect the retail housing segment to undergo significant price correction for ticket size of Rs10mn+ and time correction expected for
ticket size of below Rs10mn. We believe demand will remain tepid till FY19 due to oversupply prevalent in all the major markets.
MHCV recovery to sustain, LCV recovery to gain momentum: On the back of improving freight rates and utilisation we expect
MHCV momentum to sustain, at the same time we see the LCV pickup which has gained strength over 2HFY16 continuing into FY17.
-40%
-30%
-20%
-10%
0%
10%
Mar-15 Jun-15 Sep-15 Dec-15 Mar-16
Bankex Sensex
Financials Strategy
Page 3
FY17 to face growth challenges, but asset quality challenges likely to bottom
out
Recapping our FY16 Strategy Our FY17 Strategy
#1 Incremental stressed asset formation to head
lower, however subdued recoveries to prolong
weak asset quality cycle
#2 Staring at 3rd straight year of subdued credit
growth (~10%)
#3 Scope for rate cuts (25-50bps), liquidity to
remain comfortable; expect yield curve to
steepen further
#4 Bond yields to decline to sub 7% by end FY17,
despite SLR cuts
#5 Rural India to bottom out
#6 Time/price correction in housing to gather
pace; LCV momentum to strengthen, MHCV
growth to continue
#1 Credit growth to remain muted, sub 10% yoy
growth likely
#2 Slippages to start trending downward,
upgrades to gain momentum towards end
FY16
#3 Pace and extent of interest rate fall to surprise.
Repo at 7% by CY15 end, yield curve to
steepen
#4 Shift from physical to financial savings to
accelerate, deposit growth to continue to
outstrip credit. CASA growth to pickup
#5 Bond yields to decline to sub 7% by end FY16,
despite SLR cuts. Operating leverage to kick in
#6 Time/price correction likely in housing; LCV
recovery to begin in 2HFY16
Financials Strategy
Page 4
… against 50% of NPAs in FY10; from a recovery standpoint we were better positioned then than now.
Source: Spark Capital Research
Low proportion of sub-standard assets are indicative of lower recoveries going ahead; only 37% of NPAs are in the substandard category
currently…
Source: Spark Capital Research
37%
80%
58% 53%
34%26% 21% 16%
68% 67%56% 51%
42%32% 29%
54%47%
39% 38% 36% 31%
26%
16%
15% 24%
19% 27%25% 31%
21% 22%
10% 22%32% 45%
44%
19% 27%28% 26%
22% 28%
28%
0%
7%
16%
38% 32%34% 38%
9%
31% 19%10% 2%
0%
21% 27%26% 28%
31% 30%
0%10%20%30%40%50%60%70%80%90%
100%
CoverageUni.
YES HDFCB KMB IIB PrivateBanks
AXSB ICICIBC DCBB CUBK SIB FB Old-genBanks
KVB JKBK PNB CBK BOI PSUBanks
BOB SBIN
New Private banks Old gen. banks PSU banks
Substandard Doubtful - 1 Doubtful - 2 Doubtful - 3 Loss
Low Substandard assets (37%) indicate lower recoveries ahead
50%
98%
79%
58% 57% 56%50% 49%
58% 58%43% 41%
26% 21%
0%
60% 58%48% 45%
37%
0%
27%
2%
12%
17% 18% 20%24%
5%
19% 20%
30%21%
8%
67%
0%
10% 17% 31% 38%
18%
0%
6%
0%
0%
1% 7% 9% 14%
2%
9%15%
6%
3%
5%
0%
14% 8%6%
4%
10%
0%
13%0%
9%22%
11% 5% 1%
43%
11%4%
19%
35%49%
12%
0%
7%14% 13% 12%
32%
0%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CoverageUni.
YES KMB HDFCB PrivateBanks
ICICIBC IIB AXSB FB CUBK Old-genBanks
DCBB SIB JKBK KVB PNB BOI PSUBanks
SBIN BOB CBK
New Private banks Old gen. banks PSU banks
Substandard Doubtful - 1 Doubtful - 2 Doubtful - 3 LossFY10
3QFY16
Financials Strategy
FY17 Slippages to trend down…
Page 5
Slippages for FY17 to be at least 20% lower than FY16 for the coverage universe; (FY17 slippage assumes normal slippage run-rate from the standard book and
50% haircut on the restructured standard book and 20% on the 5/25 refinance book)
Rs. Bn NNPARestructured
standardSRs O/s
5/25
RefinanceSDR
Total
stressed
assets
NetworthStressed
assets/networth %
Average
Slippage
FY08 - FY12
FY17
Slippages
**
FY16
SlippagesDelta
HDFCB 13 4 3 0 0 20 720 3% 1.3% 60 61 -1%
IIB 3 5 3 0 0 11 170 6% 1.3% 14 9 59%
KMB 11 4 0 0 0 15 232 7% 1.8% 26 23 12%
YES 2 6 2 0 0 10 135 7% 0.5% 8 7 9%
DCBB 1 0 0 0 0 2 17 12% 1.7% 2 2 5%
AXSB 25 77 8 36 5 152 510 30% 1.5% 94 78 20%
ICICIBC 99 113 6 35 17 270 896 30% 2.0% 145 170 -15%
CUBK 3 3 4 0 0 10 30 32% 1.8% 5 4 21%
FB 9 23 6 0 0 38 82 46% 2.9% 22 16 34%
KVB 4 22 3 1 0 29 47 63% 0.9% 11 7 48%
SIB 7 19 1 1 2 30 37 81% 1.2% 11 9 17%
JKBK 12 25 0 10 8 55 66 83% 1.4% 16 12 32%
SBIN 402 486 56 170 165 1,279 1,466 87% 2.7% 605 554 9%
BOB 218 171 5 54 24 473 390 121% 1.2% 109 289 -62%
CBK 129 206 13 16 39 403 301 134% 2.1% 128 154 -17%
BOI 200 173 26 80 0 478 280 171% 2.1% 137 321 -57%
PNB 230 350 12 68 70 730 408 179% 2.1% 218 305 -28%
Total 4,003 5,788 69% 1611 2022 -20%
** FY17 slippages calculated as FY08-12 average slippage on the FY16 standard book + 50% slippage from restructured book + 20% slippage from the 5/25
refinance book
Source: Spark Capital Research
Financials Strategy
Page 6
FY17 likely to be another year of revised estimates being in line with
budgetary estimates
Source: Spark Research
0
500
1000
1500
2000
2500
3000
3500
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
Incremental govt. expenditure (Rs. Bn)
FY16, first year without a spending cut, with RE>BE, after 3
consecutive years of spending cuts
Source: Spark Research
199
-30-108 -63
355280
-56
176 289
1501
7 0
610
-601-749
-1137
79
-10%
-5%
0%
5%
10%
15%
20%
25%
-1500
-1000
-500
0
500
1000
1500
2000
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
Variance of RE over BE (Rs. Bn) Variance of RE over BE (%) RHS
Historically, periods of fiscal austerity have negatively impacted slippages
e
Source: Spark Research
… higher Government spending to impact slippage trajectory…
8 26 37 2080 92 73 76 86 92 71
117 129 159 146 122
206 215 204 195
279201 220 227 254 241 261
295 277322
771
643
0
100
200
300
400
500
600
700
800
900
1Q
FY
09
2Q
FY
09
3Q
FY
09
4Q
FY
09
1Q
FY
10
2Q
FY
10
3Q
FY
10
4Q
FY
10
1Q
FY
11
2Q
FY
11
3Q
FY
11
4Q
FY
11
1Q
FY
12
2Q
FY
12
3Q
FY
12
4Q
FY
12
1Q
FY
13
2Q
FY
13
3Q
FY
13
4Q
FY
13
1Q
FY
14
2Q
FY
14
3Q
FY
14
4Q
FY
14
1Q
FY
15
2Q
FY
15
3Q
FY
15
4Q
FY
15
1Q
FY
16
2Q
FY
16
3Q
FY
16
4Q
FY
16
Slippages (Rs.bn) Spark Coverage Universe
Slippages dropped 31% and 10% qoq in 4QFY09 and
4QFY12 respectively. Both were periods when
revised expenditure estimates overshot budgetary
estimates by 20% and 5%.
Slippages dropped 31% and 10% qoq in 4QFY09 and
4QFY12 respectively. Both were periods when
revised expenditure estimates overshot budgetary
estimates by 20% and 5%.
Financials Strategy
… but reductions need to catch up for GNPAs to come down
Page 7
Working backwards, we believe a ~3.3% slippage number for the system will be the tipping point, wherein NPA reductions will outpace slippages
e
Source: RBI, Spark Research
Slippages vs recoveries In Rs. Comments
Opening GNPA 100.0 5% GNPA assumed on a loan book of Rs.2000. Standard restructured loans assumed at 6% of the loan book
Addition 71.6 Slippages at 3.6% (3.6% * 2000)
- Normal slippage 35.6 2.0% slippage assumed on the non-restructured standard loan book (2.0% * 1780)
- Slippage from the restructured book 36.0 30% slippage assumed on the standard restructured book (30% * 120)
Reduction 68.0 Reductions at 31% (31% * 220)
- Cash recovery 23.0 Assume 40% recovery from sub standard, 20% from D1
- Upgrades 25.0 Assume upgrades percentage to pickup to 25% from 20% currently
- Write offs 20.0 Assume write offs to continue at 20% given elevated D2,D3 and Loss assets
Closing GNPA 103.6 For GNPAs to decline, slippages will have to be <3.3%
Reduction in NPAs (recovery + upgradation + write-off) needs to exceed gross additions for gross NPAs to head lower, in an environment
devoid of growth
Source: Spark Capital Research
14.0% 12.8% 9.8% 8.0% 6.2% 4.0% 3.0% 3.1% 2.9% 3.1% 3.3% 4.6% 4.9% 5.1% 4.4% 6.1% 6.1%0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
SBIN NPA trend
GNPA % Gross Slippages (%, RHS) Reductions (%, RHS)
• SBIN’s robust recovery
cycle in FY01-FY06 was
led by a real estate super
cycle, treasury gains and
growth.
• We see FY17 slippages
being lower than FY16, but
GNPAs are likely to be
sticky until recoveries &
upgradations catch up -
highly unlikely given the
weak real estate market
and structural problems
with recovery
Financials Strategy
Page 8
Quantum of cases & amounts referred to recovery channels
e
Source: RBI, Spark Research
Recoveries through LA, DRTs and SARFAESI at a decadal low…
e
Source: RBI, Spark Research
Recovery infrastructure not keeping pace with stressed assets
… as DRTs which forms ~40% of amount referred…
Source: Spark Capital Research
9381
1726
49%
39%
50%
37%
24%
31%
24% 22%18% 18%
0%
10%
20%
30%
40%
50%
60%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Amount referred (Rs. Bn) Amount recovered (Rs. Bn) Recovery %
17%22%
42%
49%
35%
0%
10%
20%
30%
40%
50%
60%
Advances GNPA Cases referredto recoverychannels
Amount referredto recoverychannels
Amountrecovered
10 year CAGR (%)
… are seeing a recovery rate of 14% due to slow legal framework
Source: Spark Capital Research
2% 5%
81%
14%
33%24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Recovery (%)
Lok Adalats Debt Recovery Tribunals SARFAESI
13%4%
14% 20% 23%11%
3% 6% 13% 9%
37% 48%38% 20%
31%
28% 39% 29%32% 40%
50% 48% 48%60%
46%61% 58% 64%
55% 50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Amount referred (%)
Lok Adalats Debt Recovery Tribunals SARFAESI
Financials Strategy
Then & Now:
Page 9
Growth
Liquidity
Bond gains
Interest rates
Leverage
Real estate
Commodity prices
Asset quality
Cyclical factorsStructural
factors
FY03 – FY09 Asset
Quality Cycle
Growth
Liquidity
Bond gains
Interest rates
Leverage
Real estate
Commodity prices
Asset quality
Cyclical factorsStructural
factors
FY12 – FY17 Asset
Quality Cycle
Negative Neutral Positive
Financials Strategy
Page 10
Exposure to Infrastructure, metals & mining remains high
Movement of Risky sector exposures (as % of total exposures) for FY14, FY15 & 3QFY16
Infrastructure TextileCommercial Real Estate &
ConstructionGems & Jewellery Metals & Mining
Total Risky Sector
Exposures
FY14 FY15 3QFY16 FY14 FY15 3QFY16 FY14 FY15 3QFY16 FY14 FY15 3QFY16 FY14 FY15 3QFY16 FY14 FY15 3QFY16
AXSB 14.1% 9.2% 10.0% 2.2% 1.7% 1.6% 4.5% 3.2% 3.3% 0.7% 0.5% 0.4% 5.7% 4.6% 4.8% 27.2% 19.3% 20.1%
HDFCB 8.8% 4.2% 6.9% 1.4% 1.6% 1.8% 1.7% 2.1% 3.2% 1.0% 0.8% 1.2% 3.8% 3.4% 3.9% 16.6% 12.1% 17.0%
ICICIBC 9.5% 8.6% 8.7% 0.6% 0.4% 0.4% 6.4% 1.7% 1.6% 0.7% 0.6% 0.7% 6.9% 6.4% 6.4% 24.1% 17.7% 17.9%
IIB 3.0% 1.3% 4.8% 0.6% 0.5% 0.5% 10.6% 7.8% 8.3% 1.9% 1.7% 4.1% 1.7% 1.1% 1.1% 17.8% 12.3% 18.7%
KMB 11.9% 5.1% 3.0% 0.0% 0.0% 0.0% 9.2% 9.8% 6.5% 0.0% 0.0% 0.0% 2.3% 1.6% 1.7% 23.4% 16.5% 11.2%
YES 21.9% 12.4% 12.5% 0.9% 0.5% 0.6% 4.4% 2.2% 2.5% 1.4% 1.2% 1.5% 9.7% 3.9% 3.1% 38.3% 20.2% 20.2%
CUBK 1.0% 0.6% 0.5% 8.8% 9.0% 9.9% 5.9% 5.2% 4.1% 0.1% 0.2% 0.2% 6.8% 5.6% 5.2% 22.6% 20.6% 20.0%
DCBB 0.8% 1.7% 1.3% 1.8% 3.6% 3.1% 12.7% 13.1% 11.9% 1.2% 0.8% 0.7% 4.2% 2.3% 2.1% 20.6% 21.4% 19.1%
