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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

India I Equities Country

Daily

1 January 2013

India Morning Bell

All the latest research and data

India Financial Services – Strong profit growth on treasury gain, low provision. Despite modest loan growth and net interest income, we expect our BFSI coverage universe to see net profit rise 25.4% yoy in 3QFY13, led by ample treasury profits and lower NPA provisions, particularly for PSU banks. We expect profit growth of 16.2% yoy and 3.4% qoq for our NBFC coverage universe. Asset quality trends and loan restructuring would continue to be key monitorables for the sector. Among banks, we expect ICICI, IndusInd, Yes, BoI, Union, IOB, and City Union Bank to post higher profit growth. Among NBFCs, HDFC and M&M Financial Services are likely to fare better than peers. ►

TV18 Broadcast – Set for solid earnings leap; initiate with Buy. TV18 Broadcast (TV 18) is a leading TV network with strong brands in key genres. With its balance-sheet issues addressed and major network expansion behind, we expect investor focus to shift to its operational strengths and opportunities from cable-TV digitisation. We initiate coverage on TV18 with a Buy and Mar’14e target of `42. ►

Derivatives view. ►

Sensex: 19427

Nifty: 5905

India: Banking capital subdued in 2QFY13

-9-7-5-3-113579

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Banking capital Other capital

Source: The RBI

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Markets 31 Dec ’12 1 Day YTD Sensex 19427 -0.1% 25.7%Nifty 5905 -0.1% 27.7%Dow Jones 13104 1.3% 7.3%S & P 500 1426 1.7% 13.4%FTSE 5898 -0.5% 5.8%Nikkei* 10395 0.7% 0.0%Hang Seng* 22657 0.0% 0.0%

Volumes (US$m) 31 Dec’12 1 Day Avg '12Cash BSE 324 -19.5% 453Cash NSE 1,372 -22.6% 2,143Derivatives (NSE) 8,891 -33.2% 23,413

Flows (US$m) 31 Dec’12* MTD YTD FII – Cash Buy 287 12,053 125,688Sell 137 7,766 101,341Net 150 4,287 24,389FII - Derivatives Buy 983 69,703 907,401Sell 929 69,899 894,708Net 55 -196 11,977DII – Cash Buy 166 1,536 21,655Sell 202 2,015 25,285Net -37 -480 -3,711

Others 31 Dec ’12 1 Day YTD Oil Brent (US$/bbl)* 111.1 0.4% 7.8%Gold (US$/oz)* 1,675.1 0.0% 0.0%Steel (US$/MT) 582.5 0.0% -8.3%`/US$ 55.00 0.0% -3.5%US$/Euro* 1.32 -2.0% -0.2%Yen/US$* 86.74 -10.5% 0.0%Call Rate 9.00% 90bps 50bps10-year G-Secs 8.05% -5.8bps -51.7bpsEMBI spreads 248.34 -6.3bps -128.2bps@7:30am *Provisional Source: BSE, Bloomberg

1 January 2013 India Morning Bell

Anand Rathi Research India Equities

Market Data

Price Performance Price Performance Price Performance Top-5 gainers Top-5 gainers Top-5 gainersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

KARUR VYSYA BANK 560 10.1 21.7 KAVERI SEED 1291 11.3 0.1 LLOYDS STEEL IND 14 19.7 17.6

MADRAS CEMENTS 249 8.3 22.2 JK LAKSHMI CEMEN 163 10.8 21.6 ACL PROJECT LTD 32 14.5 112.8

INDIA TOURISM 1467 8.2 100.3 PHOENIX MILLS 259 8.4 21.4 AHMEDNAGAR FORGE 150 12.7 14.7

NHPC LTD 26 8.0 9.4 ARVIND LTD 101 8.2 16.2 SREELEATHERS LTD 248 12.3 0.0

BHARAT ELECTRON 1269 7.1 6.7 CHETTINAD CEMENT 979 8.0 21.7 SIMPLEX INFRASTR 245 9.6 35.6

Top-5 losers Top-5 losers Top-5 losersCompany CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%) Company CMP (INR) 1 wk (%) 1 Mth (%)

GODREJ CONSUMER 721 (3.2) 1.4 SREI INFRASTRUCT 42 (11.3) 25.5 SRS LTD 44 (9.2) 6.1

STRIDES ARCOLAB 1075 (3.0) (4.1) TUNI TEXTILE MIL 162 (10.2) (25.7) VIKAS WSP LTD 45 (9.0) (11.4)

INDUSIND BANK 415 (2.9) 5.3 AMTEK INDIA LTD 107 (9.0) 7.0 AANJANEY LIFE LT 746 (7.7) (5.3)

MMTC LTD 627 (2.8) (7.2) SIFY TECHNOL-ADR 105 (8.2) (0.7) TECHNO ELE & ENG 181 (7.0) (2.9)

L&T FINANCE HOLD 88 (2.3) 14.9 INDIAN INFOTECH 22 (6.8) 1.6 BRIGADE ENTERPRI 95 (6.9) 34.4

Volume Volume VolumeVolume spurts Volume spurts Volume spurtsCompany CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%) Company CMP (INR) 1 wk avg 1/4 wk (%)

BAJAJ FINSERV LT 907 829,102 163.1 RESPONSIVE IND L 92 146,263 270.2 ACL PROJECT LTD 32 1,006 291.4

BAJAJ FINANCE LT 1,353 357,100 127.9 FDC LTD 93 2,208,130 260.6 OUT OF CITY TRAV 91 56,813 236.2

NHPC LTD 26 35,285,624 108.5 CLARIANT CHEM 652 48,322 202.1 AHMEDNAGAR FORGE 150 156,299 219.6

INDIA TOURISM 1,467 68 98.5 AMTEK AUTO LTD 88 4,497,933 197.5 KRISHNA VENTURES 625 7 176.9

M&M FIN SERVICES 1,124 703,320 74.2 KSK ENERGY VENTU 62 649,642 181.5 LLOYDS STEEL IND 14 1,171,004 160.7

Technicals Technicals Technicals Above 200 DMA Above 200 DMA Above 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

INDIA TOURISM 1,467 322 355.1 JK LAKSHMI CEMEN 163 93 75.7 ACL PROJECT LTD 32 7 351.3

UNITED SPIRITS 1,899 1,012 87.5 JK CEMENTS LTD 358 210 70.1 VISESH INFOTECNI 28 7 286.4

L&T FINANCE HOLD 88 52 67.8 DB REALTY LTD 156 92 68.8 OUT OF CITY TRAV 91 34 165.9

UNITED BREWERIES 952 619 53.8 SREI INFRASTRUCT 42 26 60.4 SHREE NATH COMM 77 30 153.9

MOTHERSON SUMI 197 133 47.4 PENINSULA LAND 70.4 44.4 58.7 RASOYA PROTEINS 99 42 135.0

Below 200 DMA Below 200 DMA Below 200 DMACompany CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%) Company CMP (INR) 200D Avg (%)

HINDUSTAN COPPER 137 246 (44.4) JAYBHARAT TEXTIL 68 98 (31.3) GTL INFRASTRUCTU 4 8 (51.5)

GMR INFRASTRUCTU 19 23 (18.0) HEXAWARE TECHNOL 85 117 (27.8) SHREE GLOBAL TRA 38 72 (47.1)

MMTC LTD 627 738 (15.0) ASTRAZENECA PHAR 1,341 1,783 (24.8) ALOK INDUSTRIES 11 15 (28.3)

BHARAT FORGE CO 253 296 (14.7) MAKEMYTRIP LTD 678 897 (24.4) ELANTAS BECK IND 1,179 1,641 (28.2)

ABB LTD 701 764 (8.2) RUCHI SOYA INDUS 64 82 (21.7) BEML LTD 279 387 (27.9)

Large Caps Mid Caps Small Caps(>US$1bn) (US$250m-1bn) (US$100m-250m)

Source: Bloomberg


Financial Services

Results previewIndia I Equities

1 January 2013

India Financial Services Strong profit growth on treasury gain, low provision

Despite modest loan growth and net interest income, we expect our BFSI coverage universe to see net profit rise 25.4% yoy in 3QFY13, led by ample treasury profits and lower NPA provisions, particularly for PSU banks. We expect profit growth of 16.2% yoy and 3.4% qoq for our NBFC coverage universe. Asset quality trends and loan restructuring would continue to be key monitorables for the sector.

Modest NII growth. Banks’ business has been fairly subdued in the Sep-Dec quarter, with the latest available data showing slower growth in credit (16.3% yoy) and deposit (13.3% yoy). Credit-deposits for the sector rose 194bps yoy to 77.1%. Despite sluggish lending yields, NIMs for banks are likely to sustain at 2QFY13 levels, owing to reduction in banks’ CRR (25bps) and yoy rise in credit-to-deposit. We expect NII growth of 16.3% yoy and 8.1% qoq for our coverage universe.

Ample treasury profit. Over 3QFY13, both 10-year and 1-year G-Sec yields have fallen 12bps and 7bps, at 7.93% and 8.25%, respectively. This could lead to decent treasury gains for most banks. Slower loan growth and third-party distribution income could, however, result in weak fee-income. We expect non-interest income growth of 23.9% yoy and 12.8% qoq for our coverage universe.

NPA provision low yoy. Given weak macro-environment, we expect asset quality issues to persist for the sector, leading to further provisions for restructured loans and fresh slippages. Yet, these provisions could be lower yoy, as most PSU banks saw abnormally high slippages in 3QFY12. Hence, the favourable base effect for provisions would drive earnings growth, particularly for PSU banks.

Our take. Among banks, we expect ICICI, IndusInd, Yes, BoI, Union, IOB, and City Union Bank to post higher profit growth. Among NBFCs, HDFC and M&M Financial Services are likely to fare better than peers.

Underweight Sensex: 19427

Nifty: 5905

Bankex vs. Sensex

Bankex

Sensex240260280300320340360380400

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Source: Bloomberg

India select large-cap banks/NBFCs – 3QFY13 forecasts Company Net profit (`m) yoy chg (%) qoq chg (%) NII (`m) yoy chg (%) qoq chg (%) Axis Bank 13,448 22.0 19.7 24,945 16.5 7.2 Bank of Baroda 16,794 30.2 27.8 32,142 21.0 12.3 Bank of India 9,581 33.8 217.4 22,292 7.8 1.5 Canara Bank 10,023 14.5 51.6 21,759 13.4 11.2 HDFC Bank 18,297 28.0 17.3 38,842 24.7 4.1 ICICI Bank 22,445 29.9 14.7 33,413 23.2 (0.9)IDBI Bank 5,222 27.4 8.0 12,021 13.5 (3.8)Punjab National Bank 12,561 9.2 17.9 39,274 11.1 7.6 State Bank of India 38,189 17.0 4.4 121,050 5.6 10.3 Union Bank 6,783 244.3 22.3 20,636 15.9 11.5 HDFC 11,481 17.0 (0.3) 12,476 15.0 (5.4)IDFC 5,050 32.5 6.2 6,401 17.2 (2.4)Large-cap universe 169,873 25.6 18.8 385,251 13.0 6.6Source: Anand Rathi Research Note: Prices as on 28 Dec’ 2012

1 January 2013 India Financial Services – Strong profit growth on treasury gain, low provision

Anand Rathi Research 2

Fig 1 – Our financial services coverage universe: 3QFY13 forecasts Company Bloomberg code NII (`m) yoy (%) qoq (%) PPP* (`m) yoy (bps) qoq (bps) PAT (`m) yoy (%) qoq (%)

Axis Bank AXSB IN 24,945 16.5 7.2 24,215 17.6 11.2 13,448 22.0 19.7

HDFC Bank HDFCB IN 38,842 24.7 4.1 30,141 26.7 17.2 18,297 28.0 17.3

ICICI Bank ICICIBC IN 33,413 23.2 (0.9) 33,676 25.3 5.5 22,445 29.9 14.7

IndusInd Bank IIB IN 5,357 24.4 5.1 4,458 27.6 6.2 2,665 29.4 6.5

Yes Bank YES IN 5,582 30.6 6.5 5,259 31.9 8.5 3,309 30.2 8.1

New Private Banks 108,140 22.5 3.3 97,748 24.2 10.5 60,164 27.5 15.8

Andhra Bank ANDB IN 10,823 10.0 21.1 8,100 5.5 26.9 3,987 31.5 22.4

BOB BOB IN 32,142 21.0 12.3 26,123 0.2 9.6 16,794 30.2 27.8

BOI BOI IN 22,292 7.8 1.5 18,225 5.2 (1.7) 9,581 33.8 217.4

Canara Bank CBK IN 21,759 13.4 11.2 16,850 6.9 31.4 10,023 14.5 51.6

IDBI IDBI IN 12,021 13.5 (3.8) 10,477 27.1 (11.2) 5,222 27.4 8.0

Indian INBK IN 13,320 13.8 18.9 10,532 15.5 15.9 6,254 18.9 25.9

IOB IOB IN 15,435 26.4 23.9 10,756 30.8 33.3 4,447 310.8 180.7

PNB PNB IN 39,274 11.1 7.6 28,859 7.8 13.9 12,561 9.2 17.9

SBI SBIN IN 121,050 5.6 10.3 87,512 20.5 19.0 38,189 17.0 4.4

Union Bank UNBK IN 20,636 15.9 11.5 15,388 19.8 20.9 6,783 244.3 22.3

Vijaya Bank VJYBK IN 5,481 15.5 21.8 3,545 17.5 65.6 1,607 29.3 30.3

PSU Banks 314,232 10.9 10.5 236,367 13.8 15.7 115,448 28.8 26.3

City Union Bank CUBK IN 1,583 28.9 6.0 1,326 26.4 3.4 991 37.2 23.2

DCB DEVB IN 712 19.4 6.4 286 27.2 8.1 209 33.3 (5.8)

Federal Bank FB IN 5,750 8.9 13.6 4,315 3.1 23.4 2,411 19.4 12.1

ING Vysya Bank VYSB IN 3,890 20.2 5.5 2,641 25.0 16.0 1,564 30.8 4.1

J&K Bank J&KBK IN 5,510 22.2 (0.3) 4,024 24.4 (4.8) 2,425 13.8 (10.0)

Karnataka Bank KBL IN 2,400 28.4 3.1 1,664 59.9 4.8 888 23.2 (24.3)

Karur Vysya Bank KVB IN 3,344 42.5 17.0 2,467 30.0 27.0 1,411 13.0 6.3

South Indian Bank SIB IN 3,285 20.1 10.3 2,145 19.8 7.4 1,168 14.3 20.2

Old Private Banks 26,474 21.4 7.6 18,870 21.4 10.5 11,067 20.1 2.0

Banks Universe 448,846 14.1 8.5 352,985 16.9 13.9 186,679 27.8 21.0

REC RECL IN 13,183 31.2 3.0 13,339 25.5 4.1 9,805 27.4 2.8 PFC POWF IN 15,381 41.7 4.9 15,147 2.8 5.4 10,491 (5.3) 1.2 Bajaj Finance BAF IN 4,938 42.1 26.3 2,759 29.4 13.2 1,432 19.4 11.3

Cholamandalam Inv CIFC IN 2,621 42.8 7.7 1,326 32.6 5.5 658 60.1 (4.8)

HDFC HDFC IN 12,476 15.0 (5.4) 15,203 14.0 (2.1) 11,481 17.0 (0.3)

IDFC IDFC IN 6,401 17.2 (2.4) 7,595 20.0 4.6 5,050 32.5 6.2

Magma Fincorp MGMA IN 1,763 81.1 10.7 791 165.6 25.8 380 173.4 34.5

M&M Fin Services MMFS IN 5,969 42.9 13.5 4,110 47.0 13.3 2,020 30.6 7.7

Shriram City Union SCUF IN 4,248 56.5 5.1 2,716 61.3 7.7 1,142 36.8 5.8

Shriram Transport SHTF IN 9,591 19.3 19.1 7,548 16.8 15.6 3,555 17.5 15.4

NBFCs 76,545 31.0 5.6 70,499 18.7 5.2 45,980 16.2 3.4 Financial Services coverage universe 525,391 16.3 8.1 423,484 17.2 12.4 232,658 25.4 17.1 Source: Anand Rathi Research *PPP = pre-provisioning profit



Modest NII growth Banks’ business has been fairly subdued in the Sep-Dec quarter, with latest available data showing slower credit (16.3% yoy) and deposit growth (13.3% yoy). Credit-deposit for the sector rose 194bps yoy to 77.1% and appears quite stretched. The incremental credit-deposit in FY13 (80.2%) has been much higher than that in FY12 (69.7%).

Despite sluggish lending yields, NIMs for banks are likely to sustain at 2QFY13 levels, owing to reduction in bank CRR (25bps) and yoy rise in credit-deposit. Banks kept base rates steady during the quarter, which should reflect in sturdy lending yields over Sep-Dec 2012. Hence, we expect NII growth of 14.1% yoy and 8.5% qoq for our banks coverage universe.

Fig 2 – Credit offtake and deposit growth (`bn) YTDFY13 YTD FY12 16 Dec ’12 14 Dec’11 % chg

Incremental credit 2,579 3,262 Credit 49,626 42,683 16.3

Incremental deposits 3,215 4,683 Deposits 64,339 56,763 13.3

Incremental credit/deposits 80.2 69.7 Credit/Deposits 77.1 75.2 194bps

Source: RBI, Anand Rathi Research

Fig 3 – Declining credit and deposit growth

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Fig 4 – Credit-deposit stretched

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Fig 5 – Falling, yet high, investment-deposits

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Weak fee income, ample treasury profits We expect non-interest income for our coverage universe to be modest, primarily driven by better treasury income. Over 3QFY13, both 10-year G-Sec and 1-year G-Sec yields have declined 12bps and 7bps to 7.93% and 8.25%, respectively. This could lead to decent treasury gains for most banks.

Fig 6 – G-Sec yields 29 Sep ’12 27 Dec ’12 Change (bps)

10-year G-Sec 8.35 8.23 -12

5-year G-Sec 8.20 8.12 -8

1-year G-Sec 7.98 7.91 -7

Source: Bloomberg, Anand Rathi Research

Slower loan growth during the quarter should result in comparable growth in fee-based income. Similarly, third-party distribution income is unlikely to see significant traction during the quarter. We expect non-interest income growth of 23.9% yoy and 12.8% qoq for our banks coverage universe. Non-interest income is likely to comprise 27.6% of total income (NII + non-interest income) in 3QFY13, a tad better than 26% registered in 3QFY12.

Fig 7 – G-Sec yields over 3QFY13 have fallen

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NPA provisions to remain high, but reduce yoy IIP growth is decelerating and is expected to rebound only by end-FY13. There appears to be a strong correlation between NPA accretion and IIP growth. On most occasions in the past, sliding IIP growth led to an increase in NPA levels and vice-versa. While the Indian economy is facing decelerating IIP growth, our chief economist expects it to rebound in 2HFY13 and grow 4.6% in FY13, as manufacturing activities would pick up during festivity and then improve gradually. The likely improvement in industrial production growth would, hence, lead to lower NPA levels in 2HFY13, due to the lag effect of IIP on NPA formation.

Fig 8 – IIP growth, declining since Mar’10, saw a small uptick in 2QFY13

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Asset quality trends and loan restructuring would continue to be key monitorables. Given the weak macro-environment, we expect asset quality issues to persist for the sector in 3QFY13, leading to further provisions for restructured loans and fresh slippages (see fig. 10). Yet, these provisions are likely to be lower yoy, as most banks saw abnormally high slippages in 3QFY12. Hence, the favourable base effect for provisions would drive earnings growth, particularly for PSU banks.

Private banks are likely to report lower credit costs, since their NPA coverage is higher than PSU banks and incremental loan defaults are estimated to be lower than PSU banks. We expect profit growth of 27.8% yoy and 21% qoq for our banks coverage universe.

Fig 9 – NPA formation correlation with IIP growth (three-month)

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Fig 10 – Incremental NPA vs Bankex (three-month)

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Source: Capitaline, RBI, Anand Rathi Research

NBFCs to post healthy profits For our NBFC coverage universe, we estimate NII to grow 22.2% yoy, 5.1% qoq. We do not expect erosion in margins, due to improvement in system liquidity conditions in the latter half of 2QFY13 and, hence, the decrease in wholesale borrowing costs. With largely stable economic activity during the quarter, we do not expect negative surprises on asset quality for asset-financing NBFCs, particularly M&M Financial Services and Shriram Transport Finance. During the quarter, RBI released draft norms on capital adequacy and NPA recognition norms. The final guidelines on both the issues are non-disruptive and unlikely to impact earnings. We expect profit growth of 16.2% yoy and 3.4% qoq for our NBFC coverage universe.

Asset finance companies

Retail asset finance companies (AFCs) have delivered strong performance both in terms of growth as well as asset quality in the current cycle. Among the AFCs under coverage, we expect MMFS to report healthy growth in assets under management (AUM) due to its multi-product strategy, while for SHTF, growth is likely to remain sluggish. While NIM is likely to be stable qoq, asset quality would be the key monitorable, due to slowdown in commercial vehicle, tractor and passenger vehicle sales.

Infrastructure finance companies

For the major infrastructure finance companies (IFCs) - IDFC, POWF and RECL - we expect robust loan growth and the decline in wholesale borrowings to cushion NIMs. Overall, we expect margins to be stable qoq. While SEB restructuring is underway, asset quality remains the key monitorable in the current macro-environment.

