HSBC 09-10-13 India Diversified Financial Services

FIG India Diversified Financial Services
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Global Research
Niche consumer NBFCs still attractive, despite macro slowdown, rising rates Prefer sectors that are cash flow and price sensitive: rural and housing finance Prefer HDFC and LICHF, both OW rated; upgrade SHTF to OW from N; downgrade IDFC and PFC to N(V) and REC to N
Niche retail NBFCs remain attractive: Non-banking financial companies (NBFCs) continue to be a space worth looking at, despite a tough macro-environment and rising rates, as niche consumer segments are still growing well. Two key sectors rural and housing finance remain attractive. Urban housing demand is steady due to affordability, income stability and urbanisation and demand remains largely price and income sensitive. Likewise, rural demand remains healthy, benefitting from good monsoons, improving consumer cash flows, rising income, and the wealth effect. Both segments have low interest rate sensitivity. However, the commercial vehicle (CV) cycle continues to be sluggish, while infrastructure issues, mainly power, remain unresolved. Little incremental impact on margins: NBFCs have effectively managed their funding costs in 2Q, despite the RBI raising the marginal standing facility (MSF) rate by 200bp. With the RBI reversing 125bp of this hike within the quarter, NBFCs funding costs will ease. However, we maintain our estimate of a 0-30bp margin decline for our NBFC universe as the RBI has started hiking repo rates. HDFC and MMFS best placed: HDFC (housing) and MMFS (rural) are both well-positioned in their respective sectors, with healthy profitability, good management and conservative risk policies. LICHFs profitability has largely bottomed out, while SHTF could see lower profitability due to declining margins and rising asset quality risks. IDFC, PFC and REC continue to be affected by the slow resolution of power sector issues. A potential banking license could be a further drag on IDFCs profitability. Preferred picks: We continue to prefer HDFC, followed by LICHF and SHTF (value buy). We remain N on MMFS, whose strong fundamentals are offset by a rich valuation. We downgrade IDFC and PFC to N(V) and REC to N as we await the full resolution of power sector issues.
India NBFCs
Remain selective
Indian NBFCs - Ratings and target prices

Company Bbg CMP* Rating (New) Rating (Old) TP TP Potential (New) (Old) return **
HDFC LICHF Mahindra & Mahindra Fin Services Shriram Transport IDFC Power Fin Rural Electrification
HDFC IN 802 LICHF IN 198 MMFS IN 264 SHTF IN 571
OW OW OW OW Neutral (V) Neutral OW Neutral
1029 1007 236 243 285 250 706 101 134 205 723 129 130 251
30.0% 21.1% 9.4% 25.2% 9.8% 5.4% 12.1%
IDFC IN 95 POWF IN 134 RECL IN 193
Neutral (V) OW Neutral (V) OW Neutral OW(V)
** Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield Source: Company data, HSBC estimates, * prices as of 3rd October 2013,
9 October 2013
Tejas Mehta * Analyst HSBC Securities & Capital Markets (India) Private Limited +91 22 2268 1243 tejasmehta@hsbc.co.in Sachin Sheth * Analyst HSBC Securities & Capital Markets (India) Private Limited +91 22 2268 1224 sachinsheth@hsbc.co.in Todd Dunivant * Head of Banks Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 tdunivant@hsbc.com.hk
View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Securities and Capital Markets (India) Private Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
FIG India Diversified Financial Services 9 October 2013
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Valuation and risk factors PE PE-based multiple TP Weights MMFS SHTF Weights HDFC LICHF Weights PFC REC Weights IDFC
Source: HSBC estimates
PB PB-based multiple TP 50% 2.4 1.7 4.5 1.4 289 772 20% 999 245 100% 0.6 0.9 134 205 50% 100
DCF Wghtd TP ___________________________________ Risks _____________________________ value (INR) Upside risks Downside risks 30% 253 624 30% 853 208 1029 236 Increase in competitive pressures could slow business growth or impact margins; Asset quality risk Asset quality deterioration and prolonged suppressed spreads 285 Improvement in asset quality 706 Higher slippages due to monsoon vagaries, regulatory uncertainties, interest rate uncertainties Rigidity, higher slippages, regulatory risks
20% 12.5 9.0 23.5 8.2 321 664 50% 1147 248
134 Earlier than expected capex revival, Increase in slippages, decline in margins lesser than expected asset quality issues 205 Earlier than expected capex revival, Increase in slippages, decline in margins lesser than expected asset quality issues 30% 102 101 Earlier than expected capex revival, Worse than expected asset quality and lesser than expected asset quality issues growth outlook
8.0
20% 100
0.9
Sector-wise analysis and outlook Sectors Housing Growth drivers Growing salaried middle class, increasing nuclearisation of families, rising incomes, home aspirations, increasing urbanisation, property prices Growth outlook Customer sensitivity Risks Rank 1
Rural vehicles
CV
Power
Growth has remained secular High sensitivity to prices and Low risk as 95%+ customers are still irrespective of the macro slowdown; income stability, low first time home buyers; asset quality Outlook remains steady with demand sensitivity to interest rates remains one of the best among all still buoyant, buying behaviour is sectors; however, its a AAAmore linked to prices and job security equivalent lending and therefore low than interest rates yield, leading to lower RoAs Rising incomes, rising employment, Rural growth largely remains Highly cash flow sensitive Monsoon risks remain every year as growing wealth effect of gold and real decoupled from macro slowdown, and sentiments highly it affects not just incremental estate, last mile connectivity resulting in supported by ever-growing food correlated to the monsoons demand, but increases risks to shift from savings to consumption demand, higher MSPs and and agriculture, although existing book asset quality; however, economy; leading to higher credit employment schemes; growth in direct monsoon linked slippages are generally temporary penetration and higher sales of vehicles vehicles likely to remain buoyant business is smaller Industrial activity for large fleet Faltering GDP and IIP growth and First time users and Small Cyclical in nature and therefore, operators; ban on mining activities have Road Transport Operators dependent on economic cycles; asset Cash and carry consumables demand significantly slowed down MHCV are borrower cash flow quality could see moderate for small operators sales, where volumes have been sensitive, however, large deterioration during downturn as people declining for past few quarters; fleet operators are interest get out of business; however, chances however, cash and carry related CV rate and IIP growth sensitive of subsequent recovery are good demand and last mile connectivity related LCV sales are still growing India is a power starved country with Given India has one of the lowest per Highly interest rate sensitive Almost all recently operationalised and annual supply shortfall at ~8-10%; upcoming gas based projects are capita power consumption among given the high leverage however, generation capacity addition, BRIC nations, long term growth likely to be restructured due to no needed to set up power fuel linkage and ability of state discoms outlook remains promising; however, infrastructure resolution on gas supply; also thermal to buy power are key drivers for the projects could face coal supply issues near term generation growth could sectors growth either due to shortage of supply from suffer due to coal and gas linkage Coal India or no PPA signed with the issues, which will take time to sort out discoms, which could lead to restructuring and some write-offs
Source: HSBC
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Stock scorecard Growth Margins Asset quality Profitability Transparency, stability, Valuations visibility and management quality Verdict
HDFC
Positive: Home sales remain buoyant, which will keep HDFC's loan growth intact at 18-20% YoY; growth supported from home sales beyond metros
Neutral: Likely to remain steady at 2.2-2.4% range with support from a good liability and asset mix and a well-matched ALM
Positive: Robust asset quality trend to continue aided by good affordability, first time home and conservative credit culture; GNPLs at 0.7-0.8% Positive: Robust asset quality trend to continue supported by good affordability, first time home purchases and conservative credit culture; GNPLs at 0.70.8%
Positive: Expect RoA to continue in 2.7-2.8% range and ROA in 21-23% range over FY14-15e
LICHF Positive: LICHF will also Neutral: Spreads at continue to benefit from lowest level of 1.1%, have the steady home sales mostly bottomed out, even growth; we expect 20-22% after considering higher loan growth over FY14- funding cost, marginal 15e recovery likely if MSF rates soften further MMFS Positive: Growing rural economy coupled with healthy monsoons this year to boost rural spending; MMFS direct beneficiary of this; expect loan growth of 24-26% over FY14-15e SHTF
Neutral: Expect low RoA of 1.3-1.4% and ROA of 17-18% to continue, but largely bottomed out as margins have bottomed out
Neutral: High cash flow Positive: Diversified loan Positive: RoA to decline sensitivity of customers book across vehicle marginally from peak 4% and low private segments coupled with levels to 3.7-3.8% due to competition helping MMFS good monsoons, rural slight margin decline and to pass on the rise in spending by government higher credit cost; ROA to funding costs; however, and good cash recovery remain at 21-23% over imbalance in ALM to efforts to support healthy FY14-15e marginally affect FY14 asset quality; GNPLs at NIM 3.3-3.6% Negative: SHTF has been Neutral: FY14 to be the Negative: Stress Negative: RoA to decline cautious on growth due to last year of margin decline increasing mainly in the to ~3% from 3.3% due to CV cycle slowdown over at 7.5-7.7% as SHTF is industrial category to decline in margins and the past few quarters; incrementally shifting to which SHTF has 20% higher credit costs, but growth mainly in the high yielding older used exposure; expect credit likely to stabilise at that younger used vehicles, CVs; also with MSF rate cost to rise in current fiscal level; ROA also likely to growth to remain stable at reducing, funding decline to 18-19% range 15-17% levels pressures have reduced, continue to price 20-25bps margin decline for FY14
IDFC
PFC
REC
Negative: Lower Negative: GNPL has incremental disbursements remained fairly stable at imply limited incremental 0.32%; However, with funds requirement, which infra sector issues still far will limit the impact on from resolution, defaults / margins of rising rates. restructuring will rise; We However with lower expect its GNPL to rise to flexibility on transmitting 2-2.5% over FY14-15e, costs, margins will decline especially from its gas by 15-20 bps over FY14- based exposure (2% of 15e the loan book) Negative: Ex-TFM, Neutral: Expect rising Negative: Slow progress disbursements growth has rates to have limited on reforms leaves a host slowed down significantly; impact on margins of ~25- of pending issues to be State sector growing well, 30bps; PFC managing resolved, increasing asset but private and central funding costs through tax- quality risks for PFC; sector growth slowing free bonds (INR11.2bn in outstanding restructured down; We expect 5-7% 2Q) and cash-credit book at INR c120 bn of disbursals growth and 15- facilities (INR 50bn in 2Q) loans to the IPPs 16% loan growth over from the banks and has FY14-15e raised lending rates by 50bps Negative: Ex-TFM, REC's Negative: Margins decline Negative: Slow progress growth also likely to to be limited at ~20-25bps on reforms leaves a host slowdown to mid teens as REC has raised INR of pending issues to be with growth largely coming 35bn via the tax free resolved, increasing asset from state sector gencos bonds at 8.5% -8.7% and quality risks for REC; and discoms utilised the cash credit outstanding restructured facility from banks as well loans at cINR230 bn as raised lending rates by 50bps to limit the impact of spike in costs in the whole sale market
Negative: IDFC has clearly opted for maintaining asset quality at the risk of slow growth. With capex revival still some time away and refinancing opportunities limited , growth will largely by muted FY14 - 15e
Negative: IDFCs profitability is likely to be under stress with pressure from all fronts growth, margins and asset quality; expect ROA to decline to 2.5-2.6% and ROA to 1213% - one of the lowest among covered NBFCs Negative: We expect ROA to decline to 2.32.4% over FY14-15e, impacted by slowing growth, asset quality risks and unhedged forex exposures; ROA is likely to remain at ~20%; Poor risk management practices reduces comfort of reported earnings Negative: We expect ROA to decline to 2.62.7% over FY14-15e, impacted by slowing growth and asset quality risks; ROA is likely to remain at ~22-23%; Poor risk management practices reduces comfort of reported earnings
Good combination of Positives: One of the best Trading at 4.1x PB and defensive with returns managed companies with 19.3x PE 12-month a quality top management, forward; ex-subsidiary prudence risk value, trading at 2.4x PB management, strong and 11.3x PE inline with growth and earnings' historical range; premium justified considering strong visibility growth and earnings' visibility Positives: Presence in Trading at 1.24x PB and Value buy the right sector, good 7.6x PE 12-month asset quality; forward, much lower than Negatives: Poor earnings' historical averages, visibility due to uncertain probably reflecting margins; average margins and earnings' management uncertainty; upturn in margins is the key catalyst to rerate the stock Positives: Presence in Trading at 2.6x PB and Good defensive stock, but rural sector, strong top 12.5x PE 12-month priced to perfection management, prudence forward, which are peak risk management, strong valuations, investors have growth and earnings' favoured given strong visibility for FY14, earnings' outlook; we transparency believe stock is fully Negatives: Visibility linked valued to monsoon vagaries Positives: Niche business Trading at 1.4x PB and Reasonably valued, some segment, margins 8.0x PE 12-month upside remain bottoming out, decent forward, valuations earnings' visibility languishing at Dec-11 Negatives: CV cycle lows, when mining issue slowdown, slow growth, occurred, probably rising asset quality building in rising NPLs and concerns, change in weaker profitability; we management, some believe asset quality doubts on risk should be broadly management maintained, given most of its customers are in cashn-carry business Positives: Good top Trading at 8.1x PE and Cheap valuations, but management, 0.9x PB , closer to all time many sector and banking conservative risk culture lows; Capex revival and license uncertainties and good reporting resolution of impeding prevail transparency issues in the infra Negatives: weakening segment would be key for visibility and stability of re-rating of the stock; earnings' growth Banking license could be a further drag on the stock in the medium term Positives: Low exposure to IPPs Negatives: exposure to IPP growing; Poor risk management practices, slowing growth, poor earnings' visibility; Uncertain growth strategy of former Chairman; Recent change of Chairman Positives: Low exposure to IPPs Negatives: exposure to IPP growing; Poor risk management practices, slowing growth, poor earnings' visibility; Uncertain growth strategy of former Chairman; Recent change of Chairman Trading close to all time Low valuations, but may low multiples of 0.6X PB remain low due to low due to continuing comfort on reported uncertainties on power earnings and sector not reforms; Change of out of the woods Chairman recently further fuelling uncertainty; Full resolution of sector issues and clear management strategy would be the key catalysts for re-rating Trading close to its all time Low valuations, but may low of 0.9x PB , though remain low due to low higher than its PFC due to comfort on reported clarity on growth strategy, earnings and sector not hedged forex liabilities and out of the woods better margins
Source: HSBC 3
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Contents
Summary Focus on housing, rural Our stock picks Company write-ups
HDFC (HDFC IN) LICHF (LICHF IN) MMFS (MMFS IN) SHTF (SHTF IN) IDFC (IDFC IN) PFC (POWF IN) REC (RECL IN)
5 9 18 24
25 29 33 37 41 46 50
Disclosure appendix Disclaimer
57 60
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Summary
Niche consumer NBFCs remain attractive, despite tough macro
conditions; housing and rural finance stand out

Rising rates to have limited impact on margins of most NBFCs;
HDFC and MMFS best placed fundamentally

We prefer HDFC, followed by LICHF and SHTF (value buys) and
MMFS; our least preferred stocks are IDFC, PFC and REC
NBFC some niches deserve consideration despite macro headwinds

Indias macro environment remains challenging. With inflation stubborn and rates again on the upswing, risks to growth have increased further. Against this backdrop, we review NBFC stocks under our coverage to identify if there are any investment opportunities among these wholesalefunded entities. We conclude that while growth, margins and asset quality risks are increasing, NBFCs that are focused on sectors where customers are more sensitive to prices and own cash flows and not sensitive to interest rates will outperform.
consumer cash flows, which will continue to drive demand. Rural customers are also more sensitive to their own cash flows than interest rates, which imply it has decoupled in the current macro environment. Lastly, while asset quality risks are high, in the current context, we believe these risks are much less.
Housing finance still the best

In our view, housing finance remains the best sector to be in due to its apparent immunity to the macro slowdown; affordability and job security, along with property prices, are the key growth drivers here, not interest rates. Increasing growth in first and second tier cities further supports growth in this segment. This sector also has the lowest asset quality risks as most customers are first-time buyers and the credit culture remains conservative.
Rural finance from a savers to a spenders economy

Indias rural economy has outperformed in the past five years, amid the slowdown in the countrys overall growth. Rising minimum support prices and rural employment schemes have lifted rural incomes, while rising gold and land prices have spurred a wealth effect. The overall improvement in sentiment has continued to boost rural spending. Going forward, a good monsoon this year and national elections next year will further boost rural
Commercial vehicle finance slowing

