financials sector strategy fy17 - spark...

Financials Strategy

Financials Sector Strategy – FY17

March 2016

A year of Atonement

ABHINESH VIJAYARAJ [email protected] +91 44 4344 0006

GAUTAM SINGH [email protected] +91 22 4228 8152

NAVIN BABU E S [email protected] +91 44 4344 0065

NISHANT RUNGTA [email protected] +91 44 4344 0033

Financials Strategy

Financials Sector Strategy – FY17

A year of Atonement

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

ABHINESH VIJAYARAJ [email protected] +91 44 4344 0006

GAUTAM SINGH [email protected] +91 22 4228 8152

NAVIN BABU E S [email protected] +91 44 4344 0065

NISHANT RUNGTA [email protected] +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

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

… 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…


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


Substandard Doubtful - 1 Doubtful - 2 Doubtful - 3 LossFY10

3QFY16

Financials Strategy

FY17 Slippages to trend down…

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


Financials Strategy

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


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


… 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

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


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

Quantum of cases & amounts referred to recovery channels

e


Recoveries through LA, DRTs and SARFAESI at a decadal low…

e


Recovery infrastructure not keeping pace with stressed assets

… as DRTs which forms ~40% of amount referred…


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


2% 5%

81%

14%

33%24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


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%


Amount referred (%)

Lok Adalats Debt Recovery Tribunals SARFAESI

Financials Strategy

Then & Now:

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

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

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


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%

)


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

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.


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%


Consumer Price Inflation (%)

Financials Strategy

Industry has contributed to 47% of incremental growth over FY08-15

E


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)

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


Financials Strategy

Significant shift from T2 to T1 CAR

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


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


-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

Bankex returns are significantly correlated to the steepness of the yield curve

e


OIS rates currently indicate that rates are headed downward by ~20bps a year from now

e


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


Non-plan expenditure is estimated to grow at 9.2%...


…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


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


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


If crude oil prices remain at $30/bbl in FY17, India’s current account

balance would turn into surplus after 12 years


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

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

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.


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…


Subsidies continue to taper…


... resulting in gradual reduction in fiscal deficit…


… expected to contain net market borrowings


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

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

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


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


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


We expect kharif crop output to increase 3.4% yoy in Apr-Oct’16 vs. 3% fall

in Apr-Oct’15


Restocking of foodgrains, Higher MSP increase and higher agri output to support rural economy


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


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


Govt rural spend (MNREGA, PMGSY, AAY etc) which declined at -10.5%

CAGR after peaking in FY11, likely to increase 20% in FY17


Govt expedites the rural electrification project as no. of

electrified villages surged 187% in Apr-Oct


Higher govt rural spend, salary hike of govt employees due to 7th Pay Commission to be a fillip


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


Negative wealth effect at the play: Land prices have fallen ~20%

from the peak in FY16…


...while recent 20% surge in gold prices may partially offset the -ve

wealth effect, the sustainability of gold price uptrend is questionable


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


Weak construction activities and fall in land prices offset by surge in gold prices


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


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


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…


Significant lag on both growth and asset quality for rural focussed NBFCs


…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.


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


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


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


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


Growth for NBFCs focused on Rural to lag the turnaround


With internal and external challenges continuing to pose significant headwinds, we

believe return ratios will be muted in the medium term


• 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%


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%


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


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


Delhi NCR and Bangalore saw steep increase in unsold inventory levels in

last 1 year


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


Positive real interest rate to result in acceleration in financial savings


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


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


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


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


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%


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


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


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…


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


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


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


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


Despite the real estate slowdown, asset quality in HDFC’s and LICHF’s developer/

corporate book is still flat


Most companies have a significant exposure to risky segments – viz.

Developer / Corporate / LAP


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...


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


Passenger Cars Per 1000 People


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


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


LCV segment has also witnessed a growing preference to switch to the 2-

3.5 tonnage segment as against <2 tonnage segment…


Marked shift towards higher tonnage vehicles continues, >16 tonnage

currently at 65% against 53% in FY13


#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


PC and UV: Price hikes announced and lower discounts acted as a

dampener on volumes


2Wheeler: Reported flat growth in Jan, another weak month post a

disappointing Dec



#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)



#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


Given the used vehicle heavy portfolio SHTF benefits with a 3 year lag on growth; SUF faces growth challenges in the non-MHCV portfolio


SHTF’s loan growth has mirrored the under-achievement of road projects

implementation over the last four years


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%


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

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

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

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


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


Salary and Pension bill of central government employees and recommendations of 7th Pay Commission


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%

5/25 refinancing: Old wine in a new bottle


RBI’s Asset quality review resulted in slippages hitting a new high


Restructured additions dry out as reg. forbearance ends


Overall stressed asset formation for coverage universe at 8.0%


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

Spark Disclaimer

Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and

infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.

We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We

have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

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

with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure

advisory services.

This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should

be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of

companies referred to in this document.

Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies

referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This

document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,

copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in

any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital

and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to

a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This

material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.

Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this

document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or

deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit

investment banking or other business from, any company referred to in this report.

This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark

Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.

Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective

directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents

or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or

damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of

or reliance on this report.

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)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

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:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

Products or services other than those above

In connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under

the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange

Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities

discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne

by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you

if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available

to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material

concerning investment to you under relevant legislation and regulations;

financials sector strategy fy17 - spark...

Documents