Our take Among banks, we expect ICICI, IndusInd, Yes Bank, BoI, Union, IOB, and City Union Bank to post higher profit growth. Among NBFCs, HDFC and M&M Financial Services are likely to fare better than peers.


Banks


`

1 January 2013

Axis Bank

Modest core earnings to be offset by lower NPA provisions; Buy

Axis Bank’s 3QFY13 profit is likely to be driven by lower NPA provisions yoy. We have a Buy rating, as the bank’s retail-asset focus, better deposit franchise and stable asset quality are likely to help it sustain 1.6% RoA over FY12-15.

Retail segment to drive business growth. Loan growth is likely to be tepid at 21% yoy, in line with the past three-quarter average of 21.4%. Retail loans are likely to be the key growth driver, with their share in overall loans expected to be 25%.

Likely stable NIM, modest fee income. NIM is likely to marginally increase qoq, from 3.46% to 3.5% in 3QFY13, led by stable asset yields and a higher credit-to-deposit (73.1% in Sep ’12). Net interest income is likely to grow at 16.5% yoy, slower than credit growth. Fee income is estimated to grow at 16% yoy, primarily led by the retail segment.

Lower NPA provisions yoy. Asset quality stress is likely to persist, with fresh slippages and likely addition of `10-12bn to restructured loans. Hence, credit costs are estimated at 90-100bps.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in FY13 exceeding the current guidance of `50-55bn; (2) NIM trajectory ahead compared with guidance of 3.25-3.50% in FY13.

Valuation. At our Mar’14 target, the stock would trade at a PBV of 2x FY13e and 1.7x FY14e. Our price target is based on the two-stage DDM (CoE: 17.2%; beta: 1.3; Rf: 8%). Risk. Slower-than-expected economic growth could impact loan growth and credit quality.

Rating: Buy Target Price: `1,317 Share Price: `1,360

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 37.3 37.3 37.4- of which, Pledged - - -Free Float 62.7 62.7 62.6- Foreign Institutions 32.8 27.3 32.9- Domestic Institutions 13.1 13.9 13.4- Public 16.9 21.5 16.3

Quarterly results (YE: Mar) 1HFY12 1HFY13 % yoy 3QFY12 3QFY13e % yoy

Net interest income (`m) 37,314 45,068 20.8 21,403 24,945 16.5

Non-interest income (`m) 24,028 29,286 21.9 14,298 17,576 22.9

Operating expenses (`m) 28,000 32,934 17.6 15,109 18,307 21.2

Cost-to-income (%) 45.6 44.3 (135)bps 42.3 43.1 73bps

Pre-provisioning profit (`m) 33,341 41,419 24.2 20,592 24,215 17.6 Provisions (`m) 5,814 7,683 32.1 4,223 4,291 1.6 PBT (`m) 27,527 33,737 22.6 16,369 19,924 21.7

Tax (`m) 8,900 10,966 23.2 5,346 6,475 21.1

PAT (`m) 18,627 22,771 22.2 11,023 13,448 22.0

EPS (`) 44.8 54.7 22.1 26.7 32.4 21.2

Source: Company, Anand Rathi Research

Financials (YE: Mar) FY13e FY14e

Net interest income (`m) 94,518 114,685 Net profit (`m) 51,470 64,054 EPS (`) 123.9 153.5 Growth (%) 20.7 23.8 PE (x) 11.0 8.9PABV (x) 2.1 1.8RoE (%) 20.7 21.6 RoA (%) 1.6 1.6 Dividend yield (%) 1.4 1.7Net NPA (%) 0.3 0.3Source: Anand Rathi Research

Key data AXSB IN / AXBK.BO52-week high / low `1,379 / `784 Sensex / Nifty 19445 / 59083-m average volume US$41.5m Market cap `581bn / US$10.6bn Shares outstanding 414.5m

1 January 2013 Axis Bank – Modest core earnings to be offset by lower NPA provisions; Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net interest income 65,630 80,177 94,518 114,685 141,504 NII growth (%) 31.1 22.2 17.9 21.3 23.4 Non-interest inc 46,321 54,202 66,325 81,985 100,444 Total income 111,951 134,380 160,843 196,671 241,948 Total Inc growth (%) 25.1 20.0 19.7 22.3 23.0 Op. expenses 47,794 60,071 70,288 84,765 102,484 Operating profit 64,157 74,309 90,554 111,906 139,464 Op profit growth (%) 22.4 15.8 21.9 23.6 24.6 Provisions 12,797 11,430 14,303 17,011 21,317 PBT 51,360 62,878 76,251 94,895 118,147 Tax 17,475 20,456 24,782 30,841 38,398 PAT 33,885 42,422 51,470 64,054 79,749 PAT growth (%) 34.8 25.2 21.3 24.4 24.5 FDEPS (`/share) 82.5 102.7 123.9 153.5 190.1 DPS (`/share) 14.0 15.9 19.2 23.8 29.5 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital 4,105 4,132 4,153 4,173 4,194 Reserves & surplus 185,883 223,953 266,082 318,496 383,753 Deposits 1,892,378 2,201,043 2,788,104 3,508,364 4,414,887 Borrowings 344,767 427,149 481,693 543,465 613,455 Minority interests - - - - -Total liabilities 2,427,134 2,856,278 3,540,031 4,374,498 5,416,289 Advances 1,424,078 1,697,595 2,105,018 2,631,273 3,289,091 Investments 719,916 931,921 1,115,241 1,368,262 1,589,359 Cash & bank bal 214,087 139,339 213,571 243,729 375,350 Fixed & other assets 69,053 87,423 106,201 131,235 162,489 Total assets 2,427,134 2,856,278 3,540,031 4,374,498 5,416,289 No. of shares (m) 411 413 415 417 419 Deposits growth (%) 33.9 16.3 26.7 25.8 25.8 Advances growth (%) 36.5 19.2 24.0 25.0 25.0 Source: Company, Anand Rathi Research

Fig 3 – Key ratios Year-end: Mar FY11 FY12 FY13e FY14e FY15e

NIM (%) 3.2 3.1 3.0 3.0 3.0 Other inc / total inc (%) 41.4 40.3 41.2 41.7 41.5 Cost-income (%) 42.7 44.7 43.7 43.1 42.4 Provision coverage (%) 74.3 74.8 71.2 72.0 73.0 Dividend payout (%) 16.9 15.5 15.5 15.5 15.5 Credit-deposit (%) 75.3 77.1 75.5 75.0 74.5 Investment-deposit (%) 38.0 42.3 40.0 39.0 36.0 Gross NPA (%) 1.1 1.1 1.1 1.0 1.0 Net NPA (%) 0.3 0.3 0.3 0.3 0.3 BV (`) 462.8 552.0 650.7 773.1 924.9 Adj BV (`) 452.8 541.0 634.7 755.9 904.7 CAR (%) 12.7 13.7 12.7 12.2 11.7 - Tier 1 (%) 9.4 9.4 9.0 8.6 8.3RoE (%) 19.3 20.3 20.7 21.6 22.4 RoA (%) 1.6 1.6 1.6 1.6 1.6 Source: Company, Anand Rathi Research

Fig 4 – PE band

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Fig 5 – Price-to-book band

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Fig 6 – Axis Bank vs. Bankex

AXSB

Bankex700

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900

1,000

1,100

1,200

1,300

1,400

Jan-

12

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12

Mar

-12

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2

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-12

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Source: Bloomberg


Banks


`

1 January 2013

HDFC Bank

Robust business, asset quality keep hopes high; Hold

Strong credit growth, healthy fees and robust asset quality are likely to drive earnings growth of 28% yoy in 3QFY13. We like the bank for its strong fundamentals and consistent profit growth over the past five years. Nevertheless, we have a Hold rating, as the stock appears fairly valued at 4x FY14e BV.

Retail segment to drive business growth. Loan growth is likely to be strong at 23% yoy, higher than system credit growth. Retail loans are likely to be the key growth driver, with their share in overall loans expected to be over 50%.

Likely stable NIM, healthy fee-income. NIM is likely to increase 10bps qoq to 4.3% in 3QFY13, led by stable asset yields and a higher credit-to-deposit (84.5% in Sep ’12). Net interest income is likely to grow at 24.7% yoy, faster than credit growth. Fee income is estimated to grow at 20% yoy, led by traction in foreign exchange related income.

Lower NPA provisions yoy. Asset quality is likely to remain robust, with NPA coverage expected to sustain above 80%. Hence, credit costs are estimated to be lowat 30-40bps.

Key monitorables. Management outlook on: (1) Overall loan growth relative to the sector and key drivers; (2) low-cost deposits (CASA) mobilization; (3) NIM trajectory ahead against the guidance of 4.0-4.3% in FY13; and (4) retail asset quality, given the bank’s strong retail loan growth.

Valuation. At our Mar’14 target, the stock would trade at PBV of 4.6x FY13e and 3.9x FY14e. Downside/upside risks. Slower-than-estimated economic growth, lower credit costs.

Rating: Hold Target Price: `685 Share Price: `678






Cost-to-income (%) 48.8 48.9 13 bps 47.6 46.9 (72)

Pre-provisioning profit (`m) 41,592 51,523 23.9 23,780 30,141 26.7

Provisions (`m) 8,097 7,802 (3.6) 3,292 2,832 (14.0)

PBT (`m) 33,495 43,721 30.5 20,488 27,309 33.3

Tax (`m) 10,651 13,947 30.9 6,191 9,012 45.6

PAT (`m) 22,843 29,774 30.3 14,297 18,297 28.0

EPS (`) 9.7 12.5 28.9 30.5 38.5 26.2



Net interest income (`m) 152,801 189,935 Net profit (`m) 66,954 86,292 EPS (`) 28.2 36.0 Growth (%) 28.0 27.5 PE (x) 24.0 18.8 PABV (x) 4.6 3.9 RoE (%) 20.6 22.5 RoA (%) 1.8 1.9 Dividend yield (%) 0.8 1.0 Net NPA (%) 0.2 0.1 Source: Anand Rathi Research

Key data HDFCB IN / HDBK.BO52-week high / low `706 / `420 Sensex / Nifty 19445 / 59083-m average volume US$65.9m Market cap `1,605bn / US$29.3bn Shares outstanding 2,362m

1 January 2013 HDFC Bank – Robust business, asset quality keep hopes high; Hold




Net interest income 105,431 122,968 152,801 189,935 238,069 NII growth (%) 25.7 16.6 24.3 24.3 25.3 Non-interest inc 43,352 52,437 65,975 82,531 100,726 Total income 8.8 21.0 25.8 25.1 22.0 Total Inc growth (%) 148,783 175,405 218,776 272,467 338,795 Op. expenses 71,529 85,901 103,854 127,311 155,168 Operating profit 77,254 89,504 114,922 145,155 183,627 Op profit growth (%) 20.2 15.9 28.4 26.3 26.5 Provisions 19,067 14,373 15,731 17,315 19,710 PBT 58,187 75,132 99,191 127,841 163,917 Tax 18,923 26,063 32,237 41,548 53,273 PAT 39,264 49,069 66,954 86,292 110,644 PAT growth (%) 33.2 31.6 29.6 28.9 28.2 FDEPS (`/share) 16.9 22.0 28.2 36.0 45.6 DPS (`/share) 3.3 4.3 5.5 7.0 8.9 Source: Company, Anand Rathi Research




NIM (%) 4.4 4.3 4.4 4.4 4.5 Other inc / total inc (%) 29.1 29.9 30.2 30.3 29.7 Cost-income (%) 48.1 49.0 47.3 46.7 45.8 Provision coverage (%) 82.5 82.4 82.7 83.3 84.0 Dividend payout (%) 19.6 19.5 19.6 19.6 19.6 Credit-deposit (%) 76.7 79.2 78.0 77.0 76.0 Investment-deposit (%) 34.0 39.5 38.5 37.0 37.0 Gross NPA (%) 1.1 1.0 0.9 0.8 0.7 Net NPA (%) 0.2 0.2 0.2 0.1 0.1 BV (`) 109.1 127.5 147.7 173.9 207.3 Adj BV (`) 107.8 126.0 146.1 172.2 205.6 CAR (%) 16.2 16.5 16.3 15.9 15.2 - Tier 1 (%) 12.2 11.6 11.5 11.3 11.1 RoE (%) 16.7 18.7 20.6 22.5 24.1 RoA (%) 1.6 1.7 1.8 1.9 2.0 Source: Company, Anand Rathi Research

Fig 4 – PE band

HDFCB

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HDFCB

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Fig 6 – HDFC Bank vs. Bankex

HDFCB

Bankex370

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470

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570

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720

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12

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12

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-12

Apr-1

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Source: Bloomberg


Banks


`

1 January 2013

ICICI Bank

Robust business, improving NIM and asset quality; Buy

Stronger credit growth, healthy fees and robust asset quality could drive earnings growth of 28% yoy in 3QFY13. We have a Buy rating, as we expect RoA of 1.6% over FY13-15, led by better NIM and stable credit costs.

Higher-than-system credit growth. Loan growth is likely to be 20% yoy, higher than system credit growth. Domestic corporate loans are likely to be the key growth driver, with their share in overall loans expected to be ~29%.

Better NIM, healthy fee-income likely. NIM is likely to increase 30bps yoy, flat qoq to 3% in 3QFY13, led by stable asset yields and a higher domestic credit-to-deposit (77.1% in Sep ’12). Net interest income is likely to grow at 23.2% yoy, faster than credit growth. Fee income is estimated to grow at 18% yoy, led by traction in domestic corporate loans and foreign exchange related income.

No negative NPA surprises. Asset quality is likely to remain stable, with fresh NPA additions and loan restructuring expected to be low. Hence, credit costs are estimated to be between 60-70bps.

Key monitorables. Management outlook on: (1) Low-cost deposits (CASA) mobilization; (2) NIM trajectory ahead compared to the guidance of 3% in FY13; and (3) corporate asset quality, given the bank’s strong domestic corporate growth.

Valuation. We value the standalone bank at `1,014, based on the two-stage DDM (CoE: 17.9%; beta: 1.4; Rf: 8%) and the subsidiaries at `248, resulting in a price target of `1,262. Risk. Slower-than-expected economic growth could impact loan growth and credit quality.


Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters - - -- of which, Pledged - - -Free Float 100.0 100.0 100.0

- Foreign Institutions 36.4 34.9 35.8- Domestic Institutions 25.4 27.8 26.8- Public 38.2 37.3 37.4





Cost-to-income (%) 44.7 41.4 (330)bps 41.6 39.8 (182)bps

Pre-provisioning profit (`m) 45,878 61,426 33.9 26,871 33,676 25.3 Provisions (`m) 7,727 9,738 26.0 3,411 4,143 21.5 PBT (`m) 38,151 51,688 35.5 23,460 29,532 25.9

Tax (`m) 9,797 13,977 42.7 6,179 7,088 14.7

PAT (`m) 28,354 37,712 33.0 17,281 22,445 29.9

EPS (`) 24.5 32.6 33.1 15.0 19.4 29.6



Net interest income (`m) 129,863 152,233 Net profit (`m) 82,307 97,022 EPS (`) 71.3 84.0 Growth (%) 27.3 17.9 PE (x) 16.0 13.6PABV (x) 2.0 1.9RoE (%) 12.9 13.9 RoA (%) 1.6 1.7 Dividend yield (%) 2.0 2.3 Net NPA (%) 0.6 0.5 Source: Anand Rathi Research

Key data ICICIBC IN / ICBK.BO52-week high / low `1,159 / `677 Sensex / Nifty 19445 / 59083-m average volume US$73.6m Market cap `1,313bn / US$23.9bn Shares outstanding 1,153.1m

1 January 2013 ICICI Bank – Robust business, improving NIM and asset quality; Buy




Net interest income 90,169 107,342 129,863 152,233 176,924NII growth (%) 11.1 19.0 21.0 17.2 16.2Non-interest inc 66,479 75,028 85,168 95,916 106,254Total income (11.1) 12.9 13.5 12.6 10.8Total Inc growth (%) 156,648 182,369 215,031 248,149 283,178Op. expenses 66,172 78,504 89,238 101,245 116,103Operating profit 90,475 103,865 125,793 146,905 167,075Op profit growth (%) (7.0) 14.8 21.1 16.8 13.7Provisions 22,898 15,891 17,495 19,244 23,170PBT 67,577 87,973 108,299 127,660 143,905Tax 16,063 21,874 25,992 30,639 34,537PAT 51,514 66,099 82,307 97,022 109,368PAT growth (%) 28.0 25.5 27.3 17.9 12.7FDEPS (`/share) 44.7 56.0 71.3 84.0 94.7DPS (`/share) 14.0 16.5 21.4 25.2 28.4Source: Company, Anand Rathi Research


Share capital 11,521 11,552 11,552 11,552 11,552Reserves & surplus 3,500 3,500 3,500 3,500 3,500Deposits 539,388 592,501 652,956 715,924 786,903Borrowings 2,256,021 2,555,000 2,989,454 3,600,483 4,365,586Minority interests 1,251,906 1,573,919 1,661,403 1,827,544 2,010,298Total liabilities 4,062,337 4,736,471 5,318,865 6,159,002 7,177,839 Advances 2,163,659 2,537,277 2,929,665 3,492,469 4,190,963Investments 1,346,860 1,595,600 1,808,620 1,944,261 2,095,481Cash & bank bal 340,901 362,293 314,638 414,322 532,503Fixed & other assets 210,917 241,301 265,943 307,950 358,892Total assets 4,062,337 4,736,471 5,318,865 6,159,002 7,177,839No. of shares (m) 1,152 1,155 1,155 1,155 1,155Deposits growth (%) 11.7 13.3 17.0 20.4 21.3Advances growth (%) 19.4 17.3 15.5 19.2 20.0Source: Company, Anand Rathi Research


NIM (%) 2.5 2.6 2.7 2.8 2.8Other inc / total inc (%) 42.4 41.1 39.6 38.7 37.5Cost-income (%) 42.2 43.0 41.5 40.8 41.0Provision coverage (%) 76.0 80.4 82.4 83.3 84.2Dividend payout (%) 31.3 29.4 30.0 30.0 30.0Credit-deposit (%) 95.9 99.3 98.0 97.0 96.0Investment-deposit (%) 59.7 62.5 60.5 54.0 48.0Gross NPA (%) 4.6 3.7 3.5 3.1 2.8Net NPA (%) 1.1 0.7 0.6 0.5 0.4BV (`) 478.2 522.9 575.3 629.8 691.2Adj BV (`) 457.3 506.8 559.8 613.9 675.0 CAR (%) 19.9 19.6 18.9 17.9 16.9 - Tier 1 (%) 12.7 12.8 12.5 11.9 11.2RoE (%) 9.6 11.1 12.9 13.9 14.3RoA (%) 1.3 1.5 1.6 1.7 1.6Source: Company, Anand Rathi Research

Fig 4 – PE band

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Fig 6 – ICICI Bank vs. Bankex

ICICIBC

Bankex600

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Source: Bloomberg


Banks


`

1 January 2013

IndusInd Bank

Robust business; stable NIM, asset quality; Buy

Higher credit growth, healthy fees and robust asset quality could drive earnings growth of 29% yoy for IndusInd Bank in 3QFY13. We have a Buy rating, as we expect the bank’s RoE to expand, led by sturdy NIM, improving fee-income share and healthy asset quality.

Higher-than-system credit growth. Loan growth is likely to be 30% yoy, in line with the past four-quarter average of 31%. Retail loans are likely to be the key growth driver, with their share in overall loans expected to be over 50%.

Better NIM owing to strong CASA. NIM is likely to increase 5bps qoq to 3.3% in 3QFY13, led by stable asset yields and a high credit-to-deposit (82.5% in Sep ’12). Also, strong traction in savings deposits (likely to be of ~40% of total low-cost deposits) is expected to support NIM.

Strong asset quality likely to persist. Asset quality is likely to remain stable, with fresh NPA additions and loan restructuring expected to be lower, and NPA coverage estimated to hover above 70%. On average, NPA additions were 1.3% of loans over 1HFY13. Credit cost is estimated at 50-60bps.

Key monitorables. Management outlook on: (1) Low-cost deposit (CASA) mobilization, particularly savings deposits; (2) fee-based income growth; and (3) asset quality, given the bank’s strong growth in commercial vehicle loans.

Valuation. At our Mar’14 target, the stock would trade at a PBV of 3.6x FY13e and 3x FY14e. Our target is based on the two-stage DDM (CoE: 15.8%; beta: 1.1; Rf: 8%). Risk. Slower-than-expected economic growth could impact loan growth and credit quality.

