initiating coverage indusind bank ltd....

Indusind Bank Ltd.

“Robust business growth and enhancing retail franchise”

INITIATING COVERAGE

BUY

Relative Capital Market Strength

Indusind Bank (IndusB) is a mid-tier Indian private sector bank in India engaged in providing a range of banking and financial services. Over the past years, IndusB has outperformed the banking sector growth in almost all the operational as well as financial parameters. During the first two phases of planning cycle, well planned strategies and superior execution skills of the management helped the bank to enhance business growth through increasing focus on specific segments of domain expertise. We prefer IndusB mainly owing to its likely robust advances & deposits growth and improving productivity, which could drive PAT by 28% CAGR over FY15-18E, with RoA of 1.9% over the same period. In our view, the premium valuations over peers will continue to be supported by its increasing low cost deposits base, superior business growth, healthy asset quality and rapid expansion in distribution network. Investment Rationale

Satish Kumar Sharma | Desk Phone: 022 - 6707 9913 | [email protected] 1 SEBI CERTIFIED: RESEARCH ANALYST

Jan 22, 2016

Rating Matrix CMP Rs874 Rating Buy Target Price Rs1,080 Target Period 12 Months Upside Potential 23.6%

52 week H/L Rs989/784 Face value Rs10 Category Mid Cap Sector Banking

Shareholding Pattern Particulars Dec'15 Sep'15 Jun'15 Mar'15

Promoters 14.9% 14.9% 15.0% 15.1%

Inst. 54.2% 53.8% 47.9% 48.7%

Non Inst. 19.9% 20.3% 24.8% 23.9%

Key Financials (Standalone) Rs mn

Particulars FY14 FY15 FY16E FY17E FY18E

NII 28,907 34,203 45,208 59,687 75,723

Growth 29.5% 18.3% 32.2% 32.0% 26.9%

NIM 3.8% 3.5% 3.7% 3.9% 3.9%

PP OP profit 25,960 30,982 41,556 52,629 67,652

A.PAT 14,080 17,937 23,128 30,032 37,604

EPS (Rs) 26.4 33.3 38.5 50.0 62.6

YoY (%) 32.2% 26.3% 15.6% 29.9% 25.2%

Eq./As. (%) 10.4% 9.8% 12.9% 11.8% 11.1%

RoA (%) 1.8% 1.8% 1.9% 1.9% 1.9%

RoE (%) 16.9% 18.2% 16.2% 15.7% 16.9%

CASA(%) 32.5% 34.1% 36.5% 38.7% 40.2%

1) Emphasizing on building a strong liability franchise page (6-9)

2) Advances to expand at solid pace; loan book diversified across segments

• IndusB to add 50% of existing network in next two fiscals, taking the total to 1,200 braches by FY17E

• Well diversified branch network across regions; significant presence in saving account (SA) rich states (51% of total branches)

• Low cost deposits base growing at rapid pace; CASA likely to improve to 40.2% by FY18E

• Economic recovery to provide impetus to CA deposits • IndusB is adding 60,000 new customers per month. As per management,

this momentum is likely to continue in future and customers base will double from 5 million to 9 million customers by March 2017

• Advances (loan) book continued to grow (CAGR: 25% during FY12-FY15) despite challenging economic condition

• Loan book to grow at higher pace (CAGR: 25.7% during FY12-FY18E) driven by robust core retail finance growth, revival in vehicle finance and likelihood of pick-up in investment leading to high corporate and commercial banking growth ….. page: 10-12

4) Strong risk management to keep asset quality at comfortable level page 12-15

3) NIM to expand further; impact of implementation of MCLR likely to be limited page (15-16)

• Favorable shift in business model; share of low cost CASA on liability side and higher yielding consumer finance on assets side is likely to increase

• Fee income is expected to grow at robust 26.4% CAGR in FY15-FY18E. Planning cycle III’FY14-17 targets (loan growth 25-30%, CASA >35% and core fee growth > loan growth) will be achieved

• Diversified loan book, increasing share of retail loans and well stringent

credit screening criteria to keep asset quality at comfortable level • Well capitalized, recent capital infusion improved CAR ratio • PAT likely to grow by CAGR of 28% during FY15-FY18E

Valuation: We initiate coverage on IndusB with a ‘BUY’ rating at a target price Rs1,080 per share, determined after assigning 70% weight to P/ABV based fair value (Rs1,144) and 30% to DCF (FCFE) fair value (Rs931). To determine P/ABV based fair value, we apply 3.4 P/ABVx to FY17E Adjusted BVPS (Rs336.4). ... page:20

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Sensex IndusB

INITIATING COVERAGE

BUY

Company Introduction

Indusind Bank (IndusB) is a mid-tier Indian private sector bank having a network of 905 branches and 1,621 ATMs as on Dec 31’ 2015 across 568 geographic location of the country. IndusB was set up in 1994 with a capital of Rs1,000 mn promoted by Non-resident Indians. The bank caters to the need of both consumer and corporate customers with a wide range of financial products and services include corporate banking, transaction banking, personal banking, investment banking, real estate, bullion and corresponding banking. Retail, wholesale and SME are the three main segments of the bank and its current customers base stands at around 5 million. Considered as one of the most profitable banks, IndusB’s business is growing at a rapid pace attaining a balance sheet size of Rs1091bn in FY15 with a five year CAGR of 25.3% in total assets, 27.3% in advances, 22.7% in deposits and 38.6% in net profit. Efficient management, solid capitalisation, strong profitability and sound asset quality makes it a superior bank on both quantitative and qualitative front in Indian banking industry. IndusB ranked 13th amongst the Top 50 Most Valuable Indian Brands 2015 as per the BrandZ Top 50 rankings powered by WPP and Millward Brown. IndusB has set a vision to become a relevant business and relevant banking partner to clients, and a frontrunner in the market place in terms of profitability, productivity and efficiency.

Satish Kumar Sharma | Desk Phone: 022 - 6707 9913| [email protected] 2

Indusind Bank Ltd. Banking

Source: Choice Broking, Company data

Products and Services

IndusB, the country sixth largest private-sector bank, has two key business segments include corporate & commercial banking (large + mid + small sized companies) and retail (consumer finance). Corporate banking focuses on providing banking solutions to large, Indian and multinational corporates, public sector units, financial institutions, commodity exchanges and mid & small sized corporates. The product and service offerings include term/structured finance, working capital, trade finance, cash management & investment banking among others. Through its consumer banking business, the bank provides its target market customers a full range of banking services and financial products ranging from various deposits products and retail loans such as auto loans, personal loans, commercial vehicles loans credit card etc. Corporate & commercial banking segment, which include around 58% share in total advances is mainly consist of working capital loans (>70% of the total corporate loans). Unlike most of the banks, which focuses on a particular product but services all client segments, IndusB differentiates among various clients and caters to particular clients segments, for which it provides the entire range of banking services and products. Hence its niche lies in client differentiation in contrast to product specialization.

