financials madhukar ladha - hdfc securities

Financials

1QFY20E Results Preview

9 July 2019

Darpin Shah [email protected] +91-22-6171-7328

Madhukar Ladha [email protected] +91-22-6171-7323

Keshav Binani [email protected] +91-22-6171-7325

Aakash Dattani [email protected] +91-22-6171-7337

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FINANCIALS : 1QFY20E RESULTS PREVIEW

A good show (for most) in tough times 1QFY20 was marked by a slew of defaults (smaller), as aftershocks from the Sept-18 episode continued. Resulting delinquencies could manifest in 2Q. We expect our coverage cos to be relatively insulated. Credit growth and mkt share gains for PVT Banks are expected to sustain. Challenges on the deposit growth front for the system persist, hence C/D ratios are expected to rise (partly seasonal). Credit costs are expected to moderate for corp heavy banks (ICICIBC, AXSB and SBIN) even as coverage continues to build up. PSBs stand to gain from the fall in benchmark yields.

The funding squeeze for the NBFC sector will continue to drive divergence. A washout quarter for auto OEMs will add to AFCs’ growth woes. The recurring theme of NBFCs with superior parentage and better asset quality gaining market share will continue to play out. An uptick in securitisation/ assignment is expected for players for whom funding has been constrained. The growth prospects for HFCs in our coverage remain unchanged.

Public sector banks (PSBs)

SBIN will continue to lead the PSB pack in terms growth and other operating metrics. It too, stands to gain from the normalisation of LLPs (after elevated provisions in 4Q esp. towards Essar) and falling bond yields.

Resolution of IBC cases and exposure to stressed accounts will be key for SBIN.

Private sector banks

PVT Banks are expected to grow ahead of the system with sustained mkt share gains. Margins are likely to stabilise on a sequential basis.

With reducing slippages, shrinking pools of identified stress and moderating LLPs, the performance gap between Corporate (AXSB and

ICICIBC) and Retail heavy banks will continue to shrink. Nevertheless, we expect the trend of increasing coverage to sustain for corporate heavy banks.

Retail heavy banks are expected to report a steady qtr (similar to previous qtrs)

Concerns on deposit growth for the system are expected to continue.

NBFCs

The saga of polarization will continue in the NBFC space. Our consistent stance on this was vindicated by 4Q results. Parentage, asset quality and granularity continue to be drivers of this segmentation.

Larger NBFCs are expected to continue to gain mkt share at the expense of smaller players. Therefore, the impact of slowing auto sales, will be contained for players like CIFC.

Seasonal deterioration in asset quality can be expected for asset financiers, however, improved lending practices and conscious collection efforts should result in lower NPLs YoY.

For a diversified and comparatively smaller player like INDOSTAR, growth will not be a constraint. We do not foresee major concerns on wholesale asset quality (Esp. real estate), nevertheless, it is a key monitorable.

HFCs

We expect AUM growth to sustain and NIMs to compress for HFCs. Competition from banks and prepayment rates will be key monitorables for LICHF.

Some seasonal deterioration in asset quality can be expected for HFCs. While no major developments are expected this qtr, the resolution of SARFAESI cases is a key monitorable for REPCO.

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Going through Structural Changes Life Insurance

Overall 1QFY20 is expected to be a strong quarter as private sector

individual NBP growth during FY20TD (Apr-May-19) is 42.6% YoY. We

expect FY20E Indiv. NBP/APE for the private sector insurers to grow

~19/14%.

1QFY20 saw a decline in interest rates (10yr benchmark down

~46bps), which should lead to a 1-3% boost in embedded values for

the listed companies. While rates are down, default incidents have

picked up in the recent months, requiring a closer monitoring of

investment portfolios.

Company specific comments: IPRU has already reported a muted

5.3% YoY APE growth. In contrast to IPRU, we believe HDFCLIFE will

continue to post strong business growth, we expect APE to grow

+35.9% despite high base. Growth is driven by new NPAR annuity

products. Aided by a softer base, SBILIFE is expected to post APE

growth of 28.0%. Lastly, MAXL is expected to deliver a steady APE

growth of 24.0%.

Broking

On account of increased volatility in equity markets, total market

ADTV (ex-prop), continues to grow at a healthy growth at 66.1/25.5%

YoY/QoQ; however cash ADTV (higher yielding) growth remained

lacklustre at 3.0/0.9% vs. 69.5/26.5% YoY/QoQ for derivatives.

Consequentially Derivative: Cash mix moved further towards

derivatives at 97:3 in 1QFY20 (vs . 95:5 in 1QFY19).

Additionally, with large brokers such as Axis and Angel converting to

becoming discount brokers, we expect broking yields to continue to

decline.

MF distribution income is expected to decline further as most large

AMCs have passed on most of the TER reductions to distributors.