Rating: Buy Target Price: `432 Share Price: `415






Cost-to-income (%) 49.0 49.6 57bps 49.8 49.3 (47)bps

Pre-provisioning profit (`m) 6,447 8,239 27.8 3,492 4,458 27.6 Provisions (`m) 916 1,026 12.0 428 509 18.9 PBT (`m) 5,531 7,213 30.4 3,064 3,948 28.9

Tax (`m) 1,799 2,348 30.5 1,005 1,283 27.7

PAT (`m) 3,733 4,865 30.3 2,060 2,665 29.4

EPS (`) 7.9 10.2 29.8 4.4 5.7 29.2




Key data IIB IN / INBK.BO52-week high / low `436 / `222 Sensex / Nifty 19445 / 59083-m average volume US$3.3m Market cap `217bn / US$4bn Shares outstanding 470m

1 January 2013 IndusInd Bank – Robust business; stable NIM, asset quality; Buy






Share capital 4,660 4,677 5,216 5,242 5,269 Reserves & surplus 35,842 42,740 70,819 81,888 96,102 Deposits 343,654 423,615 571,413 773,360 1,047,350 Borrowings 72,203 104,928 119,762 136,730 156,144 Minority interests - - - - -Total liabilities 456,358 575,961 767,210 997,220 1,304,865 Advances 261,656 350,640 462,844 610,954 806,460 Investments 135,508 145,719 185,709 239,742 314,205 Cash & bank bal 40,246 55,396 84,132 101,649 125,481 Fixed & other assets 18,948 24,206 34,524 44,875 58,719 Total assets 456,358 575,961 767,210 997,220 1,304,865 No. of shares (m) 466 468 522 524 527 Deposits growth (%) 28.7 23.3 34.9 35.3 35.4 Advances growth (%) 27.3 34.0 32.0 32.0 32.0 Source: Company, Anand Rathi Research



Fig 4 – PE band

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8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – IndusInd Bank vs. Bankex

IIB

Bankex

200

250

300

350

400

450

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Yes Bank

CASA and NIM to rise, low credit costs to sustain; Buy

Higher credit growth and persistent low credit costs are likely to drive earnings growth of 29% yoy in 3QFY13. We have a Buy rating, as the bank could sustain ~1.5% RoA over FY13-15, led by its expanding branch network, stable margin and healthy asset quality.

Likely improvement in credit growth and NIM. Loan growth is likely to be 18% yoy, higher than the past four quarter average of 16.3%. NIM is likely to increase 20bps yoy, 10bps qoq to 3% in 3QFY13, led by high asset yields and a sustaining high credit-to-deposit (80.4% in Sep ’12). Also, strong traction in savings deposits (likely to be of ~42% of low-cost deposits) is expected to support NIM.

Healthy NII and fee income growth. Net interest income is likely to grow at 24% yoy, with fee income estimated to grow at 19% yoy, led by traction in domestic corporate loans and foreign exchange related income.

Low credit costs to persist. Asset quality is unlikely to surprise negatively, with fresh NPA additions and loan restructuring expected to be low. Hence, credit costs are estimated to be low, at 20-30bps.

Key monitorables. Management outlook on: (1) Low-cost deposits (CASA) mobilization, particularly savings deposits; (2) branch additions over the next 12-18 months; and (3) corporate asset quality, given the bank’s strong corporate growth.

Valuation. At our Mar’14 target, the stock would trade at a PBV of 2.8x FY13e and 2.3x FY14e. Our target is based on the two-stage DDM (CoE: 17.7%; beta: 1.4; Rf: 8%). Risks. Slower credit growth; shortfall in branch expansion plans.








Pre-provisioning profit (`m) 7,110 9,444 32.8 3,492 4,458 27.6 Provisions (`m) 394 617 56.8 428 509 18.9 PBT (`m) 6,716 8,826 31.4 3,064 3,948 28.9

Tax (`m) 2,205 2,864 29.9 1,005 1,283 27.7

PAT (`m) 4,511 5,962 32.2 2,060 2,665 29.4

EPS (`) 12.6 16.5 30.6 4.4 5.7 29.2




Key data YES IN / YESB.BO52-week high / low `463 / `504 Sensex / Nifty 19445 / 59083-m average volume US$21.5m Market cap `165bn / US$3bn Shares outstanding 356.1m

1 January 2013 Yes Bank – CASA and NIM to rise, low credit costs to sustain; Buy




Net interest income 12,469 16,156 20,771 27,397 35,361 NII growth (%) 60.1 29.6 28.6 31.9 29.1 Non-interest inc 6,233 8,571 11,067 13,602 16,888 Total income 18,702 24,728 31,838 40,999 52,249 Total Inc growth (%) 37.2 32.2 28.8 28.8 27.4 Op. expenses 6,798 9,325 11,788 15,822 19,907 Operating profit 11,904 15,402 20,050 25,177 32,342 Op profit growth (%) 39.4 29.4 30.2 25.6 28.5 Provisions 982 902 1,407 1,857 2,376 PBT 10,922 14,500 18,643 23,321 29,966 Tax 3,650 4,730 6,059 7,766 9,979 PAT 7,271 9,770 12,584 15,555 19,987 PAT growth (%) 52.2 34.4 28.8 23.6 28.5 FDEPS (`/share) 20.9 27.7 35.3 43.2 55.0DPS (`/share) 2.5 4.0 5.1 6.2 7.9Source: Company, Anand Rathi Research


Share capital 3,471 3,530 3,565 3,601 3,637 Reserves & surplus 34,469 43,236 53,693 66,618 83,225 Deposits 459,389 491,517 674,798 883,047 1,147,961 Borrowings 92,740 198,338 229,057 263,514 304,863 Minority interests - - - - -Total liabilities 590,070 736,621 961,114 1,216,780 1,539,686 Advances 343,636 379,886 512,847 666,701 866,711 Investments 188,288 277,573 357,643 441,524 533,802 Cash & bank bal 34,960 35,855 52,179 59,884 77,585 Fixed & other assets 23,185 43,306 38,445 48,671 61,587 Total assets 590,070 736,621 961,114 1,216,780 1,539,686 No. of shares (m) 347 353 357 360 364 Deposits growth (%) 71.4 7.0 37.3 30.9 30.0 Advances growth (%) 54.8 10.5 35.0 30.0 30.0 Source: Company, Anand Rathi Research



Fig 4 – PE band

YES

5x

10x

15x

20x

-

100

200

300

400

500

600

700

800

900

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



YES

0.5x

1.5x

2.5x

3.5x

0

100

200

300

400

500

600

700

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – Yes Bank vs. Bankex

YES

Bankex

190

240

290

340

390

440

490

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Federal Bank

SME and retail key growth drivers; Buy

Federal Bank’s 3QFY13 profit is likely to be driven by lower NPA provisions yoy. We have a Buy on the stock, as it is expected to show better productivity and high capital adequacy, with consolidation almost over. This will aid ROE to improve to 17.5% by FY15.

SME, retail to drive business growth. Loan growth is likely to improve to 17% yoy, in line with system, meaningfully faster than 8% in 2QFY13. An increased branch network penetration will aid a likely faster loan growth in the secured SME and retail segments.

NIM and fee income likey to improve. The bank has gained some traction in mobilisation of current accounts. Also, with the re-pricing of NRE deposits largely completed, cost of funds is likely to be lower. As a result, we expect NIM to improve 10bps qoq at 3.7% We expect core fee income growth to increase to 17% qoq compared to (4.4% in 2Q13), due to a pickup in retail and SME loans, improvement in cash management services, and improvement in third party product income.

Lower NPA provisions yoy. Slippages in the retail and SME have remained stable over the past four quarters. However, we expect some stress in corporate segment (nil in 2QFY13), given legacy issues. While credit costs are likely to rise to 50-60bps in 3QFY13 compared to 40bps in 2QFY13, they are expected to be lower yoy.

Key monitorables. Management outlook on: (1) Credit growth compared to guidance of 18% in FY13; (2) stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) NIM trajectory ahead, compared to the guidance of over 3.6% in FY13.

Valuation. The stock would trade at PBV of 1.5x FY13e and 1.3x FY14e. Our target is based on the two-stage DDM (CoE: 15%; beta: 0.8; Rf: 8%). Risk. Slower-than-expected economic growth could hit loan growth and credit quality.


Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters - - -- of which, Pledged - - -Free Float 100 100 100.0- Foreign Institutions 39.9 43.8 42.3- Domestic Institutions 22.5 20.8 20.8- Public 37.6 35.4 36.9

Quarterly results (YE: Mar) 1HFY12 1HFY13 % yoy 3QFY12 3QFY13 % yoy




Cost-to-income (%) 38.8 44.8 605bps 37.1 41.8 470bps

Pre-provisioning profit (`m) 7,153 6,962 (2.7) 4,187 4,315 3.1 Provisions (`m) 2,062 932 (54.8) 1,153 708 (38.5)PBT (`m) 5,091 6,029 18.4 3,035 3,607 18.9

Tax (`m) 1,718 1,975 14.9 1,016 1,196 17.7

PAT (`m) 3,373 4,055 20.2 2,019 2,411 19.4

EPS (`) 19.7 23.7 20.2 11.8 12.8 8.5




Key data FB IN/FED.BO52-week high / low `571/`332 Sensex / Nifty 19445/59083-m average volume US$5.5mMarket cap `92bn/US$1.6bn Shares outstanding 170.9m

1 January 2013 Federal Bank – SME and retail key growth drivers; Buy




Net interest income 17,466 19,534 22,928 27,612 33,545NII growth (%) 23.8 11.8 17.4 20.4 21.5Non-interest inc 5,168 5,323 6,508 7,499 8,316Total income 22,634 24,858 29,436 35,111 41,861Total Inc growth (%) 16.6 9.8 18.4 19.3 19.2Op. expenses 8,361 9,793 12,363 14,396 16,326Operating profit 14,273 15,065 17,073 20,716 25,535Op profit growth (%) 12.8 5.6 13.3 21.3 23.3Provisions 5,254 3,370 3,233 4,032 4,922PBT 9,018 11,695 13,840 16,684 20,613Tax 3,147 3,927 4,429 5,255 6,596PAT 5,871 7,768 9,411 11,428 14,017PAT growth (%) 26.4 32.3 21.2 21.4 22.7FDEPS (`/share) 34.3 45.4 55.0 66.8 81.9DPS (`/share) 8.5 9.0 9.5 10.0 11.0Source: Company, Anand Rathi Research


Share capital 1,711 1,711 1,711 1,711 1,711Reserves & surplus 49,376 55,353 62,191 71,632 83,462Deposits 430,148 489,371 595,094 733,910 918,568Borrowings 33,329 59,833 57,335 74,535 86,971Minority interests - - - - -Total liabilities 514,564 606,268 716,331 881,787 1,090,712 Advances 319,532 377,560 449,296 552,634 679,740Investments 145,377 174,025 202,332 245,860 312,313Cash & bank bal 37,483 35,326 41,780 55,076 63,755Fixed & other assets 12,172 19,358 22,923 28,217 34,903Total assets 514,564 606,268 716,331 881,787 1,090,712No. of shares (m) 171 171 171 171 171Deposits growth (%) 19.3 13.8 21.6 23.3 25.2Advances growth (%) 18.6 18.2 19.0 23.0 23.0Source: Company, Anand Rathi Research



Fig 4 – PE band

FB

4x

7x

10x

13x

50

150

250

350

450

550

650

750

850

950

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



FB

0.4x

0.8x

1.2x

1.6x

0

100

200

300

400

500

600

700

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – Federal Bank vs. Bankex

FB

Bankex

300

350

400

450

500

550

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

ING Vysya Bank

Healthy growth, improving productivity, robust asset quality; Buy

Healthy NII growth and better productivity are likely to drive a robust 30.8% yoy profit growth for ING Vysya Bank in 3QFY13. We have a Buy on the bank on account of its healthy credit growth, better productivity and best-in-class NPA coverage which will aid in RoA expansion to 1.3% by FY15 from 1.1% in FY12.

Faster than system credit growth to continue. At 22% yoy, we expect ING Vysya Bank’s credit to continue to grow faster than the system. Loan mix is likely to remain diversified. Within the retail segment, we expect focus on higher yielding assets such as CVs, gold loans.

Stable NIM, better productivity. NIM is likely to remain stable at 3.4%, on account of a stretched credit-deposit (83.1% in 2Q13), partially offset by strong momentum in CASA at 32.8% in 2Q13. Productivity is expected to improve with the bank calibrating its branch and employee expansion plans. With asset growth outstripping growth in operating expenses, we expect cost-income to improve to 55% in 3QFY13.

Robust asset quality, low credit cost. Asset quality is unlikely to surprise negatively given low exposure to stressed assets, miniscule restructured book, nil exposure to project finance and strong underwriting standards. As a result we expect credit cost to remain low in the range of 30-40bps.

Key monitorables. (1) Loan growth outlook and sectors driving growth; and (2) outlook on branch expansion to determine productivity improvement.

Valuation. At our Mar’14 target, the stock would trade at a PABV of 1.9x FY13e and 1.6x FY14e. Our target is based on the two-stage DDM (CoE: 15%; beta: 0.8; Rf: 8%). Risk. Slower-than-expected economic growth could impact loan growth and credit quality.


Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 43.4- 43.8 43.8- of which, Pledged - - -Free Float 56.6 56.2 56.2- Foreign Institutions 25.0 25.2 25.2- Domestic Institutions 13.4 13.7 12.8- Public 18.1 17.3 18.2


Net interest income (`m) 5,656 7,120 25.9 3,236 3,890 20.2Non-interest income (`m) 3,030 3,399 12.2 1,699 1,983 16.7Operating expenses (`m) 5,323 6,068 14.0 2,822 3,232 14.5Cost-to-income (%) 61.3 57.7 (360)bps 57.2 55.0 (216)bpsPre-provisioning profit (`m) 3,363 4,451 32.4 2,113 2,641 25.0Provisions (`m) 237 331 39.6 334 354 6.0PBT (`m) 3,126 4,121 31.8 1,779 2,287 28.6Tax (`m) 1,032 1,318 27.7 584 723 23.9PAT (`m) 2,094 2,803 33.9 1,195 1,564 30.8EPS (`) 14.0 18.7 33.6 8.0 10.4 30.8Source: Company, Anand Rathi Research



Key data VYSB IN / VYSA.BO52-week high / low `525 / `278 Sensex / Nifty 19445/59083-m average volume US$1.06mMarket cap `79bn / US$1.4bn Shares outstanding 152.9m

1 January 2013 ING Vysya Bank – Healthy growth, improving productivity, robust asset quality; Buy




Net interest income 10,065 12,084 15,400 19,079 23,711NII growth (%) 21.3 20.1 27.4 23.9 24.3Non-interest inc 6,550 6,698 7,962 9,462 11,508Total income 16,615 18,781 23,362 28,541 35,219Total Inc growth (%) 14.6 13.0 24.4 22.2 23.4Op. expenses 10,260 11,102 13,059 15,127 17,997Operating profit 6,355 7,679 10,303 13,414 17,222Op profit growth (%) (1.0) 20.8 34.2 30.2 28.4Provisions 1,518 1,140 1,540 2,250 2,650PBT 4,836 6,539 8,763 11,164 14,572Tax 1,417 1,847 2,760 3,573 4,590PAT 3,420 4,692 6,002 7,592 9,982PAT growth (%) 31.6 43.2 31.5 26.5 31.5FDEPS (`/share) 26.3 30.4 39.2 49.1 63.9DPS (`/share) 3.0 4.0 4.5 5.0 5.5Source: Company, Anand Rathi Research


Share capital 1,210 1,501 1,531 1,547 1,562Reserves & surplus 25,033 38,297 43,561 50,247 59,221Deposits 301,943 351,954 447,419 567,735 700,128Borrowings 62,286 78,562 86,418 95,060 101,120Minority interests - - - - -Total liabilities 390,472 470,314 578,930 714,588 862,031 Advances 236,021 287,367 353,461 438,292 539,099Investments 110,583 127,155 158,834 193,030 233,143Cash & bank bal 25,214 32,306 38,267 49,681 50,136Fixed & other assets 18,653 23,487 28,368 33,586 39,653Total assets 390,472 470,314 578,930 714,588 862,031No. of shares (m) 121 150 153 155 156Deposits growth (%) 16.7 16.6 27.1 26.9 23.3Advances growth (%) 27.5 21.8 23.0 24.0 23.0Source: Company, Anand Rathi Research



Fig 4 – PE band

VYSB

5x

10x

15x

20x

0

100

200

300

400

500

600

700

800

900

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



0.5x

1.0x

VYSB

2.0x

1.5x

0

100

200

300

400

500

600

700

Apr-0

5Au

g-05

Dec

-05

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – ING Vysya Bank vs. Bankex

VYSB

Bankex

250

300

350

400

450

500

550

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Jammu & Kashmir Bank

Steady loan growth, better NIM and treasury profits; Buy

Better-than-past credit growth and persisting low credit costs are likely to drive earnings growth of 29% yoy in 3QFY13. We have a Buy rating, since we expect robust profitability to sustain, led by improving NIM, low operating expenses and stable credit costs.

Steady loan growth, likely NIM improvement. Loan growth is likely to be 23% yoy, in line with the past four quarter average of 22.7%. NIM is likely to increase 20bps yoy, flat qoq to 3.95% in 3QFY13, led by high asset yields and an increasing credit-to-deposit (62.4% in Sep ’12).

Healthy NII, subdued fee income growth. Net interest income is likely to grow at 22.2% yoy, with fee income estimated to grow at 15% yoy, slower than credit growth. Treasury gains are likely to be much higher than the `88m booked in 3QFY12, supporting non-interest income.

Robust asset quality. Asset quality is unlikely to surprise negatively, with fresh NPA additions likely to range at 1.0-1.2%. Hence, credit costs are estimated to be low, between 20bps and 30bps. Further provisions are likely for Deccan Chronicle (non-performing investment), a ~`500m exposure, of which 25% is already provided for.

Key monitorables. Management outlook on: (1) Low-cost deposits (CASA) mobilization, particularly savings deposits; (2) branch additions over the next 12-18 months; and (3) asset quality of loan exposures outside the state of Jammu & Kashmir.

Valuation. At our Mar’14 target, J&K would trade at PBV of 1.5x FY13e and 1.2x FY14e. Our TP is based on the two-stage DDM (CoE: 12.2%; beta: 0.5; Rf: 8%). Risk. Slower credit growth, sharp rise in defaults.





Non-interest income (`m) 1,382 1,843 33.3 736 941 27.8


Cost-to-income (%) 37.7 34.2 (353)bps 38.3 37.6 (68)

Pre-provisioning profit (`m) 6,291 8,379 33.2 3,236 4,024 24.4 Provisions (`m) 668 832 24.5 182 377 107.6 PBT (`m) 5,623 7,547 34.2 3,054 3,647 19.4

Tax (`m) 1,804 2,391 32.5 922 1,222 32.5

PAT (`m) 3,819 5,156 35.0 2,132 2,425 13.8

EPS (`) 78.8 106.3 35.0 44.0 50.0 13.8




Key data JKBK IN / JKBK.BO52-week high / low `1,474 / `659 Sensex / Nifty 19445 / 59083-m average volume US$1.4m Market cap `64bn / US$1.2bn Shares outstanding 48.5m

1 January 2013 Jammu & Kashmir Bank – Steady loan growth, better NIM and treasury profits; Buy






Share capital 485 485 485 485 485 Reserves & surplus 34,302 40,447 48,090 57,143 68,070 Deposits 446,759 533,469 625,927 734,170 861,570 Borrowings 23,535 28,291 31,121 34,233 37,656 Minority interests - - - - -Total liabilities 505,082 602,692 705,622 826,030 967,780 Advances 261,936 330,774 406,852 488,223 585,867 Investments 196,958 216,243 237,852 264,301 292,934 Cash & bank bal 35,488 44,539 46,805 56,985 69,624 Fixed & other assets 10,699 11,136 14,112 16,521 19,356 Total assets 505,082 602,692 705,622 826,030 967,780 No. of shares (m) 48 48 48 48 48 Deposits growth (%) 20.0 19.4 17.3 17.3 17.4 Advances growth (%) 13.6 26.3 23.0 20.0 20.0 Source: Company, Anand Rathi Research


NIM (%) 3.4 3.4 3.5 3.6 3.7 Other inc / total inc (%) 19.1 15.4 15.3 14.3 13.6 Cost-income (%) 39.8 36.9 35.9 35.2 35.4 Provision coverage (%) 89.7 90.4 88.4 86.0 81.4 Dividend payout (%) 20.5 20.2 20.2 20.2 20.2 Credit-deposit (%) 58.6 62.0 65.0 66.5 68.0 Investment-deposit (%) 44.1 40.5 38.0 36.0 34.0 Gross NPA (%) 2.0 1.6 1.4 1.3 1.0 Net NPA (%) 0.2 0.1 0.2 0.2 0.2 BV (`) 717.4 844.1 1,001.7 1,188.4 1,413.7 Adj BV (`) 706.4 833.9 987.8 1,170.4 1,390.9 CAR (%) 13.7 13.4 12.1 11.8 11.5 - Tier 1 (%) 11.3 11.1 10.8 10.6 10.5 RoE (%) 19.0 21.2 22.4 22.3 22.7 RoA (%) 1.3 1.5 1.5 1.5 1.6 Source: Company, Anand Rathi Research

Fig 4 – PE band

JNBK

2x

4x

6x

8x

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



JNBK

0.7x

0.9x

1.1x

1.3x

200

400

600

800

1,000

1,200

1,400

1,600

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – Jammu & Kashmir Bank vs. Bankex

JNBK

Bankex

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

State Bank of India

Modest loan growth, lower NIM, subdued fees; Sell

State Bank of India’s (SBI) 3QFY13 profit is likely to be driven by treasury profits and lower NPA provisions. We, however, have a Sell on the bank, since we see slowing credit growth and persisting asset-quality deterioration limiting valuation upsides.