Shareholders holding more than 1% of share capital (Public, June 2015) %

Bridge India Fund 3.76 ICICI Prudential (Life insurance+FBE) 2.95 Franklin Templeton Investment Fund 2.89 Afrin Dia 2.49 GA Global Investments Ltd 2.02 Goldman Sachs Investments (Mauritius) I Ltd 1.66 Hinduja Group Ltd 1.50 Morgan Stanley Asia (Singapore) PTE 1.37 LIC 1.04

Large Corp. 27%

Mid size Corp. 19%

Small Corp. 12%

Vehicle Finance

29%

Equipment Financing

4%

Credit Card 1%

Loans agaist

property 6%

BL,PL,GL,etc

2%

Breat-out of loan portfolio

65% 13%

1% 20%

Interest/Discount on advance/billsIncome on investmentsInterest on balances with RBI/ Other banksOther Interest



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BUY

Economic View

India enjoyed a strong economic growth phase during the period FY03-FY11 with average GDP growth remaining around 8%. However, growth faltered during FY12-FY14 as gains from past structured reforms diminished and fiscal and monetary stimuli could no longer be sustained due to the high inflation. Deteriorated external factors such as high current account deficit (CAD) and trade deficit also played a crucial role. As monetary policies have been gradually tightened, inflation has started to decline and with structural restriction on gold imports and decline in crude oil prices helped to narrow the CAD. Economic activity has rebounded little bit in FY15 and H1FY16 with average growth of 7.2% (with new base 2011-12). Though economic recovery has been remained sluggish so far owing to global factors (slowdown in China, contracting exports and deflationary trend in commodity prices in the global market), micro picture of domestic economy looks very much attractive with restraining inflation, easing interest rate cycle and controlled CAD & fiscal deficits of the government. Likelihood of low inflation and easing interest rates is a positive sign for domestic economy as it will augment demand in domestic markets.

Increase in public capex likely to improve the economic situation

Given prevailing uncertain scenario in global economy, private sector remains still reluctant towards increasing investments. Weak asset quality of Indian banking industry & high leverage levels of various corporates are likely to check private sector investments plans. Meanwhile, policy environment on both monetary and fiscal policies has turned more supportive for economic growth. As the subsidy burden has declined and fiscal health improved, the government focus has shifted from deficit reduction to capital expenditure. The government has budgeted for a 25% YoY rise in capex spending in FY16 increasing public (central government) capex from 1.5% of GDP to 1.7% of GDP. Most of the increase in public capex spending is expected to be in infrastructure sectors, particularly roads and railways. As the private sector focuses on improving capacity utilization and deleveraging, increase in public capex is likely to improve the economic situation which in turn will also boost private investments going forward.

Satish Kumar Sharma | Desk Phone: 022 - 6707 9913 | [email protected] 3


5.1%

6.9% 7.3% 7.6% 7.9% 8.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY13 FY14 FY15 FY16P FY17P FY18P

India’s GDP Growth (%)

6.7%

8.4%

6.6% 7.5% 7.0% 7.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Quarterly India’s GDP Growth (%)

4.5%

1.3% 2.0%

3.4% 3.2%

4.7% 3.9%

0.4% 1.1%

3.8% 3.6% 4.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Quarterly trend in IIP

IIP Manufacturing IIP (12 months Avg.) Core Sector



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BUY

Banking Industry Overview Indian banking industry is well regulated, sound and adequately capitalized. As the sector gives credit to various industries for growth, banking industry is considered as the backbone of the economy. Indian banking industry is fragmented with 46 commercial banks and dozen of foreign as well as rural and corporate lenders. However, public sector banks account for around 75% share in total advance while the remaining portion is represented by private banks. Industry is also highly correlated to economic scenario as the industry revenue grows at 1.8-2x Indian GDP growth. As the economic activity remained sluggish over the past two fiscal, advances and deposits growth of industry declined to single digit in FY15. Despite the sluggish growth, high interest rate and poor repayment capacity of borrower's deteriorated the banks' asset quality.



* - Industry data include 24 top PSBs and 16 private sector banks

Particulars (Rs mn) Growth (YoY) FY09 FY10 FY11 FY12 FY13 FY14 FY15 H1FY16

Private Banks PAT 119,279.4 146,494.1 190,591.7 239,253.3 293,571.9 358,321.2 390,728.8 199,464.5 Private Banks PAT Gr. 16.6% 22.8% 30.1% 25.5% 22.7% 22.1% 9.0% 14.3% PSBs PAT 329,463.1 375,755.7 430,815.9 474,191.1 486,657.6 355,394.7 361,214.1 162,609.8 PSBs PAT Gr. 30.9% 14.1% 14.7% 10.1% 2.6% -27.0% 1.6% -20.9% Industry 448,742.5 522,249.7 621,407.6 713,444.4 780,229.5 713,716.0 751,942.9 362,073.9 Industry PAT Gr. 26.8% 16.4% 19.0% 14.8% 9.4% -8.5% 5.4% -4.7% Private Banks NNPA 1.19% 1.04% 0.84% 0.51% 0.65% 1.01% 1.14% 1.33% PSBs NNPA 0.75% 0.98% 1.00% 1.49% 2.02% 2.77% 3.23% 3.61% Industry NNPA (%) 0.97% 1.01% 0.92% 1.00% 1.33% 1.89% 2.18% 2.47%

0.0%5.0%10.0%15.0%20.0%25.0%30.0%

0

20000

40000

60000

80000

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Rs b

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Industry Advances Ind. Adv. Gr.

Private Banks Adv. Gr.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

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40000

60000

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100000

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Rs b

illio

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Industry Deposits Ind. Deposits Gr.Private Banks Deposits Gr.

Outperformance continued for private banks over PSBs The aggregated profit after tax (PAT) of public sector banks (PSBs) grew marginally by 1.6% in FY15 despite being a low base of previous year. On the other hand, PAT of private banks increased by 9% during the reported fiscal. Concerns over performance has become more intense for PSBs as during H1FY16 PAT declined by 20.9% and NNPA (% of net NPA to net Advances) rose to 3.61% as on Sep 31, 2015. On the other hand Private sector banks PAT grew by 14.3% YoY in H1FY16 while NNPA rose to 1.33% as on Sep 31, 2015. Overall industry PAT contracted by 4.7% in H1FY16 and NNPAs rose to 2.47% of net advances as compared to 2.18% as on Mar 31’2015


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Possible scenario of Banking industry


Indian banking industry is going through challenging phases, characterized by low credit growth, impairment of assets and low profitability. The recovery in Indian economy has been remained sluggish and financial position of borrower has not improved so far due to prevailing low domestic demand and less exports opportunities owing to the global slowdown. Further steep fall in crude oil prices due to oversupply in markets and low commodity prices in the international markets also dented the business sentiments. All this has impacted the profitability as well as assets quality of Indian banking industry. Medium to long term prospect bright for industry However we are of the view that despite some near term concern, the medium to long term picture of industry looks bright. Indian banking sector is relatively underpenetrated and only half of India’s population is bank penetrated. India’s credit to GDP ratio at around 78% is far below as compared to other peers nations such as China (~165%) and US (~250%). Increase in working population, growing disposable incomes and rising middle class are giving traction to demand for banking and related services in the country. With the easing interest rates in the economy, credit flow to various industries is expected to increase. Further with rise in demand and low interest rate, the financial situation of borrower is likely to improve and industry would witness gradual reduction in stressed loans on lower slippages and higher recoveries. The RBI’s has introduced latest norm 5/25 and strategic debt restructuring (SDR). 5/25 rule enables banks to extend the tenure of loan repayment to 25 years, (without being classified as restructured, provided certain conditions are met) to existing operational projects. SDR allows banks to convert their loans into equity giving them more control in recovering bad loans by fastening the sale of assets. The norms are expected to have positive impact on banks’ reported standard restructured advances and NPAs. Certain government initiatives include focus on increasing financial inclusion and Pradhan Mantri Jan-Dhan Yojana are positively impacting the liquidity profile of banks. Economic situation is gradually improving with rising spending on infrastructure development. All this translates into a strong growth for the banking industry too, as rapidly growing business turn to banks for their credit needs, thus helping them to grow. Further, with the development in technology, mobile, internet banking services have come to the fore and Indian banks are focusing more and more to provide better and innovative services to their customers. We believe that in the near term, bank business growth will be mainly driven by retail segment afterward contribution of corporate segment will increase. In terms of asset quality, capital adequacy and other key financial parameters, private sector banks are more efficient than PSBs and thus we believe that private banks would remain the prime beneficiary of reversal of interest rate cycle in the economy.