Although the CV space does not face any particular structural issues, its cyclical nature and close linkage to industrial activity make it more vulnerable to the economic slowdown. Given the current industrial slowdown and mining ban, demand has come off significantly in the past few quarters and it is probably at its lowest point in
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recent history. The exception has been LCVs, where demand remains healthy due to growth in last-mile connectivity in the hinterlands. In terms of sensitivity, first-time users (FTUs) and small road transport operators (SRTOs) are more cash flow sensitive than large fleet operators, which are likely to be more sensitive to interest rate and industrial activity. In terms of asset quality, NBFCs catering to the cash-and-carry CV operators are less prone to credit risks, than those financing fleet operators.
Similarly, discoms total historical loss of INR1.2trn is yet to be restructured under the Financial Restructuring Package (FRP) package, leading to significant uncertainties on asset quality.
HFC and rural finance best sectoral play

Overall, on the parameters of growth, sensitivity and risk, the housing finance sector stands out given end-customers (a salaried class with c95% first-time home buyers) secured nature of collateral lending and secular growth witnessed historically. Rural buoyancy, amid a good monsoon, bumper harvest and increasing income levels, makes rural financing our next most preferred pick. Risks to growth, asset quality and sensitivity to interest rates make infra financing the least preferred.
Power sector issues unresolved

The infrastructure space, especially power, remains our least preferred sector, as structural issues there are unresolved. While some progress has been made on coal supply issues (tariff revisions by distribution companies (discoms), fuel supply passthrough to name a few), speedier resolution to power sector problems has yet to be seen. Issues like PPA signing by discoms and FRP signing by state governments have not progressed and continue to get delayed, thereby leading to poor visibility on growth, asset quality and earnings. Not only is incremental growth likely to slow drastically, the asset quality of upcoming and recently completed projects is also under question. The infrastructure space is also largely interest rate sensitive as most projects are built with a substantial debt burden. Ongoing delays in the execution of projects are leading to a substantial increase in interest cost burden for many private sector players. Given the problems related to coal supply, gas supply, fuel cost pass-through and PPAs not signed, we expect c.19GW of projects could be restructured, of which 20% could eventually be written off due to low capacity utilisation. In addition, c.32GW of projects are under Comptroller and Auditor General (CAG) scanner and at risk of default.
HDFC and MMFS, best stocks fundamentally

On growth, prefer HDFC, LICHF and MMFS
HDFC and LICHF have seen steady secular growth in the past decade through economic cycles, and we believe they will continue to do reasonably well over the next few quarters. MMFS, a rural play, has also grown well and diversified its loan book. With a good monsoon and stable rural incomes, MMFS should continue to do well in the next few quarters. SHTF has seen slower growth amid the slowdown in the overall CV demand cycle, although its AUM are still growing 15-17% annually as it is focused on used CVs, which are achieving better sales than new CVs. This growth level should continue in the near future. IDFC has seen and will likely continue to see a significant slump in growth due to a lack of new capex, extreme management caution and a lack of refinance opportunities. PFC and REC should also
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see barely single-digit growth in disbursements, as private sector disbursements slow, well-rated central Public Sector Utilities (PSUs) migrate to banks and power sector issues remain unresolved.
MMFS should see relatively stable asset quality as the rural economy continues to do well. SHTF could see some rise in NPLs as the CV demand cycle remains weak. IDFC, PFC and REC are most at risk of ongoing issues in the power sector and therefore, risk to earnings is significant for these stocks. Overall, HDFC and MMFS remain fundamentally the best NBFCs with quality management, transparency, prudence, growth and earnings visibility. SHTF and LICHF come next, while IDFC ranks poorly on fundamentals, though it has a good management team, in our view.
Rankings based on key performance metrics HDFC LICHF MMFS SHTF IDFC RoA ROA Prudence Transparency Earnings visibility Earnings stability Management quality Points Overall rank
On margins, most do well, despite recent spike in rates

Most NBFCs have managed to limit the impact of the recent spike in rates by using their cash-credit limits and liquidity on the balance sheet, while IFCs have also raised tax-free bonds to manage funding costs. HDFC remains the most insulated on margins, given its superior Asset Liability Management (ALM) structure, good asset mix and balanced liability profile. MMFS has also largely limited the impact of margins, though with the RBI starting to raise repo rates, it could see a 25-30bp impact on margins in the current fiscal year. LICHFs margins remain subdued at 1.1% and are likely to remain so in the current fiscal year due to funding cost pressures, though they could improve slightly in the next fiscal year. SHTF has seen margins slide from 8.5-9% to 7.8%, and we expect them to slide further to 7.5% in the current fiscal year, though incremental growth in the older used CVs will lift yields, which will protect incremental margins. IDFC should see 10-15bp margin decline due to rising funding costs, though low incremental growth should limit funding requirements and therefore margins. PFC and REC have seen their margins remain resilient, though we expect a marginal drop given they are at historical high levels and rates in the system are rising.
PFC 5 4 7 6 6 6 6 40 7
REC 3 1 6 7 7 7 7 38 6
3 1 1 2 1 1 1 10 1
7 6 4 5 4 4 5 35 4
1 1 1 1 2 2 2 10 2
2 4 3 4 3 3 3 22 3
5 7 5 3 5 5 4 34 5
Valuations: Prefer HDFC, LICHF

We prefer HDFC (OW); valuations (19.3x PE and 4.1x PB, 12-mth forward) remain in line with historical multiples and fundamentals. This is followed by LICHF (also OW) at a 7.6x PE and 1.2x PB, where margins and therefore earnings have bottomed out and growth remains healthy. While fundamentals are not likely to improve this year, we expect margins to start rising next year, which should act as a catalyst for LICHF to rerate from its current low valuations. At an 8.0 x PE and 1.4x PB, we believe SHTF has corrected more than what is warranted by its fundamentals. Recently, the stock has also reacted
Asset quality avoid IFCs

HDFC and LICHFs asset quality remains strong by virtue of the segments that they cater to. Our view on their outlook has not changed, while
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negatively due to the resignation of its CEO. We believe the current stock price is a good entry point for long-term investors. We therefore upgrade our rating to OW, but reduce its EPM value after lowering growth forecasts. We like MMFS from a fundamental point of view but consider the stock fully valued at a 12.5x PE and 2.6x PB. However, given the likely strong harvest and stable rural incomes, we think it is a good defensive stock. We raise our target multiples to 12.5x PE and 2.4x PB, but remain Neutral, adding the volatility flag.
IDFC has corrected significantly, especially after the Board recently reduced the FII limit. However, given its low growth and drag on profitability over the medium term, in case it gets the banking license, we do not expect its multiples to rerate much from current levels. We therefore downgrade the stock to N(V). As for PFC and REC, although some progress is being made on power sector reforms, a host of issues still need to be resolved. We note a lack of clarity on reform implementation. We do not think the stocks will rerate until power sector issues are resolved. We downgrade PFC to N(V) and REC to N. Overall HDFC, LICHF and SHTF remain our preferred picks and MMFS is a good defensive play. IDFC, REC and PFC remain least preferred.
Indian NBFCs - Ratings and target prices Company HDFC LICHF Mahindra & Mahindra Fin Services Shriram Transport IDFC Power Fin Rural Electrification Bbg HDFC IN LICHF IN MMFS IN SHTF IN IDFC IN POWF IN RECL IN CMP 802 198 264 571 95 134 193 Rating (New) OW OW Neutral (V) OW Neutral (V) Neutral (V) Neutral Rating (Old) OW OW Neutral Neutral OW OW OW(V) TP (New) 1029 236 285 706 101 134 205 TP (Old) 1007 243 250 723 129 130 251 Pot return 30.0% 21.1% 9.4% 25.2% 9.8% 5.4% 12.1%
Source: Company data, HSBC estimates; Prices as of 3 October. Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield
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Focus on housing, rural

We conduct a cross-sectoral review, attempting to rank most-to-
least preferred sectors, followed by top NBFC picks

Rural and housing sectors continue to promise good growth and
profitability; CV cycle at the bottom, but visibility low

Power sector, though in better shape than last year, has
unresolved issues
A reality check
With the economy slowing further in 1Q, inflation still elevated and interest rates up significantly, NBFCs have been a tough space to be in, given that most are niche players and wholesale funded. In light of this, we attempt to identify the preferred investment themes among rural, housing, CVs and infrastructure (mainly power) and pick stock winners within the NBFC space based on the relative strength of the sectors and stock-specific fundamentals. We believe the relative outperformance of the sectors is driven by: Growth drivers and outlook Customer sensitivity to borrowing Risks to asset quality
shown slowing growth, rural buoyancy has been an important driver of consumption growth due to rising incomes and the wealth effect. Factors such as consistently rising Minimum Support Prices (MSP) and rural employment schemes (e.g., Mahatma Gandhi National Rural Employment Guarantee Scheme) have increased rural incomes.
Rural wages on the rise The income effect
200
1 8% 20%
25%
1 8%
150 100 50 0 FY05 FY06 FY09

5% 6% 1 % 11 % 8%
16%
20% 15% 10% 5% 0%
FY10
FY11
FY07
FY08
FY12
A verage daily wage rate in rural India for men(INR) y-o-y growth(RHS)
Source: RBI, HSBC
Rural the most buoyant

Rural finance shift from savings to consumption economy to drive growth
Rural has been the single most important sector and has remained buoyant over the past five years. While urban centres and industrial activity have
FY13
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MSP on the rise = Rural buoyancy and income effect

2,000 1,500 1,000 500 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Tractor sales jump in 1QFY14 - leading indicator of rural health

60% 40% 20% 0% 1Q09 1Q10 3Q10 1Q11 1Q12 3Q12 1Q13 -20% -40%
Tract or sales (Yo Y)
Source: SIAM, HSBC
Paddy M SP
Source: CIEC, HSBC
Wheat M SP
Coarse Cereals M SP
Similarly, our channel checks suggest that rising prices of gold and land the two core assets that rural people own have led to the wealth effect, making rural people feel richer and improving the broader rural sentiment, which has induced people to shift from savings to consumption.
Gold prices have risen exponentially = Wealth effect
40,000 30,000 20,000 10,000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Overall, the rural theme is relatively decoupled from domestic and global macro uncertainties and therefore remains an attractive space. Gold loans and vehicle finance are two sub-sectors that one could consider in terms of the rural theme.
High cash flow sensitivity

Spending behaviour in the rural segment is more linked to income and wealth levels and sentiment (which is a function of agricultural production levels) than to changes in interest rates. High interest rates in a year with a good monsoon will not deter rural people from borrowing for an asset purchase. In essence, they are more cash flow sensitive than interest rate sensitive. Backed by rising income and wealth levels, auto sales, one of the largest assets purchased in rural areas, have shown significant buoyancy in the past five years. As a proxy to this, below we show a chart of Maruti car sales over the past few years in rural areas. Similar buoyancy can been seen in FMCG sales, which have been considerably more in rural areas than urban centres and LCV demand from last mile connectivity (as per our channel checks). All of this points toward higher sensitivity of demand to the customers cash flow than interest rate movements.
Gold prices (INR)

Source: CIEC, HSBC
Growth outlook for rural sector
Along with the above, we believe two additional factors will keep the rural economy buoyant for FY14-15: Good monsoons this year along with higher MSP will further boost rural incomes General elections by May 2014 will further boost spending in rural regions, which will drive consumption
10
1Q14
3Q09
3Q11
3Q13
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Maruti sales growth in rural centres outstrips urban growth

100% 80% 60% 40% 20% 0% FY09 FY10 FY11 FY12 FY13 150% 100% 50% 0% -50%
Housing finance secular growth continues

Indias housing finance sector has historically shown resilience in the face of economic upheavals. Increasing urbanisation, a rising middle class, rising income and the increasing comfort of borrowers to take on debt have been long-term growth drivers for this sector. With the housing loans to GDP ratio in the vicinity of 10%, we believe the potential for growth in this sector remains intact.
Housing loan growth still resilient
40% 30% 20% 10% 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Rural sales Growth Ex Rural (RHS)

Source: Company data. HSBC
Non Rural Sales Growth - Rural (RHS)
Asset quality seasonality associated, but no imminent risk

Rural businesses are cash flow dependent, which in turn is seasonal in nature. The asset quality cycle follows a similar trend a case in point is the asset quality of MMFS, which deteriorates in 1H and then improves in 2H every year.
Asset quality MMFS
12% 10% 8% 6% 4% 2% 0% Q207 Q407 Q208 Q408 Q209 Q409 Q210 Q410 Q211 Q411 Q212 Q412 Q213 Q413
Hom e Loan Grow th SCB Loan Grow th LIC HF

Source: Company data, HSBC
Loan Grow th - HDFC Sy s tem Credit grow th
Gr oss N PL
Net NPL
Thus the performance on the asset quality front is more closely linked to the patterns of cash flow and income generation than to activity on the macro front. In the current environment, with above-average monsoons and bumper harvest expectations, the cash flow cycle is expected to remain robust, which suggests improving asset quality in the latter half of the year.
While the economic slowdown, combined with high property prices, has slowed sales in metro areas significantly, especially Mumbai and the National Capital Region (NCR), our discussions with the banks/NBFCs suggest smaller, underpenetrated centres are doing well as the slowdown has not yet threatened the job security of the salaried class, who make up the majority of home loan seekers. Also, most of the demand has been driven by a large base of government employees, as well as the IT, financial and other service sectors. Most of these have remained healthy, barring some job losses in the financial sector. Further, our channel checks suggest that the first and second tier cities are becoming more important in driving overall growth. The IT sector has started witnessing a rebound, thereby improving sentiment in this segment. Overall we
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expect housing finance growth to remain resilient at 15-17% as buying behaviour is driven more by property prices and job security than interest rates.
financiers with a diversified presence across India, like HDFC and LICHF, could sustain current growth over the coming years.
Asset prices more sensitive than interest rates

Purchasing a property is a long-term, possibly once-in-a-lifetime, event for many so its demand is driven more by prices and affordability than the borrowing rate to finance the purchase. Below we see very little correlation between the change in growth rates versus the change in repo rate (the proxy of prevailing interest rates).
Growth vs repo rates Very low correlation
40% 30% 20% 10% 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 9.00% 8.00% 7.00% 6.00% 5.00% 4.00%
Asset quality as good as ever

With collateral-based lending, a relatively conservative credit culture and 95% of home sales being to first-time buyers, housing finance is the least exposed to asset quality risks. The strong asset quality of HDFC and LICHF over the years reflects the relatively low risk nature of lending in this sector is, albeit at lower returns.
Gross NPLs No spikes
2.00% 1.50% 1.00% 0.50% 0.00% FY08 FY09 FY10 FY11 FY12 FY13
Hom e Loan Grow th SCB Loan Grow th LIC HF

Loan Grow th - HDFC Repo R ate (RHS)

HDFC
LIC HF
Home loan growth has remained fairly stable over the past few years, despite rates moving significantly in both directions. Therefore,
Despite property price rise, affordability has remained constant on the back of rising disposable income
50 45 40 35 30 25 20 15 10 5 0 FY01 12 10 8 6 4 5.3 FY02 5.1 FY03 4. 7 FY04 4.3 FY05 4.7 FY06 5.0 FY07 5.1 FY08 5.1 FY09 4.5 FY10 4.7 FY11 4.8 FY12 4.6 FY13 4.7 2 0
Property C ost (INR Lacs)

Source: HDFC FY13 company release, Affordability = Property Prices/ Annual income
Annual Incom e (IN R Lacs ) RHS
Affordability
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CVs heading toward the bottom but LCV still bright

Demand for MHCVs is closely correlated to growth in the economy in general and to industrial activity more specifically (see chart below). So it is no surprise then that MHCV sales declined 23% y-o-y in FY13. However, within this segment: Passenger vehicle (i.e., buses) sales have not been affected. Goods transporting vehicle sales have not slowed down much. Most of the slowdown has been seen in the infrastructure and construction related segment and this is mainly due to the mining freeze.
IIP vs CV sales Close correlation
40% 20% 0% -20% -40% Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 20% 10% 0% -10% -20%
LCV most resilient

60% 40% 20% 0% FY03 FY06 FY07 FY08 FY11 FY12
MHCV
-20% -40%
CV
Source: SIAM, HSBC
LCV
decoupling from the greater economy. With industrial activity not likely to pick up any time soon and the rural segment aided by the monsoon, we expect LCV sales to continue to grow steadily, while visibility on MHCVs will emerge only in 2HFY14.
CV financing is cash flow sensitive