Additionally, AUM growth is expected to be muted owing to limited

M2M gains (1QFY20 Nifty Return only +1.4%) and tepid MF inflows.

Asset Management

For 1QFY20, monthly SIP inflows remained stable at ~Rs 82bn, while

lumpsum money saw net total outflows of Rs ~162bn, leading to total

equity inflows (ex. arbitrage and ETF) of only Rs 83bn (-79.2% YoY).

Led by marginal gains in equity markets (1QFY20 Nifty Return :

+1.4%), AUM growth is expected to be muted.

Debt funds have faced outflows of ~Rs 147bn, due to a series of

defaults by several groups- DHFL, ADAG, Essel etc. This has led to

investors becoming more risk averse leading to net outflows of Rs

81bn during 1QFY20 in the credit risk category.

We believe in the medium term, flows may remain subdued due to

market volatility and below benchmark returns for most AMCs in the

last 12 months. SIPs, however are expected to support overall flows.

Revised TERs will impact the financials of AMCs w.e.f. Apr-19. We

expect minor reduction in revenue yields on account of the above as

as most of the reduction in TER has been passed on to the distributors

and some price increases have been taken on in liquid schemes.

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Banks

Our consistently positive stance on PVT Banks remains unchanged, as opportunity for profitable growth abounds. On the corporate end of the spectrum, we prefer AXSB and ICICBC, where normalization of LLPs and consequently earnings have begun. At the retail end we prefer CUBK and DCBB.

Responsible underwriting practices should mitigate concerns (unfound) on RBK’s asset quality. Further, a book-accretive fund raise appears to be around the corner.

NBFCs

In the face of sustained polarization, we prefer CIFC due to its diversified product mix, geographical spread and ability to raise funds. While MMFS too, is able to access adequate funds, sluggish upcountry macros remain a concern.

INDOSTAR, given its small base, presence in the used CV market and business acquisition, is set for sustained mkt share gains in this high yielding segment.

Life insurance We remain positive on the long term prospects of life insurers,

however strong sales growth (+26% p.a.) in FY17 and FY18 followed

by ~16% growth in FY19E has set the companies up with a high base.

We expect the Indiv. NBP/APE for the private sector insurers to grow

~19%/14% for FY20E. Group business continues to do well and is

expected to growth at ~25% YoY.

At current stock price levels SBILIFE is our top pick with a TP of Rs

850 (+12.2%). CMP of MAXF, also adequately builds in risks and

offers meaningful upside potential- TP Rs 681 (+70.0%).

Broking

The financial performance of the sector shall continue to remain

under stress as traditional players with credible names such as Axis

Securities and Angel Broking have moved to fixed/subscription based

business models. We believe this in time will lead to further decline

in broking yields. Additionally, distribution revenues will be

challenged in short term owing to recent regulatory changes.

We believe earnings growth for brokers will remain challenged over

FY19-21E. Key monitorables here include launch of PayTM’s broking

services and pick up (if any) of business, at newly converted discount

brokers.

We are encouraged by the emerging cost consciousness at ISEC and

will remain watchful of the cost reduction measures taken up.

Currently we have a NEUTRAL on ISEC with TP of Rs 216.

View

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Asset management

We continue to maintain a positive stance on the prospects of the

asset management Industry in India. Regulatory changes now are

behind us and the industry now has a clear road map ahead.

Having said the above, we believe that regulatory changes have led to

a difficult distribution environment for mutual funds, as alternative

financial products (life insurance, PMS, AIF) which are offering higher

commissions, have become more attractive for distributors to sell.

Additionally, volatile financial markets (both debt and equity) are

negatively impacting retail flows to domestic mutual funds and PMSs.

Key monitorables include the allocation/walletshare of MFs in retail

savings, overall flows and direct TER changes.

RNAMC: We are also encouraged by the emerging cost consciousness

shown by the company and believet that it will continue into the near

future. Additionally, we are excited by the exit of ADAG as promoter,

which we believe will aid fund raising from HNIs and institutions. We

have a buy on RNAM with TP of Rs 254.

MOFS: While we like the Asset Management slice of MOFS, especially

given the scale it has achieved, we remain concerned about future

regulatory clampdown on PMSs. Given subdued trailing 1-3 yr returns

in PMS, we believe HNI investors are likely to re-negotiate fees. It is

also likely that SEBI (in line with its stance on MF expense ratios and

distributor commissions) may clamp down on PMSs. On broking we

are wary of increased competition. Lastly, despite much of the

negatives in MOHL being factored in, the business needs to display

profitability and scalability. Post recent correction in the stock price,

we continue to rate the stock NEUTRAL, with a TP of at Rs 656.