17.7% 20.3%

15.0% 15.6% 14.9%

10.6% 11.6%

16.7% 15.2%

17.8%

24.1%

18.0% 16.0% 15.1%

9.7%

11.6% 14.8%

17.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Industry Advances and Deposits Growth

Industry Deposits Growth (%) Industry Advances Growth (%)


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BUY

Investment Rationale

1) Emphasizing on building a strong liability franchise

IndusB shifted its focus towards retail segment, this requires large branch network and strong customer interface. Further, there is a direct linearity between branch expansion, CASA growth, core retail expansion and fee income growth. IndusB recorded 26% CAGR growth in branch expansion during FY12-FY15, higher than ICICI Bank (ICICIB), Axis Bank (AxisB) and HDFC Bank (HDFCB) having CAGR at 13.7%, 16.9% and 16.4%. Improved branch network helped the bank to expand retail loan book and subsequently the customer base.

IndusB to add 50% of existing network in next two fiscals: IndusB strategizes to focus on CASA growth on the payments side, core retail expansion on the lending side and fee income growth on the income side. Accordingly, IndusB planned to open 400 more branches in the next two fiscal, taking the total to 1,200 braches by FY17E. As Indian banking sector is underpenetrated, extending reach to help IndusB to increase low cost deposits share, retail loans as well as customers base. IndusB set a target of doubling the customer base to 9 mn over the next three years from current 4.5 mn customers.



Well diversified branch network across regions; significant presence in SA rich states : In order to significantly leverage the benefit arising out of the increasing financial inclusion in the country, the bank has been constantly making investments in branches & ATMs, strong brand recognition and quality services. IndusB’s presence has now much more diversifies compared to past period with north and west region accounts for around 27% and 23% of overall branch network by Dec 31, 2015. Given the presence in the rural and semi-urban regions, bank has significant presence in the Saving Accounts (SA) rich states (Maharashtra, Gujarat, Haryana, UP, Rajasthan and Punjab) as share of these states in total branches network rose to 51% by Dec 31, 2015 as compared to 44% in FY13. Furthermore, IndusB is now building a strong network in the cities includes Gurgaon, Ahmedabad, Indore, Lucknow, Nagpur, Kolhapur and Chandigarh. As there is a direct linearity between branch expansions, CASA growth, fee income and core retail loans expansion, improved geographical presence is helping IndusB to post strong low cost deposits and fee income growth over the last three fiscals.


210 300

400 500

602 801

905

497 594

692 882

1110

1487 1621

0200400600800

10001200140016001800

FY10 FY11 FY12 FY13 FY14 FY15 Q3FY16

Distrinution network growing at rapid pace

Branches ATMs

24.7%

16.9% 21.5%

13.7%

35.2%

16.4%

24.8% 26.0%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

Mar08-Mar12 Mar12-Mar15

CAGR in branches

AxisB ICICIB HDFCB IndusB

3%

2%

3%

3%

4%

4%

28%

28%

24%

22%

17%

17%

22%

21%

20%

21%

23%

23%

11%

11%

16%

18%

17%

18%

13%

15%

14%

15%

12%

12%

24%

23%

24%

22%

27%

27%

0% 20% 40% 60% 80% 100%

FY11

FY12

FY13

FY14

FY15

Q3FY…

Geo. diversification in branhces (% of total branch network)

North East South West Central East North

0

200

400

600

800

1000

FY13 FY14 FY15 Q3FY16

Significant presence in SA rich states

MH GJ HR PJ UP RJ Oth. States

INITIATING COVERAGE

BUY

Low cost deposits growing at rapid pace; margin to improve

Increasing network reach helping to raise liability franchise

Deposit of IndusB grew at a CAGR of 20.4% to 1,196,629.7 mn in FY15, significantly outperforming the industry growth of around 13.7% CAGR during FY12-FY15. Till FY12, IndusB deposits portfolio was largely skewed towards term deposits, however the bank later diversified it over the current and saving deposits.



Saving bank deposits growth remained higher than peers

SA deposits growth is directly correlated to the branch expansion. The bank has built a strong retail deposit franchise with doubling the branch network over the last three years. SA deposits grew by a CAGR of 40% during FY12-FY15, outperforming the peers growth (AxisB-20%, HDFCB-19.1% and ICICIB-14.7%). Besides the expansion in network, continuous innovation in product portfolio and introducing differentiated products and offering also supported the SA deposits growth through creating a brand image. Key products offering (1) my account my number facility which gives options to customer to choose his/her account number, (2) ATM facility with an option to choose currency denomination, (3) ‘video branch’ facility and (4) issue bank statements with scanned images of cheques. Besides keeping focus on high net worth individuals, self-employed and emerging corporate business, IndusB has started tracing housing or mass public for increasing the deposits share though increasing distribution front. IndusB is currently adding around 60,000 customers per month and as per the management this traction is likely to continue in the future. IndusB has tied up with online payment solution firm, PayU India to provide customers the full suite of consumer banking products online as well as payment innovations. The partnership is aimed at bridging the gap between conventional banking and new online payment systems. We expects 38% CAGR in SA deposits over the period of FY15-FY18E.


Current Deposits [CA] - 16.3%

Retail-35%

Term Deposits [TD]-65.3%

Saving Deposits [SA] – 18.7%

Deposits [Dec 31’15]

Wholesale - 65%

0100200300400500600700

FY10 FY11 FY12 FY13 FY14 FY15

CASA per Branch (Rs mn)

ICICIB AxisB HDFCB IndusB

22.8% 14.7%

26.0% 19.6%

28.5%

19.1%

53.4%

40.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


IndusB's SA deposits CAGR remained higher than peers


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CASA ratio likely to improve to 40.2% by FY18E

In spite of the robust growth in SA deposits, share of CA deposits maintained around 16-17%, CASA deposits has now become more diversified over the CA deposits and SA deposits. CASA is likely to improve to 40.2% by FY18E from 35% of total deposit in Dec 31, 3015. In an easing interest-rate scenario, a consistently high CASA share would help to protect NIM and help it to grow to over 3.8% over the next three years.




Economic recovery to provide impetus to CA deposits

CA deposit growth is largely dependent on economic cycles as it is a function of advances book mix. During FY12-FY15, CA deposits grew by a CAGR of 22%, much below than SA deposits growth as Indian economy was characterized by low credit demand, rising interest rates and lesser idle cash investments due to stretched corporate working capital cycle. However, despite the downturn in Indian economy, CA deposits growth remained higher than 20% over the last three fiscals. CA deposits growth was driven by factors include emphasis on continued interaction with client (mainly SME, HNW individuals), increased focus on segment specific focus in CA product suite, implementation of transaction model and participation in merchant and investment banking. Given the likely improvement in domestic economic scenario and enhanced segment-centric offers in CA product suite, CA deposits are expected to grow by a CAGR of 27% during FY15-FY18E.