CV segment uptake is fragmented in terms of end use, with LCV demand driven more by last-mile connectivity and growing cash-and-carry business volumes. This, plus increasing freight rates, has ensured steady cash flows, which can boost demand for LCVs. In contrast, MHCV sales, which are driven by industrial activity, have faltered due to weak IIP leading to weakening cash flows despite freight rates rising steadily. In general, FTUs and small road transport operators (SRTOs) are more cash flow sensitive than large fleet operators, which are likely to be more sensitive to interest rates and industrial activity.
CV sales (Mo M growt h)

Source: Bloomberg, SIAM, HSBC
IIP (M oM growth) RHS
Banks and NBFCs believe mining activity will resume over the next few months, which could restart demand for MHCVs in 2HFY14. But this is still uncertain. LCV sales are holding onto growth, in the midteens compared to a 2% decline in overall CV sales in FY13. LCV demand continues to be driven by last-mile connectivity in rural regions, mainly for cash-and-carry and FMCG and for ferrying rural people to nearby areas due to lack of a public transport system. Moreover, we note that the rural economy has been doing well for the past five years, essentially
Freight rates are a significant driver of profitability and thus asset quality
Asset quality in the CV segment is dependent on the profitability of the fleet operators while the FTUs and SRTOs are more cash flow sensitive. Though diesel prices have been on the rise and thereby increasing the cost of operations for the
FY13
FY04
FY05
FY09
FY10
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fleet operators, freight rates have risen in line to compensate for the increasing cost, keeping the operators profitable.
Freight rates
1.59 1.57 (Rs/ tkm) 1.55 1.53 1.51 1.49 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
coal supply through fuel supply agreements (FSAs), creating new bidding guidelines, and introducing tariff relief for low-tariff PPAs. Also, the discoms have been raising tariffs regularly for a couple of years now to reduce financial losses.
Progress made, but much remains to be done

The recent Cabinet Committee on Economic Affairs (CCEA) ruling allows projects with coal linkage from Coal India with PPAs to passthrough increased costs by allowing them to raise tariffs. This is likely to benefit about 5.5GW of power projects. However, loans to projects where PPAs have not yet been signed (8,335MW) are at risk of impairment amounting to an estimated INR348bn. However, the decision regarding the pass-through mechanism for power producers using imported coal with PPAs being signed still needs to be resolved. The Central Electricity Regulatory Commission (CERC) has appointed a panel headed by HDFC Chairman Deepak Parekh to make a recommendation on tariff increases. Should these projects be allowed to raise tariffs, then we would expect their positive returns, however small, to be sufficient to service debt. The bulk of these projects have PPAs signed. For the projects without PPAs signed (totalling 2,940MW), we estimate impaired loans of INR141bn. There is a risk that the arbitration panels decision could lead to litigation, thus delaying relief for even those projects with PPAs in place. Projects which use both domestic and imported coal and have not signed a PPA are expected to remain in limbo as we do not expect any fresh signing of PPAs.
A verage f reight rat es

Source: Crisil, HSBC
However, as industrial activity slows, business volumes could shrink, thereby increasing the risk of large fleet operators facing stress. Hence the segment could witness a moderate deterioration in asset quality
Infra finance structural bottlenecks

While the long-term growth potential of the infrastructure sector remains promising with a need to add more power generation capacity to address the chronic power deficit and the requirement for better road and other physical infrastructure, the near-term outlook for the sector (especially power) is clouded by structural bottlenecks. See our report Indian Power and Banks: Progressing towards value discovery, dated 12 July 2013. Delayed clearances, problems in acquiring land, lack of coal supplies for power production, lack of gas, and the financial ill health of the state discoms are among a host of issues that have stunted the sectors growth. Over the past 12 months, there has been progress with the central government trying to resolve various issues, including restructuring discoms debt, expediting clearances for projects, securing
Gas-based projects most at risk

Total private sector gas-based capacities are about 8GW. These projects are close to completion, but do not have sufficient gas supply to operate and, even
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where gas is available for operational plants, they face difficulty in selling power since their average tariff is expected to go up significantly after the new natural gas pricing policy. The future of these projects is uncertain. In fact, most developers have suspended their unfinished gas projects regardless of how close to completion they are. Overall, we estimate c.19GW of power capacity is at risk of restructuring or defaulting over the next couple of years. In addition, the CAG-related coal block allocations could put at risk another upcoming 33.2GW of power capacity.
Power projects at risk At risk (MW) Probable disbursals (INRbn) 348 141 273 370 143 1,275
the losses, the central government has finalised a FRP for these states, whereby short-term debt up to 31 March 2012 will be restructured, with 50% to be taken up by state governments by issuing bonds and the balance 50% to be restructured by banks. However, barring Tamil Nadu and Rajasthan, other states have yet to sign the FRP. Banks funding will likely remain low and incremental PPAs are unlikely to be signed by the states as they are still not out of woods. In such a scenario, existing generation capacities will operate at suboptimal levels, while IPPs will slow the pace of commissioning new projects, which could lead to significant restructuring by banks and IFCs over the next few quarters. Also, many large promoters like Lanco, GMR and GVK are sitting on significantly leveraged balance sheets, which increases the risk of default if the government does not resolve the issues in time. Given these issues in the power sector, we expect new capex will be postponed, which is already resulting into muted sanctions growth, implying slowing disbursements growth going forward. All this suggests that the revival of the sector is some time away, though we are moving in that direction.
Domestic coal-based projects with partial PPAs and no fuel passthrough Imported coal-based projects with partial or no fuel pass-through Gas-based projects at risk CAG related risk exposure Risky exposures of PFC and REC Total
8,335 2,940 7,968 19,243
Uncertainty over discoms continuing

The revenue gap carried by discoms has been a key area of concern, with average sale prices not enough to meet the average cost of supply. This has led to total losses of about INR1.2trn with major losses coming from the discoms of the seven key states Uttar Pradesh, Tamil Nadu, Rajasthan, Andhra Pradesh, Haryana, Punjab and Madhya Pradesh. However, in the last two years, incrementally, the situation has improved after almost all states raised tariffs in FY13. To tackle
Pro forma impact of risky power sector exposure (INRbn, FY13) Pvt Gencos SEB Total Pvt Genco % of total exposure (FB+NFB) 166 193 13% 12% Risky / Total risky Write-off/ power exposure Total exposure exposure* 40% 40% 5% 5% 0.70% 0.70% Write-off/ PAT (tax adj) 24% 24% Write-off/ BV
REC PFC
166 193
6% 5%
Source: HSBC estimates , *Write-off assumed at 20% of risky exposure
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High interest rate sensitivity

The capex-intensive nature of infrastructure projects places a substantial debt burden on the project owners. Interest cost, therefore, is a significant determinant of the profitability and viability of a project. The interest cost has assumed greater significance in the current environment given power projects are underutilized, which hurts their profitability. The decade-low interest coverage and fixed asset coverage ratios and high debt/equity ratio for some of the biggest names in infrastructure (GVK Power, JP Associates and GMR Infrastructure) is a clear indication of stress. High leverage, coupled with rising borrowing costs, raises financial risks.
Interest coverage at all-time low for major infra players
5 4 3 2 1 0 FY08 FY09 FY10 FY11 FY12 FY13 FY07
Debt/equity ratio on the rise

10 8 6 4 2 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13
LANC O INFR A GVK POWER & IN FR

Source: Bloomberg, HSBC
GM R IN FRA JP Associate
A significant number of projects is likely to come up for restructuring in the power sector over the next few quarters. Overall, the nature of lending (secured), and clientele make housing finance the least exposed to asset quality risks. In the current scenario of vibrant agri and rural growth, the rural financiers should see improvement in asset quality and remains our preferred sector after housing finance. Infrastructure finance is most exposed and least preferred with a higher potential for defaults and restructuring.
LANC O IN FR A GVK POWER & IN FR

GM R IN FRA JP Associate
Embroiled in asset quality worries

Infrastructure projects are most exposed to asset quality risks owing to multiple issues, including: delays in project execution, underutilization and fuel shortages. The key ratios, like debt/equity and fixed asset coverage, for some of the infrastructure companies point to acute financial stress.
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Summary of state discoms financial health and our analysis of their ability to call for new bids and initiate a capex programme State 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Andhra Pradesh Bihar Chhattisgarh Delhi Gujarat Haryana Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Punjab Rajasthan Tamil Nadu Uttar Pradesh Total ____ Outstanding loans (INRbn) _____ FY11e FY12e FY13e na 101 19 41 24 150 na 48 11 111 82 168 31 241 243 1,268 na 111 35 46 30 184 na 53 17 149 117 179 54 300 270 1,543 na 122 55 54 33 222 na 59 19 199 157 200 112 388 300 1,921 Revenue gap (INRbn) Revenue gap Case I FY14e exists Bids likely 0 3.5 4.6 NA 0 0 0 0 4.1 0 0 0 12.8 NA 0 25 No Yes Yes NA No No No No Yes No No No Yes No No Yes possible No Not likely Not likely Not likely Not likely Yes possible Yes possible Not likely Not likely Yes possible Not likely Not likely Yes possible Not likely Capex likely Possible No Yes No Yes Yes Yes No Yes No No No No
Source: HSBC
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Our stock picks

HDFC, LICHF and MMFS set to see resilient growth; others to see
slower growth due to cyclical and structural issues

We see a limited impact on margins due to rising rates for most
NBFCs; HDFC, LICHF and MMFS best placed on asset quality

Overall HDFC and MMFS score better than others although
MMFS is fully valued; we prefer LICHF; IFCs are trading cheap, but structural weakness makes them relatively unattractive
Having looked at various sectors, we compare stocks under our coverage based on growth, margins, asset quality, profitability, and valuations.
Growth HDFC, MMFS and LICHF emerge as winners

Most sectors saw reasonable growth up to FY12. However, with macro and industrial activity faltering post FY12, along with the mining ban in FY12, sectors like CV have slowed significantly. Accordingly, SHTF has consciously reduced its growth since FY13. Also, emerging structural issues in the power sector meant that while disbursements were continuing against pending sanctions, incremental sanctions have reduced. As a result, IDFC has already seen a significant slowdown in growth, while PFC and RECs growth has been cushioned by state sector capex. Incrementally, we expect disbursements to grow at a single-digit rate for PFC and REC, which will slow growth to a mid-teens rate over FY14-16e.
Compared with these stocks, HDFC and LICHFs growth has remained resilient and should remain so in the foreseeable future. MMFS is the best way to play the rural theme, which remains one of the key growth sectors. Over the past five years, MMFS has not only grown well, it has done so with diversification and reduced direct linkage with agriculture. Going forward, the growth outlook for MMFS looks fairly buoyant, with the exception of CV and to some extent cars.
Growth
100% 50% 0% -50% FY16e SHT F FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14e FY15e
HDFC IDFC
LICHF PFC
MM FS REC
Source: Company data, HSBC estimates
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Asset quality HDFC and LICHF key winners

Housing finance has had among the most resilient asset quality over the years. Factors like first-time purchases, rising income levels, sentimentality, and a prudent credit culture in India have helped financiers keep asset quality healthy and minimize credit costs. Not surprisingly, both HDFC and LICHF have had credit costs as low as 15-20bp in the past few years. On the other hand, given the rural market is fragmented with physical cash recovery as a repayment mechanism, it is a high risk segment. Though MMFS usually has high credit cost, this has been built into loan pricing and profitability, helping it to maintain high profitability even with high credit cost. Also, MMFS has significantly improved its gross NPL levels since 2008 from c.10% levels to 3% as of FY13 by diversifying to various vehicle categories and reducing direct linkage to agriculture activities. Going forward, MMFS is likely to maintain stable asset quality in FY14, buoyed by good monsoons and as a possible beneficiary of election spending. However, SHTF, being the largest player in used CVs, could see some rise in delinquencies as 20% of its loans are linked to industrial activity. Therefore if IIP remains weak, it will eventually impact cash flows of the truck operators. On the infrastructure front, IDFC, REC and PFC have seen very low NPLs and credit costs as most of the growth in the past five years was due to disbursements toward new capex in the power generation sector by the private sector. However, with issues continuing to plague the sector, coupled with leverage on promoters balance sheets, despite positive steps taken by the central government in the past year, we think there is a good chance of large-scale restructuring and eventual write-off of a few assets. Nearly all gas-
based capacity is at a serious risk of being written off over the next couple of years. See our report Indian Power and Banks, published 12 July. PFC and REC have made about 85% of their loans to state and central sector utilities and may therefore continue to report low NPLs. However, their private sector exposure is increasing, which could be a source of concern.
Gross NPLs
10% 8% 6% 4% 2% 0% -2% -4% -6%
FY09
FY12
FY07
FY10
FY13
HDFC IDFC
LICHF PF C
MM FS REC
SHT F
Margins HDFC stands out

Margins vary significantly across NBFCs depending on the segment that each is serving and the required business model for the same. However, given the current volatile rate environment, their margins could be at risk as they are wholesale funded. Having well-matched ALM, along with matched repricing of assets and liabilities and the ability to change asset mix incrementally, is crucial in managing margins under the current conditions. Post RBI monetary action to increase the MSF rate by 200bp to 10.25% in addition to other measures on 15 July and 23 July, borrowing rates have jumped across tenors with the short end moving up 200-250bp from 8.5% to 11% and the long end moving up by about 100bp from 9% to 10%. This has inverted the yield curve and tightened liquidity, which could have a serious impact on NBFCs margins till the measures are reversed and liquidity eased.
FY16e
FY08
FY11
FY14e
FY15e
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Yield curve pre and post 15 July 2013

11% 10% 9% 8% 7% 6% 1M CD 6M CD ON rates 12M CD 3M CD AAA 1 Year AAA 5 Year AAA 3 Year
15-Jul
15-Sep
30-Sep
We have found that most NBFCs have tried to manage spreads by: Maintaining sufficient liquidity on the balance sheet, which can be used during tough times like these Borrowing in surplus in 1Q, when money is available more cheaply at 8.25-8.5%, which they have lent in the current quarter Using their committed cash-credit lines with banks, which were available at a lower rate than market PFC and REC have also raised tax free bonds Many have increased lending rates by 25-50bp On 20 September, although the new RBI Governor reversed 75bp of the 200bp hike on the MSF, he simultaneously increased the repo rate by 25bp, making the rate hike more permanent, though in small amounts. This implies that while short-term rates will come off from current high levels, they will remain above the pre-15 July levels. With the RBI further reducing the MSF rate by 50bp to 9% now, short-term funding costs will decline further and ease funding cost pressures for NBFCs. However, we maintain our estimate for a 0-30bp margin decline for our NBFC universe as the RBI has started hiking repo rates.
In this context, HDFC stands out with steady spreads in the 2.2% to 2.4% range or margins in the 3.4% to 3.6% range. HDFC has a well-matched ALM book, which when combined with its ability to incrementally change its asset mix between wholesale and retail, helps it to maintain steady spreads. In the current quarter, given the jump in interest rates, HDFC has been able to maintain spreads by pre-empting surplus borrowing at lower cost in 1Q, while steadily building up a retail deposit base and minimizing reliance on bank loans (under 10% of liabilities). Also, it is likely to have increased its exposure to wholesale borrowers, which is a high yield segment. LICHF has seen significant margin compression in the past few quarters, with FY13 spreads dropping to a low of 1.1% versus the peak of 1.7%. Mismatch in its ALM and around 97% retail loans in the overall loan book affected its spreads significantly as rates increased significantly in FY13. However, in the current fiscal year, LICHF seems to be managing the spreads well with 1Q spreads improving to 1.2%. Also, like HDFC, it borrowed in surplus in 1Q when money was available cheaply, which it is now using to disburse incremental loans. Also, it recently introduced new products at higher rates, which can partially offset higher funding costs. So, while it is likely to make spreads of 1.2-1.3% in 1H, spreads can shrink to 0.9% in 2H as incremental new borrowing cost is likely to be about 10%, while incremental lending yield is at 10.9%. Overall for FY14, spreads should remain stable at 1.1% at best. Accordingly, while spreads are close to the lowest levels, earnings could remain weak till the spreads improve. MMFS has been able to reduce the impact to a large extent by using cash-credit lines and raising lending rates for new borrowers. However, with almost 100% of assets at fixed rates vs. 50% fixed rate liabilities, a sudden rise in funding cost will
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take time to pass on to borrowers. As a result, MMFS is expecting a 20-30bp margin contraction for FY14 over FY13, without much impact on growth. However, 30bp in the context of a 10% average margin is not much. SHTFs margins have declined from a peak of 9% in FY11, when it resorted to aggressive securitization, which boosted margins to 7.8% in FY13, when securitization levels fell along with the loan book shifting to the 1-4 year-old usedvehicle category, where yields are lower. According to SHTFs management, the last two months have not had much impact on margins as it maintains sufficient liquidity. SHTF has always been a high cost borrower in the market and securitized INR10bn in 2Q. The company is replacing the 1-4 year-old vehicle segment with older high yielding vehicle segments, which will help to maintain margins. The impact of rate volatility on margins is also likely to be minimal for PFC and REC this quarter, as they too have utilized their cash-credit limits and raised tax-free bonds to fund growth and reduce dependence on NCD and bank term loans. Both PFC and REC have also raised their incremental lending rates by 50bp to minimize the impact of higher funding cost. By contrast, IDFC has resorted to tapping the market at higher cost and become extremely cautious on expanding the loan book. Refinancing opportunities have also shrunk, as PSU banks like SBI have been aggressive in refinancing this year. Accordingly, IDFC will see only a limited margin impact in the current quarter. Going forward, with the RBI hiking repo rates, we believe most of the NBFCs will start hiking prime lending rates as they head into the busy 2HFY14. Overall, HDFC, MMFS, SHTF, PFC, and REC should be able to minimize margin loss, without sacrificing much growth. However, IDFC could
see margin stress, while LICHFs margins will remain low at an estimated 1.1% for the current fiscal year.
Net interest margins
15% 10% 5% 0% FY16e SHT F
REC
FY08
FY09
FY11
FY12
FY07
FY10
FY13
FY14e
PFC
HDFC IDFC
LICHF PFC
MM FS REC
Liability mix (FY13)