FB 9.4% 11.6% 10.9% 2.0% 2.5% 2.6% 0.1% 0.3% 0.3% 0.2% 0.1% 0.2% 4.9% 4.8% 4.4% 16.6% 19.3% 18.4%
JKBK 12.6% 14.2% 13.6% 2.1% 3.4% 3.1% 0.1% 0.5% 0.2% 0.1% 0.4% 0.4% 7.0% 6.6% 5.9% 21.9% 25.0% 23.2%
KVB 10.0% 9.5% 8.9% 6.7% 7.7% 8.7% 0.7% 0.9% 1.0% 1.1% 1.0% 0.9% 4.9% 4.6% 4.7% 23.5% 23.7% 24.2%
SIB 17.8% 12.6% 12.0% 3.1% 4.1% 4.0% 1.4% 2.4% 1.9% 2.1% 2.2% 1.8% 5.2% 4.7% 4.7% 29.5% 26.0% 24.4%
BOB 9.3% 9.0% 9.3% 3.5% 4.4% 4.1% 1.7% 2.8% 2.3% 0.5% 0.5% 0.4% 4.7% 7.1% 6.5% 19.7% 23.8% 22.7%
BOI 10.7% 10.9% 12.0% 2.7% 2.5% 2.5% 0.5% 0.9% 0.8% 2.5% 2.3% 2.6% 7.3% 5.0% 4.8% 23.7% 21.6% 22.6%
CBK 22.5% 25.7% 23.5% 4.6% 4.8% 4.6% 1.9% 1.8% 2.0% 0.6% 0.4% 0.4% 8.2% 7.1% 6.9% 37.7% 39.7% 37.4%
PNB 17.6% 15.6% 13.9% 2.1% 2.8% 2.7% 2.2% 4.0% 1.5% 1.3% 0.6% 0.7% 7.2% 6.5% 6.8% 30.3% 29.4% 25.6%
SBIN 11.4% 15.0% 16.2% 4.3% 3.7% 3.2% 0.8% 0.8% 1.1% 3.6% 1.1% 0.9% 9.8% 10.3% 9.9% 29.9% 30.9% 31.3%
Financials Strategy
Page 11
Barring SBIN, all PSU banks have stressed assets > net worth; amongst private banks JKBK has the highest stressed assets ratio, while HDFCB
is the lowest
Source: Spark Capital Research
2.8% 2.3%0.8% 1.0% 1.0% 0.3% 0.2% 0.3%
2.6%0.9% 1.7% 1.8% 1.7% 1.5% 1.1%
5.8% 5.2% 5.7%3.9% 4.1% 2.9%
3.3%2.6%
2.5% 1.4% 0.3% 0.6% 0.7% 0.1%
5.4%5.7% 4.4% 4.8% 4.3%
1.6%0.4%
8.9%
4.5% 4.5%6.2% 4.8%
3.5%
0.9%0.8%
1.1%0.5%
0.0% 0.0% 0.0% 0.0%
2.1%
0.3% 0.6% 0.2%0.0%
0.0%
0.0%
1.7%
2.1% 1.4% 0.5%1.3%
1.2%0.3%
0.1%0.3%
0.1%
0.0% 0.4% 0.3% 0.0%
0.0%
0.8% 0.7% 0.3%1.2%
1.9%
0.1%
0.3%
0.7% 0.1%0.4% 0.4%
0.4%
0%
5%
10%
15%
20%
25%
Covera
ge U
ni. (
7.3
%)
ICIC
IBC
(5.8
%)
AX
SB
(4.7
%)
Private
Banks (
3.1
%)
KM
B (
1.3
%)
IIB
(1.3
%)
YE
S (
1.1
%)
HD
FC
B (
0.4
%)
JK
BK
(1
0.1
%)
KV
B (
7.7
%)
Old
-gen B
anks (
7.4
%)
SIB
(7.1
%)
FB
(7.1
%)
CU
BK
(5%
)
DC
BB
(1.6
%)
PN
B (
16.8
%)
BO
I (1
2.6
%)
BO
B (
11.7
%)
CB
K (
11%
)
PS
U B
anks (
10.6
%)
SB
IN (
8%
)
New Private banks Old gen. banks PSU banks
NNPA (% of advances) Restructured Standard (% of advances) 5/25 Refinance (% of advances) Security Receipts (% of advances) Networth (% of advances)
Most PSU banks have stressed assets > net worth
Coverag
e Uni.ICICIBC AXSB
Private
BanksKMB IIB YES HDFCB JKBK KVB
Old-gen
BanksSIB FB CUBK DCBB PNB BOI BOB CBK
PSU
BanksSBIN
Stressed Assets
(%)7.3% 5.8% 4.7% 3.1% 1.3% 1.3% 1.1% 0.4% 10.1% 7.7% 7.4% 7.1% 7.1% 5.0% 1.6% 16.8% 12.6% 11.7% 11.0% 10.6% 8.0%
Networth (% of
advances)11.3% 20.6% 16.2% 18.1% 20.1% 20.7% 16.0% 16.5% 14.1% 12.4% 13.4% 9.3% 15.6% 15.6% 14.2% 10.4% 7.4% 10.2% 9.1% 9.9% 10.5%
Difference 4.0% 14.8% 11.5% 15.1% 18.8% 19.4% 14.9% 16.1% 4.0% 4.6% 6.0% 2.2% 8.5% 10.6% 12.6% -6.4% -5.2% -1.5% -1.9% -0.8% 2.5%
Financials Strategy
Page 12
Capex pipeline on a sharp slowdown driven by draw downs and new
proposals drying up; pipeline set to run off by FY16
Source: RBI,Spark Research
1763 17552296
26171,939
1,507 936
600
1,022 1,324
1,071 669
567
348
348 684
2,7853,079
3,367 3,286
2,506
1,855
1,284 1,284
0
500
1000
1500
2000
2500
3000
3500
4000
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Capex pertaining to earlier years (Rs. Bn) New proposals (Rs. Bn) Total
Key proponents of banking system credit growth viz. inflation and capex falling away
Source: RBI sectoral deployment of credit data, Company data, Spark Research
21% 32% 22% 26% 34% 29% 29% 25%
44%
40%
35%43%
33%23% 20%
11%
34%28%
43%
31% 32%
48%51%
64%
18%17%
21%
16%
14% 14%
9%9%
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
0%
20%
40%
60%
80%
100%
F Y 0 9 F Y 1 0 F Y 1 1 F Y 1 2 F Y 1 3 F Y 1 4 F Y 1 5 F Y 1 6 E
Inflation led credit growth Capex led credit growth GDP linked credit growth System Credit Growth % (RHS)
Low crude, commodity prices & agri inflation expected to further lower
inflation to ~5% by FY16.
Source: RBI, Spark Research
Historically, inflation & capital
expenditure that were accounting for
~67% of the incremental systemic
credit growth have now fallen to
~36% in FY16.
With inflation expected to flatten out
at ~5%, and capex pipeline
experiencing a sharp slowdown,
credit growth in FY17 has to be
largely driven by real growth in the
economy.
Systemic credit growth to be subdued
9%
12%
10%
9% 9%
8%
5% 5%
0%
2%
4%
6%
8%
10%
12%
14%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Consumer Price Inflation (%)
Financials Strategy
Page 13
Industry has contributed to 47% of incremental growth over FY08-15
E
Source: RBI, Spark Research
Industry, 47%
Agriculture & Allied Activities,
13%
Services, 23%
Personal Loans, 17%
Incremental Industry credit growth needs to be ~Rs.2.5tn to
support >10% system credit growth
Assumptions
Agri credit assumed at Rs. 9.8tn (13% growth), same as
FY16.
Personal credit assumed to grow at 16% for FY17, as the
Housing sector which forms ~60% of the personal loans
is expected to grow at ~16%.
Services sector growth is assumed at ~9%, in line with
historic growth rates.
FY08-15
Incremental
Growth
For system credit to grow between 8-16% [B], Industry credit needs to grow at 2-21% [D], which translates to incremental lending to industry of Rs. 0.6tn to Rs. 5.8tn [E], while the
capex pipeline for FY16 is at a 10 year low of Rs. 600bn, implying that the credit growth cannot happen without pick up in the industry growth…
Rs. Bn FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17 (Non food credit growth scenarios)
8% 9% 10% 11% 12% 13% 14% 15% 16%
A Non-food Credit 22,048 26,018 30,400 36,871 42,897 48,696 55,296 60,030 65,612 70,861 71,517 72,173 72,830 73,486 74,142 74,798 75,454 76,110
B growth % 18% 17% 21% 16% 14% 14% 9% 9% 8% 9% 10% 11% 12% 13% 14% 15% 16%
C Industry 8,583 10,544 13,115 16,132 19,373 22,302 25,165 26,576 28,025 28,598 29,254 29,911 30,567 31,223 31,879 32,535 33,191 33,847
D growth % 23% 24% 23% 20% 15% 13% 6% 5% 2% 4% 7% 9% 11% 14% 16% 18% 21%
E Incremental growth 1,960 2,571 3,017 3,241 2,929 2,863 1,411 1,449 573 1,229 1,885 2,541 3,197 3,854 4,510 5,166 5,822
F Agriculture & Allied Activities 2,753 3,387 4,161 4,835 5,466 5,899 6,660 7,659 8,654 9,780 9,780 9,780 9,780 9,780 9,780 9,780 9,780 9,780
G growth % 23% 23% 16% 13% 8% 13% 15% 13% 13% 13% 13% 13% 13% 13% 13% 13% 13%
H Services 5,493 6,463 7,268 8,908 10,230 11,519 13,375 14,131 15,403 16,789 16,789 16,789 16,789 16,789 16,789 16,789 16,789 16,789
I growth % 18% 12% 23% 15% 13% 16% 6% 9% 9% 9% 9% 9% 9% 9% 9% 9% 9%
J Personal Loans 5,218 5,625 5,856 6,997 7,828 8,976 10,097 11,663 13,530 15,694 15,694 15,694 15,694 15,694 15,694 15,694 15,694 15,694
K growth % 8% 4% 19% 12% 15% 12% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%
Out of the 9% credit growth for
FY16, ~1% could be due to the
addition of IDFC bank & Bandhan
bank to the list of SCBs
Financials Strategy
Capital Requirements (considering revaluation reserves as CET1)
Page 14
As per revised guidelines, we estimate a CET 1 capital requirement (other than internal accruals) of Rs. 129bn for our coverage universe to support the respective growth in RWAs
over FY16-19; a further Rs. 97bn will have to be raised under AT1 instruments to meet the total T1 CAR of 9.5% by FY19.
Growth CAGR
assumed (%)CET 1% assuming no capital infusion CET 1 shortfall
AT1 required to
meet 9.5% T1
(Rs. Bn)
Total T1 capital
requirement by
FY19 (Rs. Bn)
T2 required to
meet 11.0% CRAR
(Rs. Bn)
Total capital
requirement by
FY19 (Rs. Bn)
FY15-19 FY16 FY17 FY18 FY19 FY16 FY17 FY18 FY19 FY19 FY19 FY19 FY19
Min. CET 1 + CCB 6.1% 6.8% 7.4% 8.0% Tier I - 9.5% CRAR - 11.5%
BOI 8% 7.1% 6.7% 6.3% 6.1% 0 2 44 92 6 98 8 106
CBK 12% 7.9% 7.6% 7.4% 7.3% 0 0 0 37 44 81 41 122
PNB 11% 9.2% 8.9% 8.9% 9.0% 0 0 0 0 34 34 0 34
BOB 9% 10.1% 9.7% 9.3% 9.0% 0 0 0 0 8 8 0 8
SIB 15% 10.4% 9.9% 9.5% 9.1% 0 0 0 0 5 5 3 8
SBIN 13% 9.0% 8.9% 8.9% 9.1% 0 0 0 0 0 0 0 0
YES 23% 10.5% 9.9% 9.5% 9.2% 0 0 0 0 0 0 11 11
DCBB 22% 13.0% 11.7% 10.5% 9.5% 0 0 0 0 0 0 2 2
JKBK 14% 10.5% 10.2% 9.9% 9.6% 0 0 0 0 0 0 9 9
IIB 25% 10.7% 10.5% 10.2% 10.2% 0 0 0 0 0 0 0 0
ICICIBC 17% 13.1% 12.4% 11.8% 11.2% 0 0 0 0 0 0 0 0
KMB 37% 13.4% 13.0% 12.5% 11.9% 0 0 0 0 0 0 0 0
AXSB 18% 12.4% 12.0% 11.8% 11.9% 0 0 0 0 0 0 0 0
HDFCB 24% 13.1% 12.5% 12.1% 11.8% 0 0 0 0 0 0 0 0
KVB 14% 12.6% 12.6% 12.4% 12.1% 0 0 0 0 0 0 0 0
FB 14% 13.7% 13.4% 13.1% 12.5% 0 0 0 0 0 0 0 0
CUBK 18% 16.0% 15.8% 15.4% 14.8% 0 0 0 0 0 0 0 0
Total Capital shortfall 0 2 44 129 97 226 74 300
Source: Spark Capital Research
Financials Strategy
Significant shift from T2 to T1 CAR
Page 15
The change in regulations frees up Tier I capital of up to 75bps for BOI & CBK, a significant portion of which is a reclassification from Tier II capital, resulting in an effective increase
in capital of <30bps. Private sector banks AXSB (52bps) & ICICIBC (50bps) witness the highest increase in total capital under the new regulations.
3QFY16Current Post the regulatory change Change (in bps)
T1 CAR T2 CAR Total CAR T1 CAR T2 CAR Total CAR T1 CAR T2 CAR Total CAR
AXSB 12.4% 3.1% 15.5% 12.9% 3.1% 16.0% 52 bps 0 bps 52 bps
BOB 9.6% 2.6% 12.2% 10.1% 2.5% 12.6% 50 bps -12 bps 38 bps
BOI 7.9% 3.4% 11.3% 8.6% 2.9% 11.6% 75 bps -46 bps 30 bps
CBK 8.7% 2.9% 11.5% 9.4% 2.2% 11.6% 75 bps -71 bps 4 bps
CUBK 14.2% 0.5% 14.6% 14.2% 0.5% 14.6% 0 bps 0 bps 0 bps
DCBB 12.3% 0.7% 13.0% 12.6% 0.5% 13.1% 27 bps -19 bps 8 bps
FB 13.7% 0.6% 14.3% 13.7% 0.6% 14.3% 0 bps 0 bps 0 bps
HDFCB 13.2% 2.7% 15.9% 13.6% 2.7% 16.3% 39 bps 0 bps 39 bps
ICICIBC 11.8% 4.0% 15.8% 12.3% 4.0% 16.3% 50 bps 0 bps 50 bps
IIB 15.6% 0.8% 16.4% 15.8% 0.6% 16.4% 18 bps -17 bps 1 bps
JKBK 11.2% 1.3% 12.5% 11.2% 1.3% 12.5% 0 bps 0 bps 0 bps
KMB 14.1% 1.1% 15.2% 14.2% 1.1% 15.3% 13 bps -3 bps 10 bps
KVB 12.0% 0.9% 12.9% 12.0% 0.9% 12.9% 0 bps 0 bps 0 bps
PNB 8.5% 2.7% 11.3% 9.0% 2.6% 11.6% 52 bps -15 bps 37 bps
SBIN 9.6% 2.8% 12.5% 10.0% 2.8% 12.8% 35 bps 0 bps 35 bps
SIB 9.4% 2.3% 11.7% 10.0% 2.1% 12.1% 57 bps -18 bps 39 bps
YES 10.9% 5.2% 16.1% 11.2% 5.2% 16.4% 29 bps 0 bps 29 bps
Financials StrategyInflation to remain under RBI’s target of 5% FY17E
Global commodity deflation and weak pricing power of corporates - the key reasons for low inflation
1. Global commodity price index has fallen to
over 11-year low in Feb’16
Source: IMF, Spark Capital Research
2. Weak domestic demand has led to fall in
corporate pricing power
Source: GoI
We estimate CPI inflation to decline to ~4.5%
by Jun’16; Expect it at 5% by Mar’17
Source: CSO, Spark Capital Research * as on 4 December
3.7
5.7
4.5
5.0
2
3
4
5
6
7
8
9
Ma
y-1
4
Jul-1
4
Se
p-1
4
Nov-1
4
Jan
-15
Ma
r-15
Ma
y-1
5
Jul-1
5
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-16
Ma
y-1
6
Jul-1
6
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-17
CPI inflation (%) Estimates (%, yoy)
RBI's target:5%
Assuming a normal monsoon in 2016, CPI
inflation is likely to fall to sub-5% by Jun'16.