17.5% 23.2% 16.7%

16.9%

65.9%

58.9%

0.0

200,000.0

400,000.0

600,000.0

800,000.0

1,000,000.0

1,200,000.0

1,400,000.0

1,600,000.0


Rs m

n

Deposits portfolio

Savings Deposit (Mn) Current Account Deposit(In Mn) Term/Fixed Deposit (Mn)


17.4% 12.3%

17.0%

12.2% 16.9% 17.4%

32.5%

21.6%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%


CAGR in CA deposits


0%

20%

40%

60%

0

100000

200000

300000

Rs m

n

Low cost deposits base to remain strong

Current Account Deposit Current Account Growth (%)CASA (%)

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BUY




Retail term deposit continue to keep pace

Major portion of the deposits is accounted by term deposits (65% by Dec 31, 2015). Though CASA share is increasing, term deposits is benefitted to IndusB as the large share of advances portfolio is based on fixed interest rate. Though around 65% of term deposits are wholesale basis, we are of the view that robustly increasing branches network to drive this segment growth as people in India go to nearby branch for making term deposits. Given rising income of people, we expect 22% CAGR in term deposits for FY15-FY18E period driven by retail term deposits, which are high in tenure as compared to wholesale term deposits.

Deposits growth to outperform the industry growth

Overall deposits of IndusB is expected to grow at a CAGR of 26.1% over FY15-18E, outperforming the industry expected growth of 15% CAGR during the same period. Deposits share of bank in the industry is also expected to increase to 1.1% by FY18E as compared 0.8% in FY15.

0.6% 0.7% 0.7% 0.8% 0.8%

0.8% 1.0%

1.1% 1.1%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%


Rising share of IndusB in Industry deposits


17.7% 20.3%

15.0% 15.6% 14.9% 10.6% 11.4%

16.1% 15.2%

20.8%

28.7%

23.3% 27.7%

11.8%

22.5%

27.7% 26.4% 24.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


IndusB deposits growth to remain higher than industry

Industry Growth (%) IndusB Deposit Growth (%)

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BUY

Well diversify Advances book

IndusB has well-diversified advances portfolio with corporate & commercial banking (Large corporates + SMEs) is in the proportion of 58:42. Break-out of Advances portfolio is described below:



2) Advances book continued to grow despite challenging economic condition Total advances grew by a CAGR of 25.2% during FY12-FY15 higher than peers (AxisB 18.3%, HDFCB:23.2% and ICICICB’ 15.2%). Earlier, advance book of IndusB was earlier more inclined to corporates mainly SMEs segment, which has more asset quality stress, and mainly funded by bulk corporate deposits which are short tenure and high cost. This lead to more assets quality mismatch as well as cash flow problems for the bank. Post the management change in FY08, IndusB changed its business model and diversify advances portfolio over corporates and SMEs and focused on retail loans particular segment like vehicle financing.


Large Corporates – 27%

Equipment Financing – 4%

Vehicle Loans - 29%

SMEs – 31% Retail - 42%

Advances Composition [Dec 31’ 15]

Mostly WC Loans

BL, PL, GL, etc – 2%

Loan Against Property – 6%

Credit Card -10%

Approximately 30% Term Loans

Approximately 70% WC Loans

Mostly Term Loans

18%

24%

18% 16% 15%

10% 12% 15%

17%

30% 27%

34%

26% 24% 25% 25% 25% 27%

0%

10%

20%

30%

40%


IndusB advances growth to outperform industry growth

Industry Growth (%) IndusInd Bank Advances Growth (%)

5%

15%

28%

18%

25% 23%

31%

25%

0%5%

10%15%20%25%30%35%


CAGR in advances

ICICI B Axis B HDFCB IndusB

INITIATING COVERAGE

BUY




Assets front; what differentiate bank from peers

As per the management, IndusB strategies to gain market share in its specific areas of domain expertise like vehicle & equipment financing in consumer finance segment and healthcare, wellness, real estate and diamond financing in corporate & commercial banking. Since, a few banks operate in these segment, IndusB would face less competition and strong operational efficiency as the bank has expertise in these area. Furthermore, IndusB planned to concentrate more on working capital (WC) loans as it enables the bank to involve itself with the company at various stages of its business cycle, cross sell other products like letter of credit and bank guarantee and to better manage, mismatch between assets and liabilities as the churn rate is faster than term loans.

Strong growth in non-vehicles loans maintaining robust retail assets growth

Vehicle financing was the major segment of the bank accounting for around 71% of the total retail advances. In retail loans portfolio, vehicles loans and equipment financing slowed down to CAGR of 12.6% and 9.7% during FY12-FY15. However, strong growth in other vectors like LAP (CAGR:108.6%), credit card business (CAGR:41.4%) and other personal loans (CAGR: 76.7%) kept overall growth momentum healthy at 18.1% CAGR during the reported period. Although IndusB continued its focus on specific area, business growth in other segment grew at robust pace as the bank adopted de-risking strategy under which the share of non-vehicles retail which accounts for 12% of the overall book and the target is to grow it to 20% by the next two years. Going forward, growth in retail loans business is likely to drive by (1) expected up-tick in vehicle loans in the easing interest rate scenario (2) more emphasis on non-vehicles loans (3) retail loans are highly correlated to branch expansion. On the other hand there remained ample space to improve the productivity as IndusB enhanced its branch network and business per branch reduced austerely. Vehicle as well equipment finance per branch lowered 30-35% in FY15 from its peak. The proportion of retail loans in total loans is expected to rise 45% by FY18E.

333.6 329.8 357.8 357.0

311.5

255.1 246.3 266.8

331.6

0

100

200

300

400


Operating leverage gain; branches could be utilize to enhance retail business (Rs mn)

Credit business per branch Vehicle finance per branchEquipment financing per branch LAP per branch

40% 44% 49% 51%

45% 41% 40% 41% 45%

0%10%20%30%40%50%60%

Retail advances weight In advances Portfolio

Improving economic scenario providing traction to corporate loans

Despite a challenging economic condition, IndusB loan book grew at a CAGR of 25% mainly driven by high corporate and commercial banking segment. Large corporates loans grew by CAGR of 28.1%, while SMEs loans increased by a CAGR of 34.8% during FY12-FY15. Since major portion is accounted by working capital (WC) loans and demand for these loans remains inherent, corporate & commercial banking has shown robust growth. We expect that WC loans to dominate the corporate & commercial banking segment. Given, the strong business relationship with corporate clients, improving economic scenario, advances to corporates (including SMEs) is likely to increase by a CAGR of 25.7% in FY15-FY18E.

INITIATING COVERAGE

BUY




IndusB acquired Rs41,000 mn gems and gewellary portfolio from the RBS

In current fiscal, IndusB purchased Rs41,000 mn gems and gewellary portfolio from the RBS. IndusB was already in this business and the acquisition is in line with bank strategy to enhance the market share in domain expertise specific area. With this acquisition the bank becomes one of the largest financiers in this segment across industry. The portfolio is very profitable and well-secured and thus we expect that despite providing decent interest income, it will also enhance fee business for the bank as these loans are very short term in nature.

4) Diversified asset book enables superior asset quality

Assets quality of IndusB over the last five fiscals remained under control and even better than peers despite an economic downturn. Stability in assets quality is owing to the well diversified loan portfolio and superior risk management practices implemented by IndusB.