Slower loan growth; NIM likely to decline. Loan growth is likely to be tepid at 17% yoy, in line with system credit growth. Large corporate and farm loans could be the key growth drivers, with slower growth expected in retail and SME loans. Despite stable asset yields, NIM is expected to be lower 50bps yoy (flat qoq) at 3.5%, due to slower credit growth and a lower domestic credit-to-deposit yoy (78.6% in Dec ’11).

Subdued fees, non-interest income better. Non-interest income is likely to grow at 5.6% yoy, largely supported by treasury profits. Fee income is estimated to grow at ~10% yoy due to likely slow business growth. We expect moderate treasury profits of ~`2bn in 3QFY13 against `10.9bn of treasury losses in 3QFY12, which would support non-interest income growth.

Incremental NPAs expected to be lower. Asset quality stress is likely to persist, though likely to be lower than 2QFY13, when fresh slippages were `71bn (annualized, 3.2% of loans) and fresh restructuring was `47bn. We expect gross slippages at 2.5% of loans, and estimate credit costs of 100bps in 3QFY13.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages, restructuring) in 2HFY13; (2) NIM trajectory ahead, relative to guidance of over 3.75% in FY13; (3) capital infusion plans.

Valuation. We value the standalone bank at `1,670, based on the two-stage DDM (CoE: 15.9%; beta: 1.1; Rf: 8%), and subsidiaries at `530. Risk. Faster-than-expected economic growth.

Rating: Sell Target Price: `2,200 Share Price: `2,380

Key data SBIN IN / SBI.BO52-week high / low `2,475 / `1,590 Sensex / Nifty 19445 / 59083-m average volume US$117.9m Market cap `1,598bn / US$29.1bn Shares outstanding 671m




Non-interest income (`m) 69,615 68,454 (1.7) 21,260 35,897 68.9



Pre-provisioning profit (`m) 147,168 155,303 5.5 72,600 87,512 20.5 Provisions (`m) 75,424 42,819 (43.2) 24,074 29,208 21.3 PBT (`m) 71,744 112,484 56.8 48,526 58,304 20.1

Tax (`m) 27,804 38,387 38.1 15,895 20,115 26.5

PAT (`m) 43,940 74,097 68.6 32,631 38,189 17.0

EPS (`) 69.2 110.4 59.5 51.4 56.9 10.7



Net interest income (`m) 468,709 546,574 Net profit (`m) 162,567 196,016 EPS (`) 242.3 292.1 Growth (%) 38.9 20.6 PE (x) 9.8* 8.1*PABV (x) 2.2* 1.9*RoE (%) 18.0 18.8 RoA (%) 1.1 1.2 Dividend yield (%) 2.2 2.7 Net NPA (%) 2.5 2.3 Source: Anand Rathi Research *standalone

1 January 2013 State Bank of India – Modest loan growth, lower NIM, subdued fees; Sell




Net interest income 325,264 432,911 468,709 546,574 627,896 NII growth (%) 37.4 33.1 8.3 16.6 14.9 Non-interest inc 158,246 143,514 170,940 199,793 229,561 Total income 483,510 576,425 639,649 746,367 857,457 Total Inc growth (%) 25.1 19.2 11.0 16.7 14.9 Op. expenses 230,154 260,690 277,208 321,065 381,568 Operating profit 253,356 315,735 362,441 425,302 475,889 Op profit growth (%) 38.3 24.6 14.8 17.3 11.9 Provisions 103,813 130,689 112,339 123,739 142,584 PBT 149,542 185,046 250,103 301,563 333,304 Tax 66,897 67,973 87,536 105,547 116,657 PAT 82,645 117,073 162,567 196,016 216,648 PAT growth (%) (9.8) 41.7 38.9 20.6 10.5 FDEPS (`/share) 130.2 174.5 242.3 292.1 322.9 DPS (`/share) 30.0 35.0 48.5 58.4 64.6 Source: Company, Anand Rathi Research


Share capital 6,350 6,710 6,710 6,710 6,710

Reserves & surplus 643,510 832,802 958,751 1,110,615 1,278,463

Deposits 9,339,328 10,436,474 12,114,480 14,237,331 17,007,458

Borrowings 2,248,173 2,079,207 2,350,630 2,658,721 3,008,576

Minority interests - - - - -

Total liabilities 12,237,362 13,355,192 15,430,572 18,013,377 21,301,207

Advances 7,567,194 8,675,789 10,010,135 11,674,611 13,776,041

Investments 2,956,006 3,121,976 3,755,489 4,271,199 5,102,237

Cash & bank bal 1,228,741 971,632 1,047,725 1,347,032 1,570,880

Fixed & other assets 485,420 585,796 617,223 720,535 852,048

Total assets 12,237,362 13,355,192 15,430,572 18,013,377 21,301,207

No. of shares (m) 635 671 671 671 671

Deposits growth (%) 16.1 11.7 16.1 17.5 19.5

Advances growth (%) 19.8 14.7 15.4 16.6 18.0 Source: Company, Anand Rathi Research


NIM (%) 3.0 3.5 3.4 3.4 3.3 Other inc / total inc (%) 32.7 24.9 26.7 26.8 26.8 Cost-income (%) 47.6 45.2 43.3 43.0 44.5 Provision coverage (%) 51.2 60.1 52.3 55.2 52.8 Dividend payout (%) 23.1 20.1 20.0 20.0 20.0 Credit-deposit (%) 81.0 83.1 82.6 82.0 81.0 Investment-deposit (%) 31.7 29.9 31.0 30.0 30.0 Gross NPA (%) 3.3 4.6 5.2 5.1 4.3 Net NPA (%) 1.6 1.8 2.5 2.3 2.0 BV (`) 1,023.4 1,251.1 1,438.7 1,636.6 1,883.8 Adj BV (`) 829.0 1,015.3 1,066.1 1,268.4 1,497.4 CAR (%) 12.0 13.9 13.8 13.6 13.1 - Tier 1 (%) 7.8 9.8 9.9 9.8 9.6 RoE (%) 12.6 15.7 18.0 18.8 18.0 RoA (%) 0.7 0.9 1.1 1.2 1.1 Source: Company, Anand Rathi Research

Fig 4 – PE band

SBIN

5x

10x

15x

20x

0

1,000

2,000

3,000

4,000

5,000

6,000

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



SBIN

0.5x

1.0x

2.0x

2.2x

400

800

1,200

1,600

2,000

2,400

2,800

3,200

3,600

4,000

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – SBI vs. Bankex

SBI

Bankex

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Bank of Baroda

Stable NIM, inexpensive valuations; Buy

Bank of Baroda’s 3QFY13 profit is likely to be subdued, due to modest core earnings and higher NPA provisions yoy. We have a Buy on inexpensive valuations (0.9x FY14e PBV), as RoE is likely to sustain at more than 20% over FY13-14, supported by stable NIM and best-in-class productivity.

Slower loan growth. Loan growth is likely to be 23% yoy, slightly lower than the past four quarter average of 24.2%. Domestic loans are estimated to grow at 17% yoy, in line with system credit growth, while international loans (~32% of total loans) likely to grow faster at 34%.

Likely fall in NIM, decent treasury gains. Despite stable asset yields, NIM is likely to be lower by 10bps qoq to 2.6%, due to slower credit growth and likely lower domestic credit-to-deposit yoy (70.7% in Dec ’11). Fee-based income is estimated to grow at ~12% yoy, due to likely slow business growth. We expect treasury gains of ~`1bn in 3QFY13, compared to `386m in 3QFY12, which would support non-interest income growth.

Elevated NPA provisions yoy. Asset quality stress is likely to persist, though likely to be lower in 2QFY13, when fresh slippages were `14.7bn (annualized, 2.2% of loans) and fresh restructuring was `9.3bn. We expect gross slippages at 1.9% of loans, and estimate credit costs of 90bps in 3QFY13.

Key monitorables. Outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; and (2) NIM trajectory in a interest easing environment

Valuation. At our Mar’14 target, the stock would trade at a PABV of 1.1x FY13e and 1x FY14e. Our target is based on the two-stage DDM (CoE: 13.4%; beta: 0.8; Rf: 8%). Risk. Sharp increase in defaults.


Key data BOB IN / BOB.BO52-week high / low `881 / `606 Sensex / Nifty 19445 / 59083-m average volume US$11m Market cap `336bn / US$6.1bn Shares outstanding 412.4m




Non-interest income (`m) 13,752 15,991 16.3 11,493 9,635 (16.2)



Pre-provisioning profit (`m) 39,713 46,358 16.7 26,082 26,123 0.2 Provisions (`m) 9,004 15,527 72.4 8,497 5,183 (39.0)PBT (`m) 30,708 30,831 0.4 17,585 20,940 19.1

Tax (`m) 8,719 6,304 (27.7) 4,686 4,146 (11.5)

PAT (`m) 21,989 24,527 11.5 12,899 16,794 30.2

EPS (`) 56.2 59.4 5.7 32.8 40.7 24.0



Net interest income (`m) 126,594 158,631 Net profit (`m) 60,926 71,901 EPS (`) 147.7 174.4 Growth (%) 21.7 18.0 PE (x) 5.8 4.9PABV (x) 1.2 1.0 RoE (%) 20.3 20.2 RoA (%) 1.2 1.2 Dividend yield (%) 2.4 2.8Net NPA (%) 0.5 0.5 Source: Anand Rathi Research

1 January 2013 Bank of Baroda – Stable NIM, inexpensive valuations; Buy




Net interest income 88,023 103,170 126,594 158,631 198,845 NII growth (%) 48.2 17.2 22.7 25.3 25.4 Non-interest inc 28,092 34,223 35,685 42,827 50,636 Total income 116,114 137,393 162,279 201,459 249,482 Total Inc growth (%) 32.8 18.3 18.1 24.1 23.8Op. expenses 46,298 51,587 60,205 75,144 93,660 Operating profit 69,816 85,806 102,073 126,315 155,821 Op profit growth (%) 41.5 22.9 19.0 23.7 23.4Provisions 13,313 25,548 25,916 30,446 36,907 PBT 56,503 60,258 76,157 95,868 118,914 Tax 14,086 10,188 15,231 23,967 29,728 PAT 42,417 50,070 60,926 71,901 89,185 PAT growth (%) 38.7 18.0 21.7 18.0 24.0 FDEPS (`/share) 108.0 121.4 147.7 174.4 216.3 DPS (`/share) 16.5 17.0 20.7 24.4 30.3 Source: Company, Anand Rathi Research




NIM (%) 2.8 2.6 2.6 2.7 2.8 Other inc / total inc (%) 24.2 24.9 22.0 21.3 20.3 Cost-income (%) 39.9 37.5 37.1 37.3 37.5 Provision coverage (%) 74.9 65.4 65.4 66.8 66.7 Dividend payout (%) 15.3 14.0 14.0 14.0 14.0 Credit-deposit (%) 74.9 74.7 74.8 75.0 75.0 Investment-deposit (%) 23.3 21.6 25.0 25.0 25.0 Gross NPA (%) 1.4 1.6 1.5 1.4 1.3 Net NPA (%) 0.3 0.5 0.5 0.5 0.4 BV (`) 535.7 666.3 789.8 874.4 1,048.0 Adj BV (`) 464.1 581.0 691.0 824.6 993.0 CAR (%) 14.5 14.7 13.5 12.8 12.4 - Tier 1 (%) 10.0 10.8 10.2 9.9 9.7 RoE (%) 23.5 20.6 20.3 20.2 21.1 RoA (%) 1.3 1.2 1.2 1.2 1.2 Source: Company, Anand Rathi Research

Fig 4 – PE band

BOB

BOB

2x

4x

6x

8x

0

300

600

900

1200

1500

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



BOB

0.4x

0.8x

1.2x

1.5x

100

300

500

700

900

1100

1300

1500

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – Bank of Baroda vs. Bankex

BOB

Bankex600

650

700

750

800

850

900

950

1,000

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Bank of India

Modest loan growth, lower NIM, subdued fees; Sell

Bank of India’s (BoI) 3QFY13 profit is likely to be driven by treasury profits and lower NPA provisions. Nevertheless, we retain Sell on the stock as its modest core earnings and high NPA provisions could keep RoE below its past peak.

Slower loan growth, lower NIM. Loan growth is likely to be 16% yoy, in line with the past four-quarter average of 16.4%. Domestic loans are estimated to grow at 14% yoy, slower than system credit growth, while international loans (~30% of total loans) could grow faster at 21%. Despite stable asset yields, NIM is likely to be lower 12bps yoy, flat qoq at 2.4%, due to slower credit growth and likely low domestic credit-to-deposit yoy (66.9% in Dec ’11).

Non-interest income a tad higher. While net interest income could grow at 7.8% yoy, fee income is estimated to grow at ~9% yoy due to likely slow business growth. We expect treasury gains of ~`1.0bn in 3QFY13 against `0.7bn in 3QFY12 to aid non-interest income.

NPA provisions to be lower yoy. Asset quality stress is likely to persist, though likely to be lower in 2QFY13, when fresh slippages were `27bn (annualized, 4.6% of loans). We expect gross slippages at 1.8% of loans, and estimate credit costs of 100bps in 3QFY13.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) loan growth and strategy in an interest rate easing environment; (3) low-cost deposits (CASA) mobilization.

Valuation. At our Mar’14 target, the stock would trade at PABV of 1x FY13e and 0.8x FY14e. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 1.2; Rf: 8%). Risk: Sharp improvement in asset quality.

Rating: Sell Target Price: `342 Share Price: `339

Key data BOI IN / BOI.BO52-week high / low `408 / `253 Sensex / Nifty 19445 / 59083-m average volume US$4.7m Market cap `195bn / US$3.6bn Shares outstanding 575m








Tax (`m) 2,172 3,140 44.5 3,227 3,026 (6.2)

PAT (`m) 10,086 11,893 17.9 7,161 9,581 33.8

EPS (`) 18.5 20.7 12.3 13.1 16.7 27.4




1 January 2013 Bank Of India – Modest loan growth, lower NIM, subdued fees; Sell






Share capital 5,472 5,745 5,745 5,745 5,745Reserves & surplus 167,435 203,873 231,722 271,506 318,739Deposits 2,988,858 3,182,160 3,898,737 4,517,157 5,420,589Borrowings 349,961 453,577 514,991 584,956 664,687Minority interests - - - - -Total liabilities 3,511,725 3,845,355 4,651,195 5,379,365 6,409,761 Advances 2,130,962 2,488,333 2,729,116 3,274,939 3,929,927Investments 858,724 867,536 1,228,102 1,309,976 1,571,971Cash & bank bal 373,100 347,113 540,488 616,931 696,341Fixed & other assets 148,940 142,373 153,489 177,519 211,522Total assets 3,511,725 3,845,355 4,651,195 5,379,365 6,409,761No. of shares (m) 547 575 575 575 575Deposits growth (%) 30.1 6.5 22.5 15.9 20.0Advances growth (%) 26.5 16.8 9.7 20.0 20.0Source: Company, Anand Rathi Research



Fig 4 – PE band

BOI BOI

5x

9x

7x

11x

100

200

300

400

500

600

700

800

900

Oct

-06

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

Apr-1

2Ju

l-12

Oct

-12



BOI

1.6x

0.7x

1.0x

1.3x

70

170

270

370

470

570

670

770

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12


Fig 6 – BoI vs. Bankex

BOI

Bankex240

260

280

300

320

340

360

380

400

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Punjab National Bank

Profitability to improve on better business outlook; Buy

Led by modest core earnings and higher NPA provisions yoy, Punjab National Bank’s (PNB) 3QFY13 profit is likely to be subdued. Yet, due to inexpensive valuations we maintain Buy, as profitability over FY14-15 could improve, led by recovery in business growth and asset quality.

Slower loan growth, likely NIM decline. Loan growth is likely to be 17.5% yoy, slightly lower than the past four-quarter average of 19.9%, and in line with system credit growth. Despite stable asset yields, NIM could be lower 46bps yoy, 8bps qoq to 3.42%, due to slower credit growth and a flat credit-to-deposit yoy (73.7% in Dec ’11).

Subdued fee-income growth, likely treasury gains. Net interest income growth is likely to be modest at 11.1% yoy, with fee income estimated to grow at ~9% yoy, due to likely slow business growth. We expect treasury gains of ~`1.1bn in 3QFY13, compared to `870m in 3QFY12, which would support non-interest income growth.

Elevated NPA provisions yoy. Asset quality stress is likely to persist, and likely to be similar to 2QFY13, when fresh slippages were `45.4bn (annualized, 6% of loans). Given the slowing macro-economic environment, the number of loan accounts referred to the CDR cell has increased, and is likely to weigh on the asset quality ahead.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) loan growth outlook; and (3) fee-income outlook, given slowing business growth.

Valuation. At our Mar’14 target, the stock would trade at PBV of 0.9x FY13e and 0.7x FY14e. Our target price is based on the two-stage DDM (CoE: 13.7%; beta: 0.8; Rf: 8%). Risks. Slower-than-estimated credit growth, sharp increase in loan defaults.


Key data PNB IN / PNBK.BO52-week high / low `1,091 / `659 Sensex / Nifty 19445 / 59083-m average volume US$6.7m Market cap `286bn / US$5.2bn Shares outstanding 339m

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 56.1 56.1 56.1

- of which, Pledged - - -Free Float 43.9 43.9 43.9- Foreign Institutions 17.4 17.3 17.4- Domestic Institutions 20.6 21.0 21.8- Public 5.9 5.6 4.7






Pre-provisioning profit (`m) 50,017 53,738 7.4 26,764 28,859 7.8 Provisions (`m) 16,038 21,063 31.3 9,461 9,970 5.4 PBT (`m) 33,979 32,674 (3.8) 17,303 18,889 9.2

Tax (`m) 10,878 9,562 (12.1) 5,803 6,328 9.0

PAT (`m) 23,101 23,113 0.0 11,500 12,561 9.2

EPS (`) 72.9 68.1 (6.6) 36.3 37.0 2.0




1 January 2013 Punjab National Bank – Profitability to improve on better business outlook; Buy






Share capital 3,168 3,392 3,392 3,392 3,392 Reserves & surplus 211,917 274,779 316,645 372,269 440,055 Deposits 3,128,987 3,795,885 4,522,585 5,417,518 6,458,251 Borrowings 439,180 507,884 558,673 614,540 675,994 Minority interests - - - - -Total liabilities 3,783,252 4,581,940 5,401,294 6,407,719 7,577,693 Advances 2,421,067 2,937,748 3,437,165 4,090,226 4,908,271 Investments 951,623 1,226,295 1,424,614 1,655,323 1,914,119 Cash & bank bal 296,912 288,280 377,477 469,939 527,972 Fixed & other assets 113,650 129,617 162,039 192,232 227,331 Total assets 3,783,252 4,581,940 5,401,294 6,407,719 7,577,693 No. of shares (m) 317 339 339 339 339 Deposits growth (%) 25.5 21.3 19.1 19.8 19.2 Advances growth (%) 29.7 21.3 17.0 19.0 20.0 Source: Company, Anand Rathi Research


NIM (%) 3.6 3.3 3.2 3.3 3.4 Other inc / total inc (%) 23.4 23.9 22.9 21.6 20.4 Cost-income (%) 41.3 39.7 42.1 40.2 40.4 Provision coverage (%) 53.4 48.9 57.2 57.8 59.8 Dividend payout (%) 15.7 15.3 15.3 15.3 15.3 Credit-deposit (%) 77.4 77.4 76.0 75.5 76.0 Investment-deposit (%) 30.4 32.3 31.5 30.6 29.6 Gross NPA (%) 1.8 3.0 4.6 4.2 3.9 Net NPA (%) 0.8 1.5 2.0 1.8 1.6 BV (`) 678.9 820.1 943.6 1,107.6 1,307.4 Adj BV (`) 568.1 646.1 699.7 849.5 1,036.8 CAR (%) 12.4 12.6 12.3 11.9 11.5 - Tier 1 (%) 8.4 9.3 9.1 9.0 8.8 RoE (%) 22.6 19.8 17.1 19.4 20.1 RoA (%) 1.3 1.2 1.0 1.1 1.2 Source: Company, Anand Rathi Research

Fig 4 – PE band

PNB3x

5x

7x

7x

10x

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12



1.0x

0.2x

PNB

2.0x

1.5x

0.5x

100

300

500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

Apr-0

6Au

g-06

Dec

-06

Apr-0

7Au

g-07

Dec

-07

Apr-0

8Au

g-08

Dec

-08

Apr-0

9Au

g-09

Dec

-09

Apr-1

0Au

g-10

Dec

-10

Apr-1

1Au

g-11

Dec

-11

Apr-1

2Au

g-12

Dec

-12

1.5x


Fig 6 – PNB vs. Bankex

PNB

Bankex

650

700

750

800

850

900

950

1,000

1,050

1,100

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Canara Bank

Sluggish business constrains profitability; Sell

Canara Bank’s 3QFY13 profit is likely to be driven by treasury profits and lower NPA provisions. We, however, have a Sell rating on the bank, since we expect profitability to be constrained by sluggish business and weak asset quality.