View

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1QFY20E: Corp banks earnings to catch-up, steady for retail banks

COMPANY 1QFY20E

OUTLOOK WHAT’S LIKELY KEY MONITORABLES

SBIN GOOD

On a high base, core earnings to grow at ~4% YoY with a book growth of ~13%.

A jump in non-int inc can be expected as the base qtr incl. a treasury loss of ~Rs 12.6bn.

Contained opex will drive PPOP growth to ~21%

Net earnings of ~Rs 30bn expected, driven further by a dip in LLPs.

Comments on IBC resolutions (and recoveries).

Asset quality movement (1Q is generally weak) and trends in stressed book.

Comments on exposures to recent defaulters.

KMB GOOD

~21% growth in advances will drive a cormmensurate

rise in NII with flattish NIMs.

PPOP to grow at ~15% after factoring in a 19% rise in

opex and a 9% rise in non-int. inc.

Given the bank’s conservative credit filters and

historically superior asset quality, we expect

sequentially stable LLPs. However, a dip in other

provisions, will drive down overall provisioning cost.

Net earnings are expected to grow at ~33% YoY.

Performance of subsidiaries.

Outlook for growth.

Comments on macros.

Comments on the mandated reduction in the

promoter’s stake.

ICICIBC GOOD

NII is expected to grow at ~20%, driven by ~14% loan

growth (16% + growth in domestic advances).

~10% drop in non int inc. as the base qtr incl. stake

sale in ICICI Pru Life. Fees are expected to grow at

~10% YoY.

After factoring in a dip in provisions (given higher

coverage), we expect net earnings of ~Rs 16.3bn.

Moderating slippages, largely from identified stress

and the agri portfolio (a 1Q phenomenon).

Movement in stressed assets incl. the ‘below

investment grade’ book.

Comments on stressed NBFCs/real estate exposures,

if any.

Comments on the progress of IBC cases.

Subsidiaries’ performance.

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1QFY20E: Corp banks earnings to catch-up, steady for retail banks

COMPANY 1QFY20E


AXSB GOOD

Led by 14% loan growth and stable NIMs, core earnings to

grow at ~15% YoY.

PPOP to grow at ~6% YoY after factoring a 12% rise in opex

and a 3% dip in other income .

With a sharp drop in LLPs, we expect net earnings of ~Rs

17.9bn (+19% QoQ).

Movement in stressed assets incl. the ‘BB and

below rated book’.

Comments on the stressed NBFCs/real estate

exposures, if any.

Recoveries from W/O Acs

Performance of subs.

IIB AVG

This will be the first qtr that IIB reports nos incl. BHAFIN.

Led by sustained loan growth (~24%) and marginal pressure on NIMs, we expect NII to grow at ~17%.

Non-int inc is expected to grow by ~25% YoY on the back of higher treasury gains.

PPOP growth of ~20% after factoring in a 20% rise in opex.

We have factored in elevated provisions (2.7x YoY), as current coverage (~43%) is low.

PAT is expected to shrink by ~14% YoY (albeit up 51% QoQ).

Rise in the coverage ratio.

Comments on the integration of BHAFIN. Movement in asset quality and comments on

stressed exposures.

Outlook for growth and yields in the retail business.

CASA traction.

RBK GOOD

NII growth of ~40% YoY, driven by a ~35% growth in advances and a YoY rise in NIMs (flat QoQ).

Sustained growth in other income, driven by fees (esp. credit cards).

We expect opex to remain elevated (+34% YoY) as the bank continues to invest in technology and branches.

We expect provisions to remain elevated ( esp. agri and MFI, +48/4% YoY/QoQ), in spite of which PAT is expected to grow at ~35/4%.

Comments on card business details.

Comments on the MFI book.

Outlook for SA and NIM movement.

Progress towards vision 2020.

Comments on exposures to stressed names, if any.

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1QFY20E : Corp banks earnings to catch-up, steady for retail banks

COMPANY 1QFY20E


FB GOOD

~14% YoY growth in NII, primarily driven by loan growth of ~18% YoY and a slight dip in NIMs.

PPOP growth of 16%, led by healthy non-int. income growth (+17%) and opex growth of ~17%.

A dip in provisions will drive earnings(+35% YoY).

Comments on growth (esp. corp book).

Asset quality movement , esp ,retail and SME as 1Q is generally weak qtr.

NIM movement & efficiency ratios.

CUBK GOOD

NII growth (13%), led by loan growth (17%) and a dip in NIMs (nevertheless robust).

~14% PPOP growth will be driven by contained opex (+13%) and a ~17% rise in other inc (partly driven by treasury gains).

Despite low stressed exposures, we expect provisions to rise ~15% YoY in an attempt to shore up coverage.

Consequently, net earnings should grow by ~14% YoY.

Additions to already adequate provisions against SRs.

Comments on TN macros.

Comments on SME II and exposures to educational trusts.