60% 56% 51% 49%

55% 59% 60% 59% 55%

0%10%20%30%40%50%60%70%


Growth in corporates advances

Weight in Porfolio (Combined)Corporate loans Gr.(%)SMEs loans Gr.(%)

0.6% 0.7% 0.7% 0.8% 0.9% 1.0%

1.1% 1.2% 1.3%

0.0%0.2%0.4%0.6%0.8%1.0%1.2%1.4%

IndusB,s advances share to increase in domestic banking industry

5.9%

4.8%

2.94% 2.8%

2.4%

1.8%

1.7%

1.5%

1.4% 1.4%

1.3% 1.3%

Diversified corporate loan book Gems and Jewellery

Lease Rental

Telecom- Cellular

Real Estate Developer

Power Transmission

NBFCs

Media,Entertainment & Advt

Housing Finance Companies

Power Generation

Contract Construction-Civil

Steel

Services


INITIATING COVERAGE

BUY




Assets quality likely to remain stable in coming future

The bank has very less exposure to stressed sectors like steel, power at the rate of 1-2% of total loan book. Though corporate portfolio is skewed towards working capital and diversified, IndusB’s exposure to real estate, power and lease rental is very high around 10%. However the management asserted these are relatively safer loans as it is cash-flow based lending, backed by mortgage and real estate clients are quality developers engaged in specific projects. Restructured assets stood at around 0.58% of total loan book, which is one of the lowest in the industry. We expects IndusB to maintain stable quality in coming future and GNPAs and NPAs ratio to net advances is likely to remain in the similar past trend at around 1.1% and 0.3% in the next three fiscals.

Sector wise advances (Rs mn) Assets Mix Assets mix (% of T Adv.)

% of GNPA/Adv. to sector

Priority sector Mar'14 Mar'15 Mar'14 Mar'15 Mar'14 Mar'15 Agriculture and allied activities 52,165.6 79,847.3 9.4% 11.5% 1.12% 0.69% Advances to industries eligible as priority sector lending 5,623.2 10,824.0 1.0% 1.6% 1.08% 0.05% Gems & Jewellary 69.5 3,274.3 0.0% 0.5% Construction 12.2 19.5 0.0% 0.0% Power 5.6 0.0% 0.0% Services 124,288.2 138,995.5 22.4% 20.1% 1.21% 1.21% Personal loans 627.4 506.2 0.1% 0.1% 9.40% 3.40% Sub-total (A) 182,704.4 230,173.0 32.9% 33.3% Non Priority sector Mar'14 Mar'15 Mar'14 Mar'15 Mar'14 Mar'15 Agriculture and allied activities - - - - - - Advances to industries eligible as priority sector lending 117,495.4 133,010.7 21.2% 19.2% 0.78% 1.45% Gems & Jewellary 10882.4 13,326.2 2.0% 1.9% 3.20% 2.61% Construction 17,492.4 15,326.0 3.1% 2.2% 2.65% 3.75% Power 10,491.2 24,389.7 1.9% 3.5% Services 235,099.5 300,177.6 42.3% 43.4% 0.51% 0.40% Personal loans 20,086.5 28,045.1 3.6% 4.1% 5.65% 3.92% Sub-total (B) 372,681.4 461,233.4 67.1% 66.7% Total (A+B) 555,385.8 691,406.4 100.0% 100.0%

Particulars (Rs mn) Mar'12 Mar'13 Mar'14 Mar'15 Total loans to twenty largest borrowers / customers (funded & non-funded) 109,503.8 162,889.4 163,355.8 228,478.5 % of total loans 22.6% 22.6% 16.3% 17.5% Total gross exposure to top four NPA accounts 453.7 967.8 1,272.7 1,004.9 GNPA as % of Net Advances 0.99% 1.03% 1.13% 0.82% NNPA as % of Net Advances 0.27% 0.31% 0.33% 0.31%

Movement of Gross NPAs (Rs mn) Mar'12 Mar'13 Mar'14 Mar'15 Mar'16E Mar'17E Mar'18E Opening balance 2,658.6 3,470.8 4,577.8 6,207.9 5,628.9 6,737.7 10,408.4 Additions during the year 2,864.5 5,277.7 6,242.4 8,873.0 11,978.6 16,171.0 20,213.8 Reductions during the year 2,052.3 4,170.7 4,612.3 9,452.0 10,869.8 12,500.3 15,000.3 Gross NPAs 3,470.8 4,577.8 6,207.9 5,628.9 6,737.7 10,408.4 15,621.9 Provisions for NPAs 2,524.1 3,210.0 4,367.0 3,525.0 4,716.4 7,285.9 10,935.3 Net NPAs 946.7 1,367.8 1,840.9 2,103.9 2,021.3 3,122.5 4,686.6 Coverage Ratio (%) 72.7% 70.1% 70.3% 62.6% 70.0% 70.0% 70.0% Gross NPA (%) 1.0% 1.0% 1.1% 0.8% 0.8% 1.0% 1.1% Net NPA (%) 0.3% 0.3% 0.3% 0.3% 0.2% 0.3% 0.3%

INITIATING COVERAGE

BUY




Well capitalized, recent equity infusion improved CAR ratio

With the phased implementation of Basel-III capital norms for banks from FY14, capital requirements for Indian banks are set to increase over the next 2–3 years. CAR ratio at 12.1% in FY15 was relatively weak as compared to industry peers. To support its future growth plans, the bank has raised ~Rs50,800 mn through QIP and preference allotment which has strengthened capital adequacy ratio (CAR) to 16%+. This capital rising will help it to aggressively grow its loan book in coming years along with implementation of Basel III norms.

RWAs grows at 30% CAGR during FY12-FY15

Risk weighted assets (RWAs) grew at a CAGR of 30% over the last three fiscals and increased to 81.5% of total assets by FY15 from 73% in FY13. This was due to structural changed in risk weight attached to different assest class like bullion trade by RBI, downgrade migration of loan portfolio’s overall ratings. As the IndusB advances book is likely to be more skewed towards retail loans growth in RWA expansion is likely to ease in coming future.

8.0%9.0%

10.0%11.0%12.0%13.0%14.0%15.0%16.0%17.0%

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16

Quarterly trend of CAR and Tier I capital

CAR(%) Tier 1 (%)


Capital adequacy (%) Basel III Mar'12 Mar'13 Mar'14 Mar'15 Mar'16E Mar'17E Mar'18E Tier I (Rs mn) 44,580.0 73,440.0 85,510.0 99,750.3 178,290.4 205,018.9 238,862.1 Tier II (Rs mn) 9,700.0 8,410.0 7,540.0 7,760.0 9,312.0 11,174.4 13,409.3 Total capital (Rs mn) 54,280.0 81,850.0 93,050.0 107,510.3 187,602.4 216,193.3 252,271.4 Total risk weighted assets (Rs mn) 392,030.0 532,850.0 672,600.0 889,290.0 1,145,109. 1,382,426. 1,669,830. Tier-1 capital adequacy ratio 11.4% 13.8% 12.7% 11.2% 15.6% 14.8% 14.3% Tier-2 capital adequacy ratio 2.5% 1.6% 1.1% 0.9% 0.8% 0.8% 0.8% Total capital adequacy ratio (Basel III) 13.8% 15.4% 13.8% 12.1% 16.4% 15.6% 15.1%

0.0%

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20.0%

CAR improved with capital infusion

Tier-1 capital adequacy ratioTotal capital adequacy ratio (Basel…

INITIATING COVERAGE

BUY



Granularty of asset & liability to improve risk profile

Credit to deposit ratio of the bank stood at 92.8% by FY15. As the advances book of bank is growing at rapid pace, it need sufficient deposits base. With the significant increase in branch network, the liability franchise of bank has improved and we are of the view that bank would be able to fund its strong advances growth with deposits. On assets-liability mismatch front, IndusB has significant exposure to corporate loans with 1-3 year tenure, which was mainly funded by borrowing as deposits has only 12% portion in the same tenure deposit book. We are of the view that going forward IndusB rely on borrowing to decrease as it is enhancing its network which in turn will rise its retail term deposits base.