100% 80% 60% 40% 20% 0% LICHF MMFS HDFC SHTF IDFC
Loans from Banks Depos its CP Others
Other Institutional loans Debentures Bonds
Source: : Company data, HSBC
Borrowings split (FY13) HDFC LICHF MMFS SHTF IDFC Loans from Banks Other Institutional loans Deposits Debentures CP Bonds Others 10% 1% 33% 50% 6% 0% 0% 30% 4% 1% 61% 0% 4% 0% 51% 0% 11% 22% 0% 3% 12% 38% 0% 4% 45% 0% 12% 1% 25% 0% 0% 72% 2% 1% 1% PFC 16% 2% 0% 0% 0% 76% 6% REC 3% 3% 0% 0% 1% 78% 15%
FY15e
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Not just about profitability

Most NBFCs deliver healthy returns, with ROA ranging between 2.5% and 4% and ROA ranging between 14% and 22%. We believe that along with profitability, the stocks should be assessed based on their credit risk management, reporting transparency, earnings visibility and earnings stability. HDFC and MMFS stand out for their steady growth in loans and earnings, healthy profitability, high reporting transparency, prudent credit risk management and good earnings visibility. LICHF comes next with healthy loan growth, and prudent risk management. But with margins declining significantly over the past two years, profitability has dipped significantly, though ROA is reasonable at 17-18%. A lack of transparent reporting of its balance sheet has considerably reduced earnings visibility in the current volatile rate environment. SHTF follows, with healthy profitability, reporting transparency, good earnings visibility and prudent risk management, but has seen loans and earnings growth decline over the past two years due to a CV demand cycle slowdown. Profitability has declined and is likely to continue to decline modestly, going forward. Our least preferred IFCs are PFC, REC and IDFC, as issues in the power sector continue to plague earnings visibility. While IDFC has seen steady profitability, high reporting transparency and reasonably prudent risk management, loan growth has been faltering and asset quality risks increasing, implying that profitability is likely to decline over FY14-15. Given its low equity leverage, ROA is likely to decline to about 12-13% over FY14-15e, which would be the lowest among
all covered NBFCs. PFC and REC have shown steady loan and earnings growth, but asset quality risks on their private sector exposure is increasing. Also, they have been the least prudent in credit risk management, historically. Therefore, transparency in their practices remains low, leading to much lower comfort in and confidence on their reported earnings and book value.
ROA
5% 4% 3% 2% 1% FY08 FY10 FY13 FY07 FY09 FY12 FY15e FY11 FY14e FY16e
HDFC IDFC
LICHF PFC
MM FS REC
SHT F
ROE
35% 30% 25% 20% 15% 10% FY15e FY07 FY10 FY12 FY08 FY09 FY11 FY13 FY14e FY16e
HDFC IDFC
LICHF PFC
MM FS REC
SHT F
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ROA DuPont analysis as % of total assets ___ HDFC ___ FY13 FY14e NII Fee income Other income Optg revenue Opex Operating profit Total Provision PBT Tax PAT 3.40 0.13 0.46 3.99 0.30 3.69 0.08 3.61 0.95 2.66 3.44 0.13 0.42 3.99 0.29 3.70 0.05 3.65 0.97 2.69 __ LICHF ____ ___MMFS ___ FY13 FY14e FY13 FY14e 2.10 0.16 0.11 2.37 0.39 1.99 0.11 1.88 0.48 1.40 2.10 0.13 0.10 2.32 0.37 1.94 0.15 1.80 0.46 1.34 10.16 0.17 10.33 3.37 6.96 1.29 5.81 1.80 4.01 9.90 0.15 10.05 3.18 6.87 1.38 5.49 1.81 3.68 __ SHTF ____ ___ IDFC ____ FY13 FY14e FY13 FY14e 8.58 0.57 9.15 2.05 7.10 2.10 5.00 1.63 3.38 8.17 0.45 8.62 2.02 6.61 2.17 4.43 1.44 2.99 3.88 0.65 0.73 5.26 0.80 4.46 0.53 3.93 1.14 2.79 3.73 0.49 0.81 5.03 0.75 4.28 0.76 3.52 0.99 2.53 ___ PFC ____ ___ REC ____ FY13 FY14e FY13 FY14e 4.15 0.12 0.13 4.40 0.34 4.06 0.05 4.02 1.01 3.00 3.69 0.11 0.11 3.92 0.31 3.60 0.13 3.48 0.98 2.50 4.47 0.11 0.15 4.73 0.31 4.42 0.11 4.25 1.11 3.14 4.18 0.11 0.14 4.43 0.27 4.16 0.22 3.88 1.05 2.83
Ranking HDFC RoA ROA Prudence Transparency Earnings' visibility Earnings' stability Management quality Points Overall rank
LICHF 7 6 4 5 4 4 5 35 4
MMFS 1 1 1 1 2 2 2 10 2
SHTF 2 4 3 4 3 3 3 22 3
IDFC 5 7 5 3 5 5 4 34 5
PFC 5 4 7 6 6 6 6 40 7
REC 3 1 6 7 7 7 7 38 6
3 1 1 2 1 1 1 10 1
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Company write-ups
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HDFC (HDFC IN)

Best play in the NBFC space on all measures and biggest
beneficiary of resilient housing growth with credible management

Margins least vulnerable to volatile rate environment; prudent risk
management helps maintain healthy profitability

Reiterate OW with a revised target price of INR1,029 (previously
INR1,007); our preferred stock in the NBFC space
Robust growth set to continue

As one of the largest home financiers in India, HDFC continues to benefit from the steady, secular growth in home sales that we have been seeing for years through economic cycles. The trend continues even now with property buying decisions still mainly driven by home prices and income stability. While first tier cities have done well, the pace of growth in second tier and third tier cities has improved, which will continue to support steady growth for HDFC. We expect it to deliver 18-20% loan growth over FY14-15.
HDFC has the best liability structure with c.33% of borrowings in the form of deposits, which is stable funding. With c.30% of its liabilities likely to reprice upward in the current fiscal year, HDFC recently increased its prime lending rate by 25bp to protect its margin.
Stable asset quality will continue to aid returns

HDFCs gross NPL ratio has been less than 1% for the last 18 quarters and has shown a steady, continuous improvement currently at 0.77%. With credit cost remaining low at 15-20bp, we expect it to continue to deliver ROA of 2.7-2.8% and ROA of 22-24% over FY14-15.
Superior liability structure and cost transmission to aid NIM

HDFC has a well-matched ALM book. That, along with its ability to change its asset mix between wholesale and retail, helps it to maintain steady spreads. In the current quarter, given the jump in interest rates, HDFC has been able to maintain spreads by pre-empting surplus borrowings at lower cost in 1Q, while steadily building up its retail deposit base and minimizing its reliance on bank loans (under 10% of liabilities). Also, it is likely to have increased its exposure to the high yielding wholesale borrowers segment. Among the NBFCs,
Retain OW
HDFC trades at a 4.1x PB and 19.3x PE 12-month forward. Ex-subsidiary value, it is trading at an 11.3x PE and 2.4x PB. We maintain our target multiples of 24x PE and 4.5x PB. But after rolling forward earnings (September 2015 base), we arrive at a new target price of INR1,029 (INR1,007). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate of 11% for Indian stocks.
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Our target price of INR1,029 implies a potential return, including dividend yield, of 30%, which is above the Neutral band; therefore, we are reiterating our OW rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield. HDFC remains our preferred pick in the NBFC space.
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Financials & valuation HDFC

Year to P&L summary(INR m) Net Interest Income Non-interest Income Processing fees & other income Income from investment Misc income Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other_assets Total Liabilities Customer deposits Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Core tier 1 Total tier 1 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 3.40 11.03 7.63 0.44 0.15 3.99 0.30 0.14 0.16 3.69 0.08 3.61 0.95 2.66 3.44 10.94 7.50 0.40 0.15 3.99 0.29 0.13 0.16 3.70 0.05 3.65 0.97 2.69 3.49 10.76 7.26 0.37 0.15 4.01 0.27 0.13 0.14 3.74 0.04 3.69 0.98 2.72 3.50 10.83 7.33 0.34 0.14 3.98 0.27 0.13 0.14 3.72 0.04 3.68 0.97 2.70 31.4 31.4 12.5 161.7 161.7 37.2 37.2 14.0 182.5 182.5 44.7 44.7 17.0 207.3 207.3 52.9 52.9 20.0 236.8 236.8 1,534,347 1,425,431 1,684,669 1,994,155 13.9% 17.2% 16.8% 16.5% 13.9% 17.2% 16.8% 16.5% 16.4% 20.0% 19.3% 18.7% 3/2013a 3/2014e 3/2015e 3/2016e 61,829 10,739 2,413 7,962 363 72,567 5,389 2,462 2,927 67,178 1,450 65,728 65,728 17,245 48,483 48,483 48,483 1,960,061 1,700,462 136,135 123,465 1,710,061 519,328 1,068,953 121,780 250,000 250,000 73,686 11,768 2,848 8,539 381 85,454 6,196 2,856 3,340 79,258 1,015 78,243 78,243 20,705 57,538 57,538 57,538 2,325,547 2,039,328 143,363 142,855 2,043,338 643,967 1,260,274 139,097 282,209 282,209 88,899 13,107 3,360 9,346 400 102,006 6,893 3,313 3,580 95,113 1,137 93,976 93,976 24,869 69,108 69,108 69,108 2,764,421 2,447,151 151,253 166,017 2,443,861 775,980 1,509,203 158,678 320,560 320,560 105,906 14,661 3,965 10,275 420 120,567 8,038 3,843 4,195 112,529 1,273 111,256 111,256 29,441 81,815 81,815 81,815 3,290,099 2,936,937 159,876 193,286 2,923,910 935,056 1,808,916 179,937 366,190 366,190 Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Customer deposits Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 25.6 18.5 5.0 5.0 1.6 0.6 21.6 15.7 4.4 4.4 1.7 0.5 18.0 13.0 3.9 3.9 2.1 0.4 15.2 11.0 3.4 3.4 2.5 0.4 3.42 11.10 9.32 1.78 0.7 0.09 106.3 0.8 0.1 4.8 86.8 78.3 99.4 81.9 7.4 14.8 2.66 22.0 26.7 8.3 3.46 10.99 9.20 1.79 0.7 0.05 133.3 1.1 0.1 5.4 87.7 61.3 99.5 81.5 7.3 13.8 2.69 21.6 25.2 8.1 3.51 10.80 8.83 1.97 0.8 0.05 129.0 1.1 0.1 5.9 88.5 60.9 99.6 82.3 6.8 12.8 2.72 22.9 26.2 8.4 3.51 10.86 8.82 2.04 0.8 0.05 129.7 1.1 0.1 6.2 89.3 60.6 99.7 83.1 6.7 12.2 2.70 23.8 24.9 8.8 3/2013a 18.4 10.1 19.3 16.9 81.3 16.0 17.6 20.7 16.7 18.4 43.1 3/2014e 19.2 9.6 15.0 18.0 (30.0) 19.0 18.7 19.9 18.6 (7.1) 24.0 3/2015e 20.6 11.4 11.2 20.0 12.0 20.1 20.1 20.0 18.9 18.2 20.5 3/2016e 19.1 11.9 16.6 18.3 12.0 18.4 18.4 20.0 19.0 18.4 20.5
1,808,431 2,132,206 2,535,952 3,017,901 1,489,778 1,746,261 2,094,712 2,514,578
Price relative
993 943 893 843 793 743 693 643 593 543 2011
HDFC
Source: HSBC
993 943 893 843 793 743 693 643 593 543 2012
Rel to BOMBAY SE SENSITIVE INDEX
2013
2014
Note: price at close of 3 October 2013
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HDFC charts
Loan growth Disbursement growth
40.00% 30.00% 20.00% 10.00% 0.00% FY08 FY09 FY12 FY13 FY07 FY10 FY11 FY15e FY14e
35% 30% 25% 20% 15% 10% FY09 FY12 FY07 FY10 FY13 FY08 FY11 FY16e FY15e FY14e
Loan Grow th (YOY%)

Disbursement Grow th
Margin
Gross NPL
3.8% 3.6% 3.4% 3.2% 3.0% 2.8% FY16e FY08 FY09 FY11 FY12 FY15e FY07 FY10 FY13 FY14e
0.95% 0.90% 0.85% 0.80% 0.75% 0.70% 0.65% 0.60% FY15e FY09 FY12 FY08 FY11 FY14e FY07 FY10 FY13 FY16e
Margin
Source: Company data, HSBC estimates Source: Company data, HSBC estimates
GNPL
ROA/ROA
Rolling PE PB 12-mth fwd
3.4% 3.2% 3.0% 2.8% 2.6% 2.4% 2.2% FY07 FY09 FY10 FY11 FY12 FY08 FY13 FY14e FY15e FY16e
35% 30% 25% 20% 15%
40x 30x 20x 10x 0x Sep-92 Sep-04 Sep-95 Sep-07 Sep-01 Sep-13 Sep-98 Sep-10
HDFC ROA
HDFC ROE (RHS)
Rolling P/E Rolling P/B (RHS)

Average 5 year Avg 5 yr PB (RHS)
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FY16e
8x 6x 4x 2x 0x
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LICHF (LICHF IN)

Expect loan growth to remain stable at 20-22% Spreads and ROA have bottomed out at 1.1% and 1.3%,
respectively; improvements likely from next year onward

Reiterate OW with a revised target price of INR236 (previously
INR243); current price factors in worst-case margin scenario
Steady loan growth to continue

Housing finance remains fairly buoyant, despite economic growth faltering and interest rates rising, as property buying decisions are more dependent on prevailing property prices and job creation than on interest rates. Also, while Mumbai and the NCR have seen slower growth, first and second-tier cities continue to grow at a steady pace. Demand from the government sector as well as service sector continues to support healthy demand. Accordingly, we maintain our loan growth estimate of 20-22% for LICHF over FY14-15. The developer segment should remain muted.
that will not allow LICHF to improve its spreads much from current levels.
Profitability at the lowest point, but likely to continue

With steady loan growth and robust asset quality, spreads are the single most important driver of LICHFs ROA. Therefore, with spreads not likely to improve much above 1.1%, ROA is likely to taper off at 1.3-1.4% levels, one of the lowest among NBFCs and leading to ROA of 17-18%.
Retain OW
As returns are unlikely to improve in the near term, the current trading multiples of 1.2x PB and 7.6x PE are probably pricing in the worst-case earnings scenario. This makes us constructive at the current price. We maintain our target multiples of 1.4x PB and 8.2x PE. With an extended period of low spreads we cut our EPM value to INR208 (previously INR251). This combined with a roll-forward of earnings (September 2015 base) arrives at our new target price of INR236 (INR243). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR236 implies a potential return,
Spreads at the bottom, but difficult to improve

At 1.1%, LICHFs spreads are near the bottom given that its average funding cost is c.9.75% against an average lending yield of 10.9%. LICHF also borrowed in surplus in 1Q at c.8.5%. In the current quarter, given the sharp rise in funding costs, LICHF has avoided borrowing at higher rates, by using the surplus funds as well as raising 10-year money at 9.5-10%. Going forward, while near-term rates will come off slightly post reversal of RBI measures, they will remain high enough
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including dividend yield, of 21.1%, which is above the Neutral band; therefore, we are reiterating our OW rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield.
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Financials & valuation - LICHF