Weak loan growth; NIM to decline. Loan growth is likely to be 5% yoy, much slower than overall system credit growth. Deposit growth is also likely to be subdued at 7% yoy. Hence, business growth in 3QFY13 is likely to hover at 6% yoy, the slowest among large-cap peers. Despite stable asset yields, NIM is likely to be lower 23bps yoy, 8bps qoq at 2.27%, due to slower credit growth and likely low domestic credit-to-deposit yoy (69.5% in Dec ’11).

Subdued fees, treasury profits to aid non-interest income. Fee income is estimated to grow at ~9% yoy, due to likely slow business growth. We expect treasury gains of ~`1.5bn in 3QFY13, flat yoy, due to which non-interest income is estimated to grow 8.1% yoy.

NPA provisions to be lower yoy. Asset quality stress is likely to persist, though it is likely to be lower in 2QFY13, when fresh slippages were `19.2bn (annualized, 3.6% of loans). We expect gross slippages at 1.8% of loans, and estimate credit costs of 60bps in 3QFY13.

Key monitorables. Outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) loan growth and strategy in an environment when interest rate easing; and (3) low-cost deposits (CASA) mobilization.

Valuation. We value the standalone bank at `1,670, based on the two-stage DDM (CoE: 15.9%; beta: 1.1; Rf: 8%), and subsidiaries at `530. Risk. Faster-than-expected economic growth.

Rating: Sell Target Price: `405 Share Price: `493

Key data CBK IN / CNBK.BO52-week high / low `566 / `306 Sensex / Nifty 19445 / 59083-m average volume US$6.7m Market cap `219bn / US$4bn Shares outstanding 443m

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 67.7 67.7 67.7- of which, Pledged - - -Free Float 32.3 32.3 32.3







Pre-provisioning profit (`m) 28,703 26,759 (6.8) 15,767 16,850 6.9 Provisions (`m) 8,922 8,397 (5.9) 5,012 4,000 (20.2)PBT (`m) 19,781 18,362 (7.2) 10,756 12,851 19.5

Tax (`m) 4,000 4,000 - 2,000 2,827 41.4

PAT (`m) 15,781 14,362 (9.0) 8,756 10,023 14.5

EPS (`) 35.6 32.4 (9.0) 19.8 22.6 14.5




1 January 2013 Canara Bank – Sluggish business constrains profitability; Sell




Net interest income 76,993 76,893 83,197 99,075 117,894 NII growth (%) 35.5 (0.1) 8.2 19.1 19.0 Non-interest inc 28,115 29,276 30,736 36,630 41,252 Total income 105,108 106,169 113,933 135,705 159,146 Total Inc growth (%) 23.1 1.0 7.3 19.1 17.3 Op. expenses 44,193 46,737 51,270 59,032 68,114 Operating profit 60,915 59,432 62,663 76,673 91,031 Op profit growth (%) 20.4 (2.4) 5.4 22.4 18.7 Provisions 10,656 18,550 16,666 17,915 20,476 PBT 50,259 40,882 45,998 58,759 70,555 Tax 10,000 8,000 10,119 12,927 15,522 PAT 40,259 32,882 35,878 45,832 55,033 PAT growth (%) 33.2 (18.3) 9.1 27.7 20.1 FDEPS (`/share) 90.9 74.2 81.0 103.5 124.2 DPS (`/share) 11.0 11.0 12.0 15.4 18.4 Source: Company, Anand Rathi Research


Share capital 4,430 4,430 4,430 4,430 4,430 Reserves & surplus 195,968 222,470 252,169 290,037 335,509 Deposits 2,934,366 3,270,537 3,537,889 4,125,876 4,782,648 Borrowings 224,684 244,165 275,140 310,524 351,020 Minority interests - - - - -Total liabilities 3,359,449 3,741,602 4,069,627 4,730,867 5,473,606 Advances 2,112,683 2,324,898 2,441,143 2,929,372 3,515,246 Investments 836,360 1,020,574 1,132,124 1,279,021 1,339,141 Cash & bank bal 307,081 281,794 374,271 380,548 455,011 Fixed & other assets 103,324 114,335 122,089 141,926 164,208 Total assets 3,359,449 3,741,602 4,069,627 4,730,867 5,473,606 No. of shares (m) 443 443 443 443 443 Deposits growth (%) 25.1 11.5 8.2 16.6 15.9 Advances growth (%) 24.8 10.0 5.0 20.0 20.0 Source: Company, Anand Rathi Research


NIM (%) 2.6 2.2 2.2 2.3 2.4 Other inc / total inc (%) 26.7 27.6 27.0 27.0 25.9 Cost-income (%) 42.0 44.0 45.0 43.5 42.8 Provision coverage (%) 25.7 16.0 19.1 20.8 22.3 Dividend payout (%) 12.1 14.8 14.9 14.9 14.9 Credit-deposit (%) 72.0 71.1 69.0 71.0 73.5 Investment-deposit (%) 28.5 31.2 32.0 31.0 28.0 Gross NPA (%) 1.5 1.7 2.5 2.2 2.0 Net NPA (%) 1.1 1.5 2.0 1.8 1.5 BV (`) 452.4 512.2 579.2 664.7 767.4 Adj BV (`) 352.4 389.1 419.8 501.3 600.0 CAR (%) 15.4 13.8 16.1 15.1 14.5 - Tier 1 (%) 10.9 10.4 12.2 11.6 11.2 RoE (%) 2.2 2.2 2.4 3.1 3.7RoA (%) 23.2 15.4 14.8 16.6 17.3 Source: Company, Anand Rathi Research

Fig 4 – PE band

Canara

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-10

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-11

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Canara

0.4x

0.8x

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-11

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Fig 6 – Canara Bank vs. Bankex

CBK

Bankex

300

350

400

450

500

550

600

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Union Bank of India

Lower NPA provisions to aid profitability; Buy

Union Bank of India’s (Union Bank) 3QFY13 profit is likely to be driven by modest net interest income and lower NPA provisions. While present valuations are compelling (0.8x FY14 PBV), re-rating is only likely once asset quality consistently improves. On inexpensive valuations, we have a Buy rating.

Higher-than-past loan growth, likely stable NIM. Loan growth is likely to be 20% yoy, faster than overall system credit growth, and higher than the past four quarter average of 18.4%. NIM is likely to be increase marginally by 6bps qoq, (down 23bps yoy) to 3.1%, led by stable asset yields, and improving credit growth. A likely flat domestic credit-to-deposit yoy (76.1% in Dec ’11) would constrain further NIM expansion.

Subdued fees, treasury profits to aid non-interest income. While net interest income is estimated to grow at 15.9% yoy, fee income is estimated to grow at ~11% yoy, due to better business growth. We expect treasury gains of ~`1bn in 3QFY13, flat yoy.

Lower NPAs provisions yoy. Asset quality stress is likely to persist, given sluggish macroeconomic environment. We expect gross slippages at 1.8% of loans, and estimate credit costs of 90bps in 3QFY13.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) NIM trajectory ahead; and (3) low-cost deposits (CASA) mobilization.

Valuation. At our Mar’14 target, the stock would trade at a PABV of 0.8x FY13e and 0.7x FY14e. Our target is based on the two-stage DDM (CoE: 14.6%; beta: 0.9; Rf: 8%). Risk. Sustained sharp increase in defaults.


Key data UNBK IN / UNBK.BO52-week high / low `278 / `150 Sensex / Nifty 19445 / 59083-m average volume US$1.1m Market cap `151bn / US$2.8bn Shares outstanding 550.5m

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 54.3 54.3 54.3

- of which, Pledged - - -Free Float 45.7 45.7 45.7







Pre-provisioning profit (`m) 23,709 25,397 7.1 12,841 15,388 19.8 Provisions (`m) 10,512 10,056 (4.3) 9,727 5,698 (41.4)PBT (`m) 13,197 15,342 16.3 3,114 9,690 211.1

Tax (`m) 5,027 4,680 (6.9) 1,144 2,907 154.0

PAT (`m) 8,169 10,662 30.5 1,970 6,783 244.3

EPS (`) 15.6 19.4 24.3 3.8 12.3 227.7




1 January 2013 Union Bank of India – Lower NPA provisions to aid profitability; Buy




Net interest income 62,162 69,089 81,067 96,198 112,949 NII growth (%) 48.3 11.1 17.3 18.7 17.4 Non-interest inc 20,388 23,324 26,156 28,939 32,214 Total income 82,550 92,413 107,223 125,137 145,162 Total Inc growth (%) 33.9 11.9 16.0 16.7 16.0 Op. expenses 39,500 39,875 47,247 55,449 65,178 Operating profit 43,050 52,538 59,975 69,688 79,984 Op profit growth (%) 17.6 22.0 14.2 16.2 14.8 Provisions 13,496 25,410 22,794 24,961 28,231 PBT 29,554 27,128 37,182 44,727 51,753 Tax 8,735 9,256 11,154 13,418 15,526 PAT 20,819 17,871 26,027 31,309 36,227 PAT growth (%) 0.3 (14.2) 45.6 20.3 15.7 FDEPS (`/share) 39.7 32.5 47.3 56.9 65.8 DPS (`/share) 8.0 8.0 11.7 14.0 16.2 Source: Company, Anand Rathi Research


Share capital 6,353 6,615 6,615 6,615 6,615 Reserves & surplus 121,292 139,715 158,249 180,555 206,364 Deposits 2,024,613 2,228,689 2,754,303 3,415,336 4,098,403 Borrowings 207,586 247,094 278,299 306,129 336,741 Minority interests - - - - -Total liabilities 2,359,844 2,622,114 3,197,467 3,908,635 4,648,125 Advances 1,509,861 1,778,821 2,134,585 2,561,502 3,073,802 Investments 583,991 623,636 798,748 973,371 1,147,553 Cash & bank bal 200,984 156,751 184,197 276,046 310,566 Fixed & other assets 65,008 62,907 79,937 97,716 116,203 Total assets 2,359,844 2,622,114 3,197,467 3,908,635 4,648,125 No. of shares (m) 524 551 551 551 551 Deposits growth (%) 19.1 10.1 23.6 24.0 20.0 Advances growth (%) 26.5 17.8 20.0 20.0 20.0 Source: Company, Anand Rathi Research


NIM (%) 3.0 2.8 2.9 2.8 2.7 Other inc / total inc (%) 24.7 25.2 24.4 23.1 22.2 Cost-income (%) 47.8 43.1 44.1 44.3 44.9 Provision coverage (%) 50.2 44.5 45.7 45.9 46.1 Dividend payout (%) 20.1 24.6 24.7 24.7 24.7 Credit-deposit (%) 74.6 79.8 77.5 75.0 75.0 Investment-deposit (%) 28.8 27.9 29.0 28.5 28.0 Gross NPA (%) 2.4 3.1 3.3 2.9 2.5 Net NPA (%) 1.2 1.7 1.8 1.5 1.4 BV (`) 243.4 265.8 299.5 340.0 386.9 Adj BV (`) 209.0 210.8 230.3 268.1 311.4 CAR (%) 13.0 11.8 11.5 11.2 10.8 - Tier 1 (%) 8.7 8.4 7.9 7.5 7.1RoE (%) 18.0 13.0 16.7 17.8 18.1 RoA (%) 1.0 0.7 0.9 0.9 0.8 Source: Company, Anand Rathi Research

Fig 4 – PE band

UBI

UNBK

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UNBK

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Fig 6 – Union Bank vs. Bankex

UNBK

Bankex

150

170

190

210

230

250

270

290

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

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12

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12

Oct

-12

Nov

-12

Dec

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Source: Bloomberg


Banks


`

1 January 2013

IDBI Bank

Priority sector focus to keep NIM in check; Buy

IDBI Bank’s 3QFY13 profit is likely to be driven by treasury profits and lower NPA provisions. We have a Buy rating on the bank, since the bank is focused on prudent credit growth, NIM protection and controlling operating costs. However, its asset quality needs to improve, in our view, for a strong valuation upside.

Priority sector lending to drive loan growth. Loan growth is likely to be 13% yoy, slower than overall system credit growth, but higher than the past four quarter average of 11.6%. The bank is aiming to achieve its priority-sector lending targets in FY13. Hence, the growth drivers for bank credit would be farm, SME and retail mortgage segments.

Marginal NIM decline likely. Despite higher-than-past credit growth, NIM is likely to be decrease marginally by 5bps qoq, (up 11bps yoy) to 2%, due to incremental lending to the priority sector, where yields are relatively lower. A likely high credit-to-deposit (88.2% in Dec ’11) would support NIM to some extent.

No respite on asset quality. Given the slowdown in the macroeconomic environment, asset quality stress is likely to persist. We expect gross slippages at 1.5% of loans (similar to 2QFY13) and estimate credit costs of 80bps in 3QFY13.

Key monitorables. Management outlook on: (1) Stressed asset additions (fresh slippages and restructuring) in 2HFY13; (2) NIM trajectory ahead, given priority sector focus; and (3) improvement in NPA coverage from 42%.

Valuation. We value the standalone bank at `118 (0.6x FY14e ABV). We price the investments at book value (`23), arriving at our target of `141. Risk: Slower-than-expected economic growth.


Key data IDBI IN / IDBI.BO52-week high / low `122 / `77 Sensex / Nifty 19445 / 59083-m average volume US$4.2m Market cap `141bn / US$2.6bn Shares outstanding 1,278.4m






Cost-to-income (%) 36.1 37.9 178bps 44.7 41.9 (280)


Tax (`m) 4,400 3,964 (9.9) 81 1,305 NM

PAT (`m) 8,510 9,109 7.0 4,098 5,222 27.4

EPS (`) 8.6 7.1 (17.6) 4.2 4.1 (1.8)




1 January 2013 IDBI Bank – Priority sector focus to keep NIM in check; Buy




Net interest income 42,693 45,448 51,467 58,172 71,386 NII growth (%) 89.2 6.5 13.2 13.0 22.7 Non-interest inc 21,432 21,188 25,078 29,522 35,034 Total income 64,125 66,636 76,545 87,694 106,420 Total Inc growth (%) 40.7 3.9 14.9 14.6 21.4 Op. expenses 22,547 26,075 29,587 32,442 39,583 Operating profit 41,578 40,562 46,958 55,252 66,837 Op profit growth (%) 52.5 (2.4) 15.8 17.7 21.0 Provisions 18,769 14,265 15,799 16,767 19,282 PBT 22,810 26,297 31,159 38,485 47,555 Tax 6,307 5,981 7,166 9,236 11,889 PAT 16,503 20,316 23,992 29,248 35,666 PAT growth (%) 60.0 23.1 18.1 21.9 21.9 FDEPS (`/share) 16.8 15.9 18.8 22.9 27.9 DPS (`/share) 3.5 3.0 3.6 4.3 5.3 Source: Company, Anand Rathi Research


Share capital 9,846 12,784 12,784 12,784 12,784 Reserves & surplus 135,830 181,495 200,213 223,041 250,879 Deposits 1,804,858 2,104,926 2,292,902 2,636,837 3,164,205 Borrowings 583,234 609,168 616,607 678,267 746,094 Minority interests - - - - -Total liabilities 2,533,768 2,908,372 3,122,505 3,550,930 4,173,962 Advances 1,570,981 1,811,584 1,994,825 2,294,048 2,752,858 Investments 682,692 831,754 687,871 738,314 885,977 Cash & bank bal 207,661 180,577 339,890 404,937 401,560 Fixed & other assets 72,435 84,458 99,920 113,630 133,567 Total assets 2,533,768 2,908,372 3,122,505 3,550,930 4,173,962 No. of shares (m) 985 1,278 1,278 1,278 1,278 Deposits growth (%) 7.6 16.6 8.9 15.0 20.0 Advances growth (%) 13.7 15.3 10.1 15.0 20.0 Source: Company, Anand Rathi Research



Fig 4 – PE band

IDBI

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IDBI

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Fig 6 – IDBI Bank vs. Bankex

IDBI

Bankex

70

75

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90

95

100

105

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115

120

Jan-

12

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12

Mar

-12

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Source: Bloomberg


NBFCs


`

1 January 2013

HDFC

Stable mortgage lending, asset quality to drive profits; Buy

Strong loan growth, stable spreads and improving asset quality are likely to drive HDFC’s 3QFY13 profits. We have a Buy rating on the stock, as we expect its RoE over FY13-14 to hold above 20%, supported by healthy business growth, stable spreads and robust performance of subsidiaries.

Healthy loan growth likely. Loan growth, net of sell-downs, is likely to be robust at 20% yoy, of which, developer loans are likely to comprise one-third of total loans.

Stable spreads to drive NII. The spread on the housing finance business is likely to hover within the management’s guidance of 2.2-2.5%. Stable spreads and robust credit growth are likely to drive NII growth of 18.6% yoy.

Asset quality likely to improve. Over the last year, asset quality has been quite healthy, with gross NPAs falling from 0.82% (90 days overdue) in Dec ’11 to 0.77% in Sep ’12. We expect this trend of asset quality improvement to continue.

Key monitorables. Management outlook on: (1) Retail mortgage demand; (2) mix between retail and developer loans in incremental lending.

Valuation. Our sum-of-parts valuation price target is `873. We value the mortgage business at `594 (3.6x FY14e BV) and the subsidiaries at `279. Risk Significant slowdown in the mortgage market, leading to slower-than-estimated loan growth.


Key data HDFC IN / HDFC.BO52-week high / low `882/`611 Sensex / Nifty 19445 / 59083-m average volume US$41m Market cap `1,287bn / US$23.5bn Shares outstanding 1,539m

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters - - -- of which, Pledged - - -Free Float 100.0 100.0 100.0- Foreign Institutions 68.7 66.7 65.8- Domestic Institutions 18.0 19.5 20.1- Public 13.3 13.8 14.1






Pre-provisioning profit (`m) 25,482 30,080 18.0 13,336 15,203 14.0Provisions (`m) 350 800 128.6 54 62 14.7 PBT (`m) 25,132 29,280 16.5 13,283 15,142 14.0

Tax (`m) 6,980 7,750 11.0 3,470 3,661 5.5

PAT (`m) 18,152 21,530 18.6 9,813 11,481 17.0

EPS (`) 12.1 14.2 17.1 10,849 12,476 15.0




1 January 2013 HDFC – Stable mortgage lending, asset quality to drive profits; Buy




Net interest income 44,876 53,279 62,626 75,084 90,114 NII growth (%) 24.6 18.7 17.5 19.9 20.0 Non-interest inc 8,305 8,696 9,187 9,399 10,311 Total income 53,181 61,975 71,813 84,484 100,425 Total Inc growth (%) 23.7 16.5 15.9 17.6 18.9 Op. expenses 3,812 4,519 5,266 5,981 7,231 Operating profit 49,370 57,456 66,547 78,503 93,194 Op profit growth (%) 24.2 16.4 15.8 18.0 18.7 Provisions 700 800 748 900 1,077 PBT 48,670 56,656 65,799 77,603 92,117 Tax 13,320 15,430 16,450 19,789 23,951 PAT 35,350 41,226 49,349 57,814 68,167 PAT growth (%) 25.1 16.6 19.7 17.2 17.9 FDEPS (`/share) 24.1 27.9 32.0 37.1 43.3 DPS (`/share) 9.0 11.0 13.0 15.0 17.5Source: Company, Anand Rathi Research


Share capital 2,934 2,954 3,087 3,118 3,149 Reserves & surplus 170,231 187,222 213,270 243,930 280,099 Deposits 445,706 574,881 592,663 694,263 812,776 Borrowings 462,148 453,466 674,978 831,160 1,021,776 Minority interests 246,251 362,928 378,646 430,248 487,666 Total liabilities 1,327,270 1,581,451 1,862,644 2,202,719 2,605,467 Advances 1,014,879 1,259,855 1,510,355 1,810,807 2,170,298 Investments 118,324 122,070 128,740 150,587 175,560 Cash & bank bal 187,246 190,904 213,742 229,490 245,517 Fixed & other assets 6,821 8,622 9,807 11,835 14,093 Total assets 1,327,270 1,581,450 1,862,644 2,202,719 2,605,467 No. of shares (m) 1,467 1,477 1,543 1,559 1,574 Deposits growth (%) n/a n/a n/a n/a n/aAdvances growth (%) 3.6 24.1 19.9 19.9 19.9 Source: Company, Anand Rathi Research



Fig 4 – PE band

HDFC

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HDFC

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Fig 6 – HDFC vs. Bankex

HDFC

Bankex

550

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12

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12

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-12

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2

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Source: Bloomberg


NBFCs


`

1 January 2013

IDFC

Poised to tap infra lending opportunities; Buy

Robust loan growth, better spreads and stable asset quality could drive IDFC’s 3QFY13 profits. With its strong domain expertise and unique position, we believe IDFC is poised to capitalize on opportunities in infra funding, and sustain RoA of over 2.5% in FY13-15. Hence, we have a Buy rating on the stock.

Robust loan growth, spreads. Loan growth is estimated at a robust 33% yoy, higher than the past four-quarter average of 30.5%. Spread on infra lending business is expected to be 2.6%, up 20bps yoy, flat qoq. Better spreads and robust loan growth could drive NII growth of 28.2% yoy.

Modest non-interest income. We estimate modest gains of `500m from principal investments (`910m in 3QFY12). Given subdued capital market activity in 3QFY13, income from investment banking and equity broking is unlikely to have grown significantly. Hence, we estimate non-interest income to grow 2.1% yoy.