We estimate CPI inflation at 5% by Mar'17
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
Jan
-08
Jul-0
8
Jan
-09
Jul-0
9
Jan
-10
Jul-1
0
Jan
-11
Jul-1
1
Jan
-12
Jul-1
2
Jan
-13
Jul-1
3
Jan
-14
Jul-1
4
Jan
-15
Jul-1
5
Jan
-16
Price index of manufactured products (3MMA, %)
WPI Inflation to turn positive in next two months; but we expect it
to remain benign in FY17E
(%, yoy) Weight Jan'15 Dec'15 Jan'16 Mar'16E Mar'17E
WPI (A+B+C) 100.0 -0.9 -0.7 -0.9 0.1 2.3
Primary (i+ii = A) 20.1 1.4 5.5 4.6 6.2 3.6
Food (i) 14.3 8.0 8.2 6.0 7.4 3.5
Non-food (ii) 5.8 -13.9 -2.0 0.6 2.7 3.8
Fuel (B) 14.9 -11.0 -9.1 -9.2 -8.6 2.0
Manufactured (iii+iv = C) 65.0 1.0 -1.4 -1.2 -0.4 1.7
Food products (iii) 10.0 2.0 2.0 2.8 4.3 2.3
Core WPI (iv) 55.0 0.8 -2.0 -2.0 -1.4 1.6
Avg. CPI inflation to fall further from 5% in FY16E to 4.8% in FY17E;
we expect it to remain within the RBI’s target of 5% in FY17E
(%, yoy) Weight Jan'15 Dec'15 Jan'16 Mar'16E Mar'17E
CPI inflation 100.0 5.2 5.6 5.7 5.4 5.0
Food & Beverages 45.9 6.3 6.3 6.7 6.3 5.9
Pan, Tobacco 2.4 8.3 9.3 9.0 9.0 6.5
Clothing and Footwear 6.5 6.2 5.7 5.7 5.6 5.2
Housing 10.1 5.1 5.1 5.2 5.0 4.4
Fuel and Light 6.8 3.8 5.4 5.3 4.6 4.9
Services 28.3 3.1 4.0 3.9 3.8 3.5
Core CPI 44.9 4.1 4.7 4.5 4.3 4.0
100.184.8
0
50
100
150
200
250
Jun
-01
Ma
y-0
2
Ap
r-03
Ma
r-04
Fe
b-0
5
Jan
-06
Dec-0
6
Nov-0
7
Oct-
08
Se
p-0
9
Au
g-1
0
Jul-1
1
Jun
-12
Ma
y-1
3
Ap
r-14
Ma
r-15
Fe
b-1
6Global: All Commodity Price Index (2005 = 100)
Financials Strategy
Higher growth in deposits over credit off-take to drive liquidity
comfortable; banks to cut deposit rates, making transmission faster
Source: GoI, Spark Capital Research
Expect the effective rates to fall to reverse repo rate as structural
factors lead to positive liquidity scenario in 2016-17
Source: GoI, Spark Capital Research
Can RBI allow liquidity to turn into surplus in 2016? Liquidity had
turned surplus in the earlier phases of positive real rates
Source: CEIC, Spark Capital Research
7.75
6.75
5.755
6
7
8
9
10
11
Jun
-11
Se
p-1
1
Dec-1
1
Ma
r-12
Jun
-12
Se
p-1
2
Dec-1
2
Ma
r-13
Jun
-13
Se
p-1
3
Dec-1
3
Ma
r-14
Jun
-14
Se
p-1
4
Dec-1
4
Ma
r-15
Jun
-15
Se
p-1
5
Dec-1
5
Ma
r-16
Jun
-16
Se
p-1
6
Dec-1
6
%
MSF rate Call money rate Repo rate Reverse repo rate
Estimate
Expect 25-50bps cut in repo rate in 1HFY17
Liquidity and monetary transmission to drive rates further low
1. Real interest rate to be positive at 1.75%, which gives some room
to the RBI to cut repo rate in Apr’16 policy
Source: GoI, Spark Capital Research
-3.76
1.75
-5
-4
-3
-2
-1
0
1
2
3
4
5
Ma
y-1
1
Oct-
11
Ma
r-12
Au
g-1
2
Jan
-13
Jun
-13
Nov-1
3
Ap
r-14
Se
p-1
4
Fe
b-1
5
Jul-1
5
Dec-1
5
Ma
y-1
6
Oct-
16
Ma
r-17
India real interest rate (Repo rate - inflation, %)
Estimates
Room for 25-50bps cut
in repo rate in FY17E
real interest rate would
be 1.75% positive
11.0
11.6
9
11
13
15
17
19
21
23
25
Fe
b-1
1
Jun
-11
Nov-1
1
Ma
r-12
Au
g-1
2
Jan
-13
Ma
y-1
3
Oct-
13
Fe
b-1
4
Jul-1
4
Dec-1
4
Ap
r-15
Se
p-1
5
Jan
-16
%, yoy
Deposit growth Credit growth
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
-1,500
-1,000
-500
0
500
1,000
1,500
Net liquidity (Rs bn) Real interest rate (%) - RHS
Financials Strategy
Page 18
Bankex returns are significantly correlated to the steepness of the yield curve
e
Source: Spark Research
OIS rates currently indicate that rates are headed downward by ~20bps a year from now
e
Source: Spark Research
OIS rates indicate lower rates going forward
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
0
5,000
10,000
15,000
20,000
25,000
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16
Spread between 10yr & 1yr bond (RHS) Bankex
Financials Strategy
…yet Govt remains on the path of fiscal consolidation
Source: GoI, Spark Capital Research
Non-plan expenditure is estimated to grow at 9.2%...
Source: GoI, Spark Capital Research
…led by 15% jump in plan expenditure, again the fastest growth
since FY11
Source: India Budget, Spark Capital Research
Total expenditure is estimated to increase by 10.8% to Rs. 19.8tn in
FY17BE, the fastest growth since FY11
Source: India Budget, Spark Capital Research
19.8
16.9
7.3
10.8
5
10
15
20
25
0
5
10
15
20
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17B
E
Total expenditure (Rs. tn) Total expenditure (Growth, %, yoy)
14.3
8.9 9.2
5
10
15
20
25
0
5
10
15
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17B
E
Non-plan expenditure (Rs. tn) Non-Plan Expenditure (%, yoy)
4.8
5.5
0.3
3.1
15.3
-5
0
5
10
15
20
25
30
35
0
1
2
3
4
5
6
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17B
E
Plan expenditure (Rs. tn) Plan Expenditure (%, yoy)
4.13.9
3.5
3
FY15 FY16RE FY17BE FY18BE
Fiscal deficit target (% of GDP)
Govt maintains the fiscal target of 3.5% despite higher expenditure
Fiscal Math: Fiscal targets in control…
Financials Strategy
10 year Gsec spread between India and US is still high at 578bps
which is very attractive if seen in light with inflation differentials
Source: CEIC, Spark Capital Research
Crude @
50/bbl
Crude @
30/bbl
Crude @
40/bbl
Crude @
50/bbl
(US$ bn) FY15 FY16E FY17E FY17E FY17E
Total imports (a) 448 398 386 404 422
- Oil imports 138 85 54 72 90
- Gold imports 34 39 42 42 42
- Non-oil non-gold imports 275 273 290 290 290
Total Exports (b) 311 268 278 286 294
- Oil exports 57 37 24 32 40
- Non-oil exports 253 231 254 254 254
Trade balance (b-a) = i -137 -130 -108 -118 -128
Invisibles (ii) 116 118 121 121 121
CAD (i+ii+iii) = a -28 -20 5 -5 -15
CAD (% of GDP) -1.4 -1.0 0.2 -0.2 -0.7
Foreign Direct Investment 33 29 32 32 32
Portfolio Investment 41 5 15 15 15
Commercial Borrowings 3 9 11 11 11
NRI Deposits 14 15 5 5 5
Others 0 -4 -4 -4 -4
Capital account (b) 90 54 59 59 59
Errors and Omissions (c) -1 -1 -1 -1 -1
Balance of Payment (a+b+c) 61 33 63 53 43
Source: GoI, Spark Capital Research
If crude oil prices remain at $30/bbl in FY17, India’s current account
balance would turn into surplus after 12 years
Source: CEIC, Spark Capital Research
i. FII inflows are muted because the FII limit of $30bn in Gsec is fully
exhausted. More FII inflows are expected once RBI increases the limit; Of
the $51bn limit in corporate bonds 62% is exhausted ($20bn can come)
ii. FCNR deposits of $32bn will mature in Nov’16. The RBI has already
purchased ~$34bn in the forward market to avoid any currency volatility
during FCNR deposit redemption.
iii. On the deposit front, as FCNR deposits didn’t require any SLR, banks will
have to replace the FCNR deposits with other deposits, which will require
SLR. Therefore, the demand for Gsecs from banks can be higher to that
extent in FY17.
-6
-5
-4
-3
-2
-1
0
1
2
30
20
40
60
80
100
120
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16E
FY
17E
Crude oil price (($/bbl.) (Indian Basket) CAD (% of GDP) - in reverse order, RHS
Since FY81, India's CAD has
been in surplus only for three
years - FY02,FY03 and FY04
After 12 years, India's CAD may turn
into surplus if crude oil prices
average at $30/bbl in FY17
Can India become a current a/c surplus economy in FY17?
External sector outlook: BoP surplus to provide further stability to macros
578
473
-200
0
200
400
600
800
1000
1200
1400
Jun
-06
Ma
r-07
Dec-0
7
Se
p-0
8
Jun
-09
Ma
r-10
Dec-1
0
Se
p-1
1
Jun
-12
Ma
r-13
Dec-1
3
Se
p-1
4
Jun
-15
Ma
r-16
Gsec spread (India-US) - bps Inflation spread (India-US) - bps
Financials Strategy
MCLR Computation – ICICIBC, HDFCB, SBIN relatively insulated
Page 21
Impact on
current base
rates
Marginal
Cost of
Borrowings
Cost of
Equity
(CAPM)
Marginal
CoF
Negative
Carry on
CRR
Operating
Costs
Tenor Premium MCLR (as per Final Guidelines)Existing
Base rate
Difference
in
Rates(▲)1D 1M 3M 6M 1YR 1D 1M 3M 6M 1YR
[A] [B]
[C] = 92% *
[A] + 8% *
[B]
[D] = 4% *
[C] / (1-
4%)
[E] [F] [G] = [C] + [D] + [E] + [F] [H][I] = [H] -
[G]
AXSB 5.7% 13.9% 6.4% 0.27% 2.0% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.50% 0.38%
BOB 7.0% 13.7% 7.5% 0.31% 1.1% 0.3% 0.4% 0.4% 0.5% 0.5% 9.2% 9.3% 9.4% 9.4% 9.4% 9.65% 0.23%
BOI 6.5% 15.5% 7.2% 0.30% 1.3% 0.3% 0.4% 0.4% 0.5% 0.5% 9.1% 9.2% 9.3% 9.3% 9.3% 9.70% 0.37%
CBK 6.4% 15.1% 7.1% 0.30% 1.3% 0.3% 0.4% 0.4% 0.5% 0.5% 9.0% 9.1% 9.1% 9.2% 9.2% 9.65% 0.45%
CUBK 6.7% 13.5% 7.3% 0.30% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 9.8% 9.9% 9.9% 10.0% 10.0% 10.50% 0.50%
DCBB 6.4% 11.9% 6.8% 0.28% 2.5% 0.3% 0.4% 0.4% 0.5% 0.5% 9.9% 9.9% 10.0% 10.0% 10.1% 10.70% 0.63%
FB 6.0% 13.3% 6.6% 0.28% 2.0% 0.3% 0.4% 0.4% 0.5% 0.5% 9.2% 9.2% 9.3% 9.3% 9.4% 9.63% 0.25%
HDFCB 5.5% 11.9% 6.0% 0.25% 2.4% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.2% 9.35% 0.18%
ICICIBC 6.0% 13.8% 6.6% 0.27% 1.8% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.35% 0.21%
IIB 6.3% 12.8% 6.8% 0.28% 2.5% 0.3% 0.4% 0.4% 0.5% 0.5% 9.9% 10.0% 10.1% 10.1% 10.1% 10.60% 0.48%
JKBK 5.9% 11.5% 6.3% 0.26% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 8.7% 8.8% 8.9% 8.9% 9.0% 9.50% 0.55%
KMB 5.6% 12.5% 6.2% 0.26% 2.8% 0.3% 0.4% 0.4% 0.5% 0.5% 9.6% 9.6% 9.7% 9.7% 9.8% 9.75% -0.03%
KVB 6.7% 12.1% 7.1% 0.30% 2.1% 0.3% 0.4% 0.4% 0.5% 0.5% 9.8% 9.9% 9.9% 10.0% 10.0% 10.40% 0.41%
PNB 5.8% 14.2% 6.5% 0.27% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 8.8% 8.9% 9.0% 9.0% 9.0% 9.60% 0.59%
SBIN 5.8% 14.2% 6.5% 0.27% 1.9% 0.3% 0.4% 0.4% 0.5% 0.5% 8.9% 9.0% 9.1% 9.1% 9.1% 9.30% 0.18%
SIB 6.3% 12.1% 6.8% 0.28% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 9.0% 9.1% 9.2% 9.2% 9.2% 10.00% 0.76%
YES 6.8% 14.8% 7.5% 0.31% 1.7% 0.3% 0.4% 0.4% 0.5% 0.5% 9.7% 9.8% 9.9% 9.9% 10.0% 10.50% 0.54%
Source: Spark Capital Research, Banks’ deposit card rates, Bloomberg
0.38%
0.23%
0.37%
0.45%
0.50%
0.63%
0.25%
0.18%
0.21%
0.48%
0.55%
-0.03%
0.41%
0.59%
0.18%
0.76%
0.54%
AXSB
BOB
BOI
CBK
CUBK
DCBB
FB
HDFCB
ICICIBC
IIB
JKBK
KMB
KVB
PNB
SBIN
SIB
YES
Delta in MCLR need not translate to actual lending rate post loan renewal
• Eg: Current borrower of say IIB: Base rate + tenor premium + risk premium (10.6% + 0.3% + 1.5%= 12.4%).
• Borrower under MCLR: MCLR + risk premium = 10.1% + 2.3% = 12.4%
Financials Strategy
Page 22
Govt. to cut subsidy
Tax revenue to increase on economic revival
Fiscal deficit to narrow
Net market borrowing to come down
Lower net market borrowings Based on the
reduction in net market borrowings, RBI to cut the SLR
RBI cuts SLR
NIM expansion led by higher CD ratios, lower interest rates
Robust treasury gains to selectively offset credit costs
Banks’ profitability to
improve
RBI to cut SLR in a phased manner depending on the pace of fiscal consolidation
Demand for bonds to be higher than supply, despite SLR cuts due to pick up in financial savings. This realignment is set to drive yields lower.