Year to P&L summary(INR m) Net Interest Income Non-interest Income Processing fees & other income Income from investment Misc income Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for Housing loans Other Other non-oper profit(loss) HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other assets Total Liabilities Customer deposits Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Core tier 1 Total tier 1 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 2.10 10.20 8.10 0.16 0.11 2.37 0.39 0.12 0.26 1.99 0.11 1.88 0.48 1.40 2.10 10.12 8.02 0.13 0.10 2.32 0.37 0.12 0.25 1.94 0.15 1.80 0.46 1.34 2.12 10.07 7.95 0.11 0.08 2.31 0.37 0.12 0.25 1.95 0.16 1.79 0.46 1.33 2.14 10.14 8.00 0.10 0.08 2.32 0.36 0.11 0.25 1.95 0.18 1.78 0.45 1.32 20.3 20.3 3.8 128.3 128.3 23.5 23.5 4.4 146.7 146.7 27.8 27.8 5.0 168.6 168.6 32.6 32.6 5.6 194.7 194.7 573,234 11.5% 11.5% 16.5% 675,227 11.0% 11.0% 15.4% 822,205 1,008,857 10.4% 9.7% 10.4% 9.7% 14.0% 12.7% 805,602 778,127 10,924 16,552 740,789 7,715 679,926 53,016 64,813 64,813 726,628 624,257 964,611 1,141,952 1,345,144 934,506 1,108,831 1,308,622 11,469 12,050 12,670 18,636 21,070 23,852 890,542 1,056,803 1,246,834 10,029 12,035 14,442 820,960 978,361 1,158,550 59,412 66,256 73,682 74,069 85,149 98,310 74,069 85,149 98,310 878,525 1,045,499 1,234,380 759,315 910,693 1,081,694 3/2013a 3/2014e 3/2015e 3/2016e 15,345 1,998 1,168 704 126 17,343 2,818 904 1,914 14,524 789 475 314 13,736 13,736 3,504 10,232 10,232 10,232 18,567 1,952 1,110 704 139 20,519 3,316 1,075 2,241 17,202 1,289 818 471 15,913 15,913 4,058 11,855 11,855 11,855 22,307 2,057 1,165 739 153 24,364 3,877 1,236 2,640 20,487 1,649 943 706 18,838 18,838 4,804 14,035 14,035 14,035 26,558 2,262 1,282 813 168 28,820 4,536 1,422 3,114 24,285 2,178 1,120 1,059 22,106 22,106 5,637 16,469 16,469 16,469 Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Customer deposits Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 9.8 6.9 1.5 1.5 1.9 0.1 8.4 5.8 1.4 1.4 2.2 0.1 7.1 4.9 1.2 1.2 2.5 0.1 6.1 4.1 1.0 1.0 2.8 0.1 2.11 10.56 9.49 1.07 0.6 0.11 41.4 0.8 0.1 7.3 96.6 71.2 99.3 85.3 16.3 11.5 1.40 16.8 16.8 12.0 2.11 10.43 9.35 1.08 0.7 0.15 45.0 1.0 0.2 9.0 96.9 70.0 99.3 85.8 16.2 9.5 1.34 17.1 17.1 12.7 2.13 10.35 9.20 1.15 0.8 0.16 45.0 1.0 0.2 10.0 97.1 72.0 99.3 86.5 15.9 8.4 1.33 17.6 17.6 13.2 2.15 10.39 9.20 1.19 0.8 0.18 45.0 1.1 0.2 10.9 97.3 75.0 99.3 87.0 15.7 7.8 1.32 18.0 18.0 13.6 3/2013a 10.3 (14.0) 18.9 4.7 (49.5) 11.6 11.9 23.4 22.5 10.2 186.5 3/2014e 21.0 (2.3) 17.7 18.4 63.4 15.9 15.9 20.1 19.7 17.8 30.0 3/2015e 20.1 5.4 16.9 19.1 27.9 18.4 18.4 18.7 18.4 21.8 20.0 3/2016e 19.1 10.0 17.0 18.5 32.1 17.3 17.3 18.0 17.8 22.7 20.0
Price relative
329 279 229 179 129 2011
Lic Housing Finance Ltd
Source: HSBC Note: price at close of 3 October 2013
329 279 229 179 129 2012 2013 2014

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LICHF charts
Loan growth Margin
40% 35% 30% 25% 20% 15% FY16e FY07 FY09 FY10 FY12 FY13 FY15e FY08 FY11 FY14e
3.0% 2.8% 2.6% 2.4% 2.2% 2.0% FY07 FY09 FY10 FY11 FY12 FY13 FY14e FY15e
FY15e
Sep-13
FY08
Loan Grow th (YOY%)

Margin
Gross NPL
Credit cost
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY15e FY07 FY10 FY13 FY08 FY11 FY09 FY12 FY14e FY16e
0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% FY07 FY08 FY10 FY11 FY13 FY09 FY12 FY14e -0.1% FY16e
3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x Sep-05 Sep-99 Sep-97 Sep-11 Sep-03 Sep-09 Sep-01 Sep-07
GNPL
Credit Cost
ROA/ROA
Rolling PE/PB 12-mth fwd
2.2% 2.0% 1.8% 1.6% 1.4% 1.2% FY07 FY08 FY10 FY11 FY12 FY13 FY09 FY14e FY15e FY16e
27% 25% 23% 21% 19% 17% 15%
20x 15x 10x 5x 0x
LICHF ROA
LICHF ROE (RHS)
Rolling P/E Rolling PB (RHS)

Average 3 year PE Avg 3 yr PB (RHS)
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FY16e
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MMFS (MMFS IN)

Good monsoons, rising rural income and upcoming elections set
to drive 24-26% loan growth over FY14-15e

Margins to decline marginally due to volatile rate environment, but
asset quality to remain healthy

Retain Neutral (adding volatility flag) with a revised target price of
INR285 (previously INR250)
Loan growth to remain healthy

MMFS is entering a phase, where a large part of its growth is self-driven. Over 40% of MMFS incremental loans are derived from repeat customers or references, thereby reducing dealer dependence. Additionally, a healthy monsoon this year has boosted tractor sales, while growth in UVs and used vehicles has also remained healthy. However, MMFS has been cautious in growing its CV book, while its car loan segment has also slowed down. Overall disbursement growth of 1820% could drive overall loan growth of 24-26% y-o-y over FY14-15e.
we anticipate 20-30bp margin decline this fiscal year. However rising cash flows of rural customers will improve cash recovery in 2H, helping it to maintain healthy asset quality. These factors should help MMFS maintain ROA at 3.6-3.7%, which represents a slight decline over FY13, but enough to maintain ROA at 22-23% over FY14-15e.
Retain N (adding V flag)

MMFS has rerated significantly and is trading at 12.5x PE and 2.6x PB, c.17-20% premium to its three-year average multiples. Given strong monsoons and a potentially good harvest season ahead, coupled with already strong tractor sales and its ability to pass on rising funding costs, MMFS has been one of the most defensive stocks in recent months. We expect it to remain defensive and therefore, increase our target multiples to 12.5x PE and 2.4x PB from 12x PE and 2.2x PB. Factoring in the value of its insurance broking and rural home finance subsidiaries and rolling forward earnings (September 2015 base), we arrive at a target price of INR285 (INR250). We add the V flag, in recognition of the stocks increased volatility. Under our research model, for stocks with a volatility indicator, the Neutral band
Cash flows of rural customers protect margins, asset quality

Continued rise in rural income along with healthy agriculture prospects this year will help ensure cash flow generation for rural customers, thereby making it easier for MMFS to pass on rising rates. Given the volatility of rates since 15 July, MMFS has stayed away from aggressive borrowing and has used liquidity on its balance sheet, its cash-credit limits and raised rates for new borrowers to manage margins. However, given that almost 100% of its assets are fixed rate versus 50% fixed rate liabilities,
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is 10ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR285 implies a potential return, including dividend yield, of 9.4%, which is within Neutral band; therefore, we are reiterating our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield
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Financials & valuation - MMFS

Year to P&L summary(INR m) Net Interest Income Non-interest Income Profit from Sale of LT investment Dividend Received Others Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for NPAs HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other_assets Total Liabilities Customer deposits Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Tier 1 Tier 2 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 10.16 17.51 7.35 0.01 0.16 10.33 3.37 1.01 2.35 6.96 1.29 5.68 1.80 3.88 9.90 17.21 7.31 0.01 0.14 10.05 3.18 0.94 2.24 6.87 1.38 5.49 1.81 3.68 9.94 17.20 7.26 0.01 0.13 10.08 3.12 0.91 2.21 6.96 1.53 5.43 1.79 3.64 9.90 17.17 7.27 0.01 0.13 10.04 3.09 0.90 2.20 6.94 1.42 5.52 1.82 3.70 15.7 15.2 3.8 79.1 79.1 18.8 18.8 4.2 93.0 93.0 22.9 22.9 5.2 109.9 109.9 28.5 28.5 6.5 130.7 130.7 255,884 17.0% 2.7% 19.7% 326,296 16.0% 2.1% 18.2% 401,987 15.4% 2.1% 17.5% 495,950 14.8% 2.1% 16.9% 254,924 227,281 5,610 22,034 210,378 188,223 22,155 44,546 44,546 209,529 183,242 318,984 288,843 6,171 23,970 266,641 239,088 27,553 52,343 52,343 271,913 238,510 391,406 356,559 6,788 28,060 329,541 298,253 31,288 61,865 61,865 334,989 298,091 474,914 433,799 7,466 33,648 401,304 365,242 36,062 73,610 73,610 406,517 365,422 3/2013a 3/2014e 3/2015e 3/2016e 22,377 382 23 167 193 22,759 7,420 2,234 5,186 15,340 2,833 2,833 12,506 286 12,792 3,965 8,827 8,827 8,541 28,406 439 24 183 231 28,845 9,129 2,692 6,437 19,716 3,949 3,949 15,767 15,767 5,203 10,564 10,564 10,564 35,300 505 25 202 278 35,805 11,077 3,238 7,838 24,728 5,444 5,444 19,284 19,284 6,364 12,921 12,921 12,921 42,896 582 27 222 333 43,478 13,395 3,882 9,513 30,083 6,161 6,161 23,922 23,922 7,894 16,028 16,028 16,028 Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Customer deposits Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 16.84 9.69 3.34 3.34 1.44 0.58 14.07 7.54 2.84 2.84 1.59 0.47 11.50 6.01 2.40 2.40 1.95 0.38 9.27 4.94 2.02 2.02 2.46 0.31 32.6 1.68 4.01 23.84 23.07 5.95 31.6 1.52 3.68 21.81 21.81 5.92 30.9 1.41 3.64 22.63 22.63 6.22 30.8 1.34 3.70 23.66 23.66 6.39 10.68 19.58 8.83 10.74 3.36 1.44 65.93 2.98 1.11 17.13 89.16 1.00 95.12 83.19 10.45 19.14 8.80 10.34 3.64 1.53 65.00 3.22 1.21 20.09 90.55 1.02 94.76 83.12 10.54 18.93 8.65 10.28 4.05 1.69 65.00 3.59 1.35 23.34 91.10 1.03 94.31 83.92 10.55 18.82 8.62 10.21 4.43 1.56 65.00 3.87 1.24 26.10 91.34 1.04 93.85 84.36 3/2013a 35.8 44.4 25.3 41.7 80.5 35.2 42.3 36.3 37.3 33.3 3/2014e 26.9 14.7 23.0 28.5 39.4 26.1 19.7 27.1 25.1 27.5 3/2015e 24.3 15.0 21.3 25.4 37.9 22.3 22.3 23.4 22.7 23.2 3/2016e 21.5 15.2 20.9 21.7 13.2 24.0 24.0 21.7 21.3 23.4
Price relative
345 295 245 195 145 95 2011 2012 2013
Rel to BOMBAY SE SENSITIVE INDEX Mahindra & Mahindra Finan
Source: HSBC Note: price at close of 3October 2013
345 295 245 195 145 95 2014
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MMFS charts
Loan growth (YoY%) Margin
50% 40% 30% 20% 10% 0% FY07 FY09 FY10 FY12 FY13 FY14e FY15e FY08 FY11 FY16e
14% 13% 12% 11% 10% 9% FY07 FY09 FY10 FY12 FY13 FY14e FY15e
FY15e
Sep-13
FY08
FY11
Loan Grow th (YOY%)

Margin
Gross NPL
Credit cost
12% 10% 8% 6% 4% 2% FY15e FY07 FY08 FY09 FY11 FY12 FY13 FY14e FY16e FY10
5% 4% 3% 2% 1% 0% FY07 FY09 FY10 FY11 FY12 FY08 FY13 FY14e FY16e

3.5x 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-06 Sep-07
GNPL
Credit Cost
ROA/ROA
26% 24% 22% 20% 18% 16% 14%
17x 15x 13x 11x 9x 7x 5x
MMFS ROA
MMFS ROE (RHS)
Rolling P/ E Rolling P/ B (RHS)

Av erage 5 year PE Av g 5 yr PB (RHS)
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SHTF (SHTF IN)

Loan mix incrementally to shift back to the better yielding 5-12-
year used CV segment from the younger 1-4-year used segment

Margins to bottom out as portfolio mix shifts to higher yielding loans;
2Q may see compression but 3Q onward margins should stabilise

Upgrade to OW from N with a revised target price of INR706
(previously INR723)
Changing loan mix aids AUM growth

Over the past few quarters, SHTFs loan growth has been mainly driven by the low yielding younger 1-4-year used CV category, which usually gets created during a CV cycle slowdown as many CV owners leave the market and fleet owners downsize their fleets. However, with growth in the 1-4-year category exhausted, growth now relies on the older high yielding 5-12-year CV segments, which we expect to support steady asset growth at 15-17%.
expect an overall 12-14bp margin decline, which will stabilize in FY15.
Profitability to decline, but stabilise this fiscal year

We continue to expect ROA to decline to 3% in FY14 with lower margin expectations and higher credit costs due to asset quality deterioration. Accordingly, we estimate ROA will decline to 1819% over FY14-15.
Upgrade to OW
SHTF is trading at an 8x PE and 1.4x PB, 12month forward, which is at a 25% and 33% discount to its three-year averages, respectively. We retain our target multiples of 9x PE and 1.7x PB, but reduce the EPM value by cutting the semi-explicit period growth forecast to 10% from 14% accounting for the slowdown in industrial activity. Combined with rolling forward our estimates (September 2015 base), we arrive at a revised target price of INR706 (INR723). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR706 implies a potential
Recent rate volatility to have limited impact on margins

Since 15 July, short-term rates have jumped 200250bp while funds up to 3 years are 150bp higher. However, SHTF maintains adequate liquidity on its balance sheet. Along with the securitization of INR10bn, this has allowed SHTF to minimize its borrowings from bond markets and banks. We are anticipating a 10-15bp margin impact in 2Q. However, given the partial roll-back of monetary measures by the RBI and potential loan book rejig to higher yielding CVs, margins are likely to stabilize from 3Q. For FY14, we continue to
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return, including dividend yield, of 25.2%, which is above the Neutral band; therefore, we are upgrading to OW. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield
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Financials & valuation - SHTF