Asset quality to remain stable. Asset quality is unlikely to surprise negatively, though some stress is likely to persist, given slowdown in the macroeconomic environment. We expect gross NPAs at 0.3% of loans (similar to 2QFY13) with NPA coverage at 52%.

Key monitorables. Management outlook on: (1) Infrastructure loan pipeline; (2) asset quality, particularly in the energy segment; and (3) non-lending businesses - asset management, investment banking and equity broking.

Valuation. Our SOTP valuation gives us fair value of `219; we value the lending business at `185 a share (1.8x FY14e BV) and other businesses and investments at `34. Risks. Substantial slowdown in infrastructure spending and inability to mobilise resources for the AMC business.


Key data IDFC IN/IDFC.BO52-week high / low `179/`90 Sensex / Nifty 19445 / 59083-m average volume US$18.2m Market cap `262bn/US$4.8bn Shares outstanding 1,513m

Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters - - -- of which, Pledged - - -Free Float 100.0 100.0 100.0- Foreign Institutions 51.2 51.2 51.2- Domestic Institutions 34.7 34.7 34.7- Public 14.1 14.1 14.1




Operating expenses (`m) 2,456 2,401 (2.2) 1,266 1,438 13.6


Pre-provisioning profit (`m) 12,504 12,719 1.7 6,344 7,128 12.4 Provisions (`m) 1,031 1,331 29.1 978 483 (50.6)PBT (`m) 11,474 11,388 (0.7) 5,366 6,645 23.8

Tax (`m) 3,092 3,901 26.1 1,537 2,062 34.2

PAT (`m) 8,380 8,554 2.1 3,812 5,050 32.5

EPS (`) 5.5 5.6 2.0 2.6 3.3 28.1




1 January 2013 IDFC – Poised to tap infra lending opportunities; Buy




Net interest income 16,195 20,168 26,100 36,208 47,902 NII growth (%) 58.6 24.5 29.4 38.7 32.3 Non-interest inc 9,260 9,620 8,661 10,510 12,871 Total income 25,455 29,788 34,761 46,718 60,773 Total Inc growth (%) 20.4 21.5 21.5 34.0 27.4 Op. expenses 5,267 5,202 5,753 8,035 11,182 Operating profit 20,188 24,587 29,009 38,682 49,591 Op profit growth (%) 11.1 11.1 11.4 11.1 11.2 Provisions 2,400 2,860 2,414 2,787 3,519 PBT 17,788 21,727 26,595 35,896 46,072 Tax 4,998 6,219 7,713 10,589 13,821 PAT 12,791 15,508 18,882 25,306 32,250 PAT growth (%) 19.8 21.2 22.3 34.0 27.4 FDEPS (`/share) 8.8 10.3 12.5 16.7 21.3 DPS (`/share) 2.0 2.3 2.7 3.7 4.7Source: Company, Anand Rathi Research


Share capital 14,609 15,124 15,124 15,124 15,124 Reserves & surplus 97,875 107,733 119,603 138,395 162,344 Deposits 356,539 457,855 651,752 872,273 1,166,662 Borrowings 6,500 6,500 6,500 6,500 6,500 Minority interests 17,643 22,581 32,975 65,468 110,537 Total liabilities 493,167 609,791 825,954 1,097,759 1,461,167 Advances 376,523 481,846 645,087 861,197 1,149,698 Investments 69,611 75,339 105,320 140,604 187,706 Cash & bank bal 11,049 7,002 11,118 14,842 19,814 Fixed & other assets 35,984 45,605 64,429 81,116 103,948 Total assets 493,167 609,791 825,954 1,097,759 1,461,167 No. of shares (m) 1,461 1,512 1,512 1,512 1,512 Deposits growth (%) n/a n/a n/a n/a n/aAdvances growth (%) 49.6 27.9 32.2 33.5 33.5 Source: Company, Anand Rathi Research


NIM (%) 4.0 3.8 3.7 3.8 3.8 Other inc / total inc (%) 36.4 32.3 24.9 22.5 21.2 Cost-income (%) 20.7 17.5 16.5 17.2 18.4 Provision coverage (%) 69.3 70.0 73.8 77.0 79.9 Dividend payout (%) 22.9 22.4 22.0 22.0 22.0 Credit-deposit (%) n/a n/a n/a n/a n/aInvestment-deposit (%) n/a n/a n/a n/a n/aGross NPA (%) 0.4 0.4 0.4 0.4 0.4Net NPA (%) 0.1 0.1 0.1 0.1 0.1BV (`) 71.2 81.3 89.1 101.5 117.3 Adj BV (`) 71.2 81.3 89.1 101.5 117.3 CAR (%) 20.5 18.1 14.7 12.6 10.9 - Tier 1 (%) 17.4 15.3 12.4 10.7 9.3RoE (%) 14.0 13.2 14.7 17.6 19.5 RoA (%) 3.0 2.8 2.6 2.6 2.5 Source: Company, Anand Rathi Research

Fig 4 – PE band

5x

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15xIDFC

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6Au

g-06

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-06

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-07

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-08

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9Au

g-09

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-09

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g-10

Dec

-10

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1Au

g-11

Dec

-11

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2Au

g-12

Dec

-12



IDFC

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2x

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6

Sep-

06

Feb-

07

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7

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-07

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-08

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-09

Aug-

09

Jan-

10

Jun-

10

Nov

-10

Apr-1

1

Sep-

11

Feb-

12

Jul-1

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-12


Fig 6 – IDFC vs. Bankex

IDFC

Bankex

80

90

100

110

120

130

140

150

160

170

180

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Power Finance Corporation

Healthy credit growth, better NIM; Buy

Despite healthy core earnings growth, Power Finance Corporation’s (PFC) 3QFY13 profit is likely to be lower yoy on account of non recurring foreign exchange gains in 2QFY13. We have a Buy on the stock as its niche operating model, robust loan growth and improving NIM would support a 2.3%+ RoA over FY12-15. Risk-reward favors PFC at the current valuations of 1.0x FY14 BV.

Healthy loan growth to continue. We expect loan growth to remain healthy at ~25% yoy, 3.5% qoq, driven by bridge loans to State Electricity Boards and drawdown from previous sanctions. We also expect an increase in exposure to State PSU in the disbursement mix.

Higher NIM and spread. The share of short-term borrowings increased 310bps qoq to 4% of total borrowings in 2QFY13. A decline in wholesale borrowing rates is likely to support a higher spread of ~2.7% (2.2% in 2QFY13). Robust loan growth and better spread are likely to drive 41.7% yoy and 4.9% qoq in net interest income (NII).

Likely higher provisions yoy: Although PFC’s asset quality has remained stable over the last two quarters, risks to asset quality could persist given the sluggish macro-economic environment. We conservatively estimate `563m of NPA provisions for the quarter.

Key monitorables. Management’s outlook on: (1) Growth in sanctions and disbursements; (2) asset quality trend; and (3) impact of SEB debt restructuring plan.

Valuation. At our Mar’14 target, the stock would trade at PABV of 1.4x FY13e and 1.2x FY14e. Our target is based on two-stage DDM (CoE: 14.6%; beta: 0.9; Rf: 8%). Risks. Slowdown in the power sector; regulatory hurdles.





Non-interest income (`m) (5,856) 53 NM 4,166 176 (95.8)

Operating expenses (`m) 595 606 1.8 290 411 41.9


Pre-provisioning profit (`m) 14,670 27,336 86.3 14,734 15,147 2.8Provisions (`m) - - NM - 569 NMPBT (`m) 14,670 27,336 86.3 14,734 14,578 (1.1)

Tax (`m) 3,615 7,222 99.8 3,655 4,086 11.8

PAT (`m) 11,055 20,114 81.9 11,079 10,491 (5.3)

EPS (`) 8.4 15.2 81.7 8.4 7.9 (5.3)




Key data POWF IN / PWFC.BO52-week high / low `224 / `134 Sensex / Nifty 19445/ 59083-m average volume US$9.8m Market cap `268bn / US$4.9n Shares outstanding 1320m

1 January 2013 Power Finance Corporation – Healthy credit growth, better NIM; Buy




Net interest income 35,519 43,142 52,963 64,467 78,788NII growth (%) 26.9 21.5 22.8 21.7 22.2Non-interest inc 1,217 614 650 1,220 1,516Total income 36,736 43,756 53,613 65,687 80,304Total Inc growth (%) 17.6 19.1 22.5 22.5 22.3Op. expenses 977 1,285 1,711 2,157 2,517Operating profit 35,759 42,470 51,902 63,530 77,787Op profit growth (%) 18.7 18.8 22.2 22.4 22.4Provisions 317 1,428 2,370 3,021 3,335PBT 35,441 41,043 49,532 60,509 74,452Tax 9,245 10,725 13,621 16,459 20,846PAT 26,196 30,317 35,911 44,051 53,605PAT growth (%) 11.1 15.7 18.4 22.7 21.7FDEPS (`/share) 22.8 23.0 27.2 33.4 40.6DPS (`/share) 5.0 5.5 7.0 8.5 9.5Source: Company, Anand Rathi Research


Share capital 11,478 13,199 13,199 13,199 13,199Reserves & surplus 140,347 193,876 218,976 249,900 288,834Borrowings 855,986 1,101,260 1,411,920 1,749,121 2,104,287Current liab & prov 37,702 46,542 54,474 64,061 78,585Deferred tax liabilities 830 874 874 874 1,619Total liabilities 1,046,342 1,355,752 1,699,444 2,077,156 2,486,525 Advances 995,707 1,300,718 1,641,768 2,010,484 2,432,702Investments 539 592 680 783 861Cash & bank bal 23,503 19,882 25,923 31,838 17,298Fixed & other assets 25,024 28,392 31,072 34,051 35,664Total assets 1,044,772 1,349,584 1,699,444 2,077,156 2,486,525No. of shares (m) 1,148 1,320 1,320 1,320 1,320Borrowings growth (%) 27.6 28.7 28.2 23.9 20.3Advances growth (%) 24.7 30.6 26.2 22.5 21.0Source: Company, Anand Rathi Research


NIM (%) 3.9 3.9 3.5 3.5 3.5Other inc / total inc (%) 3.3 1.4 1.2 1.9 1.9Cost-income (%) 2.7 2.9 3.2 3.3 3.1Provision coverage (%) 15.6 10.5 20.9 30.0 39.0Dividend payout (%) 25.6 28.0 30.1 29.8 27.4Borrowing-loans (%) 86.0 84.7 86.0 87.0 86.5Investment-deposit (%) - - - - -Gross NPA (%) 0.2 1.0 0.9 0.9 0.8Net NPA (%) 0.2 0.9 0.7 0.6 0.5BV (`) 133.0 157.5 176.6 200.0 230.1Adj BV (`) 131.9 151.6 170.5 194.0 224.3CAR (%) 17.0 16.3 17.0 16.5 16.0RoE (%) 18.3 16.8 16.3 17.7 18.9RoA (%) 2.8 2.5 2.4 2.3 2.3Dividend yield (%) 2.6 2.9 3.7 4.5 5.0Source: Company, Anand Rathi Research

Fig 4 – PE band

PFC

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7

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PFC

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Fig 6 – PFC vs. Bankex

POWF

Bankex

120

140

160

180

200

220

240

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Rural Electrification Corporation

Steady credit growth, higher NIM ; Buy

Healthy loan growth and improving NIM are likely to drive Rural Electrification Corporation’s (REC) 3QFY13 profit yoy. We have a Buy on the stock as its niche operating model, steady loan growth and improving NIM would support a 2.6%+ RoA over FY12-15. Risk-reward favors REC at the current valuations of 1.2x FY14 BV.

Healthy loan growth to continue, bias towards T&D sector. Loan growth is likely to remain healthy at ~23% yoy, 4% qoq, driven by short term working capital loans in T&D sector. We expect disbursement mix to remain biased towards T&D sector which saw a sharp increase in 2QFY13 (51%) compared to 38% in 1QFY13.

Higher NIM and spread. The proportion of commercial paper for the infra finance NBFC increased in 2QFY13. Robust loan growth and a decline in wholesale borrowing rates are likely to support a higher spread of ~3.5% compared to 3.0% in 3QFY12. Hence, we estimate net interest income (NII) to grow 31.2% yoy and 3.0% qoq.

Higher credit costs likely: Although REC’s asset quality has remained stable over the last two quarters however risks to asset quality would persist given the slowing macro-economic environment. With REC hedging a large part of its foreign currency exposure, an MTM hit on account of currency depreciation is likely to be limited. We conservatively estimate `320m of NPA provisions for the quarter.

Key monitorables. Management’s outlook on: (1) Growth in sanctions and disbursements; (2) asset quality trend and; (3) impact of SEB debt restructuring plan.

Valuation. At our Mar’14 target, the stock would trade at PABV of 1.7x FY13e and 1.4x FY14e. Our target is based on the two-stage DDM (CoE: 15.1%; beta: 1.2; Rf: 8%). Risks. Slowdown in the power sector; regulatory risk.




Net interest income (`m) 18,594 24,456 31.5 10,052 13,183 31.2Non-interest income (`m) (100) 1,177 (1,276) 1,357 774 (43.0)Operating expenses (`m) 926 1,040 12.4 779 618 (20.6)Cost-to-income (%) 5.0 4.1 (95)bps 6.8 4.4 (240)bpsPre-provisioning profit (`m) 17,568 24,592 40.0 10,629 13,339 25.5Provisions (`m) - - - 241 320 33.0PBT (`m) 17,568 24,592 40.0 10,389 13,018 25.3Tax (`m) 4,455 6,286 41.1 2,693 3,213 19.3PAT (`m) 13,113 18,306 39.6 7,695 9,805 27.4EPS (`) 13.0 18.5 42.3 7.8 9.9 27.4Source: Company, Anand Rathi Research



Key data RECL IN / RURL.BO 52-week high / low `252/`142 Sensex / Nifty 19445/59083-m average volume US$8.7mMarket cap `239bn/US$4.3bn Shares outstanding 987.5m

1 January 2013 Rural Electrification Corporation – Steady credit growth, higher NIM ; Buy




Net interest income 34,059 39,588 49,183 59,421 68,364NII growth (%) 34.4 16.2 24.2 20.8 15.0Non-interest inc 2,384 1,715 1,140 1,235 1,652Total income 36,443 41,303 50,323 60,656 70,016Total Inc growth (%) 29.6 13.3 21.8 20.5 15.4Op. expenses 1,645 2,326 2,822 3,285 3,821Operating profit 34,797 38,977 47,501 57,371 66,194Op profit growth (%) 31.3 12.0 21.9 20.8 15.4Provisions 2 1,048 1,602 2,019 2,448PBT 34,795 37,929 45,899 55,352 63,746Tax 9,096 9,758 11,475 13,838 17,211PAT 25,699 28,170 34,424 41,514 46,535PAT growth (%) 28.4 9.6 22.2 20.6 12.1FDEPS (`/share) 26.0 28.5 34.9 42.0 47.1DPS (`/share) 6.5 6.5 7.0 7.5 8.5Source: Company, Anand Rathi Research


Share capital 9,875 9,875 9,875 9,875 9,875Reserves & surplus 118,012 137,575 163,912 196,761 233,475Borrowings 700,397 900,565 1,079,478 1,307,974 1,569,228

Current liab & prov 36,844 39,272 47,126 56,551 68,427Minority interest - - - - -Total liabilities 864,999 1,087,185 1,300,290 1,571,060 1,881,542 Advances 817,360 1,014,029 1,226,680 1,481,284 1,783,214Investments 8,368 7,576 8,333 9,167 10,175Cash & bank bal 28,319 53,115 56,961 70,949 77,330Fixed & other assets 7,310 8,167 8,316 9,661 10,824Total assets 861,357 1,082,887 1,300,290 1,571,060 1,881,542No. of shares (m) 987 987 987 987 987Borrowings growth (%) 25.2 28.6 19.9 21.2 20.0Advances growth (%) 23.0 24.1 21.0 20.8 20.4Source: Company, Anand Rathi Research


NIM (%) 4.5 4.1 4.2 4.2 4.0Other inc / total inc (%) 6.5 4.2 2.3 2.0 2.4Cost-income (%) 4.5 5.6 5.6 5.4 5.5Provision coverage (%) 90.0 13.5 29.9 56.2 87.9Dividend payout (%) 33.5 30.6 23.5 20.9 21.1Borrowing-loans (%) 85.7 88.8 88.0 88.3 88.0Investment-deposit (%) - - - - -Gross NPA (%) 0.0 0.5 0.6 0.5 0.4Net NPA (%) 0.0 0.4 0.4 0.2 0.1BV (`) 129.4 149.2 175.9 209.2 247.0Adj BV (`) 123.3 137.0 161.6 195.6 234.4CAR (%) 19.1 17.0 16.4 15.9 15.3RoE (%) 21.5 20.5 21.4 21.8 20.7RoA (%) 3.3 2.9 2.9 2.9 2.7Dividend yield (%) 3.0 3.0 3.2 3.4 3.9Source: Company, Anand Rathi Research

Fig 4 – PE band

REC

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REC

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Fig 6 – REC vs. Bankex

RECL

Bankex

130

150

170

190

210

230

250

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

M&M Financial Services

Robust credit growth, better NIM; Buy

Robust credit growth, better NIM and stable asset quality are key growth triggers for M&M Financial Services (MMFS). We maintain Buy on the stock as we expect its niche rural presence, strong parentage and diversified product mix to drive +3.5% RoA in FY12-14.

Utility vehicles, car finance to aid credit growth. AUM growth is likely to remain robust, at +30%, driven by healthy disbursements in utility vehicle, cars and used vehicles. Tractor growth could, however, remain subdued.

NIM, net interest income likely to inch higher. Declining wholesale borrowing costs and capital infusion of `8.9bn during the quarter are likely to support NIM (on AUM) of 10.2%, up 10bps qoq. Robust AUM growth and better NIM could, in turn, drive 42% yoy growth in net interest income.

Asset quality to remain stable; subsidiaries on track. We expect some stress on asset quality, given slowdown in tractors, commercial vehicles and automobiles. By moving to the 90-day NPA recognition norm, MMFS is likely to provide more for NPAs. Credit cost is likely to remain stable at 1.6-1.7% of AUM, given likely robust recoveries. We expect its key subsidiaries - Mahindra Rural Housing and Mahindra Insurance Brokers, to continue doing well in terms of profitability.

Key monitorables. Management outlook: (1) Disbursement growth and the products driving credit growth; (2) Stress in tractor, CV financing.

Valuation. At our target of `1146, the stock would trade at FY13e and FY14e PBV of 3x and 2.5x, respectively. Our valuation is based on the two-stage DDM (CoE: 15%; beta: 1.1; Rf: 8%). Risk. Slower-than-expected economic growth could hit loan growth and credit quality.




Net interest income (`m) 7,219 10,136 40.4 4,178 5,943 42.2 Non-interest income (`m) 321 174 (45.8) 138 116 (16.4)Operating expenses (`m) 2,927 3,433 17.3 1,520 1,983 30.5 Cost-to-income (%) 38.8 33.3 (552)bps 35.2 32.7 (247)bpsPre-provisioning profit (`m) 4,613 6,876 49.1 2,797 4,075 45.7 Provisions (`m) 1,085 1,692 56.0 494 1,135 129.9 PBT (`m) 3,529 5,185 46.9 2,303 2,940 27.7 Tax (`m) 1,152 1,698 47.5 756 954 26.3 PAT (`m) 2,377 3,487 46.7 1,547 1,985 28.3 EPS (`) 23.2 34.0 46.3 15.1 17.7 17.1 Source: Company, Anand Rathi Research



Key data MMFS IN /MMFS .BO 52-week high / low `1173 / `568 Sensex / Nifty 19445/59083-m average volume US$4.3m Market cap `128bn/US$2.34bn Shares outstanding 113.7m

1 January 2013 M&M Financial Services – Robust credit growth, better NIM; Buy




Net interest income 13,137 16,474 22,858 28,498 33,674NII growth (%) 27.7 25.4 38.8 24.7 18.2Non-interest inc 386 269 413 403 407Total income 13,524 16,742 23,271 28,901 34,081Total Inc growth (%) 26.7 23.8 39.0 24.2 17.9Op. expenses 4,932 5,920 7,639 9,671 11,847Operating profit 8,592 10,822 15,632 19,230 22,234Op profit growth (%) 15.8 26.0 44.4 23.0 15.6Provisions 1,253 1,570 3,954 4,464 4,609PBT 7,339 9,252 11,678 14,766 17,625Tax 2,393 3,051 3,854 4,947 5,904PAT 4,945 6,201 7,824 9,819 11,721PAT growth (%) 34.5 33.9 26.2 25.5 19.4FDEPS (`/share) 45.2 60.4 69.6 87.3 104.2DPS (`/share) 10.0 11.0 12.0 13.0 13.0Source: Company, Anand Rathi Research


Share capital 1,025 1,027 1,124 1,124 1,124Reserves & surplus 23,876 28,483 43,242 51,351 61,349Borrowings 96,750 139,611 176,363 223,209 276,242

Current liab & prov 15,890 16,495 18,969 22,763 27,316Minority interest - - - - -Total liabilities 137,541 185,616 239,698 298,447 366,030 Advances 124,650 174,963 220,453 275,567 338,947Investments 6,746 5,025 6,030 7,236 8,756Cash & bank bal 2,977 2,452 9,659 11,719 13,978Fixed & other assets 3,169 3,176 3,555 3,925 4,350Total assets 137,541 185,616 239,698 298,447 366,030No. of shares (m) 102 103 112 112 112Borrowings growth (%) 49.8 44.3 26.3 26.6 23.8Advances growth (%) 48.8 40.4 26.0 25.0 23.0Source: Company, Anand Rathi Research


NIM (%) 11.4 10.2 10.7 10.6 10.1Other inc. / Total inc.(%) 2.9 1.6 1.8 1.4 1.2Cost-Income (%) 36.5 35.4 32.8 33.5 34.8Provision coverage (%) 86.4 78.0 71.1 68.3 68.1Dividend payout (%) 22.5 18.2 17.2 14.9 12.5Borrowings-loans (%) 77.6 79.8 80.0 81.0 81.5Investment-Deposit (%) - - - - -Gross NPA (%) 4.2 3.1 3.3 3.3 3.1Net NPA (%) 0.6 0.7 1.0 1.1 1.0BV (`) 243.0 287.4 394.6 466.7 555.7Adj. BV BV (`) 240.5 283.2 387.9 457.6 545.1CAR (%) 17.5 16.0 18.7 17.6 17.0Tier 1 (%) 15.1 13.8 16.3 15.3 14.7RoE (%) 22.0 22.8 21.2 20.3 20.4RoA (%) 4.1 3.8 3.7 3.6 3.5Source: Company, Anand Rathi Research

Fig 4 – PE band

MMFS

3x

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-12



MMFS

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9Au

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1Au

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Fig 6 – MMFS vs. Bankex

MMFS

Bankex

500

600

700

800

900

1,000

1,100

1,200

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg


Banks


`

1 January 2013

Shriram Transport Finance

Improving credit growth, better NIM, high NPA coverage; Buy

Shriram Transport Finance’s (SHTF) 3QFY13 profit is likely to be driven by lower NPA provisions yoy. We have a Buy on the stock as its niche model, unmatched presence and diversified branch network would support a 3.6%+ RoA over FY12-15. We retain a Buy.