DCBB GOOD

Core earnings growth (~15%) to be driven by ~17% loan growth as NIMs compress(stable QoQ).

Controlled opex (+7% YoY) will drive PPOP by ~25%.

After factoring in a rise in provisions, we expect a PAT growth of 31% (down 6% QoQ).

Improvement in operating efficiency.

Outlook on growth and pricing power.

Commentary on the LAP business.

KVB BAD

Sequentially flat (+~6% YoY) NII led by sluggish loan growth and flattish NIMs.

Non-int inc. growth at ~15% will be driven by treasury gains.

However, at ~12%, opex growth will erase these benefits, limiting PPOP growth to ~6% YoY.

Elevated provisioning is expected to continue, given that calc.PCR is ~46% and further stress is expected to manifest.

On a lower base, PAT is expected to grow ~35%

Slippages from the MSME and Corporate books.

Corporate recoveries

Outlook on growth.

Changes in processes and people at the bank.

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1QFY20E : Mixed bag for VF NBFCs; Strong growth at AU to sustain

COMPANY 1QFY20E


AUSFB GOOD

Healthy AUM growth (+48% YoY) will drive core earnings

growth (+42% YoY) , even as NIMs dip.

Stake sale in Aavas Housing will largely contribute to a

13% sequential rise in other income.

Controlled opex (+5% QoQ) and healthy income growth

will drive PPOP (+55% YoY).

We have conservatively factored in higher provisions even

though current NPL levels may not warrant it.

Expect PAT growth of ~63/6% YoY/QoQ.

CASA and particularly retail deposit traction.

Commentary on growth (esp. for MSME and

CVs).

Comments on the RE book.

Improvement in operating efficiency.

SHTF AVG

Sluggish disbursal growth and a large base will contain

AUM growth (sub 8%).

NIMs to compress marginally, QoQ as the CoF continues

to rise.

Stable provisions (YoY and QoQ) with no major worries on

asset quality .

Net earnings to grow at ~16% YoY.

Commentary on competition and the

availability of funds.

Comments on growth and margins.

Comments on the rural economy.

Comments on the possibility of a three-way

merger within the group.

MMFS AVG

Muted disbursals growth will contain overall AUM growth

at ~16%.

Marginal dip in NIMs given the rise in CoF.

Sharp rise in provisions (after write back in 4Q) will drag

net earnings by 40% QoQ (Rs 3.5bn).

Commentary on the rural economy.

Availability of funds and its cost.

Comments on growth and collection efficiency.

Performance of the housing finance subsidiary .

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1QFY20E : Mixed bag for VF NBFCs

COMPANY 1QFY20E


CIFC GOOD

Diversification across products and geographies will

enable CIFC to grow disbursals in excess of ~20% (VF), in

spite of a dip in vehicle sales.

Healthy overall AUM growth (23%+) and some NIM

compression will lead to a ~16% rise in core earnings.

PPOP growth is expected at 9% YoY, after factoring in an

opex growth of ~30% YoY.

With a dip in provisions (higher QoQ), PAT growth is

expected at ~15% YoY.

HE Business parameters (growth, yields and

NPLs).

Improvement in operating efficiency .

Comments on AUM growth.

Improvement in coverage.

INDOSTAR GOOD

Granular businesses to drive disbursals growth.

25% QoQ NII growth optical , as inc and int on acquired biz

is recognised in 1Q.

28% QoQ opex growth, as opex of the acquired biz will

now be charged to the P&L, commensurately with NII.

Stable asset quality across the board (esp. the corp book).

Comments on the corp (esp. RE) book.

Commentary on the integration with the

acquired business.

Strategy for corp lending here on.

Comments on fund availability and its cost.

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1QFY20E : Steady for HFCs

COMPANY 1QFY20E


LICHF AVG

NII to grow at 18% YoY with steady AUM growth (~16%).

Spreads are expected to compress slightly QoQ (1Q

phenomenon).

PAT is expected to grow 16% YoY with a 27% rise in opex

and a ~9% dip in provisions (+40% QoQ).

Developer book resolutions.

Repayment rates.

Comments on competition, growth and NIMs.

Rise in retail NPAs .

REPCO AVG

Muted NII growth in spite of a ~12% AUM growth due to

pressure on spreads.

In a seasonally weak qtr, provisions are expected to jump

YoY (vs. a write back QoQ).

Net earnings to dip 9% YoY.

Commentary on the availability of funds and its

cost.

Outlook on growth, pricing and competition.

Recoveries through SARFAESI and the status of

the residual stock .

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1QFY20E: Strong start to FY20E

COMPANY 1QFY20E


HDFC Life GOOD

1QFY20E APE expected at 35.9% YoY .

Strong APE growth due to launch of new NPAR annuity

products.