Source: India Budget, Spark Capital Research
Demand to outstrip supply – despite SLR cuts, driving bond yields
lower
67166487
72637533
7942
8335
65636901
77547931
8698
9130
5000
5500
6000
6500
7000
7500
8000
8500
9000
9500
FY15 FY16E FY17E FY18E FY19E FY20E
Supply of G-secs (Rs.tn) Demand for G-secs (Rs.tn)
Financials Strategy
Fall in Fiscal deficit to cap Net Market Borrowings
… coupled with tax revenue increasing on economic recovery…
Source: Spark Capital Research
Subsidies continue to taper…
Source: Spark Capital Research
... resulting in gradual reduction in fiscal deficit…
Source: Spark Capital Research
… expected to contain net market borrowings
Source: Spark Capital Research
1.41.3 1.3 1.4
2.32.2 2.2
2.42.5
2.22.1
1.91.7 1.6
1.4 1.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17E
FY
18E
FY
19E
FY
20E
Subsidies (% of GDP)
Average: 1.4% Estimates
6.9
7.3
8.2
8.8
7.9
7.07.3
7.07.3
7.2 7.27.0 7.0
7.4
7.8
8.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17E
FY
18E
FY
19E
FY
20E
Net tax revenue (% of GDP)
Estimates
3.9 4.0
3.3
2.5
6.0
6.5
4.8
5.7
4.84.4
4.1 3.93.5
3.23.0
2.8
2.0
3.0
4.0
5.0
6.0
7.0
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17E
FY
18E
FY
19E
FY
20E
Fiscal deficit (% of GDP)
Estimates
0.5 1.0 1.1
1.3
2.3
4.0
3.3
4.4 4.7 4.5 4.5
4.0 4.3 4.3 4.5 4.7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17E
FY
18E
FY
19E
FY
20E
Net market borrowings (Rs. tn)
EstimatesCAGR: 25.2%
CAGR: 1.2%
Financials Strategy
Page 24
RBI can cut the SLR to 18% of NDTL by FY20 as lower fiscal deficit leads to lower net market borrowing
Demand and supply of G-secs
(Rs. bn) FY15 FY16E FY17E FY18E FY19E FY20E
Fiscal deficit 5,107 5,351 5,339 5,375 5,644 5,921
Fiscal deficit (% of GDP) 4.1 3.9 3.5 3.2 3.0 2.8
Central government borrowings 4,451 4,019 4,252 4,281 4,495 4,715
State government borrowings 2,264 2,468 3,011 3,252 3,447 3,619
Total Supply 6,716 6,487 7,263 7,533 7,942 8,335
Demand model for banks
Deposits 85,856 95,472 1,06,929 1,20,723 1,37,141 1,56,067
Deposits growth 11.4 11.2 12.0 12.9 13.6 13.8
Systemic SLR (% of DTL) 29.2 28.6 28.0 26.8 25.9 24.9
Systemic SLR 25,052 27,305 29,940 32,354 35,520 38,861
Systemic SLR investment (Incremental) 2,924 2,253 2,635 2,414 3,166 3,341
Mandated SLR by RBI (% of NDTL) 22.0 21.5 21.0 20.0 19.0 18.0
Mandated SLR by RBI 18,888 20,527 22,455 24,145 26,057 28,092
Mandated SLR investment (Incremental) 1,551 1,638 1,929 1,689 1,912 2,035
Institution-wise demand for bonds
Banks 1,887 2,253 2,635 2,414 3,166 3,341
Insurance 2,412 2,122 2,334 2,521 2,483 2,682
Provident Funds 900 893 923 979 1,067 1,163
MFs + Financial Institutions 1,050 781 836 874 874 882
FIIs 901 -9 329 375 366 347
Corporates + Primary Dealers 310 263 276 298 319 337
RBI (own account) -364 400 420 471 424 377
RBI's OMO -533 197 0 0 0 0
Total demand 6,563 6,901 7,754 7,931 8,698 9,130
Demand -Supply -153 413 491 399 756 795
Bank deposits account for ~55% of household financial savings. We expect financial savings to pick up in next 4-5 years, leading to a sharp
increase in the Banks Deposit base – from Rs. 95tn to Rs. 156tn in next five years. Hence, as the deposit base increases, demand for bonds from
banks would increase despite SLR cuts.
Supply
To
tal D
em
and
Actual SLR
investments
Mandated
SLR
investments
Demand - supply gap to drive down bond yields despite SLR cuts
Financials Strategy
Page 25
At yields of 6%, the losses from stressed assets written-off is covered by bond gains for HDFCB, YES, IIB, KMB & DCBB
BankAdvances
[A]
Investmen
ts [B]
Other
assets [C]
Total
Assets
[X=A+B+C
]
Networth
[D]
Other
liabilities
[E]
Total
Liabilities
[Y=D+E+F
]
Stressed assets
written off @
45% LGD
[G]
Advances net
of written-off
assets
[P=A-G]
Gains in
market value of
Investment
book [H]
Market value of
Investment
book [Q=B+H]
Market
Value of
Assets
[Z=P+Q+C]
Accrual to
Networth
[(Z-X)/D]
Bond gains
to written-
off assets
[G/H]
HDFCB 63 27 10 100 10 90 100 0 63 1 28 101 11% 1263%
YES 57 31 12 100 9 91 100 0 57 2 32 101 14% 560%
IIB 64 22 14 100 13 87 100 0 64 1 23 101 7% 406%
KMB 63 25 12 100 13 87 100 0 63 1 26 101 8% 394%
DCBB 67 23 11 100 9 91 100 0 66 1 24 101 7% 231%
CUBK 64 22 14 100 10 90 100 1 62 1 23 100 -1% 93%
AXSB 64 23 13 100 10 90 100 1 62 1 24 100 -1% 92%
FB 60 28 13 100 9 91 100 2 58 1 29 100 -3% 80%
JKBK 63 27 10 100 9 91 100 1 61 1 28 100 -3% 76%
SIB 66 22 12 100 6 94 100 2 64 1 23 99 -9% 71%
KVB 67 22 11 100 8 92 100 2 65 1 24 99 -9% 62%
CBK 59 28 14 100 5 95 100 3 56 2 29 99 -23% 56%
SBIN 65 25 10 100 7 93 100 2 62 1 27 99 -15% 56%
ICICIBC 62 23 15 100 13 87 100 2 60 1 24 99 -6% 53%
BOB 56 21 23 100 6 94 100 3 53 1 22 98 -28% 41%
BOI 62 20 18 100 5 95 100 3 59 1 21 98 -48% 34%
PNB 61 25 14 100 6 94 100 4 56 1 27 97 -49% 31%
Assumptions: Mod. Duration of SLR book: 4, Stressed assets written off @ 40% Loss given default
Gains on G-Sec book from bond yields dropping to 6.0% (▼164bps)
Financials Strategy
Rural India to bottom out in FY17
Financials Strategy
Evaluating 10 major factors related to Rural India
Rural India Bottoming Out
4. Agri Exports
2. Minimum Support
Prices
3. FCI’s policy on
foodgrains
5. Agri imports
1. Agri Production
6. Construction activities
Agri exports contracted 27% during Apr-
Dec 2015
Given lower global food prices, agri
exports may continue to suffer in 2016
Foodgrain output fell 4.9% to 252MT Foodgrain output to go up 3.6% to 261MT
Only ~2% increase in MSP6.8% hike in Rabi MSP Rabi, highest in
3yrs, expect 5-8% hike in Kharif MSP
Foodgrain stocks hit a multi year low of
41MT in Mar’15 as FCI off-loaded
foodgrains to curb inflation
Stopped offloading foodgrain stocks;
Foodgrains stock growth turned +ve in
Nov’15 after 27mths
Agri imports grew at ~13.4% yoy; Wheat
imports surged from $10mn in FY15 to
$131mn during Apr-Dec’15
Govt hiked custom duty on imports of
wheat, edible oil, sugar and natural
rubber to discourage cheaper imports
Weak construction activities as new
home launches fell 30% in Dec quarter
Weak real estate related activities to be a
drag on non-farm rural economy as
surplus labour to keep rural wage low
FY2015 & FY2016 FY2017E
7. Wealth effectNegative wealth effect at the play as land
prices fell ~20% from the peak
Recent 20% surge in gold prices may
partially offset the negative wealth effect
8. Govt. rural spendMuted govt rural spend at 3.4% during
Apr-Dec 2015
Budget to focus more on rural spend;
Expect 20% surge in rural spend in FY17.
State Govt. spend to be fillip
9. Pay Commission hike No impact from Pay Commission
7th Pay & OROP to provide Rs. 550bn
stimulus to Rural India as 53% of govt
employees live in rural India
10. Rural wage growthRural nominal wage growth has been
muted at ~4% in 2015
No significant change vs. 2015; Rural
wage growth likely to be ~5% in 2016E
Agri exports increased at ~26% CAGR
during this period
Foodgrain output increased from 217MT
to an all time high of 265MT
MSP increased at 13.5% CAGR
From 20 MT in Mar’08, foodgrain stock
went up 4.2x to 82MT in Jun’12 and then
fell to 48MT in Dec14
Agri imports grew at ~6% CAGR during
the period
Construction activities were in full swing
as real estate cycle hit its peak, a big
chunk of rural labor shifted to cities
FY2008-14
Positive wealth effect as both land and
gold prices were record high
Govt spend first went up ~25% CAGR
and peaked in FY11 and then tapered off
6th Pay Commission got implemented;
Govt employees saw ~35% hike in salary
Rural nominal wage grew in double digits
at 16% avg. during the period
International climate models indicate a neutral 2H 2016
Southern Oscillation Index (SOI) indicates weakening of El Nino that is good for monsoon outlook in 2016.
Based on the 26 El Niño events since 1900, around 50% have been followed by a neutral year, and 40% have been followed by La Niña.
International climate models suggest a neutral second half of 2016, which could result in normal monsoon this year.
Financials Strategy
FCI starts restocking foodgrains after hitting a low of 41MT in Mar’15;
Foodgrains stock growth turned +ve in Nov’15 after 27mths
Source: GoI, Spark Capital Research
After keeping MSP hike low at ~3% for two years, govt hiked rabi MSP by
6.8% in 2016; we expect 5-8% hike in MSP for kharif crop
Source: CEIC, Spark Capital Research
According to the advance estimate by govt, rabi crop output to increase 4%
yoy in Nov-Mar FY16 vs. 9.1% fall in Nov-Mar FY15
Source: GoI, Spark Capital Research
We expect kharif crop output to increase 3.4% yoy in Apr-Oct’16 vs. 3% fall
in Apr-Oct’15
Source: GoI, Spark Capital Research
Restocking of foodgrains, Higher MSP increase and higher agri output to support rural economy
Rural India Bottoming Out
65
20
82
41
49
26.8
-15.9
3.2
-80
-60
-40
-20
0
20
40
60
80
100
0
10
20
30
40
50
60
70
80
90
Jan
/01
Oct/01
Jul/02
Ap
r/03
Jan
/04
Oct/04
Jul/05
Ap
r/06
Jan
/07
Oct/07
Jul/08
Ap
r/09
Jan
/10
Oct/10
Jul/11
Ap
r/12
Jan
/13
Oct/13
Jul/14
Ap
r/15
Jan
/16
Foodgrains stock (mn ton) Foodgrains stock growth (%, yoy) - RHS
From 20 MT in Mar’08,
foodgrain stock went up 4.2x
to 82MT in Jun’12 and then
fell 50% to 41MT in Mar’15
Rural demand cycle 100
127
259275
294
75
100
125
150
175
200
225
250
275
300
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
MSP hike (rebased to 2001=100)
MSP hike
CAGR: 3.4%
MSP hike
CAGR: 15.4%
MSP hike
CAGR: 3%
110
136
124
129
-9.1
4.0
-15
-10
-5
0
5
10
15
85
90
95
100
105
110
115
120
125
130
135
140
Foodgrains production (ton mn): Rabi Growth (%, yoy) - RHS
24% jump in
rabi output131
124128
-3.0
3.4
-25-20-15-10-50510152025303540
85
90
95
100
105
110
115
120
125
130
135
Foodgrains production (ton mn): Kharif Growth (%, yoy) - RHS
Financials Strategy
7th Pay & OROP to provide Rs550bn stimulus to Rural India
as 53% of govt employees live in rural India
Source: GoI, Spark Capital Research
Govt spend on MGNREGA during Apr-Dec FY16 reaches Rs 337bn which is
higher than the full year spend in any of the last 3 years
Source: CEIC, Spark Capital Research
Govt rural spend (MNREGA, PMGSY, AAY etc) which declined at -10.5%
CAGR after peaking in FY11, likely to increase 20% in FY17
Source: GoI, Spark Capital Research
Govt expedites the rural electrification project as no. of
electrified villages surged 187% in Apr-Oct
Source: GoI, Spark Capital Research
Higher govt rural spend, salary hike of govt employees due to 7th Pay Commission to be a fillip
Rural India Bottoming Out
X Class Cities (Metros)
18%
Y Class Cities (Tier II)
29%
Rural and rurban India
53%
Dispersal of Central govt employees (% of Total)
Pay hike & OROP – Rs.
550bn stimulus to Rural
India
Unlike popular perception,
rural India to be a bigger
beneficiary of
implementation of the 7th
Pay Commission and
OROP as 53% of the govt
employees reside in rurban
India
Therefore, Rural India to get
a Rs 550bn stimulus on
account of implementation
of the 7th Pay Commission.
781
2,240
3,500
0
500
1000
1500
2000
2500
3000
3500
4000
FY15 Apr-Oct FY16 FY16
No. of electrified villages
74% of the total electrified villages
are from Bihar and UP
182 192 182
275 310
377
673 679
853
767
663 612
698 700
875
-
100
200
300
400
500
600
700
800
900
1,000
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
FY03-07 CAGR:14%
FY07-11 CAGR:29%CAGR:-10.5%
113 120
160
335
401 400
330 334 325 337
385
-
50
100
150
200
250
300
350
400
450
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16R
E
FY
17B
E
Central allocation for NREGA (Rs. bn)
Financials Strategy
New home launches fall 30% in Dec’15; Falling construction
activities lead to surplus labour in rural and keep rural wages low
Source: GoI, Spark Capital Research
Negative wealth effect at the play: Land prices have fallen ~20%
from the peak in FY16…
Source: CEIC, Spark Capital Research
...while recent 20% surge in gold prices may partially offset the -ve
wealth effect, the sustainability of gold price uptrend is questionable
Source: GoI, Spark Capital Research
Food inflation also bottoms out in Jul’15 and surges to 8.2% in
Jan’16; this would mean more money transfer from urban to rural
Source: GoI, Spark Capital Research
Weak construction activities and fall in land prices offset by surge in gold prices
Rural India Bottoming Out
100 98
88 90
87
85 84
80 80 78
71
60
65
70
75
80
85
90
95
100
2Q
13
3Q
13
4Q
13
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15E
4Q
15E
Pan India
units la
unched (
4Q
tr
MA
) based to 1
00
Real estate: New Launches
200.0237.5
337.5
487.5
750.0
600.0
0
100
200
300
400
500
600
700
800
FY06 FY08 FY10 FY12 FY14 FY16
Agricultural land price (Rs. '000/acre)
25,208
29,595
15,000
20,000
25,000
30,000
35,000
Se
p/0
9
Ap
r/10
Nov/1
0
Jun
/11
Jan
/12
Au
g/1
2
Ma
r/13
Oct/13
May/1
4
Dec/1
4
Jul/15
Fe
b/1
6
Gold prices (Rs/10 g)
19.7
-1.0
8.2
-5
0
5
10
15
20
25
Se
p-0
9
Fe
b-1
0
Jul-1
0
Dec-1
0
Ma
y-1
1
Oct-
11
Mar-
12
Au
g-1
2
Jan
-13
Jun
-13
Nov-1
3
Ap
r-14
Se
p-1
4
Fe
b-1
5
Jul-1
5
Dec-1
5
Food inflation (%, yoy)
Financials Strategy
Rural nominal wage growth remains low at 3% while the real wage growth is in negative territory
Source: GoI, Spark Capital Research
Volume growth of staples moves in tandem with rural demand
drivers
Source: Company data, SIAM, Spark Capital Research
Demand for two wheelers also peaked along with rural demand
drivers
Source: Company data, Spark Capital Research
Portfolio Strategy - Staples and two wheeler companies demand react faster to rural demand drivers
Rural India Bottoming Out
17.6
3.2
-1.8
-5
0
5
10
15
20
25
30
Jan
-08
Ap
r-08
Jul-0
8
Oct-
08
Jan
-09
Ap
r-09
Jul-0
9
Oct-
09
Jan
-10
Ap
r-10
Jul-1
0
Oct-
10
Jan
-11
Ap
r-11
Jul-1
1
Oct-
11
Jan
-12
Ap
r-12
Jul-1
2
Oct-
12
Jan
-13
Ap
r-13
Jul-1
3
Oct-
13
Jan
-14
Ap
r-14
Jul-1
4
Oct-
14
Jan
-15
Ap
r-15
Jul-1
5
Oct-
15
Rural wage growth: Nominal ( % yoy) Rural wage growth:Real ( % yoy)
10.5%
-4.8%
3.0%
6.0%
-10%
-5%
0%
5%
10%
15%
1Q
FY
08
3Q
FY
08
1Q
FY
09
3Q
FY
09
1Q
FY
10
3Q
FY
10
1Q
FY
11
3Q
FY
11
1Q
FY
12
3Q
FY
12
1Q
FY
13
3Q
FY
13
1Q
FY
14
3Q
FY
14
1Q
FY
15
3Q
FY
15
1Q
FY
16
3Q
FY
16
HUL Volume Growth
(%, yoy) 38.8
32.8
0.3
-20
-10
0
10
20
30
40
50
60
Jan
/08
Ma
y/0
8
Se
p/0
8
Jan
/09
Ma
y/0
9
Se
p/0
9
Jan
/10
Ma
y/1
0
Se
p/1
0
Jan
/11
Ma
y/1
1
Se
p/1
1
Jan
/12
Ma
y/1
2
Se
p/1
2
Jan
/13
Ma
y/1
3
Se
p/1
3
Jan
/14
Ma
y/1
4
Se
p/1
4
Jan
/15
Ma
y/1
5
Se
p/1
5
Jan
/16
Two Wheelers Domestic Sales: Motorcycles (%,yoy)
6th Pay
effect
Financials Strategy
Loan growth of NBFCs focused in rural segment have mirrored the movement in govt. spend in rural India (MNREGA, PMGSY, AAY etc.) with typically a 4
quarter lag…
Source: GoI, Spark Capital Research
Significant lag on both growth and asset quality for rural focussed NBFCs
Rural India Bottoming Out
…combined with an extreme correlation of their asset quality to the government spend on rural development indicating the dependency on rural consumption
story. The chart below depicts the impact of govt. spend trickling down to asset quality with a lag of 4-6 quarters.