Year to P&L summary(INR m) Net Interest Income Non-interest Income Income from term deposits Income from investment Misc income Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for NPAs Other Other non-oper profit(loss) HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) I Investment assets Other assets Total Liabilities Customer deposits Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Tier 1 Tier 2 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 8.58 15.70 7.12 0.47 0.10 9.15 2.05 0.95 1.10 7.10 2.10 5.00 1.63 3.38 8.17 15.94 7.76 0.36 0.09 8.62 2.02 0.92 1.10 6.60 2.17 4.43 1.44 2.99 7.84 15.57 7.73 0.31 0.07 8.23 1.95 0.88 1.07 6.27 2.16 4.11 1.34 2.78 7.66 15.34 7.68 0.27 0.06 7.99 1.89 0.85 1.04 6.10 2.14 3.96 1.29 2.67 60.0 60.0 7.0 317.5 317.5 66.2 66.2 7.7 374.2 374.2 75.5 75.5 8.8 439.5 439.5 88.5 88.5 10.3 516.0 516.0 523,907 13.7% 7.0% 20.7% 694,076 12.2% 5.8% 18.0% 882,913 1,072,832 11.3% 10.9% 5.0% 4.5% 16.3% 15.4% 448,332 304,484 35,689 108,159 376,385 310,024 66,361 71,948 71,948 390,114 270,649 555,261 403,151 38,544 113,566 470,341 395,900 74,441 84,920 84,920 483,993 352,962 679,164 518,645 41,242 119,276 579,443 495,667 83,776 99,721 99,721 594,412 445,784 825,256 655,852 44,129 125,275 708,180 613,636 94,544 117,076 117,076 723,827 554,652 3/2013a 34,574 2,301 158 1,898 245 36,875 8,262 3,848 4,415 28,613 8,451 6,765 1,687 20,162 20,162 6,556 13,606 13,606 13,606 3/2014e 41,016 2,256 173 1,825 257 43,272 10,132 4,617 5,514 33,141 10,894 9,161 1,732 22,247 22,247 7,230 15,017 15,017 15,017 3/2015e 48,414 2,372 186 1,917 270 50,787 12,062 5,448 6,614 38,724 13,335 11,596 1,739 25,389 25,389 8,251 17,137 17,137 17,137 3/2016e 57,621 2,495 199 2,013 284 60,116 14,228 6,429 7,799 45,888 16,126 14,363 1,763 29,762 29,762 9,673 20,089 20,089 20,089 Year to Growth (y-o-y %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 9.51 4.53 1.80 1.80 1.23 0.29 8.63 3.91 1.53 1.53 1.35 0.23 7.56 3.35 1.30 1.30 1.54 0.19 6.45 2.82 1.11 1.11 1.80 0.16 7.84 16.22 10.61 5.61 3.37 2.61 76.4 1.96 1.61 14.25 67.91 1.17 96.79 67.15 22.4 6.24 3.38 20.64 20.64 6.1 7.77 16.52 11.04 5.49 3.68 2.59 75.0 2.14 1.57 17.45 72.61 1.25 96.45 70.34 23.4 5.21 2.99 19.15 19.15 6.4 7.74 16.17 10.70 5.47 3.79 2.52 76.0 2.23 1.51 19.71 76.37 1.30 96.31 72.23 23.8 4.67 2.78 18.56 18.56 6.7 7.70 15.94 10.42 5.53 3.87 2.45 77.0 2.36 1.50 21.66 79.47 1.30 96.23 73.74 23.7 4.15 2.67 18.53 18.53 6.9 3/2013a 8.4 (2.6) 5.5 8.3 10.9 7.2 8.2 42.0 25.3 25.6 3/2014e 18.6 (2.0) 22.6 15.8 28.9 10.3 10.4 32.4 23.9 32.5 3/2015e 18.0 5.2 19.1 16.8 22.4 14.1 14.1 28.6 22.3 27.2 3/2016e 19.0 5.2 18.0 18.5 20.9 17.2 17.2 26.5 21.5 21.5
Price relative
958 858 758 658 558 458 358 2011 2012 2013
Rel to BOMBAY SE SENSITIVE INDEX Shriram Transport Finance
Source: HSBC
958 858 758 658 558 458 358 2014
Note: Price at close of 3 October 2013
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SHTF charts
AUM growth Margin
70% 60% 50% 40% 30% 20% 10% 0% FY07 FY09 FY10 FY12 FY13 FY08 FY11 FY14e FY15e FY16e
10% 9% 9% 8% 8% 7% 7% 6% FY15e
FY15e
FY07
FY08
FY09
FY11
FY12
FY13
FY14e
AUM Grow th (YoY%)

Margin
Gross NPL
Credit cost
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% FY07 FY09 FY10 FY11 FY12 FY13 FY08 FY14e FY16e
GNPL
Credit Cost
ROA/ROA
35% 30% 25% 20% 15%
20x 15x 10x 5x 0x Sep-03 Sep-09 Sep-11 Sep-13 Sep-01 Sep-05 Sep-07
SHTF ROA
SHTF ROE (RHS)
Rolling P/E Rolling PB (RHS)

Average 3 year Avg 3 yr PB (RHS)
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FY16e
FY10
4x 3x 2x 1x 0x
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IDFC (IDFC IN)

Loan growth set to remain subdued as new project pipeline
remains weak and refinancing opportunities are limited

Asset quality risk increases as macro outlook worsens and
multiple infra-related issues unresolved; banking license to drag earnings and returns for several years
Downgrade to N (adding volatility flag) from OW with a revised
target price of INR101 (previously INR129)
Sluggish growth this year

We expect IDFCs loan growth to remain in the mid-single digits at best because: The new project pipeline remains dry with no visible signs of a capex revival. Management has become very cautious on growth with a focus mainly on managing the asset quality of its existing book. Refinancing was a significant part of IDFCs growth strategy in the last fiscal year. We estimate it will account for c.50% of incremental growth in FY13. However opportunities are fewer this fiscal year. Along with more competition from banks, this implies muted loan growth.
Asset quality risks increasing

With the availability of gas for gas-based power projects still uncertain, we estimate c.2% of IDFCs loan book is exposed to high default risk. Though IDFC has managed its asset quality commendably at 0.32% gross NPL, we expect GNPLs to rise to 2-2.5% over FY14-15e due to financial stress in the power and road sectors, though balance sheet provisions of 1.7% of loan book provide cushion.
Profitability
IDFCs profitability is likely to come under pressure along with growth, margins and asset quality. We cut estimates for FY14, FY15 and FY16 by 2.6%, 12.5% and 19.2%, respectively. Accordingly, ROA and ROA will decline to 2.52.6% and 12-13%, respectively in FY14e and FY15e. Additionally, if it gets a banking license, we expect profitability to remain weak in the medium term with ROA likely to fall to 1.2-1.3% and ROA to 10-12% levels in the first few years of banking operations.
Margin squeeze limited

With limited new disbursements, fresh borrowing in the near term should be equally limited, thus limiting the impact of increased short-term rates. We expect a moderate 10-15bp negative impact on margins in the current fiscal year.
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Downgrade to N (add V flag)

Post the recent reduction in the FII limit, IDFCs valuations have declined to 0.9x PB and 8.1x PE, 12-month forward. Given the stress in all business areas, coupled with the potential drag on the profitability of the banking license, the stock is unlikely to rerate over the next 12 months, in our view. We, therefore, cut our target multiples to 8x PE and 0.9x PB (September 2015 base) and roll forward our earnings to arrive at a revised target price of INR101 (INR129). Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR101 implies a potential return, including dividend yield, of 9.8%, which is within the Neutral band; therefore, we are downgrading to N(V). We add the V flag in recognition of the stocks increased volatility. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield
IDFC Banking license: Analysing potential profitability ROA analysis Interest earned Interest expended Net interest income Other income Operating income Operating expense Operating Profit Provisions Pre-Tax Profit Tax Net Profit (R0A) Loans + investments G-secs Cash balances (CRR) Liabilities Assets Equity Loans / NDTL (%) SLR / NDTL (%) Cash / NDTL (%) Leverage RoA ROA PAT Mn shares EPS % chg BVPS % chg
Existing business SLR & CRR Combined (FY13) 10.96 7.08 3.88 1.38 5.26 0.80 4.46 0.53 3.93 1.14 2.79 631,806 35,600 2,627 542,273 710,593 136,795 116.5% 6.6% 0.5% 5.19 2.79 14.5 18,362 1,515 12.12 90.31 6.30 9.00 (2.70) (2.70) (2.70) (2.70) (0.81) (1.89) 125,862 25,453 159,734 159,734 (3,015) 0.0% 78.8% 15.9% (52.98) (1.89) 100.0 (3,015) 1,515 (1.99) (1.99) 10.11 7.43 2.68 1.12 3.80 0.65 3.14 0.43 2.71 0.78 1.93 631,806 161,462 28,080 702,007 870,327 133,780 90.0% 23.0% 4.0% 6.51 1.93 12.6 15,347 1,515 10.13 -16.4% 88.32 -2.2%
Banking license
IDFC is one of the candidates for a new banking license, the winners of which will be announced by the new RBI Governor by January-February 2014. Given its relatively clean operations, good management, pure financial operations, and recent reduction in the FII limit, we think it stands a good chance to win a license. We attempt to do a theoretical analysis of the impact that a banking license would have on IDFCs profitability. As per RBI regulations, all new banks will have to meet the Statutory Liquidity Ratio (SLR) and Cash Reserve Requirement (CRR) requirements from day zero. Accordingly, on a FY13 base, on day zero, IDFCs ROA would drop from 2.8% to 1.9% in FY13, just meeting the CRR and SLR requirements, while earnings would decline 16% and book value by 2.2% over FY13.
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Also, given that IDFC is an infrastructure NBFC, it would have to build up the retail brand from scratch, similar to YES Bank. We think building a retail liabilities franchise and creating a brand presence would likely be a 3-5 year process. Given that the established private banks deliver an average ROA of 1.5-1.6%, with more competition, IDFC would find it tougher to deliver growth. Accordingly, we expect it to deliver a best case ROA of 1.2-1.3%, which at a low equity leverage of 9x (due to equity requirements under Basel III), imply ROA of 1012% over the medium term, much lower than the COE of 14%.
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With a reasonably high probability of IDFC getting a banking license, but also a high probability of weak profitability over the medium term, we do not expect it to trade above 1x PB and 8-9x PE. All told, the stock looks fairly valued at the current 0.9x PB and 8x PE.
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Financials & valuation - IDFC

Year to P&L summary(INR m) Net Interest Income Non-interest Income Income from other fin services Profit on sale of invest /assignment Others Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for NPAs Provision for contingency/ std asset Other non operating profit/loss HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other_assets Total Liabilities Loans funds Provisions Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Tier 1 Tier 2 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 3.88 10.96 7.08 0.61 0.77 5.26 0.80 0.44 0.36 4.46 0.53 3.93 1.14 2.79 3.73 11.06 7.33 0.69 0.60 5.03 0.75 0.41 0.34 4.28 0.76 3.52 0.99 2.53 3.65 10.79 7.14 0.68 0.61 4.94 0.77 0.43 0.35 4.17 0.75 3.42 0.96 2.46 3.64 10.60 6.96 0.66 0.64 4.94 0.83 0.46 0.36 4.11 0.66 3.45 0.97 2.48 12.12 12.12 2.60 90.31 90.31 12.11 12.11 3.10 98.35 98.35 12.50 12.50 3.50 106.92 106.92 13.69 13.69 3.50 116.68 116.68 Price relative
204 184 164 144 124 104 84 64 2011
IDFC
3/2013a 3/2014e 3/2015e 3/2016e 25,640 9,086 4,281 4,013 792 34,726 5,294 2,916 2,378 29,432 3,496 1,193 2,303 25,936 25,936 7,511 18,424 (62) 18,362 18,362 710,593 557,365 110,042 43,187 573,799 542,273 6,876 24,649 136,795 136,795 640,047 503,314 690,533 19.81 2.29 22.10 27,127 9,416 3,545 5,017 855 36,543 5,449 3,004 2,445 31,094 5,509 3,697 1,812 25,585 25,585 7,164 18,421 (75) 18,346 18,346 743,823 575,418 119,945 48,459 594,849 559,096 7,564 28,189 148,973 148,973 701,301 550,685 830,289 19.00 2.50 21.50 28,217 9,996 3,769 5,267 959 38,213 5,977 3,304 2,672 32,236 5,803 3,885 1,918 26,432 26,432 7,401 19,031 (90) 18,942 18,942 803,301 614,377 134,324 54,601 641,349 600,482 8,320 32,547 161,952 161,952 740,567 579,789 897,634 18.50 2.50 21.00 30,603 10,887 4,280 5,531 1,076 41,489 6,944 3,899 3,045 34,545 5,585 3,526 2,059 28,960 28,960 8,109 20,851 (108) 20,744 20,744 876,498 666,400 148,410 61,689 699,762 653,444 9,152 37,165 176,736 176,736 803,204 626,963 979,692 18.50 2.50 21.00
Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Loan Funds Ratios (%) NIM Gross yield (on avg IEA) Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset
3/2013a 22.3 2.9 1.5 19.8 22.9 19.4 18.8 15.7 16.5 12.9 16.8 4.01 11.31 9.29 2.02 0.15 0.60 66.04 0.12 0.49 0.62 78.44 0.97 96.93 76.22 15.2 26.16 2.81 14.28 5.09
3/2014e 5.8 3.6 2.9 5.6 57.6 (1.4) (0.0) 3.2 4.7 20.2 3.1 3.87 11.47 9.68 1.79 2.07 0.91 35.00 1.47 0.47 8.17 77.36 1.12 96.44 75.73 14.9 25.77 2.55 12.98 5.09
3/2015e 4.0 6.2 9.7 3.7 5.3 3.3 3.3 6.8 8.0 8.1 7.4 3.81 11.27 9.53 1.74 2.58 0.91 50.00 1.81 0.51 10.06 76.48 1.12 95.73 74.95 15.6 26.16 2.48 12.33 4.98
3/2016e 8.5 8.9 16.2 7.2 (3.8) 9.6 9.6 8.5 9.1 9.1 8.8 3.81 11.09 9.32 1.76 2.82 0.81 60.00 1.99 0.66 11.01 76.03 1.12 95.63 74.65 16.7 26.24 2.50 12.41 4.96
7.80 4.86 1.05 1.05 2.75 0.20
7.80 4.60 0.96 0.96 3.28 0.19
7.56 4.44 0.88 0.88 3.70 0.18
6.90 4.14 0.81 0.81 3.70 0.16
204 184 164 144 124 104 84 64 2012

2013
2014
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IDFC charts
4.5% 4.0% 3.5% 3.0% 2.5% FY07 FY10 FY12 FY13 FY09 FY11 FY15e FY15e FY08 FY14e FY16e
Sep-13
Loan Grow th (YOY%)

Margin
Gross NPL
Credit cost
3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY15e FY07 FY10 FY13 FY08 FY11 FY09 FY12 FY14e FY16e
1.0% 0.8% 0.6% 0.4% 0.2% 0.0% FY08 FY09 FY11 FY07 FY10 FY12 FY13 FY14e FY16e
6x 5x 4x 3x 2x 1x 0x Sep-06 Sep-09 Sep-12 Sep-05 Sep-08 Sep-11 Sep-07 Sep-10
GNPL
Credit Cost
ROA/ROA
20% 18% 16% 14% 12% 10%
50x 40x 30x 20x 10x 0x
IDFC ROA
IDFC ROE (RHS)
Rolling PB Rolling PB (RHS)

Avg 5 yr Rolling PE Avg 5 yr Rolling PB (RHS)
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PFC (POWF IN)

Loan growth to slow as refinancing business faces competition
from banks, pace of IPP disbursals slows and TFM window nears exhaustion; state sector utilities to drive incremental growth
Margins to moderate as tax-free bond and cash-credit lines from
banks utilised prudently, but asset quality black box remains

Downgrade to N (adding volatility flag) from OW with a revised
target price of INR134 (previously INR130)
Loan growth to moderate

Loan growth for PFC is likely to moderate to 1516% because: Banks look to aggressively refinance the central sector utilities at more competitive rates PFC is unwilling to sacrifice margins, hence growth could be impacted. The TFM window which drove a significant part of incremental growth in FY13 is nearing exhaustion c.INR148bn of the INR180bn of TFM is already disbursed. The pace of growth of new loans to the IPPs is likely to slow as riskiness associated with them increases. However, state sector utilities are likely to be the major driver of incremental growth.
It has raised c.INR11.24bn by means of taxfree bonds at 8.7%. It targets a total of INR50bn by this route in the current fiscal year which should shield margins to a significant extent. It has prudently utilised the cash-credit line of INR50bn from banks at rates lower than prevailing market rates. Additionally it has raised lending rates by c.50bp to account for increased rates in the system. PFC has limited the impact of the rate spike in the wholesale market post the RBI measures to tighten liquidity. However, with the 25bp increase in repo rates on 20 September and a further expected increase of 25bp by the next policy meeting, the increase in rates over FY13 is likely to be more permanent. We maintain our estimate of a 25-30bp margin decline this fiscal year.
Margins to be impacted marginally

On funding costs, PFC has remained relatively insulated from the spike in short and long-term rates as:
Asset quality remains a black box

With issues surrounding fuel availability and the higher cost pass-through mechanism still unclear,
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the IPP project faces a high probability of being restructured. About INR101bn of IPP loans have been restructured due to delays or repayment rescheduling. Credit costs are likely to rise as standard asset provisioning could increase to 25bp by end-FY14. However, it does have a buffer of cINR1,400bn in the form of balance sheet provisions to tap in case asset quality deteriorates severely. However, poor credit risk management policy reduces earnings comfort significantly.
Restructured loans Company Lanco Amarkantak Lanco Udupi ONGC Tripura Orissa Power Consortium MP Power Company Indian Metals & Ferro Alloys Suzlon Others (includes Sasan, VP and others) Total Restructuring done (INRbn) 14.00 13.00 29.00 0.51 0.27 2.89 9.46 32.33 101.46
Downgrade to N (add V flag)