VNB margins expected to improve marginally by ~20 bps

YoY to 24.5%.

• Management commentary on interest rate risk

on annuity products.

• Product mix.

• Competitive landscape in credit protect.

• Additional margin levers.

• Persistency trend.

ICICI Pru Life AVG

IPRU has reported a muted 1QFY20 APE growth of 5.3% to

Rs 14.7bn.

VNB margin is expected to come in at ~17.0% given lower

growth.

• Mix between individual and group businesses

• Transition to selling low ticket size ULIPs.

• Share of protection.

• Margin levers and guidance.

Max Life GOOD

1QFY20E APE growth expected at ~24.0% YoY.

VNB margin expected at 21.7% (+359bps YoY) as

expansion has been done and the business should see

benefits of scale.

• Growth in proprietary channel.


• Persistency trend.

• Comments on Axis Bank partnership.

SBI Life GOOD

Expect 1QFY20E APE growth at +28.0% YoY to Rs 16.9bn,

partly due to low base in Apr-May18.

FY19E Adj. VNB margin is expected at 19.5% (+60bps

YoY).

• Growth outlook.


• Margin levers.

• Persistency trend especially for ULIP products.

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1QFY20E: Regulatory changes to boost profitability

COMPANY 1QFY20E


HDFC AMC GOOD

Driven by MF AUM growth of 3.3%,and offshore asset management fees revenues are expected to grow to Rs 4.85bn (+2.3/-0.3% YoY/QoQ).

Reduction in equity revenue yields as new lower TER regulations came in to effect from 01/04/19.

PAT is expected to grow 46.5/8.9% YoY/QoQ to Rs ~3bn.

Commentary on distributor behaviour post reduction in distributors payouts.

Yields in a no-upfront commission payment environment.

Scale up of off-shore business.

MOFS GOOD

MF business to face redemptions while PMS business expected to face fee re-negotiations given lower returns of equity markets.

Broking revenues are expected to be flat as ADTV continues to be buoyant; pricing pressure to persist.

MOHF is expected to report marginal profitability but disbursements are expected to remain muted.

Fund based income to support overall profitability as share prices of specific investment (AUBANK) has zoomed up.

Management commentary on PMS yields and redemption pressure (if any).

Scaling up of the AMC off-shore business.

Outlook on broking business as pricing pressure intensifies.

Outlook on small ticket housing finance segment.

RNAMC GOOD

Equity AUM is expected to grow 2.6% QoQ while total AUM is expected to decline 5.7% QoQ.

Bulky outflows from debt schemes expected as (1) redemptions at the industry level and (2) debt exposure to stressed ADAG companies.

Brokerage expenses are expected to reduce further as regulatory changes have been implemented

Cost reduction initiatives taken and commentary on same.

Yields in a no-upfront commission payment environment.

Plan on recovery of ICDs given to ADAG companies.

Any specific initiatives taken to tap HNI and Institution money.

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1QFY20E: Competition intensifying

COMPANY 1QFY20E


ISEC AVG

Broking revenues to remain flat as pressure on yields may

sustain which shall be offset by volume growth

MF distribution revenues will be impacted due to cut in

TERs.

Outlook on reducing costs through productivity

improvements.

Outlook on broking market share and yields .

Pick up in new plans and the cost of those plans

for ISEC.

Commentary on new distribution arrangement

with ICICIBC.

Costs trajectory and management commentary

on the same.

Any new initiatives by the new CEO.

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Financial Summary

Source: Companies and HDFC sec Inst Research

Rs bn NII PPOP APAT

1QFY20E YoY (%) QoQ (%) 1QFY20E YoY (%) QoQ (%) 1QFY20E YoY (%) QoQ (%)

Public Sector Banks

SBIN 227 4.3 (0.9) 145 21.2 (14.3) 30.3 NA 261.4

Private Sector Banks

KMB 31.2 20.7 2.3 23.4 15.1 2.5 13.6 32.6 (3.4)

ICICIBC 73.4 20.3 (3.7) 59.5 2.4 (4.6) 16.3 NA 68.2

AXSB 59.6 15.4 4.5 46.3 5.9 (7.7) 17.9 154.7 18.6

IIB 29.6 16.9 5.7 25.2 19.5 1.1 10.1 (14.4) 50.9

RBK 7.7 39.6 4.5 5.8 34.6 3.9 2.6 34.6 3.5

FB 11.1 13.5 1.4 7.0 162 (7.7) 3.5 34.6 (7.3)

CUB 4.2 12.8 0.5 3.4 14.3 1.3 1.8 13.9 5.2

DCBB 3.1 15.3 4.6 1.8 25.0 (4.6) 0.9 30.9 (5.6)