Source: GoI, Spark Capital Research
192 182
275310
377
673 679
853
767
663612
698 700
45%
51%
21%30%
16%7%
26%
37%
44%
35%
22%
8%12%
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
800
900
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Govt spend on rural development (Rs. Bn) MMFS Loan Growth
192 182
275310
377
673 679
853
767
663612
698
700
5.9%
3.9%4.80%
5.5%
7.6%
8.7%
6.4%
4.0%3.0% 3.0%
4.4%
5.9%
9.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
100
200
300
400
500
600
700
800
900
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Govt spend on rural development (Rs. Bn) MMFS GNPAs
A sharp increase in
spending in FY09 & FY11
translated to a sharp growth
in AUM in FY10 & FY12
A gradual fall in spending from FY12-14
pulled the growth down from FY13-15
192 182
275310 377
673 679
853
767
663612
698 700
59%
20%24%
45%
56%
24%
-12% -10%
1%
38%
84%
49%
82%
-20%
0%
20%
40%
60%
80%
100%
0
100
200
300
400
500
600
700
800
900
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Govt spend on rural development (Rs. Bn) MMFS GNPA increase (YoY)
Financials Strategy
2.7% 2.8% 2.9% 2.9% 3.0%
2.8% 2.9%
1.3% 1.4%1.2%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FY16 FY17 FY18 FY19 FY20
Opex to assets Provision to Assets (RHS)
Pressures for MMFS are more than one fold – to continue to focus on recoveries,
transition to stringent NPA norms, contain costs and vie for growth
Source: GoI, Spark Capital Research
Asset quality pressures for MMFS to continue until FY17 by which time the company
is expected to completely transition to 90 DPD and then trend downwards
Source: GoI, Spark Capital Research
Growth for NBFCs focused on Rural to lag the turnaround
Rural India Bottoming Out
With internal and external challenges continuing to pose significant headwinds, we
believe return ratios will be muted in the medium term
Source: GoI, Spark Capital Research
• Most NBFCs focused in rural India will continue to see pressures
related to growth and credit cost containment over the medium term.
• The bottoming out of rural macros is expected to translate into
increased collection efficiencies and growth thereby reversing
provisions and subdued profitability – however the lag on NPAs is
typically a 6 quarter phenomenon.
• With lot hinging on monsoon, farm produce, MSP hikes vs inflation
containment and government spend in rural, we believe that growth
for NBFCs focused in this segment will revive post FY17 and not in
the immediate term.
• We believe current valuations for MMFS do not factor in both the lag
effect of a potential rural turnaround & the NPA transition challenges.
• With growth not a concern for SCUF and presence in varied
segments, the rural turnaround will only benefit SCUF in terms of
increased disbursements and improvement in asset quality – our
preferred pick over MMFS.
Provisions and opex to remain elevated due to
continued efforts on collections and NPA
transition – to fully move to 90 DPD by FY17
end
FY18 to see a complete normalization of business
operations with transition to 90 DPD and resumption
of growth – provisions to drop considerably
3.0%
4.4%
5.9%
9.8%
12.0%
10.0%9.0%
8.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
MMFS GNPA Trajectory
3.3%
2.6%
2.1%
1.1% 1.0%
2.0%2.1%
2.4%
23.8%
18.6%
15.5%
8.3% 8.1%
16.9%18.5%
20.9%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
ROA ROE (RHS)
Financials Strategy
Housing
Financials Strategy
New launches and sales volumes have, dried up by >20% in last 2 years
Housing Market
Pan India new launches witnessed contraction of almost 20% in last 2 years
Note: Pan India consists of top 7 regions: MMR, Delhi NCR, Kolkata, Chennai, Bangalore,
Pune, Hyderabad. Source: JLL, Spark Capital Research
Sales volumes growth has also taken a beating across all markets whereas unsold inventory level at life time high
Note: Pan India consist s of top 7 regions: MMR, Delhi NCR, Kolkata, Chennai, Bangalore, Pune, Hyderabad. Source: JLL, Spark Capital Research
100 98
88
90 87
85 84
80 80
75
80
85
90
95
100
2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Pan
In
dia
un
its lau
nc
hed
(4Q
tr
MA
) b
ased
to
100
100
98
95 92
85 83 81
79
79
104 106
113 117
121 123
129 133
75
85
95
105
115
125
135
2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15
Pan
In
dia
da
ta (
Ind
exed
to
100)
Units Sold Unsold inventory
Pan India Sold units is down by 21% whereas unsold inventory is up by 33%.
Drop in sales rate in last 2 years in all markets
Note: Pan India consist s of top 7 regions: MMR, Delhi NCR, Kolkata, Chennai, Bangalore,
Pune, Hyderabad. Sales rate is ppt difference in total units sold as % of total units available in
last 2 years Source: JLL, Spark Capital Research
-5.30%
-10.30%
-0.60%
-3.40%
-0.90%
-4.80% -4.90%
-9.40%
-12%
-10%
-8%
-6%
-4%
-2%
0%
India DelhiNCR
MMR Bangalore Chennai Pune Hyderbad Kolkata
Sale
s r
ate
pp
t ch
an
ge %
Financials Strategy
40% of the buyers belong to age group between
31-40 years
Source: Industry sources, Spark Capital Research
Northern India and Mumbai are more speculator driven markets, hence more
vulnerable to investors sentiments
Source: JLL survey, Spark Capital Research
Bangalore and Pune residential buyers are mostly dominated by salaried
class
Source: JLL survey, Spark Capital Research
28% of the residential property buyers belong to
IT industry
Source: Industry sources, Spark Capital Research
8070 65 65 60 60 55
1020
20 25 30 35
25
10 10 15 10 10 520
0
10
20
30
40
50
60
70
80
90
100
Bangalore Pune Chennai Hyderabad Delhi NCR Kolkata MumbaiMMR
% o
f re
sid
en
tial p
rop
ert
y
bu
yers
Salaried Businessmen NRI
80 80 80 75 70 6550
40
20 20 20 25 30 3550
60
0
10
20
30
40
50
60
70
80
90
100
Bangalore Chennai Hyderabad Thane Mumbai NaviMumbai
Noida,Ghaziabad
&Faridabad
Delhi andGurgaon%
of
resid
en
tial p
rop
ert
y b
uyers
Investor End user
Age 21-30, 14%
Age 31-40, 40%
Age 41-50, 27%
Age >50, 19%
IT profession
al, 28%
Non IT profession
al, 33%
Businessman, 22%
NRI, 11%
Others, 6%
Ticket size of Rs 3mn to 6.5mn range saw
uptick in last 1Y new launches
Source: JLL, Spark Capital Research
15
31
37
15
1
9
46
25
16
3
0
5
10
15
20
25
30
35
40
45
50
Under
Rs
3m
n
Rs 3
.0m
n -
Rs 6
.5m
n
Rs 6
.5m
n -
Rs 1
0m
n
Rs 1
0m
n -
Rs 2
5m
n
Ab
ove R
s25m
n
New
lau
nc
hes in
vari
ou
s t
icket
siz
e
2Q14 2Q15
Approximately 70% of residential property demand is from end users and rest from speculators
Housing Market
Financials Strategy
Most of Indian metros are least affordable compared to Global financial capitals like USA, London etc
Source: GPG, Spark Capital Research
India has one of the lowest rental yields globally
Global Property Monitor
Indian property prices price appreciation among the highest
1.62.2
2.7 2.8 2.83.2
3.94.6
5.0 5.1
7.1 7.5
0
1
2
3
4
5
6
7
8
Ren
tal yie
lds
%
105
6754 51 49
37
18 18 17 17 15 9 9
0
20
40
60
80
100
120
5Y
Pri
ce c
ha
ng
e %
Indian residential property
prices witnessed appreciation
higher than Asian peers
Indian residential market is one of the costliest markets globally on multiple key metrics
CityPrice To Income
Ratio
Gross Rental Yield
City Centre
Price To Rent Ratio
City Centre
Mortgage As A
Percentage Of
Income
Affordability Index
(Higher the better)
Mumbai, India 32.5 2.4 42.4 399.3 0.25
Beijing, China 33.1 2.7 36.5 289.7 0.35
Rio De Janeiro, Brazil 21.9 4.8 20.7 266.0 0.38
Hong Kong, HK 36.8 2.4 41.7 239.1 0.42
Shanghai, China 26.7 3.0 33.2 236.4 0.42
Delhi, India 16.0 2.1 47.1 198.1 0.50
Chennai, India 14.0 2.3 43.4 178.3 0.56
Taipei, Taiwan 25.8 1.4 69.8 157.6 0.63
Milan, Italy 18.7 2.5 40.8 141.9 0.70
Pune, India 11.3 2.7 37.1 138.9 0.72
Singapore 21.8 3.6 28.1 136.7 0.73
Noida, India 11.1 2.9 34.4 131.1 0.76
London, UK 16.6 3.6 27.7 122.7 0.81
Paris, France 17.2 2.7 37.1 118.2 0.85
Gurgaon, India 9.6 3.4 29.4 114.9 0.87
Bangalore, India 8.5 3.6 27.8 105.5 0.95
Ahmedabad 7.0 3.8 26.6 90.0 1.11
Hyderabad, India 6.6 4.3 23.2 82.2 1.22
New York, USA 8.9 6.5 15.3 64.4 1.55
Toronto, Canada 9.0 5.1 19.7 61.9 1.62
Most of the Tier 1-2 Indian cities rank in
Top 100 least affordable residential
property in survey of 222 cities globally.
Mumbai is ranked at 5th , Delhi at 22nd ,
Chennai at 71st and Kolkata at 84th .
Globally New York is placed at 38th and
London at 28th rank respectively
Financials StrategyHigh Inventories Coupled with Delayed Projects Across Markets
Delhi NCR and Mumbai has 15% of the projects delayed by more than 3
years
Source: JLL, Spark Capital Research
Delhi NCR and Bangalore saw steep increase in unsold inventory levels in
last 1 year
Source: JLL, Spark Capital Research
15
50
25
10
Hyderabad
25
60
114
Delhi NCR
25
60
12
3
Mumbai MMR
20
65
12
3
Pune
25
70
3 2
Chennai
20
75
4
1Bangalore
Most of the markets will take at least 2-3 years to sell the existing unsold
inventory
Source: JLL:, Spark Capital Research
20
2629
18
32
16 14
71
32 3025 24 24
21
0
10
20
30
40
50
60
70
80
NCR Bangalore Mumbai Pune Chennai Kolkata Hyderabad
Un
so
ld in
ven
tory
mo
nth
s
2Q13 2Q15
Bangalore surpassed
Mumbai in terms of level of
unsold inventory in 2Q 15
Unsold inventory peaked to life time high and it will take at least 2-3 years to sell the existing stock
129
67
50 50
21
8 12
175
80 84
47
2513
22
0
20
40
60
80
100
120
140
160
180
NCR Mumbai Bangalore Chennai Pune Hyderabad Kolkata
Un
so
ld in
vesn
tory
in
th
ou
san
ds 2Q13 2Q15
Chennai market saw some
decline in unsold inventory
due to very few new
launches in last quarters
Financials Strategy
A quick turnaround isn’t on the cards
Financials Strategy#1. Benign Inflation will boost the flow to Financial Savings
Softening inflation to lead to fall in HH physical savings
Source: RBI, Spark Capital Research
Weak gold and real estate outlook will shift the savings the flow from
physical to financial savings
Source: RBI, Spark Capital Research
Positive real interest rate to result in acceleration in financial savings
Source: RBI, Spark Capital Research
The RBI’s latest data adds further credence to our view of a
continued shift from physical to financial assets, which we expect
to gather pace of over FY15-FY17.
Gross savings of the household sector declined from 22% in
FY12 to 18% in FY14, primarily led by a fall in physical assets
and savings in valuables
Physical asset savings declined to 10% of GNDI against 15% in
FY12
Savings in the form of valuables also declined to 0.3% against
0.4%
Sluggish performance of Gold and Real estate is boosting shifts towards Mutual funds
32.4
40.4
67.6
59.6
30
40
50
60
70
FY
71
FY
73
FY
75
FY
77
FY
79
FY
81
FY
83
FY
85
FY
87
FY
89
FY
91
FY
93
FY
95
FY
97
FY
99
FY
01
FY
03
FY
05
FY
07
FY
09
FY
11
FY
13
FY
15E
% o
f t
ota
l H
H s
avin
gs
HH financial savings (% of total HH savings - RHS)
5.5
67.6
59.6
30
35
40
45
50
55
60
65
70
-5
0
5
10
15
20
25
FY
71
FY
73
FY
75
FY
77
FY
79
FY
81
FY
83
FY
85
FY
87
FY
89
FY
91
FY
93
FY
95
FY
97
FY
99
FY
01
FY
03
FY
05
FY
07
FY
09
FY
11
FY
13
FY
15E
CPI inflation, % HH physical savings (% of total HH savings) - RHS
25
30
35
40
45
50
55
60
65
-15
-10
-5
0
5
10
15
FY
71
FY
73
FY
75
FY
77
FY
79
FY
81
FY
83
FY
85
FY
87
FY
89
FY
91
FY
93
FY
95
FY
97
FY
99
FY
01
FY
03
FY
05
FY
07
FY
09
FY
11
FY
13
FY
15E
HH financial savings (% of total HH savings - RHS) Real interest rate (%)
Financials Strategy#2. Maturing IT Sector
In addition to the lower wage hikes, Fresher's hiring has also decreased in
last couple of years.
Source: Company, Spark Capital Research
Lot of IT companies are considering trimming
this Mid management layer
Source: Industry sources, Spark Capital Research
Majority of the employees earn between Rs
0.7-1.5 mn per annum
Source: Payscale.com, Spark Capital Research
IT * sector wage growth has been in range of 8-10% in past couple of years
Source: * Infosys as representative, Spark Capital Research
Job cuts in mid-management layer and falling wage hikes for new entrants should hurt
100
140
180
220
260
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IT Offshore wage Index Organized sector wage Index Residential index
Stagnation in property
prices since 2013 as
income levels still have to
catch up
IT sector wage hikes
have decreased from 15%
in 2005 to 8-10% now
Residential property
prices went way higher
than the organized sector
wage growth
27%
22%
25%
3%
32%
5%
10%9%
7%
11%
7%
0%
5%
10%
15%
20%
25%
30%
35%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
IT i
nd
us
try e
mp
loyees s
tren
gth
in
cre
ase
Total employees
growth has also gone
down from past levels
of 20-25%
Onsite opportunities are declining and based on
random visa lotteries nowadays
Source: Industry sources, Spark Capital Research
33 30 25
67 70 75
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2010 2015
Eff
ort
mix
Offshore Onshore
73%
54%
30%
24%
41%
62%
3% 5% 8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2010 2015
IT s
ecto
r exp
eri
en
ce w
ise
bre
aku
p
15 yrs + 5-15 yrs 0-5 yrs
Financials Strategy#3. Affordability is the key issue
Either property prices have to come down or Salary levels have to catch up to make property
affordable again
Note: EMI to Income ratio of 40 is the affordable range. Source: Spark Capital Research
Either price or time correction required for income to catch up to the property prices
Property prices have gone up too high too quickly vis
–a-vis income levels. Differential in median property
prices and median income has expanded.