Operational Parameters

3) NIM to expand further; Impact of implementation of MCLR likely to be limited

During the period FY12-FY15, NIM remained in the range of 3.5-3.6% despite the fall in yield on advances to 12.5% in FY15 from 13.8% in FY12 as this impact was offset by decline in avg. cost of decline to 7.7% from 8% during the same period. We expect that increase in CASA base, shift in loan mix towards high yielding retail segments and recent equity infusion of Rs51,000 mn to expand the NIM to 3.9% by FY18E.


20%

9% 12% 12% 5%

30%

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51%

10% 8% 4% 8%

26% 35%

1% 4%

0%

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20%

30%

40%

50%

60%

29D-3M 3-6m 6m-1Y 1-3Y 3-5Y Over5Y

Assets- Liability profile

Deposits Advances Borrowings

3.3% 3.5% 3.8% 3.5% 3.8% 4.0% 4.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Trend in NIM

Net interest margin Yield on advances Avg. Cost of Deposits


INITIATING COVERAGE

BUY



Marginal cost largely factored in; MCLR rate expected at 10.4%

Since January 2015, the central bank has lowered its policy rate by 125 basis points, but banks lowered their lending rates by only about 60 basis points. In a bid to force lenders to effectively pass on policy rate cuts, the RBI has issued guidelines for banks on computing interest rates on advances based on the marginal cost of funds. All banks will have to follow new and uniform methodology from April 1, 2016 to calculate base as per the marginal cost of funds - based lending rate (MCLR), determined on the basis of banks’ marginal cost of borrowing. The reason for introducing this system is to force banks to pass on the benefits on interest rate cut to customers. Meanwhile, IndusB already uses a hybrid of marginal CoF & average CoF in base rate, implying impact of new base rate is seen minimal with around 70% of book being fixed and higher proportion of liabilities in the short term bucket.

Diversified fee income; growing at rapid pace

Fee income has been remained a key profit driver segment of IndusB contributed to around 50-70 basis points to RoA over the past few years. Fee income is diversified across a range of products with 13% from trade and remittances, 18% from processing fees, 16% for investment banking, 27% from foreign exchange income and 8% from general banking fees. Presently, a major portion of fee income is non-capital consumptive including remittance, retail foreign exchange fees distribution and general banking fees and investment banking. Over the past three years, fee income from distribution (insurance, MF, cards) and general banking fees segments recorded sluggish growth, however high growth in investment banking, trade and remittance improved the overall core fee which growing at a CAGR of 32% of FY12-FY15.



Marginal Cost of funding Expected MCLR Particulars Marginal cost Marginal Cost 6.6% RoNW 1.5% Negative carry from SLR, CRR 0.6% Cost Overhead 1.7% Calculated base rate 10.4% Current base rate 10.6%

Trade and Remittances

13% Foreign Exchange

Income 27%

Distribution Fees (Insurance, MF,

Cards) 18%

General Banking Fees 8%

Loan Processing fees 18%

Investment Banking

16%

Diversified fee income profile

INITIATING COVERAGE

BUY



Fee income expected to outpace loan growth

Management told to us that 50% of fee income came from the retail segment and with the increasing branch network, this traction is likely to continue. We expect 26.4% CAGR in core fee income growth driven by improving branch network of bank leading to high growth in business, high growth in third party product selling, and transactional banking.

Cost to income ratio to remain around 45%

With an aim to significantly leverage the benefit arising out of the increasing financial inclusion in the country, IndusB is aggressively enhancing the distribution network. The management indicated to us that high growth in expenditure in the form of depreciation, rent and repair and maintaines is likely to offset by rapid pace in income growth as well as increases in the usage of digitalization in the branches. Cost to income ratio is likely to remain around 45% in the coming three fiscals despite heavy investments on network expansion.



Particulars (Rs mn) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Trade and Remittances 1,180.0 1,690.0 2,140.0 2,650.7 3,219.8 4,142.7 5,567.9 Foreign Exchange Income 2,010.0 2,850.0 4,350.0 5,530.8 5,623.9 7,662.2 10,454.6 Distribution Fees (Insurance, MF, Cards) 2,450.0 2,700.0 2,810.0 3,841.0 5,327.0 6,700.1 8,503.4

General Banking Fees 1,100.0 1,390.0 1,450.0 1,710.1 2,635.2 3,231.1 4,175.8 Loan Processing fees 1,610.0 2,330.0 2,910.0 3,780.1 4,469.0 5,731.4 7,721.9 Investment Banking 790.0 1,430.0 2,420.0 3,340.7 2,926.4 3,984.6 5,672.1 Total core-fee income 9,142.2 12,391.7 16,081.1 20,870.0 24,202.6 31,453.5 42,097.5 Other Income 10,117.8 13,629.6 18,905.3 24,038.7 28,467.7 36,710.7 46,771.4

51.1%

48.2% 49.4% 48.8%

45.7% 46.8%

45.8% 45.4% 44.8%

40.0%

42.0%

44.0%

46.0%

48.0%

50.0%

52.0%

Cost to Income Ratio

0.0

20000.0

40000.0


Rs m

n

Operating expenditure s likely to grow by 26.2% CAGR

Employee cost Other ExpenditureRepairs and maintenance Rent, taxes and lightingDepreciation on bank's property

INITIATING COVERAGE

BUY



PAT likely to grow by CAGR of 28% during FY15-FY18E

Despite the economic downturn, IndusB PAT grew by a CAGR of 30.7% during FY12-FY15. Increasing low cost deposits base, high fee income growth and strong management’s focus on operational efficiency helped the bank to outperform large number of banks in industry. PAT likely to grow at a 28% CAGR during FY15-FY18E driven by expected strong NII CAGR of 30.3%. Owing to the capital infusion of ~Rs51,800 mn, RoE is likely to decline to 16.2% in FY16E from 18.2% in FY15, however it likely to improve to over 17% in the coming fiscals. We expect that RoA to improve to 1.9% by FY18E from 1.8% in FY18.



0%

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0

10000

20000

30000

40000

Rs m

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PAT likely to grow by a CAGR of 28%

Reported PAT Growth in Adjusted PAT %

0.0%

5.0%

10.0%

15.0%

20.0%


Trend in RoE, ROA

RoA RoE Equity / Assets

Particulars (Rs mn) FY14 FY15 FY16E FY17E FY18E Advances Growth 24.3% 24.8% 25.4% 25.2% 26.7% Deposits Growth 11.8% 22.5% 27.7% 26.4% 24.2% Interest Income 82,535.3 96,919.7 116,025.8 143,349.3 175,105.6 Interest Expenses 53,628.2 62,716.9 70,817.3 83,662.3 99,382.4 NII 28,907.1 34,202.8 45,208.5 59,687.0 75,723.2 NII Growth 29.5% 18.3% 32.2% 32.0% 26.9% Operating Expenses 21,852.8 27,259.3 35,148.4 43,768.6 54,843.0 P&C % of Advances 0.8% 0.6% 0.7% 0.7% 0.8% PAT 14,080.2 17,937.2 23,127.8 30,032.0 37,603.5 PAT Growth 32.2% 27.4% 28.9% 29.9% 25.2% Assets 870,259.3 1,091,159.2 1,384,633.2 1,733,177.8 2,161,339.7

Key financial projections and assumptions

INITIATING COVERAGE

BUY



IndusB’s stock trading below 1Y average P/BV

IndusB stock is currently trading at discount to HDFCB and KMB on P/BV basis. Over the last six month, IndusB remained the only stock given positive return of around 3%. We believe that the stock still holds upside potential, given strong growth in assets and liabilities, superior risk management strategies, rapid increase in branch network and increase in investment in infrastructure like digitalization. Present correction in Indian stock markets has pulled InudsB’s share below its past one year average P/BV, indicating a best opportunity to pile up position in the stock.