KVB 6.2 6.3 0.2 4.9 6.3 5.1 6.2 35.4 3.6

Aggregate 226.3 18.1 1.2 117.3 9.04 (3.3) 67.3 91.5 22.1

Small Finance Banks

AU 4.1 41.7 4.9 2.4 54.9 9.5 1.3 63.0 5.9

NBFCs

SHTF 20.1 7.2 1.2 15.4 9.8 1.5 6.6 15.6 (11.4)

MMFS 13.0 20.3 2.3 8.6 21.8 10.2 3.5 32.9 (40.4)

CIFC 9.5 16.3 5.9 5.8 8.7 13.0 3.3 15.2 12.6

INDOSTAR 2.2 81.3 25.2 1.4 102.4 23.9 0.9 180.5 19.2

Aggregate 44.8 15.1 3.5 31.3 15.1 6.7 14.3 224 (15.5)

HFCs

LICHF 12.0 17.7 (1.5) 11.3 15.6 3.6 6.9 15.9 (0.1)

REPCO 1.2 1.5 3.4 0.9 (4.0) 4.5 0.6 (8.9) 7.0

Aggregate 13.2 16.1 (1.1) 12.2 13.9 3.6 7.5 13.6 0.4

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Financial Summary

Source: Company, HDFC sec Inst Research

COMPANY Revenue (Rs mn) EBITDA (Rs mn) APAT (Rs mn)


HDFC AMC 4,850 2.9 -0.3 3,925 46.8 7.0 3,007 46.5 8.9

RNAMC 3,280 -16.8 -4.7 1,628 15.0 15.1 1,427 29.9 3.3

Aggregate 8,130 -6.1 -2.0 5,553 35.8 9.2 4,434 40.7 4.8

Asset Management



ICICI Securities 3,781 -9.2 -2.6 1,664 -16.8 2.4 1,100 -17.8 1.4

Broking



MOFS (ex. MOHL) 4,615 -0.7 -1.1 2,325 10.4 5.8 1,542 35.5 11.4

Diversified

COMPANY APE (Rs bn) VNB Margin (%) VNB (Rs bn)

1QFY20 YoY (%) 1QFY20 YoY (bps)# 1QFY20 YoY (%)

HDFC Life 14.0 35.9 24.5 20 3.4 37.2

ICICI Prudential 14.7 5.3 17.0 -50 2.5 2.4

Max Life 6.9 24.0 21.6 360 1.5 48.6

SBI Life 16.9 28.0 19.5 60 3.3 31.8

Aggregate 52.5 22.0 20.4 80 10.7 26.9

#Change in VNB margins is calculated with FY18 margin as the base Source: Insurance companies, HDFC sec Inst Research

Life Insurance

17


Peer Set Comparison

Source: HDFC sec Inst Research, #Adjusted for subsidiaries

MCap (Rs bn)

CMP (Rs)

Rating TP

(Rs)

ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E

PSU Banks

SBIN # 3,171 355 BUY 383 146 188 222 275.0 9.6 6.5 1.82 1.41 1.18 0.4 10.6 14.0 0.02 0.64 0.85

Pvt Banks

KMB # 2,816 1,475 BUY 1,481 209 236 272 46.5 37.2 30.4 5.67 4.94 4.23 12.7 13.6 14.3 1.70 1.75 1.76

ICICIBC # 2,746 426 BUY 454 138 153 172 62.6 18.9 13.2 2.37 2.10 1.84 3.3 9.2 12.0 0.36 1.07 1.34

AXSB # 2,049 783 BUY 896 215 261 309 41.4 22.1 15.4 3.50 2.89 2.44 7.2 12.4 15.4 0.63 1.05 1.32

IIB 1,022 1,476 BUY 1,964 400 515 561 26.9 20.8 15.1 3.69 2.87 2.63 13.3 16.1 18.0 1.32 1.56 1.73

RBL 301 627 BUY 803 168 243 268 30.9 24.7 18.5 3.73 2.58 2.34 12.2 12.5 12.9 1.22 1.31 1.36

FB 209 105 NEU 98 59 66 76 16.8 13.0 9.9 1.79 1.58 1.38 9.8 11.5 13.7 0.84 0.93 1.05

CUB 147 200 BUY 240 58 68 80 21.5 18.6 15.8 3.46 2.93 2.50 15.2 15.1 15.4 1.60 1.61 1.61

DCBB 69 224 BUY 228 88 99 114 21.3 16.2 12.1 2.55 2.25 1.95 11.0 13.0 15.2 0.99 1.09 1.20

KVB 55 69 NEU 84 50 52 60 26.2 16.1 9.4 1.38 1.32 1.15 3.3 5.3 8.9 0.31 0.47 0.73

SFB

AU SFB 206 680 BUY 680 101 128 151 52.1 36.8 26.3 6.73 5.31 4.50 14.1 15.3 17.3 1.48 1.49 1.62

NBFCs

MMFS# 239 389 BUY 504 124 152 177 14.7 12.6 11.2 2.99 2.44 2.10 15.2 15.7 15.8 2.60 2.54 2.49

SHTF 234 1,033 BUY 1,308 449 590 747 9.1 8.4 7.5 2.30 1.75 1.38 17.4 16.3 15.8 2.53 2.47 2.45

CIFC 43 276 BUY 360 72 86 104 18.2 15.3 13.0 3.84 3.20 2.65 21.1 20.7 20.3 2.34 2.30 2.37

INDOSTAR 33 355 BUY 520 272 297 346 13.6 9.4 5.9 1.31 1.19 1.02 9.5 11.0 15.4 1.96 2.45 2.82

HFCs

LICHF 278 551 NEU 566 281 326 377 11.4 10.1 8.9 1.96 1.69 1.46 15.9 15.9 15.8 1.31 1.28 1.26

REPCO 23 375 BUY 592 211 250 296 10.0 9.0 7.8 1.78 1.50 1.27 16.6 15.8 15.8 2.28 2.21 2.24

18


Change in estimates HDFC Life

Max Life

SBI Life

Source: HDFC sec Inst Research

Rs bn FY20E FY21E

Old New Change(%) Old New Change(%)

APE 71.4 72.7 1.8 81.4 83.7 2.9

VNB 17.8 18.2 2.2 20.6 21.3 3.7

VNB Margin (%) 25.0 25.1 10bps 25.3 25.5 20bps

Embedded Value 215.6 216.2 0.3 253.8 253.2 -0.2

Rs bn FY20E FY21E

Old New Change(%) Old New Change(%)

APE 46.6 47.8 2.5 54.1 56.9 5.2

VNB 10.4 10.6 2.2 12.4 13.0 4.4

VNB Margin (%) 22.3 22.2 -10bps 23.0 22.8 -20bps

Embedded Value 102.0 103.0 1.0 117.1 118.6 1.3

Rs bn FY20E FY21E

Old New Change (%) Old New Change (%)

APE 109.8 112.4 2.3 124.3 129.1 3.9

VNB 22.2 22.7 2.3 25.6 26.6 3.9

VNB Margin (%) 20.2 20.2 0bps 20.6 20.6 0bps

Embedded Value 277.0 281.9 1.8 322.8 328.0 1.6

Rs bn FY20E FY21E

Old New Change (%) Old New Change (%)

Revenues 16.5 15.8 -4.4 17.5 16.6 -4.8

EBITDA 7.5 6.8 -9.0 8.1 7.3 -9.6

EBITDA margin (%) 45.6 43.5 -218bps 46.5 44.2 -233bps

PAT 5.1 4.6 -9.4 5.5 5.0 -10.1

RoE (%) 45.2 41.8 -337bps 42.3 39.8 -247bps

ICICI Securities

19


Peer Set Comparison


Bloomberg Ticker IPRU MAXF SBILIFE HDFCLIFE

Rating NEUTRAL BUY BUY Not Rated

Current market price Rs 381 400 759 459

Market Capitalisation Rs bn 548 107 759 923

Target price Rs 407 681 850 383*

Upside/(Downside) % 6.7 70.0 12.0 (16.6)