PFC trades at a 0.6x PB, 12-month forward. Given the lower visibility of resolutions to the discoms and IPP issues and with several state elections coming up followed by national elections, visibility is poor. We do not expect PFC to rerate significantly until the issues are resolved fully. We maintain our target PB of 0.6x. Rolling forward earnings, we arrive at a revised target price of INR134 (INR130). We add the V flag in recognition of the stocks increased volatility. Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR 134 implies a potential return, including dividend yield, of 5.4%, which is within the Neutral band; therefore, we are downgrading to N(V). Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield.
Out of INR101.45bn, INR88.32bn is on account of delay in COD and INR13.14bn is on account of alteration in repayment schedule
Profitability
As growth is likely to moderate to around 1516%, ROA is likely to decline to 2.3-2.4% and ROA to the proximity of 20%.
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Financials & valuation - PFC

Year to P&L summary(INR m) Net Interest Income Non-interest Income Income from term deposits Income from investment Misc Income Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for NPAs Other provisions Other expense HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other_assets Total Liabilities Loans from Banks/FI Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Tier 1 Tier 2 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 4.15 11.06 6.91 0.25 4.40 0.34 0.05 0.29 4.06 0.05 (0.01) 4.02 1.01 3.00 3.69 10.95 7.26 0.22 3.92 0.31 0.05 0.26 3.60 0.13 (0.01) 3.48 0.98 2.50 3.68 10.85 7.17 0.21 3.89 0.30 0.05 0.26 3.59 0.16 (0.00) 3.44 0.97 2.46 3.67 10.74 7.07 0.19 3.86 0.30 0.04 0.25 3.56 0.19 (0.00) 3.37 0.97 2.41 34.8 34.8 7.0 171.6 171.6 34.5 34.5 7.7 195.4 195.4 38.3 38.3 8.5 221.9 221.9 41.8 41.8 9.3 250.8 250.8 1,345,227 1,740,823 2,060,911 2,414,292 16.8% 14.8% 14.2% 13.7% 1.1% 1.0% 0.9% 0.8% 18.0% 15.8% 15.1% 14.6% Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 4.00 2.85 0.78 0.78 5.22 1.04 3.89 2.70 0.69 0.69 5.75 0.91 3.50 2.40 0.60 0.60 6.32 0.82 3.21 2.17 0.53 0.53 6.95 0.73 1,698,166 1,603,666 1,872 92,628 1,471,715 332,621 1,063,206 75,887 226,451 226,451 1,934,248 1,826,624 2,059 105,565 1,676,366 354,150 1,236,508 85,708 257,881 257,881 2,169,380 2,045,007 2,265 122,109 1,876,490 396,339 1,384,889 95,261 292,890 292,890 2,414,292 2,272,964 2,491 138,836 2,083,280 438,968 1,535,842 108,470 331,012 331,012 3/2013a 3/2014e 3/2015e 3/2016e 63,358 3,849 1,562 2,288 67,208 5,137 771 4,366 62,071 808 808 (88) 61,262 (1,680) 61,350 15,474 45,876 44,196 44,108 67,067 4,042 1,640 2,402 71,108 5,651 848 4,802 65,458 2,334 2,334 (101) 63,124 63,225 17,729 45,495 45,495 45,394 75,581 4,244 1,722 2,522 79,825 6,216 933 5,283 73,609 3,197 3,197 (81) 70,413 70,494 19,991 50,503 50,503 50,422 84,003 4,456 1,808 2,648 88,459 6,837 1,026 5,811 81,622 4,392 4,392 (89) 77,230 77,319 22,173 55,146 55,146 55,056 Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Total liabilities Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) 4.21 11.21 8.34 2.87 0.71 0.06 10.7 0.84 0.06 5.01 94.44 0.79 98.65 82.83 7.6 5.73 2.89 20.95 21.70 7.2 3.74 11.10 8.72 2.38 0.97 0.14 15.0 1.02 0.13 6.89 94.44 0.90 98.72 83.30 7.9 5.68 2.50 18.79 18.75 7.5 3.74 11.02 8.61 2.41 1.40 0.17 17.0 1.39 0.16 9.81 94.27 0.95 98.49 83.27 7.8 5.32 2.46 18.34 18.31 7.5 3.73 10.94 8.52 2.42 1.80 0.20 20.0 1.70 0.18 12.38 94.15 1.00 98.19 83.07 7.7 5.04 2.41 17.68 17.65 7.3 3/2013a 44.9 (11.4) 30.7 40.6 (43.4) 43.4 43.4 23.3 25.3 5.9 26.8 3/2014e 5.9 5.0 10.0 5.5 188.7 3.0 (0.8) 13.9 13.9 29.4 13.9 3/2015e 12.7 5.0 10.0 12.5 37.0 11.5 11.0 12.0 12.2 18.4 11.9 3/2016e 11.1 5.0 10.0 10.9 37.4 9.7 9.2 11.1 11.3 17.1 11.0
1,506,385 1,792,972 2,020,822 2,250,425 1,264,780 1,512,955 1,708,504 1,903,714
Price relative
277 227 177 127 77 2011
Power Finance Corp
277 227 177 127 77 2012 2013 2014

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PFC charts
35% 30% 25% 20% 15% 10% FY15e FY07 FY09 FY11 FY12 FY14e FY16e FY08 FY13 FY10
4.4% 4.2% 4.0% 3.8% 3.6% 3.4% 3.2% 3.0% FY15e FY15e
Sep-13 Mar-13
FY14e
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Loan Grow th (YOY%)

Margin
Gross NPL
Credit cost
2.0% 1.5% 1.0% 0.5% 0.0% FY09 FY12 FY07 FY08 FY10 FY11 FY13 FY15e FY14e -0.5% FY16e
0.35% 0.30% 0.25% 0.20% 0.15% 0.10% FY08 FY11 FY14e FY16e
3.5x 3.0x 15x 10x 5x 0x Sep-11 Sep-12 Mar-12 Sep-07 Sep-08 Sep-09 Sep-10 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x
FY07
FY10
GNPL
Credit Cost
ROA/ROA
4.0% 3.5% 3.0% 2.5% 2.0% FY16e FY07 FY09 FY10 FY11 FY12 FY14e FY15e FY08 FY13
24% 22% 20% 18% 16% 14% 12% 10%
20x
PFC ROA
PFC ROE (RHS)
Rolling P/ E Rolling P/ B (RHS)

Avg 2 y r Rolling PE Avg 2 y r Rolling PB (RHS)
FY13
FY09
FY12
FY16e
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REC (RECL IN)

Loan growth to moderate as last leg of TFM disbursements
approaches and central utilities borrow from banks at more competitive rates
Margin impact limited as it raises borrowings via tax-free bonds
and utilises cash credit facility from banks

Downgrade to Neutral (removing volatility flag) from OW(V) with a
revised target price of INR205 (previously INR251)
Loan growth to moderate

Similar to PFC, we expect RECs loan growth to moderate to a mid-teens rate in the current fiscal year as it has already disbursed c.85% (cINR150bn of INR180bn) from its TFM window. PFC is facing increasing competition from banks for financing business from central utilities. We expect state power generation and distribution utilities to be the major growth drivers, as the pace of growth for IPPs slows given challenges relating to fuel availability and elevated fuel costs have yet to be resolved.
We are, however, not changing our overall assumption of a 20-25bp margin decline in the current fiscal year.
Asset quality worries persist

Although we are seeing increasingly favourable news flow about reforms in the power sector, the implementation and positive impact will take time. With c.INR230bn of loans likely to be restructured, asset quality risks will likely persist for REC in the near term.
Profitability
We expect RECs ROA to move toward a more sustainable 2.6-2.7% and ROA c.22-23% over the next couple of years, as growth moderates. However, the margin impact should be moderate on account of its good liability management.
Marginal pressure on margins

We expect REC to manage margins well because: It raised c.INR35bn via tax-free bonds at 8.58.7%, much lower than prevailing rates It increased lending rates by 50bp to compensate for the increased borrowing costs It utilised the cash credit facilities of cINR50bn
Downgrade to N (remove V flag)

REC is trading at a 0.9x PB, 12-month forward. Previously, we valued the stock at a target multiple of 1.1x PB based on a fair PB of 1.4x and a 33% discount to the fair multiple due to government
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ownership, NPL policy and IPP default risk based on reforms being carried out. Also, we factored in a 30% probability of reforms being carried out versus 20% as implied by the market. However, given the events that have taken place since then, with reforms showing little progress, we now believe that: Our initial fair PB multiple has downside risk as the COE required by investors has gone up. The probability of power sector issues being resolved has dwindled given that we are approaching the state and national elections. Accordingly, we now factor in a 20% probability of reforms being carried out versus 30% earlier.
We, therefore, cut our target PB multiple to 0.9x (September 2015 base) and roll forward our earnings to arrive at a revised target price of INR205 (INR251). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate of 11% for Indian stocks. Our target price of INR205 implies a potential return, including dividend yield, of 12.1%, which is within the Neutral band; therefore, we are downgrading to Neutral. We are dropping the V flag in recognition of the stocks reduced volatility. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield.
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Financials & valuation - REC

Year to P&L summary(INR m) Net Interest Income Non-interest Income Income from term deposits Income from investment Misc Income Total Operating income Operating expense Staff costs Other oper expense PPOP Provisions Provision for NPAs Other provisions Other expense HSBC PBT Exceptionals Profit-before tax Taxation PAT Minorities + pref dividend Attributable profit HSBC attributable profit Balance sheet summary (INRm) Total assets Customer loans (net) Investment assets Other_assets Total Liabilities Loans from Banks/FI Debt securities issued Other liabilities Total capital Ordinary equity Minorities + other capital IEA (avg) IBL (avg) Capital adequacy (%) RWA (INRm) Tier 1 Tier 2 Total capital Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) ROAA deconstruction Net interest income Total interest income Total interest expense Income from investment Other income Operating income Operating expenses Staff costs Other oper exp PPOP Provisions Non-op items PBT Taxation PAT 4.47 10.93 6.45 0.02 0.24 4.73 0.31 0.12 0.18 4.42 0.11 4.31 1.11 3.20 4.18 11.23 7.05 0.01 0.23 4.43 0.27 0.12 0.16 4.16 0.22 3.94 1.06 2.88 4.09 11.04 6.95 0.01 0.24 4.35 0.27 0.11 0.16 4.08 0.31 3.77 1.06 2.72 4.07 10.94 6.87 0.01 0.25 4.33 0.26 0.11 0.15 4.07 0.34 3.73 1.06 2.66 39.4 39.4 8.2 166.8 166.8 41.7 41.7 11.0 194.7 194.7 45.3 45.3 13.0 223.2 223.2 50.4 50.4 15.0 254.3 254.3 930,176 1,184,467 1,403,555 1,684,030 17.7% 16.2% 15.7% 14.9% 0.0% 0.0% 0.0% 0.0% 17.7% 16.2% 15.7% 14.9% 1,328,342 1,275,051 6,606 46,686 1,153,608 25,694 898,631 229,284 164,734 164,734 1,538,269 1,476,672 8,258 53,339 1,336,556 24,409 1,058,194 253,953 192,212 192,212 1,754,443 1,683,990 9,496 60,957 1,525,008 23,189 1,225,872 275,947 220,410 220,410 1,981,212 1,901,084 10,446 69,683 1,720,635 24,348 1,397,814 298,472 251,101 251,101 3/2013a 3/2014e 3/2015e 3/2016e 54,410 3,077 968 189 1,921 57,487 3,766 1,518 2,248 53,721 1,307 250 1,057 52,415 (775) 51,640 13,463 38,176 38,176 37,401 59,920 3,556 1,162 189 2,205 63,475 3,913 1,677 2,235 59,563 3,086 1,870 1,215 56,477 56,477 15,255 41,222 41,222 41,222 67,386 4,159 1,394 207 2,558 71,545 4,385 1,853 2,532 67,160 5,042 3,645 1,398 62,117 62,117 17,399 44,718 44,718 44,718 76,082 4,839 1,673 228 2,938 80,921 4,918 2,047 2,871 76,003 6,426 4,819 1,607 69,577 69,577 19,837 49,740 49,740 49,740 Year to Growth (YoY %) Net interest income Non-interest income Operating expense PPOP Provisions PBT PAT Customer loans (net) Total Assets RWA Total liabilities Ratios (%) NIM Gross yield Cost of funds Spread NPL/gross loans Credit cost Coverage NPL/RWA Provision/RWA Net write-off/RWA NPL/NTE Net loans/total assets RWA/total assets Avg IEA/avg total assets Avg IBL/avg total liab Cost/income Non-int income/total income ROAA (including goodwill) ROAE (including goodwill) Return on avg tier 1 Leverage (x) Valuation data PE (diluted EPS) P/PPOP P/BVPS P/NTE Dividend yield (x) P/Asset 4.99 3.55 1.16 1.16 4.27 1.44 4.62 3.20 0.99 0.99 5.69 1.24 4.26 2.84 0.86 0.86 6.71 1.09 3.83 2.51 0.76 0.76 7.76 0.96 4.60 11.24 7.94 3.31 0.38 0.02 18.3 0.53 0.14 2.98 95.99 0.70 97.19 81.33 6.6 5.35 3.20 25.73 25.73 8.0 4.30 11.57 8.65 2.91 0.93 0.14 20.0 1.17 0.26 7.19 96.00 0.77 97.11 81.49 6.2 5.60 2.88 23.10 23.10 8.0 4.23 11.41 8.45 2.95 1.52 0.23 25.0 1.83 0.36 11.63 95.98 0.80 96.77 82.17 6.1 5.81 2.72 21.67 21.67 8.0 4.22 11.34 8.29 3.05 1.96 0.27 30.0 2.22 0.38 14.91 95.96 0.85 96.46 82.84 6.1 5.98 2.66 21.10 21.10 7.9 3/2013a 35.8 25.6 6.4 37.8 150.0 36.3 35.7 25.5 20.3 7.8 19.4 3/2014e 10.1 15.6 3.9 10.9 136.1 7.8 5.8 15.8 15.8 27.3 15.9 3/2015e 12.5 17.0 12.1 12.8 63.4 10.0 8.5 14.0 14.1 18.5 14.1 3/2016e 12.9 16.3 12.1 13.2 27.4 12.0 11.2 12.9 12.9 20.0 12.8
1,182,231 1,391,892 1,593,157 1,801,784 989,238 1,168,000 1,352,750 1,547,361
Price relative
327 277 227 177 127 2011
Rural Electrification Cor
Source: HSBC Note: price at close of 3 October 2013. We introduce FY16 estimates in this report.
327 277 227 177 127 2012 2013 2014

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REC charts
35% 30% 25% 20% 15% 10% FY15e FY07 FY09 FY12 FY08 FY11 FY13 FY14e FY16e FY10
5.0% 4.5% 4.0% 3.5% 3.0% 2.5% FY15e FY07 FY10 FY13 FY08 FY11 FY09 FY12 FY14e FY16e
3. 0x 2. 5x 2. 0x 1. 5x 1. 0x 0. 5x 0. 0x Sep-09 Sep-12 Sep-08 Sep-10 Sep-11 Sep-13
Loan Grow th (YOY%)

Margin
Gross NPL
Credit cost
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY15e FY14e FY08 FY11 FY07 FY10 FY13 FY09 FY12 -0.5% FY16e
0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% FY15e FY07 FY10 FY11 FY13 FY08 FY09 FY12 FY14e -0.05% FY16e
GNPL
Credit Cost
ROA/ROA
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% FY10 FY11 FY15e FY16e FY07 FY12 FY08 FY09 FY13 FY14e
29% 27% 25% 23% 21% 19% 17% 15%
16x 14x 12x 10x 8x 6x 4x 2x 0x
REC ROA
REC ROE (RHS)
Rolling P/ E Rolling PB (RHS)

Av g 2 y r Rolling PE Av g 2 y r Rolling PB (RHS)
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Valuation and risks