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declined significantly

AxisB [P/BV (x)] HDFCB [P/BV(x)] ICICIB [P/BV(x)]IndusB [P/BV(x)] KMB

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IndusB's share trading at discount to avg. P/BV

IndusB [P/BV(x)] IndusB Avg. P/Bv

Issues and concerns

Increasing exposure to sensitive infrastructure sector

IndusB diversified its loan portfolio across sectors and segments, however bank exposure to sectors like construction, real estate, power, steel and telecom increased to around 20%. Though, the management’s assurances that these exposures are with the best corporate in these industry segments, pressures in these industries are intense already. Thus subdued economic recovery poses the risk on assets quality front.

Slow recovery in economy

Amid expectations of improvement in economy scenario in future, IndusB is investing heavily to strengthen its network and operating infrastructure. If economic recovery will remain sluggish, then increase in operating cost will erode the financial performance of the bank.

Rising competition in industry

Competition in the banking industry is continuously increasing and with the entry of two new banks (IDFC and Bandhan), small financial and payment banks in rural area, the situation is likely to be more intense. Therefore, it would remain a challenge for IndusB to compete in high competitive industry.

Pressure on some key ratios

RWA of IndusB is growing at around 30-32% annual growth rate over the past few years. Though the focus on retail loans would help to ease the RWA growth, however this benefit is expected to offset by the growing non-fund based exposure of the bank. This also lead to make high provision against these advances. Therefore higher than expected P&C outflow in future can put pressure on profit margins.

INITIATING COVERAGE

BUY



Valuation: IndusB has traded at premium valuation as compared to its peers except HDFCB and Kotak Mahindra Bank (KMB). However, consistent profit growth over the past five years even in challenging economic conditions and superior return ratio of (RoE~18% and RoE ~1.9%) justified this valuation. With the growing branch network of bank, increasing CASA base, likelihood of strong fee income inflow, and diversified loan book with superior assets quality, IndusB is likely to emerge far stronger over the next few years. We used P/Adjusted BV and Discounted Cash Flow (DCF) methods to value the stock. Our Target Price (TP) is blended, where we assign 70% weight to P/ABV based fair value and 30% to DCF (FCFE) fair value. To determine P/ABV based fair value, we apply 3.4 P/ABVx to FY17E Adjusted BVPS. We initiate coverage on IndusB with a ‘BUY’ rating at a target price Rs1,080, which implies potential upside of 23.6% to the CMP.

P/ABV, DCF (FCFE)-based fair values Rs P/ABV DCF (FCFE) Weights 70% 30%

1,080 Fair Value (After Assigning Weight) 1,144 931 P/ABV Valuation FY14 FY15 FY16E FY17E FY18E Adjusted BVPS (Rs) 166.0 193.8 293.7 336.4 390.1 Valuation Parameter (Apply P/Adjusted BV multiple of 3.4 P/ABV 3.4

DCF (FCFE Valuation) Particulars (Rs mn) FY15 FY16E FY17E FY18E FY19E FY20E Interest Income 96,919.7 116,025.8 143,349.3 175,105.6 206,575.5 253,196.8 [-] Interest Expenses 62,716.9 70,817.3 83,662.3 99,382.4 118,893.0 141,026.5 [-] P&C 3,890.5 6,456.6 7,558.8 10,530.8 10,741.9 10,948.2 [-] Operating Exp 27,259.3 35,148.4 43,768.6 54,843.0 64,756.9 77,366.1 [+] other income 24,038.7 31,496.1 36,710.7 46,771.4 54,329.4 63,037.3 [-] Tax 9,154.5 11,971.8 15,038.3 19,517.3 19,313.7 24,460.4 Cash flow from Operation 17,937.2 23,127.8 30,032.0 37,603.5 47,199.3 62,432.9 FCFE 42,018.5 13,970.9 57,780.7 48,162.6 31,994.8 82,462.6 Present Value of FCFE 12,118.3 43,472.5 31,430.9 18,111.0 40,488.8 Horizon Value/Terminal value 841,612.5 Present Value of Horizon Value 413,228.4 Equity Value 558,849.8 Outstanding Shares 600.2 Fundamental Value (Rs) 931.1

Peers Group Comparison Beta : 1.08, Cost of equity (As per CAPM Model): 15.3% Continual Growth: 5%

Source: Choice Broking, Company data, Ace Equity

Companies (Rs) CMP 6M R(%) 12M R(%) EPS BVPS P/E (x) P/ABV (x) FV HDFCB 1023 -8.8% -0.1% 44.3 271.1 23.1 3.8 2 ICICIB 226 -29.1% -38.9% 20.2 148.0 11.2 1.7 2 AxisB 409 -35.3% -29.5% 33.3 204.2 12.3 2.1 2 IndusB 879 -8.4% 3.2% 34.0 281.5 25.8 3.2 10 KMB 660 -10.1% -5.1% 10.0 129.4 65.8 5.4 5 Average 640.2 -18.3% -14.1% 28.4 206.8 27.7 3.2 4 Companies (Rs mn) M Cap. Net Worth PAT (TTM) NIM(%) ROA(%) NNPA(%) CASA (%) NW/Assets (%) HDFCB 2,576,118.6 682,771.1 111,665.9 4.2 1.7% 0.3% 39.7% 10.3% ICICIB 1,345,415.6 865,656.0 118,173.1 3.5 1.8% 1.7% 45.1% 13.2% AxisB 979,371.0 488,920.9 79,744.3 3.9 1.7% 0.5% 44.2% 10.3% IndusB 523,697.0 167,698.1 20,275.4 3.9 1.6% 0.3% 35.0% 13.6% KMB 1,152,975.5 226,082.4 17,509.4 4.3 1.0% 1.1% 36.0% 12.9% Average 1315515.5 486225.7 69473.6 4.0 1.6% 0.8% 40.0% 12.1%

INITIATING COVERAGE

BUY



Five Quarters at a Glance Particulars (Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 YoY QoQ Interest Earned 24,369.5 25,789.5 27,235.0 27,977.7 29,277.0 20.1% 4.6% Interest Expended 15,755.8 16,538.1 17,428.4 17,034.9 17,542.8 11.3% 3.0% NII 8,613.7 9,251.4 9,806.6 10,942.8 11,734.2 36.2% 7.2% Operating Expenditure 6,982.8 7,331.1 7,822.8 8,712.9 9,514.4 36.3% 9.2% Pre- Prov Operating Profit 7,738.4 8,505.1 9,227.2 10,065.3 10,609.8 37.1% 5.4% Provisions and contigencies (incl NPA) 980.1 1,074.4 1,233.3 1,580.9 1,770.8 80.7% 12.0%