AUM growth has bottomed out, expected to improve. AUM growth is likely to have bottomed out. We expect growth to be marginally better at 17% yoy compared to 15.5% in 2QFY13, driven by robust disbursements in used CV disbursements with focus in rural hinterland. We expect NII to grow 16.8% yoy and 8.2% qoq, led by stable NIM of 7.7%, supported by declining wholesale borrowing rates.

Likely stress in asset quality, but high NPA coverage. We expect some stress in asset quality, given the slowdown in commercial vehicle financing. However, high NPA coverage (~80%) over the past eight quarters provides comfort. We estimate marginally higher credit cost of 2.1% on AUM, led by higher NPA provisions on account of shifting to 90-day NPA recognition.

Subsidiaries likely to do well: We expect SHTF’s key subsidiaries - Shriram Equipment Finance and Shriram Automall, to continue doing well in terms of growth and profitability.

Key monitorables. Management outlook on: (1) Commercial vehicle growth, given a stressed macro environment; (2) NIM in light of easing wholesale rates; and (3) quantum of securitization.

Valuation. At our Mar’14 target, the stock would trade at a PBV of 2.3x FY13e and 1.9x FY14e. Our target is based on the two-stage DDM (CoE: 15.7%; beta: 1.1; Rf: 8%) Risks. Economic slowdown and thus slower loan growth and high NPAs could impact earnings negatively.


Shareholding pattern (%) Sep-12 Jun-12 Mar-12Promoters 46.2 46.2 45.6- of which, Pledged 4.2 4.2 4.2Free Float 53.8 53.8 54.4- Foreign Institutions 41 40.1 39.2- Domestic Institutions 1.7 2.0 2.4- Public 11.0 11.7 12.7


Net interest income (`m) 16,168 16,703 3.3 8,038 9,391 16.8 Non-interest income (`m) 735 1,016 38.3 294 321 9.4 Operating expenses (`m) 3,465 3,813 10.0 1,867 2,165 16.0 Cost-to-income (%) 20.5 21.5 102bps 22.4 22.3 (11)bpsPre-provisioning profit (`m) 13,438 13,906 3.5 6,465 7,548 16.8 Provisions (`m) 3,783 4,132 9.2 1,920 2,336 21.6 PBT (`m) 9,654 9,774 1.2 4,545 5,212 14.7 Tax (`m) 3,187 3,180 (0.2) 1,518 1,656 9.1 PAT (`m) 6,467 6,594 2.0 3,027 3,555 17.5 EPS (`) 28.6 29.1 1.7 13.2 16 18.7 Source: Company, Anand Rathi Research



Key data SHTF IN / SRTR .BO52-week high / low `785 / `416 Sensex / Nifty 19445 / 59083-m average volume US$4.9mMarket cap `170bn / US$3.1bn Shares outstanding 226.8m

1 January 2013 Shriram Transport Finance – Improving credit growth, better NIM, high NPA coverage; Buy






Share capital 2,262 2,263 2,263 2,263 2,263Reserves & surplus 46,782 57,660 69,735 84,266 101,497Borrowings 197,782 231,274 267,855 324,558 378,170

Current liab & prov 69,850 66,578 74,789 83,199 92,590ct - - - - -Total liabilities 316,676 357,775 414,642 494,287 574,520 Advances 198,559 219,813 259,330 323,500 385,222Investments 36,457 39,545 43,499 47,849 52,634Cash & bank bal 35,724 53,081 61,089 66,215 73,310Fixed & other assets 45,937 45,337 50,724 56,723 63,355Total assets 316,676 357,775 414,642 494,287 574,520No. of shares (m) 226 226 226 226 226Borrowings growth (%) 7.1 16.9 15.8 21.2 16.5Advances growth (%) 10.5 10.7 18.0 24.7 19.1Source: Company, Anand Rathi Research


NIM (%) 7.8 7.2 7.7 7.8 7.9Other inc. / Total inc.(%) 6.3 3.0 2.6 2.7 2.7Cost-Income (%) 23.9 22.8 21.9 21.1 20.5Provision coverage (%) 85.9 85.9 84.9 84.1 85.0Dividend payout (%) 13.9 13.7 16.5 16.7 16.7Borrowings-loans (%) 99.6 105.2 103.3 100.3 98.2Investment-Deposit (%) - - - - -Gross NPA (%) 2.6 3.1 3.4 3.4 3.5Net NPA (%) 0.4 0.4 0.5 0.6 0.5BV (`) 216.7 264.7 318.0 382.2 458.4Adj. BV BV (`) 213.4 260.3 311.9 374.2 449.1CAR (%) 21.5 24.3 21.6 20.0 20.0Tier 1 (%) 16.5 17.3 16.6 15.8 15.6RoE (%) 28.2 23.1 21.9 22.0 21.7RoA (%) 4.2 3.7 3.7 3.8 3.9Source: Company, Anand Rathi Research

Fig 4 – PE band

STFC

3x

7x

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Fig 6 – SHTF vs. Bankex

SHTF

Bankex

350

400

450

500

550

600

650

700

750

800

Jan-

12

Feb-

12

Mar

-12

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

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Dec

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Source: Bloomberg

Appendix Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 29 Oct 2012) Buy Hold Sell Anand Rathi Research stock coverage (155) 65% 25% 10% % who are investment banking clients 5% 3% 0% Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned.

Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest.

Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

© 2012 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited.

Additional information on recommended securities/instruments is available on request.


Key f inancia ls* (YE Mar) FY11 FY12 FY13e FY14e FY15e

Sales (`m) 8,092 14,099 14,814 16,278 18,642

Adjusted net profit (`m) (174) (1,102) (135) 1,415 2,161

EPS (`) (2.1) 0.3 (0.1) 0.5 0.8

Growth (%) NM NM (123.6) NM 59.0

PE (x) NM 71.3 NM 62.0 39.0

PBV (x) 2.8 1.3 1.7 1.6 1.5

RoE (%) (2.7) (16.0) (0.7) 4.1 6.0

RoCE (%) 2.9 0.7 3.6 5.2 6.2

Dividend yield (%) 0.0 0.0 0.0 0.1 0.2

Net gearing (%) 50 129 9 9 9

Source: Company, Anand Rathi Research * We have not consolidated financials of ETV

Media and Entertainment

Initiating CoverageIndia I Equities

1 January 2013

TV18 Broadcast

Set for solid earnings leap; initiate with a Buy

TV18 Broadcast (TV 18) is a leading TV network with strong brands in key genres. With its balance-sheet issues addressed and major network expansion behind, we expect investor focus to shift to its operational strengths and opportunities from cable-TV digitisation. We initiate coverage on TV18 with a Buy and Mar’14e target of `42.

Offers strong bouquet of channels. TV18 is a dominant player in the business news segment (with a 70% ad-revenue market share), and one of the top two in English news and Hindi GEC market. In all, it operates 12 channels and is set to acquire equity stakes in 12 channels of the ETV network. Management focus ahead would be on consolidating operations and raising profitability.

Set to unlock full revenue potential. We expect TV18’s EBITDA margin to expand ~1250bps over FY13-15, as digitisation of cable TV aids in lower carriage fee payouts and growth in subscription income. Recovery in advertising growth from FY14 would help margins as well.

Investor focus to shift meaningfully. After the recent rights issue, we expect TV18’s net debt to be `3.8bn (post-ETV investments), which implies a comfortable financial position – net debt-to-EV of 6.5% (vs. 49% pre-issue). With limited expansion activity expected ahead, the balance sheet would stay healthy. This would shift investor focus to the company’s operational strengths and opportunities in the space.

Valuations. TV18 trades at 18.7x FY14e proforma EBITDA (incl. pro-rata share of ETV), which is at premium to Zee Ent. (17.2x) and Sun TV (12.4x). We believe this premium is justified by TV18’s solid growth profile (60% EBITDA CAGR over FY13-15). Our target price is based on 15x FY15e EBITDA. Risks. Delay in cable TV digitisation, intensifying competition.


Relative price performance

TV18

Sensex

15

20

25

30

35

40

Jan-

12

Feb-

12M

ar-1

2

Apr-1

2

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Source: Bloomberg

Key data TV18 IN / TVEB.BO

52-week high / low `36.6 / `15.1

Sensex / Nifty 19427 / 5905

3-m average volume US$6.7m

Market cap `55.7bn / US$1.0bn

Shares outstanding 1,712m

Shareholding pattern (%) Mar ’12 Jun ’12 Sep’12Promoters 59.8 59.8 59.8 - of which, Pledged 67.1 67.1 67.1Free Float 40.2 40.2 40.2 - Foreign Institutions 5.5 8.4 9.2 - Domestic Institutions 6.6 7.8 7.9 - Public 28.2 24.1 23.2

1 January 2013 TV18 Broadcast – Set for solid earnings leap; initiate with Buy


Quick Glance – Financials (ex ETV) and ValuationsFig 1 – Income statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15eNet revenues 8,092 14,099 14,814 16,278 18,642 Revenue growth (%) 34.1 74.2 5.1 9.9 14.5 - Op. expenses 7,673 14,722 13,792 14,242 15,024 EBIDTA 419 (623) 1,022 2,036 3,618 EBITDA margin (%) 5.2 (4.4) 6.9 12.5 19.4 - Interest expenses 509 1,197 1,132 644 474 - Depreciation 176 335 412 382 401 + Other income 135 858 387 405 343 - Tax 43 58 0 0 926 Effective tax rate (%) NM NM NM 0 30Reported PAT (174) (962) (135) 1,415 2,161 +/- Extraordinary items 0 393 0 0 0 +/- Minority interest 0 (224) 0 0 0 Adjusted PAT (174) (1,102) (135) 1,415 2,161 Adj. FDEPS (`/share) (2.1) 0.3 (0.1) 0.5 0.8 Adj. FDEPS growth (%) NM NM (123.6) NM 59.0 Source: Company, Anand Rathi Research

Fig 3 – Cash-flow statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15ePAT (174) (738) (135) 1,415 2,161 + Non-cash items 97 (288) 412 382 401 Cash profit (77) (1,026) 277 1,797 2,561 - Incr./(Decr.) in WC 2,157 451 1,646 1,353 1,951 Operating cash-flow (2,234) (1,477) (1,370) 445 610 - Capex 55 475 620 574 577 Free cash-flow (2,289) (1,952) (1,990) (129) 34 - Dividend 0 0 0 45 143 + Equity raised 3,420 (93) 26,992 0 (0) + Debt raised 714 307 (4,189) (1,000) (1,013) - Investments 2,480 21 19,250 0 0 - Misc. items (261) (536) 0 0 0 Net cash-flow (374) (1,223) 1,563 (1,174) (1,122) + Op. cash & bank bal. 2,416 2,043 819 2,383 1,209 Cl. cash & bank bal. 2,043 819 2,383 1,209 87 Source: Company, Anand Rathi Research

Fig 5 – EV/Sales band

MCLR

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6x

4x5x

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20

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100

120

140

Dec

-07

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Fig 2 – Balance sheet (`m) Year-end: Mar FY11 FY12 FY13e FY14e FY15eShare capital 476 724 3,423 3,423 3,423 Reserves & surplus 6,408 6,132 30,289 31,659 33,677 Net worth 6,884 6,856 33,712 35,082 37,100 Minority interest 0 80 80 80 80 Total debt 5,507 9,644 5,455 4,455 3,442 Def. tax liab. (net) 0 0 0 0 0 Capital employed 12,391 16,580 39,247 39,617 40,622 Net fixed assets 4,825 6,136 6,344 6,535 6,712 Investments 59 61 19,311 19,311 19,311 - of which, Liquid 59 61 19,311 19,311 19,311 Net working capital 5,465 9,563 11,209 12,562 14,513 Cash and bank balance 2,043 819 2,383 1,209 87 Capital deployed 12,391 16,580 39,247 39,617 40,622 Net debt 3,434 8,825 3,073 3,246 3,356 WC days 246 248 276 282 284 Book value (`/sh) 28.9 18.9 19.7 20.5 21.7 Source: Company, Anand Rathi Research

Fig 4 – Ratio analysis @ `33 Year-end: Mar FY11 FY12 FY13e FY14e FY15eP/E (x) NM 71.3 NM 62.0 39.0 P/B (x) 2.8 1.3 1.7 1.6 1.5 EV/Sales (x) 2.8 1.2 4.0 3.6 3.2 EV/EBITDA (x) 53.8 NM 57.5 29.0 16.3 RoAE (%) (2.7) (16.0) (0.7) 4.1 6.0 RoACE (%) 2.9 0.7 3.6 5.2 6.2 Dividend yield (%) 0.0 0.0 0.0 0.1 0.2 Dividend payout (%) 0.0 0.0 0.0 5.0 10.0 EBITDA growth (%) NM (248.7) NM 99.3 77.7 EPS growth (%) NM NM (123.6) NM 59.0 PAT margin (%) (2.2) (7.8) (0.9) 8.7 11.6 Subs. sales growth (%) NA NA 10.9 18.0 17.0 Carriage fees growth (%) NA NA (1.4) (10.9) (10.7)Advt. revenue growth (%) NA NA 4.3 11.4 14.2 Net subs sales/Advtg rev (%) NA (9.8) (7.0) (0.3) 5.0 Source: Company, Anand Rathi Research

Fig 6 – FY12 revenue break-up (ex ETV)

Others0%

General news21%

Viacom18 - TV41%

Viacom18 - Film and others

15%Business news

23%

Source: Company



A formidable content offering

Strong brands in key genres TV18 pioneered the business news segment in India with the launch of CNBC TV18 (English) in 1999 and CNBC Awaaz (Hindi) in 2005. Together, these channels have a 70% market share in advertising in the business news category. TV18 is one of the top two in the Hindi general entertainment channel (GEC) segment – the largest for TV advertising – and the English general news segment.

Fig 8 – TV18 has strong market share in key TV genres

TV genres Channels Advt. market size Market Key peers

`bn % of total share (%) Business News CNBC TV18 (English),

CNBC (Awaaz), CNBC TV18 Prime HD

3.5 3.0 ~70 ET Now (English), Zee Business (Hindi)

Hindi GEC Colors 33 28.3 20-24 Star Plus, Zee TV, Sony Entertainment

English News CNN - IBN 4.5 3.9 30-35 Times Now, NDTV


Viewership share in business news stabilizing

During 2008-11, TV18’s market share in business news was cut into by new operators (notably ET Now). After initial losses, however, in the last year and a half its viewership share has been fairly constant. It still commands a strong market share (70%) in TV advertising on business news channels.

Fig 9 – TV18’s viewership share in business news has been stable

71 66 62 59 59 58

12 17 2219 18 22

38 15 10

17 14 9 96 7

3 4 5 2 3

0

10

20

30

40

50

60

70

80

90

100

4QFY08 FY09 4QFY10 FY11 4QFY12 2QFY13

CNBC Universe Zee Business ET Now NDTV Profit Bloomberg UTV Source: TAM, MarketShare, TG: CSABMale25+

One of the top two channels in Hindi GEC

Hindi GEC is the largest segment for TV advertising, accounting for 30-35% share. TV18’s offering in the segment, Colors, was a late entrant (launched in Jul’08). The channel, however, quickly rose to the top slot following aggressive investment in content and focus on reality shows and new movies. Over time, the channel has achieved a fair balance in content – of fiction (characterised by sticky viewership, long run, low cost) and non-fiction.

Fig 7 – TV18’s channels Business news General News

CNBC-TV18 (English) CNN-IBN (English)

CNBC Awaaz (Hindi) IBN7 (Hindi)

CNBC-TV18 Prime HD IBN Lokmat (Marathi)

Hindi GEC Kids

Colors Nick

Colors HD Sonic

Factual Entertainment Music

History18 MTV

English GEC VH1

Comedy Central

Source: Company



Set to expand footprint in regional markets Pursuant to a deal with the Reliance Industries group, the country’s largest conglomerate, TV18 is set to acquire stakes in ETV entities (which operate 12 regional language channels) from the group. (RIL group funded TV18 promoters to subscribe to their entitlements in the rights issue).

Fig 11 – ETV deal to expand TV18’s footprint in regional markets News channels News-cum-GEC Telugu channels

TV18's economic interest

100% 50% 24.50%

ETV Rajasthan ETV Kannada ETV Telugu

ETV Uttar Pradesh ETV Bangla ETV2

ETV Madhya Pradesh ETV Marathi

ETV Bihar ETV Gujarati

ETV Urdu ETV Oriya

Source: Company

Regional TV advertising growing rapidly

Regional markets account for ~35-40% TV viewership and ~30-35% of advertisement market in India, – working out to a `35-40bn annual market. Advertising on regional TV channels has been increasing at a higher rate (est. ~15% in CY11) than overall TV advertising (~6%) due to relative under-penetration vs. Hindi markets. The regional advertising market is also less cyclical than the Hindi and English markets.

ETV is a strong operator

Combined revenues from ETV channels in FY12 were `5.9bn. This implies ~15% share in advertising revenues from regional markets, despite lack of exposure to the largest, the Tamil market. ETV’s share in regional market (ex-Tamil) would be ~20%.

Fig 10 – Colors has been consistently one of the top-two channels 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 2QFY13

Viewership share in Hindi GEC (%)

Colors 24 23 23 26 24 22 23 23 24 25 22 21 18 19

Star Plus 27 23 22 20 23 27 25 24 24 24 25 27 26 21

Zee TV 19 21 21 20 20 20 21 18 23 22 17 15 17 19

Sony Entertainment 8 8 10 14 12 12 13 15 15 15 15 20 20 20

SAB 4 5 5 6 7 7 8 9 9 12 9 8 10 11

Life OK 6 5 4 4 3 4 2 3 3 2 2 2 5 10

Others 13 16 14 12 11 10 8 8 8 7 7 7 7 2

Colors Position (#) 2 1 1 1 1 2 2 2 1 1 2 2 2 2

Source: TAM (TAM; Hindi Speaking Markets; TG: CS 4+, Prime Time Share 1930-2359 hrs, All Days)



TV18 to emerge as leading network of channels Post ETV transaction, TV18 will join the league of top TV networks in the country alongside Star Network, the Zee group and SET.

Being a large TV network will help TV18 to –

(1) Raise ad-revenue potential of TV channels, through greater pricing power, potential for bulk, multi-channel advertising deals

(2) Bargain for better revenue-sharing terms with MSOs/DTH companies

(3) Enhance content offering and lower costs through resource sharing among channels (sharing of news gathering resources by news channels in the group); replication of successful TV programs across channels.

The ETV acquisition also marks a material consolidation in Indian broadcasting, which is beneficial for the industry.

Fig 12 – TV18 set to join the league of big TV networks

Star Zee MSM TV18

Number of channels 33 40 26

Exposure across genres

Hindi GEC

English GEC

Movies

Music

News

Sports

Regional

Cartoon Network

Key:

Strong exposure

No exposure

Source: Anand Rathi Research.



Set to unlock full revenue potential

Net subscription revenues to turnaround on cable TV digitisation, strong brand pull Being a news-centric and relatively young TV network, TV18 has been unable to fully realise its subscription-revenue potential in the analogue TV eco-system. This is evident from the fact that despite similar advertising revenues, TV18 trails significantly behind the Zee network in subscription and net subscription revenues.

However, with TV digitisation already underway in metros and the government/industry actively pushing for its implementation in the rest of India, we expect TV18 to witness a major turnaround in net subscription revenues – from `(1.0)bn in FY12 to `1.2bn in FY16e.