We base our weights for PE, PB and EPM on macro factors influencing the sector. Historically, PE holds sway over PB in valuing financial services stocks during a recovering credit cycle. As economic growth peaks, the focus is likely to shift from earnings growth potential towards asset quality and the risk to book. We assign 50% , 20% and 30% weight for PE, PB and EPM methodologies for the HFCs, reflecting the reflecting the better earnings quality and lower risk on asset quality. On the other hand, we assign 20% (PE), 50% (PB), 30% (EPM) for IDFC, SHTF and MMFS to reflect the higher risk to asset quality. We value the power financiers only on book value and assign a 100% weight to it as its asset quality is the single most important metric determining its valuation. Our three-stage EPM uses explicit forecasts until FY16e, followed by 10 years of semi-explicit forecasts. The final stage of 12 years (fade period) assumes the convergence of ROA and COE.
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Valuation and assumptions PE PE-based PB PB-based multiple TP multiple TP Weights 20% 50% DCF Wghtd TP _________________________________ DCF assumptions ____________________________ value (INR) Semi-explicit forecasts for 10 yrs Fade period of 12 yrs 30%
MMFS SHTF
Weights
12.5 9.0
321 664
50%
2.4 1.7
289 772
20%
253 624
30%
285 706
Loan CAGR: 14%, Dividend payout: 20% Loan CAGR: 10%, Dividend payout: 14%
Beta: 1.0, Equity risk premium: 6%, Cost of Equity: 14% Beta: 1.0, Equity risk premium: 6%, Cost of Equity: 14% Beta: 1.0, Equity risk premium: 6%, Cost of Equity: 14% Beta: 1.0, Equity risk premium: 6%, Cost of Equity: 14%
HDFC LICHF
Weights
23.5 8.2
1147 248
4.5 1.4
999 245
100%
853 208
1029 236
Loan CAGR: 15%, Dividend payout: 45% Loan CAGR: 10%, Dividend payout: 20%
PFC REC Weights IDFC
0.6 0.9 8.0

20% 100
0.9
134 205 50% 100
134 205
30% 102
101
Loan CAGR: 14%, Dividend payout: 20%
Beta: 1.0, Equity risk premium: 6%, Cost of Equity: 14%
Valuation and risk factors PE PE-based PB PB-based multiple TP multiple TP Weights 20% 50% DCF Wghtd TP _________________________________ Risks ___________________________________ value (INR) Upside risks Downside risks 30%
MMFS SHTF
Weights
12.5 9.0 23.5 8.2
321 664
50%
2.4 1.7 4.5 1.4
289 772
20%
253 624
30%
285 706 1029 236
Improvement in asset quality
Higher slippages due to monsoon vagaries, regulatory uncertainties, interest rate uncertainties Rigidity, higher slippages, regulatory risks Increase in competitive pressures could slow business growth or impact margins; Asset quality risk Asset quality deterioration and prolonged suppressed spreads
HDFC LICHF
Weights
1147 248
999 245
100%
853 208
PFC REC
Weights IDFC 20% 100
0.6 0.9
134 205
50% 100 30% 102
134 205
Earlier than expected capex revival, lesser Increase in slippages, decline in margins than expected asset quality issues Earlier than expected capex revival, lesser Increase in slippages, decline in margins than expected asset quality issues Earlier than expected capex revival, lesser Worse than expected asset quality and growth than expected asset quality issues outlook
8.0
0.9
101
A more detailed explanation of the various factors that drive our weightings across these three methods and also the target multiples themselves is highlighted in the table below.
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Rationale for weightages applied to valuation methodologies NBFC _______ Macro ________ ___________ Micro _____________ Other GDP 10yr GOI Short- Earnings Margins Asset Balance Indices growth bond end growth quality sheet weight yield rates visibility size PE wtg PB wtg DCF/SO PE PBRemarks TP wtg multiple multiple
HDFC IN LICHF IN
= =
= -
+ +
+ =
+ +
= =
+ =
50% 50%
20% 20%
30% 30%
23.5 8.2
IDFC IN MMFS IN SHTF IN POWF IN RECL IN
= = = = =
= =
+ = -
= = = = =
= = -
= = + = =
+ + = = =
20% 20% 20% 0% 0%
50% 50% 30% 100% 100%
30% 30% 50% 0% 0%
8.0 12.5 9.0 NA NA
4.5 HDFC & LICHF enjoy higher 1.4 PE wtg due to their presence in the home finance segment which by nature is much more defensive, underpenetrated and safer than other segments 0.9 2.4 1.7 0.6 PFC & REC do not have a 0.9 sustainable business model into eternity + believability of their earnings is very low even though visibility of reported earnings is high, hence zero weights for PE & DCF
Source: HSBC, Indicators: -: Low Confidence, =: Medium Confidence, +: High Confidence
The above table highlights our assessment of how various macro, micro and other indicators will impact the valuations for each stock. For instance, for GDP growth, a - sign indicates that GDP growth will impact valuations adversely; an = sign indicates that it is unlikely to impact valuations either significantly positively or negatively, and a + sign indicates that it would impact valuations positively. Broadly, the macro factors would drive our decision on the mix of weights used across the three methods while the micro and other factors would determine the target multiple levels. For the HFCs in our coverage, we apply a 5020-30 weightage to the three factors of PE, PB, DCF, given greater earnings clarity and minimal risks on asset quality and hence book value. On
India NBFC coverage universe (closing price as on 3 October 2013) Bloomberg Stock NBFC Market price INR/sh Target price INR/sh Rating
the other hand, the asset finance companies (MMFS, SHTF) and diversified infra financiers (IDFC) are more exposed to asset quality risks; thereby making book value a more important valuation metric. Also as earnings visibility reduces, investors would give higher significance to PB vs. PE, the latter being more of a near-term valuation metric given the volatility of earnings in a credit downcycle. Thus we assign 20-50-30 weightages to PE, PB and DCF. Finally, PFC and RECs reporting standards hamper earnings and asset quality. This combined with the numerous issues in the power sector significantly increases the risk of equity erosion, making book value the most important determinant of fair value; hence we have chosen to value them only on PB.
EPS Market cap __________ HSBC PE _________ _________ HSBC PB__________ CAGR (USDm) FY14e FY15e FY16e FY14e FY15e FY16e FY14-16e
HDFC IN LICHF IN MMFS IN SHTF IN IDFC IN POWF IN RECL IN
HDFC LIC Housing Finance M& M Fin Services Shriram Transport IDFC Power Finance Corp Rural Electrification Corp
802 198 264 571 95 134 193
1,029 236 285 706 101 134 205
OW OW N(V) OW N(V) N(V) N
20,242 1,621 2,431 2,098 2,320 2,864 3,086
21.6 8.4 14.1 8.6 7.8 3.9 4.6
18.0 7.1 11.5 7.6 7.6 3.5 4.3
15.2 6.1 9.3 6.5 6.9 3.2 3.8
4.4 1.4 2.8 1.5 1.0 0.7 1.0
3.9 1.2 2.4 1.3 0.9 0.6 0.9
3.4 1.0 2.0 1.1 0.8 0.5 0.8
19.2% 17.9% 23.2% 15.7% 6.3% 10.1% 9.8%
Source: Company data, Bloomberg, HSBC estimates
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Tejas Mehta, Sachin Sheth and Todd Dunivant
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 08 October 2013, the distribution of all ratings published is as follows: Overweight (Buy) 45% (33% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 38% 17% (34% of these provided with Investment Banking Services) (25% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its longterm investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
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HSBC & Analyst disclosures

Disclosure checklist Company Ticker Recent price Price Date Disclosure
HDFC IDFC LIC HOUSING FINANCE LTD MAHINDRA & MAHINDRA FINAN POWER FINANCE CORP RURAL ELECTRIFICATION COR SHRIRAM TRANSPORT FINANCE
Source: HSBC
HDFC.NS IDFC.BO LICH.BO MMFS.BO PWFC.NS RURL.BO SRTR.BO
797.80 95.70 204.65 277.15 134.65 192.40 558.55
08-Oct-2013 08-Oct-2013 08-Oct-2013 08-Oct-2013 08-Oct-2013 08-Oct-2013 08-Oct-2013
6, 7 4, 6, 7 4, 6, 7 1, 2, 5, 7 6 1, 4, 5, 6 6, 7
1 2 3 4 5 6 7 8 9 10 11
HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 31 August 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 August 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 August 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 August 2013, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures
1 2 3 This report is dated as at 09 October 2013. All market data included in this report are dated as at close 03 October 2013, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. As of 27 September 2013, HSBC owned a significant interest in the debt securities of the following company(ies) :RURAL ELECTRIFICATION COR
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Disclaimer
* Legal entities as at 8 August 2012 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, HSBC Securities and Capital Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Markets (India) Private Limited Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Registered Office Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities 52/60 Mahatma Gandhi Road (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Fort, Mumbai 400 001, India Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Telephone: +91 22 2267 4921 Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Fax: +91 22 2263 1983 Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Website: www.research.hsbc.com Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR This document has been issued by HSBC Securities and Capital Markets (India) Private Limited ("HSBC") for the information of its customers only. 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Global Financial Institution Group Research Team

Carlo Digrandi Global Head of Financial Institutions Research +44 20 7991 6843 carlo.digrandi@hsbcib.com
Banks
Europe Robin Down Analyst, Global Sector Head, Banks +44 20 7991 6926 robin.down@hsbcib.com Peter Toeman +44 20 7991 6791 Rob Murphy +44 20 7991 6748 peter.toeman@hsbcib.com robert.murphy@hsbcib.com
Asia James Garner Analyst, Head of Asian Insurance +852 2822 4321 james.e.garner@hsbc.com.hk Michael Chang +852 2996 6555 Sinyoung Park +822 3706 8770 Sojung Park +822 3706 8756 michaelpchang@hsbc.com.hk sinyoungpark@kr.hsbc.com sojungpark@kr.hsbc.com
Iason Kepaptsoglou +44 20 7991 6722 iason.kepaptsoglou@hsbcib.com Lorraine Quoirez +44 20 7992 4192 lorraine.quoirez@hsbcib.com
Real Estate
Europe John Fraser-Andrews Analyst +44 20 7991 6732 john.fraser-andrews@hsbcib.com Thomas Martin +49 211 910 3276 thomas.martin@hsbc.de
Johannes Thormann Global Head of Exchanges +49 211 910 3017 johannes.thormann@hsbc.de CEEMEA Aybek Islamov +44 20 7992 3624 Tamer Sengun +90 212 376 46 15 Jan Rost +27 11 676 4209
aybek.islamov@hsbcib.com tamersengun@hsbc.com.tr jan.rost@za.hsbc.com
Stphanie Dossmann +33 1 56 52 43 01 stephanie.dossmann@hsbc.com Asia Derek Kwong Head of Real Estate Equity Research, Asia +852 2996 6629 derekkwong@hsbc.com.hk Ashutosh Narkar +91 22 2268 1474 Michelle Kwok +852 2996 6918 Perveen Wong +852 2996 6571 Pratik Burman Ray +65 6658 0611 David Choo +65 6658 0612 Abel Lee +8862 6631 2866 Ken Luo +852 2822 4395 Frank Lee +852 3941 7008 CEEMEA Levent Bayar +90 212 376 46 17 ashutoshnarkar@hsbc.co.in michellekwok@hsbc.com.hk perveenwong@hsbc.com.hk pratikray@hsbc.com.sg davidthchoo@hsbc.com.sg abelchlee@hsbc.com.tw kenjmluo@hsbc.com.hk frankcclee@hsbc.com.hk
Latin America Financials Carlos Gomez-Lopez +1 212 525 5253 carlos.gomezlopez@us.hsbc.com Mariel Santiago +1 212 525 5418 mariel.x.santiago@us.hsbc.com
Asia Todd Dunivant Analyst, Head of Banks, Asia-Pacific +852 2996 6599 tdunivant@hsbc.com.hk York Pun +852 2822 4396 Michael Chu +852 2996 6926 Donger Wang +852 2996 6584 Kathy Park +82 2 3706 8755 Sinyoung Park +822 3706 8770 Sojung Park +822 3706 8756 Sachin Sheth +91 22 2268 1224 Tejas Mehta +91 22 2268 1243 Kar Weng Loo +65 6658 0621 Xiushi Cai +65 6658 0617 Bruce Warden +8862 6631 2868 yorkkypun@hsbc.com.hk michaelwschu@hsbc.com.hk dongerwang@hsbc.com.hk kathypark@kr.hsbc.com sinyoungpark@kr.hsbc.com sojungpark@kr.hsbc.com sachinsheth@hsbc.co.in tejasmehta@hsbc.co.in karwengloo@hsbc.com.sg xiushicai@hsbc.com.sg brucebwarden@hsbc.com.tw
leventbayar@hsbc.com.tr
Credit Research Banks and Insurance

Asia Dilip Shahani Analyst, Head of Global Research, Asia-Pacific +852 2822 4520 dilipshahani@hsbc.com.hk Devendran Mahendran Sovereigns and Financial Institutions +852 2822 4521 devendran@hsbc.com.hk
Insurance
Europe Kailesh Mistry Analyst, Head of European Insurance +44 20 7991 6756 kailesh.mistry@hsbcib.com Dhruv Gahlaut +44 207 991 6728 Steven Haywood +44 207 991 3184 Thomas Fossard +33 1 56 52 43 40 dhruv.gahlaut@hsbcib.com steven.haywood@hsbcib.com thomas.fossard@hsbc.com
Specialist Sales
Nigel Grinyer +44 20 7991 5386 Martin Williams +44 20 7991 5381 Juergen Werner +49 211 910 4461 nigel.grinyer@hsbcib.com martin.williams@hsbcib.com juergen.werner@hsbc.de
Jonathan Weetman +44 20 7991 5939 jonathan.weetman@hsbcib.com Matthew Robertson +44 20 7991 5077 matthew.robertson@hsbcib.com
61

HSBC 09-10-13 India Diversified Financial Services

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HSBC 09-10-13 India Diversified Financial Services

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FIG India Diversified Financial Services

Indian NBFCs - Ratings and target prices

HDFC IN 802 LICHF IN 198 MMFS IN 264 SHTF IN 571

OW OW OW OW Neutral (V) Neutral OW Neutral

30.0% 21.1% 9.4% 25.2% 9.8% 5.4% 12.1%

IDFC IN 95 POWF IN 134 RECL IN 193

Neutral (V) OW Neutral (V) OW Neutral OW(V)

FIG India Diversified Financial Services 9 October 2013

FIG India Diversified Financial Services 9 October 2013

FIG India Diversified Financial Services 9 October 2013

Disclosure appendix Disclaimer

FIG India Diversified Financial Services 9 October 2013

conditions; housing and rural finance stand out

HDFC and MMFS best placed fundamentally

NBFC some niches deserve consideration despite macro headwinds

Housing finance still the best

Rural finance from a savers to a spenders economy

Commercial vehicle finance slowing

FIG India Diversified Financial Services 9 October 2013

HFC and rural finance best sectoral play

Power sector issues unresolved

HDFC and MMFS, best stocks fundamentally

FIG India Diversified Financial Services 9 October 2013

On margins, most do well, despite recent spike in rates

Valuations: Prefer HDFC, LICHF

Asset quality avoid IFCs

FIG India Diversified Financial Services 9 October 2013

FIG India Diversified Financial Services 9 October 2013

Focus on housing, rural

least preferred sectors, followed by top NBFC picks

profitability; CV cycle at the bottom, but visibility low

150 100 50 0 FY05 FY06 FY09

20% 15% 10% 5% 0%

Rural the most buoyant

FIG India Diversified Financial Services 9 October 2013

MSP on the rise = Rural buoyancy and income effect

Tractor sales jump in 1QFY14 - leading indicator of rural health

High cash flow sensitivity

Gold prices (INR)

Growth outlook for rural sector

FIG India Diversified Financial Services 9 October 2013

Maruti sales growth in rural centres outstrips urban growth

Housing finance secular growth continues

Rural sales Growth Ex Rural (RHS)

Non Rural Sales Growth - Rural (RHS)

Asset quality seasonality associated, but no imminent risk

Hom e Loan Grow th SCB Loan Grow th LIC HF

Loan Grow th - HDFC Sy s tem Credit grow th

Source: Company data, HSBC

FIG India Diversified Financial Services 9 October 2013

Asset prices more sensitive than interest rates

Asset quality as good as ever

Hom e Loan Grow th SCB Loan Grow th LIC HF

Loan Grow th - HDFC Repo R ate (RHS)

Property C ost (INR Lacs)

Annual Incom e (IN R Lacs ) RHS

FIG India Diversified Financial Services 9 October 2013

CVs heading toward the bottom but LCV still bright

LCV most resilient

CV financing is cash flow sensitive

CV sales (Mo M growt h)

IIP (M oM growth) RHS

FIG India Diversified Financial Services 9 October 2013