Particulars FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

Profitablity

VNB Margin % 17.0 17.3 17.5 21.7 22.2 22.8 19.8 20.2 20.6 24.6 25.1 25.5

Total RoEV % 19.6 16.4 15.5 27.1 22.6 22.2 18.8 20.0 17.6 22.5 20.2 18.9

Operating RoEV % 20.2 15.3 15.5 21.9 21.5 22.2 17.6 17.9 17.6 20.1 19.1 18.9

Non-operating RoEV % -0.6 1.2 0.0 5.1 1.1 0.0 1.2 2.1 0.0 2.4 1.1 0.0

RoE % 17.1 25.7 25.7 30.9 31.8 30.9 19.2 19.9 21.0 27.4 30.8 33.1

Valuation at CMP

P/EV x 2.5 2.3 2.0 1.7 1.5 1.3 3.2 2.7 2.3 5.0 4.3 3.6

P/EVOP x 14.4 16.6 14.6 11.1 9.7 8.2 21.4 17.9 15.3 30.2 26.4 22.6

Implied P/VNB x 27.1 21.9 17.5 12.2 7.8 5.0 29.0 23.0 17.9 50.1 40.6 33.1

Implied P/VIF x 3.8 3.5 3.1 3.4 2.8 2.4 5.0 4.4 3.8 7.4 6.5 5.6

P/B x 8.0 7.0 6.2 4.5 3.5 2.8 10.2 8.6 7.3 16.2 13.0 10.3

P/E x 47.7 29.1 25.5 16.8 13.7 11.1 57.2 46.9 37.6 64.8 46.8 34.7

P/AUM x 0.3 0.3 0.3 0.2 0.2 0.2 0.5 0.4 0.4 0.7 0.6 0.5

Valuation at TP/FV

P/EV x 2.7 2.4 2.2 2.9 2.5 2.2 3.6 3.0 2.6 4.2 3.6 3.0

P/EVOP x 15.4 17.7 15.6 18.8 16.4 13.9 23.9 20.0 17.1 25.2 22.1 18.9

Implied P/VNB x 29.8 24.3 19.6 29.0 20.7 15.6 33.8 27.0 21.4 40.2 32.2 26.0

Implied P/VIF x 4.1 3.7 3.3 5.7 4.8 4.1 5.6 4.9 4.2 6.2 5.4 4.7

P/B x 8.5 7.5 6.6 7.6 6.0 4.7 11.4 9.7 8.1 13.5 10.8 8.6

P/E x 50.9 31.0 27.2 28.5 23.4 18.9 64.1 52.5 42.1 54.0 39.0 29.0

P/AUM x 0.4 0.3 0.3 0.2 0.2 0.1 0.6 0.5 0.4 0.6 0.5 0.4

* Fair Value

20


Peer Set Comparison


Bloomberg Ticker IPRU MAXF SBILIFE HDFCLIFE

Particulars FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E

Key parameters

APE Rs bn 78 88 100 40 48 57 97 112 129 63 73 84

VNB Rs bn 13 15 17 8 11 13 19 23 27 15 18 21

Total EVOP Rs bn 37 35 38 16 19 23 36 42 50 34 37 41

Operating EVOP Rs bn 38 33 38 16 19 23 36 42 50 31 35 41

Non- operating EVOP

Rs bn (1) 3 0 4 1 0 3 5 0 4 2 0

EV Rs bn 216 242 269 89 103 119 237 282 328 183 216 253

Net worth Rs bn 69 78 89 34 43 55 75 88 105 57 71 90

Net Profit Rs bn 11 19 21 9 11 14 13 16 20 14 20 27

AUM Rs bn 1,604 1,859 2,164 628 739 876 1,410 1,709 2,090 1,281 1,560 1,909

Growth YOY

APE % 0.1 12.4 13.7 21.6 21.0 19.0 13.5 16.0 14.9 15.9 16.1 15.2

VNB % 3.3 14.2 15.0 25.5 28.9 22.2 22.2 18.3 17.2 20.3 18.4 17.0

Total EVOP % (3.0) (3.5) 5.9 26.9 16.9 18.7 13.4 19.5 17.0 16.3 8.0 10.4

Operating EVOP % 3.2 (13.2) 13.9 26.9 16.9 18.7 13.4 19.5 17.0 14.2 14.2 16.7

Non- operating EVOP

% (208.9) NM NM NM NM NM (238.9) NM NM 38.5 NM NM

EV % 15.1 12.1 11.1 19.3 15.3 15.1 17.7 18.8 16.4 20.2 18.2 17.1

Net worth % 4.5 13.6 13.7 27.4 26.8 26.8 17.0 17.9 19.0 21.4 24.3 26.3

Net Profit % (29.3) 64.1 13.9 73.7 22.0 23.6 15.3 22.0 24.8 30.0 38.4 34.7

AUM % 15.0 15.9 16.4 20.2 17.7 18.6 21.3 21.2 22.3 20.2 21.8 22.4

21


Peer Set Comparison


MCap (Rs bn)

CMP (Rs)

Reco TP/FV

(Rs)

P/E (x) Mkt Cap/AUM (%) EPS (Rs) MF AUM (Rs bn) ROIC (%)

FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E

AMC

HDFC AMC 406 1,904 NR 1,777* 34.8 31.5 28.4 10.4 9.1 8.1 45.5 54.7 60.5 3,439 3,899 4,462 541.6 812.1 775.2

RNAMC 136 221 BUY 254 28.0 23.4 21.3 6.0 5.4 4.8 7.5 7.9 9.4 2,278 2,513 2,820 102.8 165.9 223.6

* Fair Value

MCap (Rs bn)

CMP (Rs)

Reco TP

(Rs)

P/E (x) P/ABV (x) EPS (Rs) ABV (Rs) ROAE (%)

FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E FY19P FY20E FY21E

Broking

ISEC 70 216 NEU 216 14.6 15.0 14.0 6.6 6.0 5.2 14.8 14.4 15.4 32.5 36.2 41.2 50.7 41.8 39.8

Diversified

MOFS (ex.

MOHL) 94 639 NEU 656 22.0 17.1 15.4 3.1 2.8 2.5 29.0 37.4 41.6 209.4 233.7 259.4 15.2 17.3 17.3

22


Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-) 10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-) 10% returns over the next 12 month period

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23


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