Monthly EMI to income ratio of 40 is the most
comfortable ratio.
Individuals with 5-10 years of experience and earning
between Rs 1-1.5 mn can only afford a property
ticket size of Rs 6mn.
Time and price correction in property price levels
along with lower HF loan rates seems inevitable.
Financials Strategy
Residential property expected returns equals total expected Inflation and Rental yield
Note: Red market region depict cases when total return exceeds HF loan rate of 10%.Source: Spark Capital Research
Flat remuneration for onsite employees and depreciating INR almost offset each other (Onsite post tax comp of US$50k
assuming 25% repatriation)
Note: Red marked region depict case when EMI as a % of Repatriated savings is less than 100. Source: Spark Capital Research
Though depreciating dollar has
helped increasing the
affordability for NRI’s and
onsite IT employees but High
ticket prices and low expected
return adversely affect the
investment in property.
Current HF loan rate @10% and expected total return < 8% make property investment less appealing
HF loan rate < Total
return expectation Best
time to invest in property
#4. Comparing expected property return with HF loan rate
Financials Strategy
Period 1994-99- The first known real estate market cycle
Source: JLL, Spark Capital Research
1997 saw the worst ever property crash with all the major markets suffered
30-50% correction (1997 printed article in ToI)
Source: TOI, HDFC, Spark Capital Research
#5. Remembering the Last Property CrashAll major markets saw property prices correction by 30-50%
Prices in Rs
000 per Sq ft
HDFC stock price languished in the period between 1994-97
Source: JLL, Spark Capital Research
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Property prices spiked due to
industrial boom post
liberalization. Opening up of
market for NRI’s boosted the flows
in sector
Prices crashed after touching
highs in 1995 on the back of
Asian financial crisis and slow
down of industrial activity
Ind
ica
tive
T
ren
d
50
70
90
110
130
150
170
190
210
230
250
Jan
-93
Ma
y-9
3
Se
p-9
3
Jan
-94
Ma
y-9
4
Se
p-9
4
Jan
-95
Ma
y-9
5
Se
p-9
5
Jan
-96
Ma
y-9
6
Se
p-9
6
Jan
-97
Ma
y-9
7
Se
p-9
7
Jan
-98
Ma
y-9
8
Se
p-9
8
Jan
-99
Ma
y-9
9
Se
p-9
9
HD
FC
pri
ce in
de
x t
o 1
00
HDFC
HDFC stock prices remained
sideways after 3x return in
period 1993-94
Financials Strategy
Even a 50bps rate cut in 1HFY17 would not be enough for HFC loan rates to
fall below 8%
Source: RBI, Spark Capital Research
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
Ap
r-10
Jul-1
0
Oct-
10
Jan
-11
Ap
r-11
Jul-1
1
Oct-
11
Jan
-12
Ap
r-12
Jul-1
2
Oct-
12
Jan
-13
Ap
r-13
Jul-1
3
Oct-
13
Jan
-14
Ap
r-14
Jul-1
4
Oct-
14
Jan
-15
Ap
r-15
Jul-1
5
Oct-
15
Jan
-16
Ap
r-16
Jul-1
6
Oct-
16
Unless HFC loan rates decline to <8%, buying a home will not be a sound
investment proposition
Source: RBI, Spark Capital Research
Can RBI’s interest rate cut prop up housing demand?
Scenario analysis of incremental savings from 100 bps cut in lending rates. Assumptions: 1. Residential unit price: Rs 7mn. 2. Approval loan size: Rs 5mn (80%
loan approval rate). 3. Current housing finance loan rate at 10%. Incremental savings with respect to current EMI @ 10% interest rate
Source: Spark Capital Research
EMI per monthHousing loan interest Rate
6% 7% 8% 9% 10%
10 Years 55,510 58,054 60,664 63,338 66,075
15 Years 42,193 44,941 47,783 50,713 53,730
20 Years 35,822 38,765 41,822 44,986 48,251
25 Years 32,215 35,339 38,591 41,960 45,435
30 Years 29,978 33,265 36,688 40,231 43,879
Net savings 6% 7% 8% 9% 10%
10 Years -10,565 -8,021 -5,412 -2,737 -
15 Years -11,537 -8,789 -5,948 -3,017 -
20 Years -12,430 -9,486 -6,429 -3,265 -
25 Years -13,220 -10,096 -6,844 -3,475 -
30 Years -13,901 -10,613 -7,190 -3,647 -
CurrentMeaningful
impact
Moderate
impact
5.0%
7.5%
9.80%
2.5%
Inflation expectation Rental yield Total return HFC loan rate
Assuming capital
value appreciation
mirroring inflation
HFC loan rate coming sub 8% will make
property investment enticing for end users
Our take: Interest rate cut will not prop up housing demand from end-users unless lending rates go below 8%
Expect repo rate to fall to 6.25% by end
of Dec 2016
Financials Strategy
Bulk of the growth for large HFCs has been consummated through
inflation in real estate prices (value) rather than addition to client base…
Source: Spark Capital Research
Growth rates have wound down considerably for larger HFCs while the pain
in the real estate sector has burgeoned over the last couple of years
Source: Spark Capital Research
Growth Rates across various segments have moderated considerably for HFCs
Housing Market takes its toll on HFCs
However smaller HFCs, which have grown customer base substantially over
the last 4 years, have shown a rather quality growth over their large peers
Source: Spark Capital Research
97.7%
47.9%
84.0%92.6%
Repco LICHF HDFC Gruh
Growth in Number of Home Loan Accounts (FY11-15)
…whereas smaller HFCs have seen a large proportion of their growth
coming in from additions to customer base
Source: Spark Capital Research
43%
19%
29%
18% 4
4%
17% 38%
17%
57%
81%
71%
82% 5
6%
83% 62%
83%
HDFC LICHF HDFC LICHF HDFC LICHF HDFC LICHF
FY12 FY13 FY14 FY15
Volume-Value Break-up (FY07 Base Year)
Volume Value
71%
75%
46%
27%
38% 6
6%
45%
44%
29%
25%
54%
73%
62% 3
4%
55%
56%
Repco Gruh Repco Gruh Repco Gruh Repco Gruh
FY12 FY13 FY14 FY15
Volume-Value Break-up (FY11 Base Year)
Volume Value
21% 20% 21%16% 16% 15% 14% 13% 13% 13%
34%
23% 23%
17% 19%14% 15% 14% 13% 13%
47%
35%
26%
32%29% 28% 27% 27% 25% 24%
0%
10%
20%
30%
40%
50%
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E
Growth rates have consistently tapered down for HFCs
HDFC LICHF REPCO
Financials Strategy
...Something which is also discernible in the builder book proportion
gradually wearing off for LICHF
Source: Spark Capital Research
Despite the real estate slowdown, asset quality in HDFC’s and LICHF’s developer/
corporate book is still flat
Source: Spark Capital Research
Most companies have a significant exposure to risky segments – viz.
Developer / Corporate / LAP
Source: Spark Capital Research
Can the growth deceleration translate into an asset quality blowout?
Housing Market takes its toll on HFCs
HDFC’s lending to developers and commercial properties has seen a sharp
fall over the last 4 years – a manifestation of the sector slowing down...
Source: Spark Capital Research
28.6%9.0%
19.0%30.3%
71.4%91.0%
81.0%69.7%
0%
20%
40%
60%
80%
100%
HDFC LICHF REPCO CIFC
Composition of risky segment exposure in the overall book
Corporate / Devleoper / LAP Others
36.0% 35.7% 33.5% 31.3%
24.3%28.6%
20.0% 19.1%13.5%
8.2%
-10.4%
8.8%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
FY11 FY12 FY13 FY14 FY15 3QFY16
HDFC's Corporate Loan Book has steadily run down
Corporate Loan Book Proportion YoY Growth Rate of Corp Book
8.5%
5.0%
3.4% 3.0%2.5% 2.6%
5.5%
-26.9%-16.3%
4.4%
-1.9%
19.7%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
FY11 FY12 FY13 FY14 FY15 3QFY16
LICHF too has wound down the Builder Book portfolio
Builder Book Proportion YoY Growth Rate of Builder Book
0.9% 1.0% 1.0% 1.1%
8.7%
13.3%
8.8%10.2%
1.8% 1.6% 1.7%
3.6%
1.9% 2.0%3.5%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
FY13 FY14 FY15 3QFY16
GNPAs in the non-core book have been on an uptrend
HDFC (Corp Book) LICHF (Developer Book) REPCO (LAP) CIFC (LAP)
Financials Strategy
Growth issues cropping
up for HFCs
Highly leveraged
Developers defaulting on
loans
Corporates and SMEs
defaulting on their LAP
loans
Individuals defaulting on
Home Loans
Discretionary spending hit on
consumers – asset additions
postponed
Unsold inventories mount, debt
servicing capabilities weaken
Economic downturn starts impacting
businesses; working capital stretch
and profitability drag weakens credit
profile of SMEs
Job losses of epidemic proportions –
final nail in the coffin – individuals
default on housing loans
12-18
months
24-30
months
36-48
months
60
months
Impact
Entities
HDFC
LICHF
LICHF
REPCO
CIFC
HDFC
LICHF
REPCO
Stages of Stress Build-up Symptoms Timeline
Can there be a full blown asset quality fallout?
With growth challenges coming to the fore, can asset quality issues be next?
HDFC and LICHF have already
started to face the heat in terms of
growth in their AUMs.
Their exposures to developers and
commercial property has declined
substantially in the past few years –
reaffirming our fears about real estate
slowing down.
Most NBFCs have switched to a
cautious stance on growing their LAP
book and started to retract on their
exposures. LAP GNPAs are at an all
time high currently.
The real estate bill mandates the
developer to park 70% of project
funds in an escrow account to
restrict diversion of funds to other
projects. Also, on delayed projects
the developer is liable to pay the
same interest to the consumer as
the EMI being paid by the
consumer to the bank.
Banks would continue to compete
aggressively with HFCs in housing
segment – lowest COFs will continue
to give banks an edge over HFCs.
Profitability may consequently remain
under duress for most HFCs and
particularly larger HFCs that compete
directly with banks.
Smaller HFCs will continue to play in
the niche they have created for
themselves – however they need to be
vary of their non-core portfolio.
Financials StrategySo how does the HFC universe stack up?
We continue to remain wary of large HFCs but upbeat on smaller, niche plays
Particulars
FY17 FY18
Investment RationaleHDFC LICHF REPCO HDFC LICHF REPCO
Growth 14% 15% 27% 13% 14% 27%
• HDFC & LICHF: Clearly a challenge in the medium term.
• REPCO: Healthy visibility on the current growth run rate to
continue in the medium term buoyed by presence in tier 2,3,4
towns which will create adequate demand.
Asset Quality –
GNPA%0.75% 0.74% 1.82% 0.77% 0.80% 1.84%
• HDFC & LICHF: Asset quality pain in individual housing loans to
hold – no signs yet of economic or real estate pressure percolating
down to consumers.
• REPCO: LAP portfolio may continue to weigh on overall GNPAs –
however any economic pressure may impact.
Profitability
NIM 3.1% 2.5% 4.4% 3.0% 2.4% 4.3%
• HDFC & LICHF: Serious competition from banks will continue to
impact margins as scope for cost reduction is low. Challenges in
non-core book may cap upside on margins.
• REPCO: NIMs to remain >4% with high flexibility to lower cost of
funds. Competition may impede any serious margin expansion.
ROA 2.0% 1.4% 2.2% 2.0% 1.3% 2.2%
• HDFC & LICHF: ROA expansion challenged by the moderation in
margins due to competitive pressures.
• REPCO: Opex containment will negate the margin moderation in
the medium term – ROA trajectory to sustain.
ROE 19.2% 18.7% 18.5% 19.2% 18.1% 19.6%
• HDFC & LICHF: ROE expansion ruled out in the medium term.
• REPCO: ROEs to further expand on the back of operating
leverage kicking in and no capital dilution.
Core Tier 1 - CAR 13.0% 11.6% 21.0% 12.9% 11.8% 19.6%
• Revised guidelines on risk weight calculations rule out any capital
dilution for these companies in the medium term. Healthy CARs to
sustain.
Financials Strategy
Commercial Vehicle Financing Industry
Financials Strategy
Major shift in income distribution post Seventh Pay Commission
Source: SCPC, Spark Capital Research
Income-wise population distribution
Source: GoI, Spark Capital Research
Passenger Cars Per 1000 People
Source: GoI, Spark Capital Research
7
6
5
4
3
2
1
010 20 30 40 50 60
(No
. C
ars
–H
un
dre
ds)
GDP per capita (‘000 $)
LUXEMBOURG
NEW ZEALAND
SLOVENIA
Income per capita of $3000 marks as the point of
inflection for durable products penetration across
countries.
This stage of development corresponds to the point
where a large numbers of consumers shift their focus
from providing only the basic necessities to
discretionary spending.
Given the fact that durable penetration is very low in
India compared to peers, the segment offers good
investment opportunity.
50m people
80m people
1.1bn people <$2000
>$3000
This category moving into
$3000 plus income per capita
bracket can start a whole new
cycle in discretionary
consumption in India.
$2000-$3000
27%
48%
13%10%
2%
13%
53%
19%
12%
3%
Less than 25000 25000-50000 50000-75000 75000-100000 More than100000
Current income distribution Likely income distribution post 7th CPC
Seventh Pay Commission to boost domestic consumption
Discretionary spending to be the growth driver in 2016
Financials StrategyWhat is affordable, what is not
We see demand for discretionary items and PVs & CVs to go up, while housing may still remain unaffordable
100.00
Price Index in 2007
224.9
Price Index in 2015
2.2
Change (x times)
100.00 196.9 2.0
100.00 182.0 1.8
100.00 171.1 1.7
100.00 162.3 1.6
100.00 151.6 1.5
100.00 150.8 1.5
100.00 150.5 1.5
100.00 133.1 1.3
100.00 131.1 1.3
100.00
Price Index in 2007
129.0
Price Index in 2015
1.3
Change (x times)
100.00 126.4 1.3
100.00 126.0 1.3
100.00 124.4 1.2
100.00 122.3 1.2
100.00 117.3 1.2
100.00 116.7 1.2
100.00 111.4 1.1
100.00 111.4 1.1
100.00 95.9 1.0
Gold
Milk
Cigarette
Sugar
Dairy
Housing
Plywood
Watches
Paints
Motorcycle
Beer
Foot Wear
P.Cooker
Refrigerators
Cement
Motor Vehicles
Fans
ACs
Bus/Truck
W Machines
Price increase in
major categories
since 2007
From an already
high base,
house prices
have increased
52% since 2007,
making it
unaffordable to
buy a house.
On the other
hand, prices of
ACs, fans and
motor vehicles
have increased
by only 10-20%
during the same
time, making
them more
affordable.