Fig 13 – TV18 yet realize full revenue potential Zee Entertainment Zee News Zee group TV18

Advertisement revenues 15,841 2,005 17,846 14,448

Subscription revenues 13,251 743 13,994 3,059

Other revenues 1,313 325 1,638 4,436

Total revenues 30,405 3,072 33,477 21,943

Subscription revenues as % of total 43.6 24.2 41.8 13.9

Operating expenses

Staff costs 2,925 745 3,670 2,916

Selling/operating costs 20,085 1,794 21,879 20,285

Operating expenses 23,010 2,539 25,549 23,201

EBITDA 7,395 534 7,928 (1,258)

EBITDA margin 24.3 17.4 23.7 (5.7)

Source: Companies, Anand Rathi Research

Fig 14 – TV18’s net subscription revenues to witness a major turnaround

(966) (718) (31)

6601,206

(1,000)

(500)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY12

FY13

e

FY14

e

FY15

e

FY16

e

Net subscription revenues Subscription revenues Carriage & placement fees Source: Company, Anand Rathi Research

Strong channel portfolio to drive subscription revenues

Digitisation of cable TV is expected to drive subscription revenues for the broadcasters, led by:



(1) Rise in end-user ARPU (more and better quality content, higher content cost to LCOs), and

(2) greater revenue share in end-user ARPU (transparency in subscriber and revenue data in the value chain).

Given its strong brand pull for its flagship business news and Hindi GEC channels, TV18 would be a key beneficiary of the expected buoyancy in subscription revenues. We expect TV18’s subscription revenues (excl. ETV) to grow at 15% CAGR over FY13e-16e.

Fig 15 – Strong brand pull for key channels to drive subscription revenues

0

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Viacom18 (50% share)

Standalone (i.e. News channel, ex-IBN-Lokmat) Source: Company, Anand Rathi Research

Carriage fees to decline

Analogue cable-TV networks can carry only a limited number of channels (80-100). Considering there are over 500 channels operating in the country, the intense competition among broadcasters has led to the surge in carriage and placement fees. In the past, the incidence of carriage and placement fees fell disproportionately on new channels (due to limited customer pull) and news channel (launch of several news channels during 2005-10, limited content differentiation).

TV18’s content portfolio has a high share of both news and new channels; hence, it was one of the most affected by higher carriage and placement fees. Five of its 12 channels have been operational for less than five years. These include the largest ones – CNN-IBN and Colors.

Fig 16 – TV18 is a relatively young network

0.0

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Digitisation is expected to expand the carrying capacity of cable-TV networks (potentially over 500 channels). Besides, the government has mandated MSOs to carry a minimum of 250 channels (500 channels after mid-2013). This is expected to reduce carriage fees.

The chief beneficiaries of falling carriage fees and placement fees would be new channels and news channel, which till now have shared the brunt of the burden. We expect TV18’s carriage and placement costs to decline 27% over FY12-16 as digitisation is gradually implemented across the country.

Fig 17 – TV18’s carriage and placement fees to decline on cable TV digitisation

0

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Viacom18 (50% share)

Standalone (i.e. News channel, ex-IBN-Lokmat) Source: Company, Anand Rathi Research

Operational focus to aid margin expansion Major network expansion behind us

From being a single-channel network during 1999-2005, the TV18/Network18 Group expanded its bouquet to 12 channels in the past seven years. The expansion led to operational aspects being neglected (apart from the balance-sheet position). Management has stated that its focus ahead would be driving business efficiencies (revenue, cost) in its present channel portfolio. The formation of a TV-distribution company should be seen in this context.

IndiaCast to aid improvement in net revenue

TV18 has carved out a TV distribution company, IndiaCast (eventually to be held by TV18 and Viacom18 in equqal proportions), to handle channel distribution activities (negotiations with DTH companies and MSOs, collection of subscription income, payment of carriage and placement fees). In addition to 26 channels of TV18 and ETV, IndiaCast will also distribute Sun Network Channels & Disney Channels in the Hindi Speaking Markets (HSMs)

Constituting the distribution function as a separate entity is expected to result in the necessary focus on distribution. As a large, independent TV distributor (IndiaCast has signed up ~50 channels for distribution), IndiaCast will be able to negotiate better terms with MSOs/DTH companies.



Focus shifts to operational strength

Balance sheet stronger, post-rights issue The recent rights issues of group companies (Network18 and TV18) saw massive equity infusion of `40bn, including `27bn in TV18 (equivalent to 70% of the post-issue market cap). Re-capitalization would aid the group in funding the acquisition of stakes in ETV channels, and reduce financial leverage.

Fig 18 – Key details of recent rights issues in Network18 and TV18 Network18 Media and Investments

Rights issue proceeds (`bn) 27.0

Promoters 20.8

Other shareholders 6.2 TV18 Broadcast

Proposed utilization plan (`bn) Rights issue proceeds (`bn) 27.0

Subscription to TV18's rights issue 13.8 Network18 Media and Investments 13.8

General corporate purposes 1.3 Other promoters 1.4

Debt repayment 11.1 Other shareholders 11.8

Proposed utilization plan (`bn)

Debt repayment 4.2

Funding ETV acquisition 19.3

General corporate purposes 2.8

Source: Company, Exchanges

The rights issue has helped TV18 significantly shore up its balance sheet. Even after the outlay on the ETV acquisition, we estimate net debt to fall to `3.9bn, from the pre-issue level of `11.3bn. This implies a sharp drop in net-debt-to-EV from a disturbing ~50% (pre-issue, based on the current share price) to a comfortable 6%.

Fig 19 – TV18’s financial leverage to fall significantly, post-issue `bn

Net debt FY12 8,825

Net debt Sep’12 (estimated*) 11,317

Rights issue proceeds 26,992

Net debt, post-issue [a] (15,675)

Consideration for ETV channels [b] 19,250

Pro-rata share of ETV debt (estimated*) [c] 289

Estimated net debt, post ETV deal (= [a] + [b] + [c] 3,864

Net debt-to-equity (x)

Pre-issue 1.7

Post-issue and post-ETV-acquisition 0.1

Net-debt-to-EV (%) (based on current share price)

Pre-issue 48.2

Post-issue and post-ETV-acquisition 6.3

Source: Company, Anand Rathi Research * Lack of disclosures pertaining to debt included in other current liabilities



In the past, new channel launches by the Network18 Group had taken a toll on balance sheets of group companies. Apart from weak profitability, high balance-sheet leverage proved a key overhang. Balance-sheet capitalization would result in a shift in investor focus from balance-sheet issues to operational strengths.

Fig 20 – Rising BS leverage was a key overhang for the stock

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Backing from Reliance Industries Reliance Industries (RIL) funded the TV18 promoters to subscribe to their entitlement in the recently concluded rights issue, and thus acquired an indirect stake/interest in TV18.

RIL is the country’s largest conglomerate, looking to expand its footprint in Indian telecom and media sector. TV18 appears to be RIL’s key vehicle of growth in the media segment, and is expected to benefit from RIL’s financial muscle and other telecom/media assets.

Strong acceptance of rights issue reflects improving sentiment The recently-concluded rights issue infused significant capital – the equity capital base expanded ~5x. The issue was priced at the then market price. TV18’s public shareholders subscribed to 590m shares, against their 543m entitlement. This reflects investors warming up to the network’s operational strengths (strong channel portfolio, financially strong promoters) and opportunities (cable-TV digitisation), topping its previous uninspiring profitability record.



Financials and valuations We expect TV18’s consolidated EBITDA (ex ETV) to grow ~88% CAGR over FY13e-15e, driven by a turnaround in its net subscription revenues. We expect the company’s proforma EBITDA, including pro-rata share of ETV, to reach `5bn by FY15. Our target price is based on 15x FY15 EBITDA.

Turnaround in subscription revenues to drive earningsWe expect TV18’s consolidated EBITDA to grow at 88% CAGR over FY13-15, driven by: (1) 17% CAGR in subscription revenues; (2) 11% average annual decline in carriage and placement fees; (3) 13% CAGR in advertisement revenues. We have modelled a 7% CAGR in operating expenses other than carriage/placement, over FY13-15.

Fig 21 – Net subscription revenues turnaround to drive EBITDA growth Year end Mar, `m FY12 FY13e FY14e FY15e FY16e

Key operating metrics

Subscription revenues 1,899 2,107 2,486 2,908 3,292

Carriage & placement fees 2,865 2,825 2,517 2,248 2,086

Net subscription revenues (966) (718) (31) 660 1,206

Advertisement revenues 9,856 10,277 11,448 13,078 14,610

Financials

Revenues 14,099 14,814 16,278 18,642 20,911

Operating expenses (other than carriage fees) 13,463 12,628 13,381 14,428 15,384

EBITDA (623) 1,022 2,036 3,618 4,988

EBITDA margin (%) (4.4) 6.9 12.5 19.4 23.9

PAT (1,102) (135) 1,415 2,161 3,160

PAT margin (%) (7.8) (0.9) 8.7 11.6 15.1


EBITDA (incl. ETV) to reach ~`5bn in FY15 Including TV18’s pro-rata share in ETV financials, we expect pro-forma revenues and EBITDA to grow at 12% and 60% CAGR over FY13-15. Of the `5bn EBITDA expected in FY15, ETV would contribute 26%. PAT would witness a major turnaround during the same period, driven by EBITDA growth and reduction of amortisation in ETV. We expect combined PAT to be ~`3bn in FY15, of which contribution of ETV is estimated to be 32%.

Fig 22 – Net subscription revenues turnaround to drive EBITDA growth Year end Mar, `m FY12 FY13e FY14e FY15e FY16e

Revenues 16,897 17,873 19,719 22,494 25,072

EBITDA 157 1,899 3,097 4,890 6,415

EBITDA margin (%) 0.9 10.6 15.7 21.7 25.6

PAT (1,154) (112) 1,703 3,172 4,224

PAT margin (%) (6.8) (0.6) 8.6 14.1 16.8

EPS (3.2) (0.1) 1.0 1.9 2.5


We expect combined EBITDA from ETV entities to grow at 20% CAGR over FY13-15. The growth will be driven by 12% revenue CAGR and 430bps increase in EBITDA margin during the period. ETV revenue



potential (both subscription and advertisement) would receive uplift from being the part of the larger network. PAT is expected to see a jump, after certain intangible assets in ETV entities are completed amortised by FY14.

Fig 23 – Financials forecasts for ETV Year end Mar, `m FY12 FY13e FY14e FY15e FY16e

Revenues 2,798 3,059 3,441 3,852 4,161

News channels (100%) 822 904 995 1,074 1,139

Non telugu channels (50%) 1,466 1,584 1,790 2,022 2,184

Telugu channels (24.5%) 510 571 656 755 838

EBITDA 780 878 1,061 1,272 1,428

News channels (100%) 163 190 231 274 305

Non telugu channels (50%) 329 364 456 566 644

Telugu channels (24.5%) 288 323 374 431 479

PAT (51) 24 288 1,011 1,064

News channels (100%) 116 83 140 221 257

Non telugu channels (50%) (93) (33) 76 409 423

Telugu channels (24.5%) (74) (26) 71 381 384

EBITDA margin (%) 27.9 28.7 30.8 33.0 34.3

News channels (100%) 19.8 21.0 23.3 25.5 26.8

Non telugu channels (50%) 22.4 23.0 25.5 28.0 29.5

Telugu channels (24.5%) 56.5 56.7 56.9 57.2 57.2

PAT margin (%) (1.8) 0.8 8.4 26.2 25.6

News channels (100%) 14.1 9.2 14.1 20.6 22.6

Non telugu channels (50%) (6.3) (2.1) 4.3 20.2 19.4

Telugu channels (24.5%) (14.6) (4.6) 10.9 50.5 45.9


Strong growth profile justifies valuation premium TV18 trades at 8-50% premium to leading broadcasters – Zee Entertainment and Sun TV Network – based on FY14 EV/EBITDA multiples (Fig 24). We believe valuations are justified by TV18’s growth profile versus peers – 60% EBITDA CAGR over FY13-15 versus 13-15% in case of Zee and Sun. Our Mar ’14e target price of `42, is based on 15x FY15 proforma EBITDA (including pro-rata share of ETV).

Fig 24 – Strong growth profile justifies valuation premium vis-à-vis peers Price Market cap EV/EBITDA (x) EBITDA CAGR P/E (x) EPS CAGR

(`) (`bn) FY14 FY15 FY13e-15e (%) FY14 FY15 FY13e-15e (%)

TV18 Broadcast (incl. pro-rata ETV) 32.6 54.8 18.7 11.7 60.4 32.7 17.6 NM

TV18 Broadcast (at target price) 42.0 71.9 23.9 15.0 60.4 42.2 22.7 NM

Zee Entertainment 220.9 211.8 17.2 14.8 15.0 26.1 26.1 15.9

Sun TV Network * 427.3 168.4 12.4 10.8 12.9 20.7 20.7 16.8

Source: Anand Rathi Research. * EBITDA calculated after deduction of amortisation charges



Company Background & Management

Tracking its antecedents TV18 is a 51% subsidiary of Network18 Media and Investments (Network18), which has interests also in digital and print mass media. The group and the company have undergone restructuring and renaming several times.

Originally incorporated as Global Broadcast Network (subsequently renamed IBN18), TV18 housed the network’s general news channels (CNN IBN) and entertainment businesses (TV channels and motion pictures) through a JV with Viacom. The business news channels were housed in a separate, listed entity Television Eighteen. In 2011, they (CNBC TV18, CNBC Awaaz) were transferred from Television Eighteen to IBN18, which was subsequently renamed TV18 Broadcast – the present name.

Fig 26 – TV18 holding structure

Network 18 Media & Investments

Shareholders Promoters 27%

51%

Public Shareholders Omer Promoters

73%

8%40.2% TV 18 Broadcast


Fig 25 – History of corporate restructuring FY08 FY09 FY10 FY11 FY12 FY13

Television EighteenBusiness New s (CN BC-TV18 & Awaaz)

Business N ews Business N ews Business News

TV18 BroadcastGeneral news (CN N-IBN, IBN7)

General new s General new s General news General news General news

50% stake in IBN Lokm at JV






Stake in W eb18 Holdings*



50% stake in Viacom 18 JV



50% stake in Viacom18 JV



51% stake in A ETN (H istory TV18)

51% stake in AETN (H istory TV18)

Business news channels

B usiness news channels

Network18 M edia Holding com pany Holding com pany Holding com pany Holding com pany Holding com pany H olding com pany

Business news channels were dem erged in to TV18 Broadcast; the com pany w as subsequently m erged in to Network18 M edia & Investm ent




Business structure TV18 directly operates English and Hindi news channels. It operates Marathi news channel through a JV with the Lokmat group, and its entertainment business (TV channels, motion pictures) through a JV with Viacom named Viacom18. The company operates an infotainment channel (History 18) through a 51% subsidiary. Earlier in the year, IndiaCast, a 100% subsidiary engaged in distributing TV channels, was carved out of the company. TV18’s stake in IndiaCast would fall to 50% after the capital infusion by Viacom18 for a 50% stake.

TV18 is set acquire equity stakes in three ETV entities, operating Telugu channels, regional (non-Telugu) news and regional (non-Telugu) GECs from the Reliance Industries group.

As part of the deal, TV18 has the option to purchase additional stakes in ETV entities – 24.5% in Enadu and 50% in Prism. TV18 will likely transfer this option to Viacom18. We have presented below the eventual organisational structure of TV18.

Fig 27 – Current organisational structure of TV18

TV 18 Broadcast

IndiaCast Media Distribution

49% 50% 50%

Subsidiary 100%

Subsidiary 51%

Joint Venture50%

Joint Venture 50%

Domestic and international distribution of TV channels (both captive, third party)

AETN Media

Operates factual entertainment TV18 –

History18

IBN Lokmat News

Operates Marathi-language news channel – IBN Lokmat

Viacom18 Media

Operates entertainment TV channels (Colors, Colors HD,

Nick, MTV, VH1, Sonic, Comedy Central) and motion

pictures business

A&E Television Network LLC

US based TV broadcaster; a JV between Hearst Corp. and Disney-ABC Television Group

Lokmat Group

A leading newspaper group based in the state of

Maharashtra

Viacom Inc.

US based global media conglomerate, with interests

mainly in cinema and cable TV

CNBC TV 18, CNBC Awaaz, CNN IBN, IBN 7

Source: Company

Fig 28 - Details of TV18's proposed investments in ETV channels Name of company Description Channels Equity stake (%) Option for purchase of

additional stake

Panaroma Operates five regional news channel (non-Telugu)

(1) ETV Rajasthan, (2) ETV Uttar Pradesh (3) ETV Madhya Pradesh (4) ETV Bihar (5) ETV Urdu

100.0 No

Prism Operates five Regional GEC (non-Telugu)

(1) ETV Kannada (2) ETV Bangla (3) ETV Marathi (4) ETV Gujarati (5) ETV Oriya

50.0 Yes, 50%

Enadu Operates Telugu channels (1) ETV Telugu (2) ETV2 24.5 Yes, 24.5%

Source: Company



Management background TV18 is headed by its founder/promoter Raghav Bahl, who is the managing director of the parent company, Network18 Media and Investments. TV18’s operations are headed by its group CEO B Sai Kumar and finance functions are headed by group CFO RDS Bawa. The company’s board of directors comprises five directors (all non-executive). The chairman is an independent director.

Fig 29 – Proposed organisational structure of TV18

TV 18 Broadcast

AETN Media

Subsidiary 51%

Joint venture

Joint Venture50%

Joint Venture 50%

IBN Lokmat News Viacom18 IndiaCast

Enadu Television

Operates Telugu language channels

Subsidiary100%

Equator

Holding company for ETV investments

24.5%

50%

100%

Prism TV

Operates regional entertainment channels (non-

Telugu)

Panaroma Television

Operates regional news channels

50%

Enadu Television

Operates Telugu language channels

50%


Fig 30 – Details of TV18’s Board of directors Name Designation Education Brief description

Manoj Mohanka Chairman, Independent Director

Batchelor in Commerce from Calcutta University; Master's degree Michael Smurfit Graduate School of Business, National University of Ireland; Chevening scholar from The London School of Economics

Has over 22 years of experience in business management; Held various positions in industry forums including President, Calcutta Chamber of Commerce, Co-Chairman, Economic Affairs Committee of FICCI (Eastern Region), Committee Member, Indo-Italian Chamber of Commerce

Raghav Bahl Non-executive director Bachelor in Economics from St. Stephen’s College, Delhi University MBA from Delhi University .

Has over 24 years experience in television and journalism Founded Network18 Group in 1993 Instrumental in establishing partnerships with media conglomerates such as CNBC- AP, CNN, Viacom Inc., Forbes and Sun Network. Was honored as the Global Leader of Tomorrow by the World Economic Forum and Entrepreneur of The Year (2007) by Ernst & Young

Sanjay Ray Chaudhuri Non-executive director Bachelor in English Literature from St. Stephens College, Delhi University Masters in Mass Communications from Jamia Millia Islamia University

Has over 17 years of experience in journalism, media and allied fields Has directed music videos, corporate films, ad films, chat/ game shows and TV serials for leading Indian TV channels; currently working on his debut feature film

Hari S. Bhartia Non-executive, Independent director

Chemical engineering graduate from Indian Institute of Technology, Delhi

Is the co-chairman of the Jubilant Group Has over 22 years of experience in the pharmaceuticals, food, oil and gas, aerospace and information technology sectors. Has been President of Confederation of Indian Industry Is Chairman, Board of Governors of the IIM, Raipur.

Shahzaad Siraj Dalal Non-executive, Independent director

Management graduate from The Northeast Louisiana University, USA

Is the Chairman and Chief Executive Officer of IL&FS Investment Advisors LLC

Source: Company

Stock Spotlight:

Trading Ban - SUEL

Nifty Option Equilibrium @ 5925 .Nifty A-T-M IVs @ 13.9%.

NIFTY ended the day approximately -0.1% lower. Market volumes (Rs791 bn) were down 31%.

Session Recap Fund Flow FIIs were net buyers of +Rs8.3bn in provisional cash & sold (-Rs5bn) in directional futures respectively .Their selling in index futures was a mixture of fresh shorts -39K shrs & long closure -372K shrs in index future. DFIs were net sellers (-Rs2bn) in provisional cash

NIFTY Jan-13 is trading at 47 pts premium to spot. Nifty OI was up approximately 0.1m shrs. Major option changes were in the Jan-13 6200CE (+0.9m shrs),Jan-13 6100CE (+0.6m shrs),Jan-13 6000CE (+0.5m shrs),Jan-13 5400PE (+0.6m shrs),Jan-13 5700PE (+0.5m shrs).

Nifty F&O

Short - PLNG. Long Closure - UTCEM,BHUS & TTCH. Short Covering -

SSF Open Interest changes

India Derivatives Flash

Stock Futures OI Money Flows (Rs mn)

UTCEM (3.4x), PNB (2.8x), WPRO (2.4x), WLCO (2x) & CLGT (1.8x).

Delivery Spikes

01-Jan-2013

Futures OI is up by Rs. 3.9bn (0.84%) and constitutes 42% of overall market-wide position.

Anand Rathi Shares and Stock Brokers, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix.

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