Financials Strategy
… reflected in tonnage creation of 1% yoy vs -5% in volume. Moreover, LCV
sales have clearly rebound in 10MFY16 with growth emerging here
Source: Spark Capital Research
Thoughts on CV Financing Business
MHCV sales in 10MFY16 have already surpassed FY15 numbers, but the
euphoria maybe short lived as most of the sales was replacement led
Source: Spark Capital Research
LCV segment has also witnessed a growing preference to switch to the 2-
3.5 tonnage segment as against <2 tonnage segment…
Source: Spark Capital Research
Marked shift towards higher tonnage vehicles continues, >16 tonnage
currently at 65% against 53% in FY13
Source: Spark Capital Research
#1. Demand recovery remains robust in the MHCV segment; LCV recovery visible
8% 8% 7% 6% 6%
14% 18% 18% 13% 12%
20%22% 20%
17% 17%
26%25% 27%
25% 22%
31% 28% 28%39% 43%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY14 FY15 10MFY16
7.5 to 10 Tonnes 10 to 12 Tonnes 12 to 16.2 Tonnes
16.2 to 25 Tonnes Above 25 Tonnes
-26% -27%
21%32%
-28% -26%
30% 35%
-
50,000
1,00,000
1,50,000
2,00,000
2,50,000
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
FY13 FY14 FY15 10MFY16
YoY Vehicles Growth YoY Tonnage Growth
Number of Vehicles Sold (RHS)
61%52%
43% 39% 35%
26% 40%50% 52% 55%
9% 6% 5% 6% 7%3% 2% 3% 3% 4%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY14 FY15 10MFY16
< 2 Tonnes 2 to 3.5 Tonnes 3.5 to 6 Tonnes 6 to 7.5 Tonnes
16%
-18%-13%
-5%
19%
-12%-10%
1%
-
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
6,00,000
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
FY13 FY14 FY15 10MFY16
YoY Vehicles Growth YoY Tonnage GrowthNumber of Vehicles Sold (RHS)
Financials Strategy
Tractor: Weakness continues unabated with another month of flat growth
Source: SIAM, Spark Capital Research
3W: Growth tapered down, continues to be moderate
Source: SIAM, Spark Capital Research
PC and UV: Price hikes announced and lower discounts acted as a
dampener on volumes
Source: SIAM, Spark Capital Research
2Wheeler: Reported flat growth in Jan, another weak month post a
disappointing Dec
Source: SIAM, Spark Capital Research
Thoughts on CV Financing Business
#2. Demand strong in the PV segment; decline in Tractors continues
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
50,000
1,00,000
1,50,000
2,00,000
2,50,000
3,00,000
Jan
-14
Feb-1
4
Mar-
14
Ap
r-14
May-1
4
Jun
-14
Jul-
14
Aug
-14
Sep
-14
Oct-
14
No
v-1
4
Dec-1
4
Jan
-15
Feb-1
5
Mar-
15
Ap
r-15
May-1
5
Jun
-15
Jul-
15
Aug
-15
Sep
-15
Oct-
15
No
v-1
5
Dec-1
5
Jan
-16
Passenger Vehicles yoy %
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-
2,00,000
4,00,000
6,00,000
8,00,000
10,00,000
12,00,000
14,00,000
16,00,000
18,00,000
Two Wheelers yoy %
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Tractors yoy%
-30%
-20%
-10%
0%
10%
20%
30%
0
10000
20000
30000
40000
50000
60000
Three wheelers yoy%
Financials Strategy
Freight Rate Movements vs Diesel Price Movement for a roundtrip from Delhi
(indexed to Jan -12)
Source: Spark Capital Research
Thoughts on CV Financing Business
#3. Improving freight rates augur well
Freight operators have benefitted from the diesel price fall - Since Feb-15, diesel (50% of cost) has reduced by ~7%
Source: IFTRT, Spark Capital Research
Truck rentals improve in February
Truck rentals for Feb’16 improved ~4-5% m-o-m, across major domestic
trade routes. This came on the heels of a 4-6% m-o-m decline in freight
rates for Jan’16. Improvement in freight rates in Feb’16 was led by
improved freight demand across segments including manufacturing,
infrastructure and agriculture segments. Roundtrip rental (for 25.2 ton
GVW) from Delhi to Mumbai was Rs.82,400 as at Mar 01, 2016 vs. Rs.
78,500 as at Feb 02, 2016 and Delhi to Chennai was Rs. 129,000 vs.
Rs. 122,900.
Diesel costs, which account for ~50% of freight rates, increased by ~3%
from Dec 31, 2015 to 29th Feb, 2016. During the same period, truck
freight rates increased by ~1.4%.
Additionally, over the 12 months through Feb’16, diesel costs have
declined ~7%, while freight rates have increased by ~0.4% - much lower
than what the theoretical decline should have been, indicating a general
improvement in the demand (largely back ended) for freight services
over this period,.
While the general softness in fuel prices (notwithstanding the increase in
diesel prices on Mar1, 2016) has afforded relief to the fleet operators,
an uptick in the freight offerings would be a key vector for fleet operator
profitability and, consequently, new truck sales.
45
50
55
60
65
70
80
85
90
95
100
105
110
115
120
Jan
12
Ma
r12
Ma
y12
Jul1
2
Oct1
2
Dec12
Fe
b13
Ap
r13
Jun
13
Au
g13
Oct1
3
Dec13
Fe
b14
Ap
r14
Jun
14
Au
g14
Oct1
4
Dec14
Fe
b15
Ma
r15
Ma
y15
Jul1
5
Se
p15
Nov15
Jan
16
Fe
b16
Mumbai Nagpur Kolkata
Guwahati Hyderabad Chennai
Diesel Price (RHS)
-5%-3%
0%
-4%
5%
-7%
0%
6%
-4%-2%
-6%
1%
6%
0%2%
-6%
0%
5%
-5%
-4%
-8%
1%
6%
0%
0%
3%
-1%-11% -3%
5%2% 1%
-3% -2%0%
4%
-12%
-8%
-4%
0%
4%
8%
Dec14
Jan
15
Fe
b15
Fe
b15
Ma
r15
Ap
r15
Ma
y15
Jun
15
Jul1
5
Au
g15
Se
p15
Oct1
5
Nov15
Dec15
Jan
16
Mid
-Jan
16
Fe
b16
Ma
r16
Freight Rate (Sequential) % Diesel (Sequential) %
Financials StrategyThoughts on CV Financing Business
#4. Early signs of pick up in utilisation
Channel-check Takeaways:
Dealer discounts continue in the market, with aggressive discounts of up to 25%
still prevalent
No uptick in second hand truck prices; supply glut and new vehicle discounts
blamed
Freight rates have shown a quality improvement after a long while as this has
been on the heels of an increase in freight demand
Repossession of vehicles emerging as an option as the current value of vehicles
will now make good the outstanding balances post provisions for many AFCs
Truck operators have seen marginal benefit of the diesel price movement due to
their limited bargaining power
Current uptick in CV sales largely replacement led and not expected to last long
Driver availability has shown significant improvement, currently a non-issue
Pro-forma P&L of fleet operators for various routes (Rs.)
Source: Industry, Spark Capital
Route Units Chennai - Kolkata Tuticorin - Ernakulam Chennai - Delhi
Distance (km per one - way trip) Kms 1,678 330 2,170
No of round trips per annum Nos 18 60 18
Revenue per trip (as of March 2016) Rs. 59,000 16,100 86,720
Revenue per annum Rs. 2,124,000 1,932,000 3,121,920
Less: Diesel expenses @4 km/litre Rs. 711,757 466,587 906,778
Less: Driver+cleaner+broker commission Rs. 276,120 251,160 410,000
Less: Check posts and other incidentals Rs. 230,000 120,000 250,000
Less: Toll Rs. 280,000 120,000 360,000
Less: Loading & unloading Rs. 72,000 200,000 90,000
Less: Other expenses (Tyre, lubricants, battery and insurance) Rs. 110,490 85,520 131,744
Net Profit pre-EMI Rs. 443,633 688,733 973,398
Annual EMI (4 years, 15% on Rs. 1.6mn) Rs. 567,430 567,430 567,430
Cash flow after debt servicing Rs. (123,797) 121,303 405,968
Sensitivity of Cash Flows to Movement in Number of Trips and Freight Rates
between Chennai - Delhi Route
Cash Flows after
Debt Servicing (in
Rs.)
Number of Round Trips in a year
14 16 18 20 21
Mo
ve
me
nt
in F
reig
ht
Rate
s Rs. 78,048 (329,102) (117,663) 93,776 305,215 410,934
Rs. 82,384 (207,694) 21,089 249,872 478,655 593,046
Rs. 86,720 (86,286) 159,841 405,968 652,095 775,158
Rs. 91,056 35,122 298,593 562,064 825,535 957,270
Rs. 92,790 83,686 354,094 624,503 894,911 1,030,115
Financials Strategy
CIFC on the other hand has been witnessing margin expansion on the back
of LCV and MHCV recovery despite transitioning to 120 DPD
Source: Spark Capital Research
Given the used vehicle heavy portfolio SHTF benefits with a 3 year lag on growth; SUF faces growth challenges in the non-MHCV portfolio
Source: Spark Capital Research
SHTF’s loan growth has mirrored the under-achievement of road projects
implementation over the last four years
Source: Spark Capital Research
14%
7%
33%30%
11%
23%
8%11%
0%
10%
20%
30%
40%
-
2,000
4,000
6,000
8,000
Mar-12 Mar-13 Mar-14 Mar-15
Implementation of Road Projects by NHAI and SHTF Loan Growth
Target (Kms) Achievement (Kms)
Target Miss % SHTF Loan Growth
Asset Financing Companies
43%
26%
4%
38%
-4% -37%
36% 36%
9%
-26% -27%
21%
32%57%
23%29%
61%
62%
19%25% 24%
11%
23%
8%11%
17%
16%
45%
21%
34%
22%
3%11%
21%
9%12%
4% 4% 9% 0%
10%
20%
30%
40%
50%
60%
70%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
MHCV Volume Growth, YoY SHTF Loan Growth, YoY (RHS) SUF Loan Growth, YoY (RHS)
7.5%
6.9% 7.0%7.1% 7.1%
7.9%
7.7% 7.7% 7.7%
25%30%
16%
-18%-13%
-6%
-30%
-20%
-10%
0%
10%
20%
30%
40%
6.0%
6.5%
7.0%
7.5%
8.0%
FY11 FY12 FY13 FY14 FY15 3QFY16 FY16 FY17 FY18
CIFC's Margin and Loan Growth Trajectory on an uptrend
CIFC NIMs LCV Sales Growth (RHS)
Govt. spend in infra and reforms in mining and rural sector to be growth drivers
Financials StrategySo how does the AFC universe stack up?
Margins and Asset Quality to outweigh growth
Particulars
FY17 FY18
Investment RationaleSHTF SUF CIFC SHTF SUF CIFC
Growth 14.7% 14.4% 16.9% 15.3% 19.1% 19.6%
• With macro revival in sight, growth may not be a top concern in the
pecking order for most AFCs. CIFC to however lead the growth
metric amongst AFCs and SUF to continue to lag behind the
peers.
Asset Quality –
GNPA%8.1% 2.0% 5.3% 9.9% 1.9% 5.0%
• Transitionary related pressures more of a tailwind for SUF and
CIFC – best positioned to leverage on turnaround.
• SHTF to continue to feel the heat of transition as the company will
transition in line with RBI guidelines – a major drag on the ensuing
profitability
Profitability
NIM 7.3% 6.4% 7.7% 7.1% 6.4% 7.7%
• SHTF & SUF: NIM expansion unlikely for these companies due to
drag on opex and provisioning for SUF and SHTF respectively.
• CIFC: Margins to stay elevated given the growth revival and
operating leverage kicking in.
ROA 1.8% 2.2% 1.9% 1.7% 2.2% 2.0%
• Resultant ROAs to stay depressed for SHTF and SUF while CIFC
is best positioned to witness an expansion in ROAs in the medium
term.
ROE 14.1% 13.7% 16.4% 13.9% 14.5% 17.2%
• ROE expansion more likely for CIFC and SUF with credit costs
and opex pressures more of a tailwind.
• SHTF to witness depressed returns due to elevated provisioning.
Core Tier 1 - CAR 12.7% 15.7% 13.0% 12.2% 14.8% 12.7%• Capital dilution not to be an issue for any of these companies in
the medium term.
Financials Strategy
Model Portfolio – Financials
Recommended
Weights (%)CMP (Rs.) Market Cap (Rs. Bn) Remarks
HDFCB 20 1025 2,589 Defensive play; RoE driven returns
KMB 15 643 1,179 Defensive play; RoE driven returns
IIB 15 924 550 Relative outperformance
SBIN 10 180 1,395 Valuation comfort; asset quality turnaround play
ICICIBC 10 215 1,247 Valuation comfort; asset quality turnaround play
YES 10 800 336 Growth play; impending capital raise
CIFC 4 670 105 Growth & operating leverage play
KVB 4 413 50 Growth & improving RoA trajectory
CUBK 4 87 52 Growth play
REPCO 4 585 37 Growth play
SIB 4 17 23 Valuation comfort; business turnaround
Key Sells
Investment Thesis
PNB Asset quality concerns
BOB Slow turnaround
SHTF Migration to 90DPD
Buy on 20% correction
Investment Thesis
DCBB Favorable risk-reward ratio
MMFS Rural India bottoming out
AXSB Improving retail & liability franchise
Portfolio Changes
What's in What's out
KMB FB
SBIN POWF
Source: Spark Capital research
Model Portfolio
Financials Strategy
Valuation Matrix - Banks
Page 60
Bank
Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY15-17E CAGR NIM
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E NII PAT ABV FY15 FY16E FY17E
AXSB 142.2 166.4 194.5 133.9 160.6 188.9 73.6 84.7 99.0 1.5% 1.8% 2.0% 17% 16% 15% 3.6% 3.7% 3.7%
BOB 131.9 124.7 132.6 99.2 84.0 89.0 34.0 -18.6 29.2 3.8% 10.2% 10.0% 0% -7% -14% 2.0% 1.9% 2.0%
BOI 113.4 113.7 118.5 74.9 59.8 62.7 17.1 -36.4 -1.4 5.5% 11.2% 13.9% 2% NM -41% 2.1% 2.0% 2.0%
CBK 96.6 97.2 106.0 69.5 71.5 77.3 27.0 13.4 24.1 4.0% 7.1% 8.2% 5% -6% -11% 2.0% 1.9% 1.9%
CUBK 8.1 9.6 11.0 6.9 8.2 9.3 3.9 4.4 5.5 1.9% 2.4% 2.3% 17% 18% 14% 3.3% 3.5% 3.5%
DCBB 5.1 6.1 7.0 2.8 3.4 3.3 1.9 1.7 1.8 1.8% 1.9% 1.8% 18% -2% 10% 3.8% 3.8% 3.7%
FB 23.8 24.5 26.5 16.3 13.7 14.9 10.1 6.5 7.7 2.1% 3.1% 3.1% 5% -12% 5% 3.3% 3.0% 3.0%
HDFCB 224.0 274.2 333.3 174.0 213.9 259.8 102.2 123.7 153.3 0.9% 1.0% 1.0% 22% 22% 17% 4.6% 4.6% 4.5%
ICICIBC 190.4 213.0 234.8 197.2 242.5 233.9 111.8 120.5 116.2 3.9% 6.0% 7.0% 11% 2% 8% 3.4% 3.5% 3.4%
IIB 34.2 44.6 55.7 31.0 40.8 49.8 17.9 22.8 28.9 0.8% 0.8% 0.8% 28% 27% 32% 3.8% 4.0% 4.0%
JKBK 26.5 27.6 30.4 18.4 17.2 19.1 5.1 6.5 9.3 6.2% 7.2% 7.4% 7% 35% 10% 3.7% 3.9% 4.0%
KMB 42.2 68.7 78.3 29.9 41.0 52.0 18.6 20.9 29.3 1.9% 2.3% 2.2% 36% 26% -11% 4.7% 4.1% 4.2%
KVB 14.7 17.5 18.9 9.4 13.0 14.4 4.6 6.0 7.2 1.9% 1.9% 1.9% 14% 26% 10% 3.0% 3.4% 3.3%
PNB 165.6 168.2 179.7 119.6 120.5 127.6 30.6 14.0 22.7 6.8% 10.0% 10.9% 4% -14% -18% 3.1% 2.8% 2.8%
SBIN 550.2 558.5 630.1 389.1 400.3 458.9 131.0 108.0 168.5 4.3% 6.1% 6.1% 7% 13% 3% 3.1% 2.9% 2.9%
SIB 13.7 15.6 18.3 8.8 9.1 10.7 3.1 3.7 5.1 1.7% 2.8% 2.8% 16% 29% 6% 2.6% 2.8% 3.0%
YES 34.9 45.3 55.1 32.5 42.7 51.2 20.1 25.2 31.0 0.4% 0.7% 0.8% 26% 24% 18% 3.1% 3.4% 3.4%
Financials Strategy
Valuation Matrix - Banks
Page 61
Bank
RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target
Rating
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY16E FY17E (Rs.) (mn) Rs. bn P/ABV(x)Price
(Rs.)
AXSB 17.8% 17.5% 17.6% 1.7% 1.7% 1.7% 185 211 242 2.0 1.7 413 2371 979 1.3 308 SELL
BOB 9.2% -4.8% 7.2% 0.5% -0.3% 0.4% 151 103 111 1.4 1.3 141 2218 312 0.7 77 SELL
BOI 6.3% -13.3% -0.5% 0.3% -0.6% 0.0% 283 143 98 0.7 1.0 93 666 62 0.5 49 SELL
CBK 10.7% 4.7% 7.8% 0.5% 0.2% 0.4% 433 357 344 0.5 0.5 182 475 87 0.4 135 SELL
CUBK 16.7% 15.5% 16.6% 1.5% 1.5% 1.6% 43 47 55 1.8 1.6 85 597 51 2.0 112 BUY
DCBB 14.5% 10.5% 10.2% 1.3% 1.0% 0.9% 52 57 63 1.3 1.2 76 282 21 1.1 68 SELL
FB 13.7% 8.2% 9.1% 1.3% 0.7% 0.8% 44 45 48 1.1 1.0 49 1713 83 1.2 57 BUY
HDFCB 19.4% 18.3% 19.3% 1.9% 1.9% 1.9% 245 285 335 3.6 3.1 1029 2506 2578 3.8 1266 BUY
ICICIBC 14.5% 14.0% 11.9% 1.8% 1.7% 1.5% 131 143 154 0.8 0.6 214 5798 1240 0.9 256 BUY
IIB 19.0% 16.5% 15.5% 1.8% 1.8% 1.9% 191 289 332 3.2 2.8 927 529 491 3.3 1092 BUY
JKBK 8.6% 10.2% 13.2% 0.7% 0.8% 1.1% 109 118 133 0.5 0.5 62 485 30 0.7 93 BUY
KMB 14.0% 9.2% 11.7% 1.9% 1.1% 1.4% 175 125 139 4.1 3.5 643 1821 1170 4.4 776 BUY
KVB 12.1% 13.4% 14.6% 0.9% 1.1% 1.2% 334 363 407 1.1 1.0 410 122 50 1.5 593 BUY
PNB 8.5% 3.6% 5.5% 0.5% 0.2% 0.3% 148 107 100 0.8 0.8 82 1855 152 0.6 60 SELL
SBIN 10.6% 7.9% 11.0% 0.7% 0.5% 0.7% 147 144 158 1.0 0.9 180 7466 1345 0.9 187 BUY
SIB 9.2% 10.4% 12.9% 0.5% 0.6% 0.7% 24 24 27 0.7 0.6 17 1350 23 0.9 25 BUY
YES 21.3% 19.8% 20.6% 1.6% 1.7% 1.7% 278 326 386 2.5 2.1 801 418 334 2.5 958 BUY
Financials Strategy
Valuation Matrix - NBFCs
Page 62
NBFC
Net Interest Income, Rs. bn Operating Profits, Rs. bn PAT, Rs. bn Gross NPA FY15-17E CAGR NIM
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E NII PAT ABV FY15 FY16E FY17E
CIFC 17.3 20.9 24.5 9.8 12.4 14.4 4.4 5.3 6.4 3.1% 4.4% 5.3% 19% 22% 14% 7.1% 7.7% 7.7%
HDFC 80.0 86.0 97.0 87.9 92.7 103.0 59.9 62.9 69.4 0.7% 0.7% 0.7% 10% 8% 11% 3.3% 3.1% 3.1%
LICHF 22.4 29.1 32.7 21.1 26.9 30.2 13.9 16.5 18.5 0.5% 0.6% 0.7% 21% 16% 16% 2.2% 2.5% 2.5%
MMFS 30.4 29.9 33.4 20.8 18.9 20.7 8.3 4.8 4.8 5.9% 9.8% 12.0% 5% -24% -5% 8.6% 7.7% 7.5%
POWF 2.4 3.0 3.8 2.1 2.6 3.4 1.2 1.5 1.9 1.3% 1.7% 1.8% 27% 25% 17% 4.4% 4.4% 4.4%
SCUF 21.4 24.4 27.3 12.9 14.4 15.8 5.6 6.0 6.1 3.1% 6.0% 7.3% 13% 4% 5% 13.6% 13.5% 12.8%
SHTF 42.5 49.1 55.8 31.3 37.3 42.1 12.4 13.7 15.2 3.8% 6.8% 8.1% 15% 11% 3% 7.6% 7.6% 7.3%
SUF 10.9 10.9 12.2 7.5 7.4 8.1 4.5 4.7 4.9 1.5% 1.6% 2.0% 6% 4% 12% 6.8% 6.4% 6.4%
NBFC
RoE RoA ABV/share Rs. P/ABV (x) CMP Shares M.Cap Target
Rating
FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY16E FY17E (Rs.) (mn) Rs. bn P/ABV(x)Price
(Rs.)
CIFC 17.5% 16.9% 16.4% 1.9% 2.1% 2.1% 170 197 219 3.4 3.1 670 144 97 3.2 700 BUY
HDFC 20.3% 19.3% 19.2% 2.3% 2.1% 2.0% 192 211 235 4.0 3.5 1161 1575 1827 3.0 1078 SELL
LICHF 18.1% 19.4% 18.7% 1.3% 1.4% 1.4% 151 175 202 2.6 2.3 462 505 233 2.1 416 SELL
MMFS 15.5% 8.3% 8.1% 2.1% 1.1% 1.0% 91 86 82 2.6 2.8 229 564 129 2.2 181 SELL
REPCO 15.8% 17.0% 18.5% 2.3% 2.2% 2.2% 127 147 175 4.0 3.4 590 62 37 3.8 661 BUY
SCUF 15.9% 13.8% 12.8% 3.2% 3.0% 2.6% 606 626 666 2.4 2.3 1501 66 99 2.5 1665 BUY
SHTF 14.1% 14.0% 14.1% 1.8% 1.9% 1.8% 396 392 416 2.4 2.2 927 227 210 1.7 708 SELL
SUF 16.9% 14.8% 13.7% 2.4% 2.3% 2.2% 262 299 326 3.4 3.0 1212 111 135 4.0 1464 BUY
Financials Strategy
Rs. bn Growth (%, yoy)
FY15 FY16BE FY16RE FY17BE FY16BE FY16RE FY17BE
Total receipt 16,637 17,775 17,854 19,781 6.8 7.3 10.8
Revenue receipt 11,015 11,416 12,061 13,770 3.6 9.5 14.2
Total tax receipt 12,449 14,495 14,596 16,309 16.4 17.2 11.7
Share of state, UT in Central taxes 3,413 5,296 5,121 5,768 55.2 50.1 12.6
Tax receipt for Centre 9,036 9,198 9,475 10,541 1.8 4.9 11.2
Direct taxes 7,075 7,980 7,520 8,471 12.8 6.3 12.6
Personal income tax 2,786 3,274 2,991 3,532 17.5 7.3 18.1
Corporate income tax 4,289 4,706 4,530 4,939 9.7 5.6 9.0
Indirect taxex 5,374 6,515 7,076 7,838 21.2 31.7 10.8
Customs duty 1,880 2,083 2,095 2,300 10.8 11.4 9.8
Excise duty 1,888 2,298 2,841 3,187 21.7 50.5 12.2
Services tax 1,680 2,098 2,100 2,310 24.9 25.0 10.0
Other tax (74) 36 39 41 -148.3 -153.3 4.4
Non-tax receipt 1,979 2,217 2,586 3,229 12.1 30.7 24.9
Interest 238 236 231 296 -0.9 -2.8 28.0
Dividend and profit 898 1,007 1,183 1,238 12.0 31.7 4.7
Other non-tax 842 975 1,172 1,695 15.7 39.1 44.7
Capital receipt 5,622 6,359 5,793 6,010 13.1 3.0 3.8
Net market borrowings 4,451 4,564 4,019 4,252 2.5 -9.7 5.8
Disinvestment of PSUs 377 695 253 565 84.2 -32.9 123.2
Receipts from small savings etc. 322 224 534 221 -30.5 65.8 -58.6
Recovery of loans 137 108 189 106 -21.7 37.6 -43.8
Other capital receipt 334 768 797 866 130.3 139.0 8.6
Total expenditure 16,637 17,775 17,854 19,781 6.8 7.3 10.8
Non-plan expenditure 12,010 13,122 13,082 14,281 9.3 8.9 9.2
Revenue expenditure 11,094 12,060 12,127 13,274 8.7 9.3 9.5
Interest payments 4,024 4,561 4,426 4,927 13.3 10.0 11.3
Defence 1,368 1,521 1,432 1,628 11.2 4.7 13.6
Explicit subsidies 2,583 2,438 2,578 2,504 -5.6 -0.2 -2.9
Others 3,119 3,539 3,690 4,215 13.5 18.3 14.2
Capital expenditure 916 1,062 955 1,006 15.9 4.2 5.4
Defence 819 946 814 863 15.5 -0.6 6.1
Others 97 116 141 143 18.9 44.9 1.2
Plan expenditure 4,626 4,653 4,772 5,500 0.6 3.1 15.3
Revenue expenditure 3,576 3,300 3,350 4,036 -7.7 -6.3 20.5
Central plan 1,001 1,397 1,332 1,761 39.6 33.2 32.1
States plan 2,575 1,904 2,018 2,276 -26.1 -21.7 12.8
Capital expenditure 1,050 1,353 1,422 1,464 28.8 35.4 2.9
Central plan 918 1,208 1,278 1,320 31.7 39.3 3.3
States plan 133 144 143 143 8.5 8 0.0
Gross fiscal deficit 5,107 5,556 5,351 5,339 8.8 4.8 -0.2
Revenue deficit 3,655 3,945 3,416 3,540 7.9 -6.5 3.6
Primary deficit 1,083 995 925 412 -8.1 -14.6 -55.4
Net market borrowings 4,469 4,564 4,019 4,252 2.1 -10.1 5.8
Gross fiscal deficit (% of GDP) 4.1 3.9 3.9 3.5 … … …
Revenue deficit (% of GDP) 2.9 2.8 2.5 2.3 … … …
Primary deficit (% of GDP) 0.9 0.7 0.7 0.3 … … …
Fiscal Arithmetic: FM has been realistic in taking tax assumptions; a
little aggressive on non-tax revenue
Source: India Budget, Spark Capital Research
Financials Strategy
Per capita income of 11mn central govt employees and pensioners to rise by ~1,45,000 per annum in FY17 over FY16
Seventh Pay Commission to result in 37% increase in salary and pension bill
Discretionary spending may flow to PV & CV industry
Source: GoI, Spark Capital Research
Salary and Pension bill of central government employees and recommendations of 7th Pay Commission
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
FY17
(Without
7th CPC)
FY17
(With 7th
CPC)
Net
increase
in FY17
over FY16
Absolute (Rs. bn)
Salary of central government employees 1,154 1,600 1,580 1,748 1,942 2,123 2,358 2,624 2,913 3,598 973
Pension of central government employees 473 777 778 847 961 1,045 1,154 1,284 1,425 1,762 478
Total Salary and Pension 1,627 2,377 2,359 2,595 2,903 3,168 3,512 3,908 4,338 5,360 1,451
Growth (%, yoy)
Salary of central government employees ... 38.6 -1.2 10.6 11.1 9.4 11.0 11.3 11.0 23.5 37.1
Pension of central government employees ... 64.4 0.1 8.8 13.4 8.7 10.4 11.3 11.0 23.6 37.2
Total Salary and Pension ... 46.1 -0.8 10.0 11.9 9.1 10.8 11.3 11.0 23.5 37.1
(As % of GDP)
Salary of central government employees 2.1 2.5 2.0 1.9 1.9 1.9 1.9 1.9 1.9 2.3 0.6
Pension of central government employees 0.8 1.2 1.0 0.9 1.0 0.9 0.9 0.9 0.9 1.1 0.3
Total Salary and Pension 2.9 3.7 3.0 2.9 2.9 2.8 2.8 2.8 2.8 3.5 0.9
Salary and Pension bill of state government employees
(Rs. bn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Salary of state government employees 1,055 1,086 1,236 1,359 1,742 2,338 2,173 3,238 3,545 3,949 4,661 5,253 6,566
Pensions of state government employees 374 406 469 561 654 832 1,083 1,278 1,448 1,638 1,869 2,057 2,572
Growth (%)
Salary of state government employees 5.3 3.0 13.8 10.0 28.2 34.2 -7.1 49.0 9.5 11.4 18.0 12.7 25.0
Pensions of state government employees 13.2 8.7 15.3 19.7 16.7 27.1 30.2 18.1 13.3 13.2 14.1 10.1 25.0
Per capita income of 11mn central
govt employees and pensioners to
rise by ~1,45,000 per annum in FY17
over FY16
Financials Strategy
Incremental stressed asset formation spikes to 8.0%
Page 65
5/25 refinancing: Old wine in a new bottle
Source: Spark Capital Research
RBI’s Asset quality review resulted in slippages hitting a new high
Source: Spark Capital Research
Restructured additions dry out as reg. forbearance ends
Source: Spark Capital Research
Overall stressed asset formation for coverage universe at 8.0%
Source: Spark Capital Research
2.7%
3.6%
2.5% 2.5% 2.7% 2.8% 2.7% 2.8% 2.9%2.6%
3.0%
6.9%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Q4F
Y13
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
Slippages annualised %
3.2%
1.6%
2.0%1.8%
2.2%
1.6%
1.2%1.5%
3.3%
0.8%
0.4%
0.0%0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Q4F
Y13
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
Restructured additions annualised %
2.0%
1.3%1.1%
0
0.005
0.01
0.015
0.02
0.025
Q4F
Y13
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
5/25 Refinancing annualized %
3.6%2.5% 2.5% 2.7% 2.8% 2.7% 2.8% 2.9% 2.6% 3.0%
6.9%
1.6%2.0% 1.8%
2.2% 1.6% 1.2% 1.5%
3.3%
0.8% 0.4%
0.0%
2.0% 1.3%
1.1%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Q1F
Y14
Q2F
Y14
Q3F
Y14
Q4F
Y14
Q1F
Y15
Q2F
Y15
Q3F
Y15
Q4F
Y15
Q1F
Y16
Q2F
Y16
Q3F
Y16
Slippages annualised % Restructured additions annualised %
5/25 Refinancing annualized %
Financials Strategy
Disclaimer
Page 66
Spark Disclaimer
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Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered
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Absolute
Rating
Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year
horizon
ADDStock expected to provide positive returns of >5% – <15% over a 1-year
horizonSELL Stock expected to fall >10% over a 1-year horizon
Financials Strategy
Disclaimer (Cont’d)
Page 67
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Disclosure of interest statement
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Associates of Spark Capital’s ownership more than 1% in the company covered No
Any other material conflict of interest at the time of publishing the research report No
Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:
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Investment banking/merchant banking/brokerage services
Products or services other than those above
In connection with research report
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