Other Income 6,107.5 6,584.8 7,243.4 7,835.4 8,390.0 37.4% 7.1% PBT 6,758.3 7,430.7 7,993.9 8,484.4 8,839.0 30.8% 4.2% Tax 2,286.4 2,478.0 2,743.5 2,884.0 3,028.8 32.5% 5.0% Net Profit 4,471.9 4,952.7 5,250.4 5,600.4 5,810.2 29.9% 3.7% Outstanding Shares 538.8 538.3 538.3 595.8 600.2 11.4% 0.7% Dil. EPS 8.3 9.2 9.8 9.4 9.7 16.6% 3.0% Balance Sheet items/ratios Deposits 693,760.0 741,343.6 776,930.0 808,400.0 864,230.0 24.6% 6.9% CA Deposits 114,510.0 129,435.7 140,160.0 130,390.0 141,070.0 23.2% 8.2% SB Deposits 121,830.0 123,560.2 112,835.9 150,460.0 161,250.0 32.4% 7.2% CASA 236,340.0 252,995.9 252,995.9 280,850.0 302,320.0 27.9% 7.6% Advances 638,470.0 687,882.0 722,430.0 786,940.0 821,670.0 28.7% 4.4% CD Ratio (%) 92.0% 92.8% 93.0% 97.3% 95.1% CASA Share (%) 34.1% 34.1% 32.6% 34.7% 35.0% CAR(%) 12.4% 12.1% 12.4% 16.5% 16.4% Tier 1 (%) 11.5% 11.2% 11.6% 15.7% 15.6% Profatibilitiy Cost of funds (%) 6.6% 6.5% 6.4% 5.9% 5.8% NIM(%) 3.7% 3.7% 3.7% 3.9% 3.9% Cost-Income Ratios (%) 47.4% 46.3% 45.9% 46.4% 47.3% Tax Rate (%) 33.8% 33.3% 34.3% 34.0% 34.3% Assets Quality Gross NPA 6,726.6 5,629.2 5,701.2 6,021.2 6,811.2 1.3% 13.1% Net NPA 2,015.1 2,104.8 2,248.0 2,407.5 2,733.4 35.6% 13.5% Gross NPA (%) 1.1% 0.8% 0.8% 0.8% 0.8% Net NPA (%) 0.3% 0.3% 0.3% 0.3% 0.3% Coverage Ratio(%) 70.0% 62.6% 60.6% 60.0% 59.9% RoA(%) 1.9% 191.0% 1.9% 1.9% 1.9% Slippages Restructuring % of loan book 0.6% 0.5% 0.6% 0.6% 0.6% 5.5% -7.9% Gross slippages 1,610.0 4,490.0 1,330.0 1,890.0 2,520.0 56.5% 33.3% Recoveries+ Up gradations 1,430.0 5,590.0 1,260.0 1,570.0 1,730.0 21.0% 10.2% Slippages (Net Addition to GNPAs) 180.0 -1,100.0 70.0 320.0 790.0 338.9% 146.9% Slippages (%) 1.9% 1.5% 1.3% 1.2% 1.4% -25.4% Advances Break-Out Total Advances 638,470.0 687,880.0 722,430.0 782,940.0 821,670.0 28.7% 4.9% Corporate Credit 187,320.0 199,640.0 214,750.0 207,850.0 220,220.0 17.6% 6.0% SME 181,040.0 204,120.0 207,610.0 255,540.0 258,960.0 43.0% 1.3% Retail Advances 270,110.0 284,120.0 300,070.0 319,550.0 342,490.0 26.8% 7.2% Retail Advances Break-Out (% wise) Equipment Financing 10.4% 9.9% 9.4% 9.0% 8.9% Credit Card% 2.2% 2.5% 2.6% 2.8% 2.9% Vehicle loans 73.1% 71.9% 71.4% 71.4% 70.2% Loans agaist property 12.3% 13.0% 13.4% 13.6% 13.9% Others (Personal Loans & GL & BL) 2.1% 2.7% 3.1% 3.6% 4.1% Network ATMs 1,350 1,487 1,543 1,578 1,621 20.1% 2.7% Branches 727 801 811 854 905 24.5% 6.0%

INITIATING COVERAGE

BUY


Profit And Loss Statement (Rs mn)


Particulars FY14 FY15 FY16E FY17E FY18E Interest Income 82,535.3 96,919.7 116,025.8 143,349.3 175,105.6 % Growth 18.2% 17.4% 19.7% 23.5% 22.2% Interest Expended 53,628.2 62,716.9 70,817.3 83,662.3 99,382.4 % Growth 12.9% 16.9% 12.9% 18.1% 18.8% Net Interest Income 28,907.1 34,202.8 45,208.5 59,687.0 75,723.2 Net Interest Margin 3.8% 3.5% 3.7% 3.9% 3.9% Other Income 18,905.3 24,038.7 31,496.1 36,710.7 46,771.4 % of Interest Income 22.9% 24.8% 27.1% 25.6% 26.7% Total Income 47,812.4 58,241.5 76,704.6 96,397.7 122,494.7 % Growth 33.0% 21.8% 31.7% 25.7% 27.1% Operating & Other expenses 21,852.8 27,259.3 35,148.4 43,768.6 54,843.0 Pre-Prov. Operating Profit 25,959.6 30,982.2 41,556.2 52,629.1 67,651.6 Provisions and contigencies (incl NPA) 4,676.3 3,890.5 6,456.6 7,558.8 10,530.8 P&C % of Advances 0.8% 0.6% 0.7% 0.7% 0.8% Operating Profit before Tax 21,283.3 27,091.7 35,099.6 45,070.3 57,120.8 Growth % 35.0% 27.3% 29.6% 28.4% 26.7% Pre-tax Margin % 44.5% 46.5% 45.8% 46.8% 46.6% Tax 7,203.1 9,154.5 11,971.8 15,038.3 19,517.3 Effective Tax Rate % 33.8% 33.8% 34.1% 33.4% 34.2% Reported PAT 14,080.2 17,937.2 23,127.8 30,032.0 37,603.5 Net Profit Margin % 29.4% 30.8% 30.2% 31.2% 30.7% Growth in Adjusted PAT % 32.7% 27.4% 28.9% 29.9% 25.2% Extrodinary Income 0.0 0.0 0.0 0.0 0.0 Adjusted PAT 14,080.2 17,937.2 23,127.8 30,032.0 37,603.5 Shares In Issue (Dil.) 533.8 538.3 600.2 600.2 600.2 Adjusted EPS 26.4 33.3 38.5 50.0 62.6 Growth % 32.2% 26.3% 15.6% 29.9% 25.2%

Dividend paid 1,868.2 2,153.3 2,659.7 3,303.5 3,760.4 Dividend pay out ratio 13.3% 12.0% 11.5% 11.0% 10.0% Net profit transferred to Reserves Acccount 12,212.0 15,783.9 20,468.1 26,728.5 33,843.2

INITIATING COVERAGE

BUY



Balance Sheet (Rs mn)

Financial Ratios Financial Ratios

Particulars FY14 FY15 FY16E FY17E FY18E Cash and balance with Reserve Bank of India……..

44,139.2 40,351.4 61,617.8 75,972.0 95,512.3

Balances with banks and money at call and short notice

23,555.3 67,440.0 108,861.8 148,984.8 173,846.8

Investments 215,629.5 248,593.7 298,308.0 363,016.2 442,102.2 Advances 551,018.4 687,882.0 862,394.0 1,079,830.9 1,367,639.3 Fixed assets 10,164.5 11,575.8 13,967.1 16,227.1 17,729.6 Other assets 25,752.5 35,316.3 39,484.6 49,146.9 64,509.6 TOTAL ASSETS 870,259.3 1,091,159.2 1,384,633.2 1,733,177.8 2,161,339.7 Capital 5,366.6 5,435.0 6,002.0 6,002.0 6,002.0 Reserves and Surplus 85,063.0 101,010.3 172,288.4 199,016.9 232,860.1 Deposits 605,022.9 741,343.6 946,557.2 1,196,629.7 1,486,669.2 Borrowings 147,619.6 206,180.6 217,158.0 277,783.9 366,796.6 Other liabilities and provisions 27,187.3 37,189.6 42,627.6 53,745.2 69,011.7 TOTAL CAPITAL AND LIABILITIES…...……

870,259.3 1,091,159.2 1,384,633.3 1,733,177.8 2,161,339.7

DIFF 0.0 0.0 0.0 0.0 0.0

Particulars FY14 FY15 FY16E FY17E FY18E Return / Profitability Ratios (%) Net interest margin 3.77% 3.53% 3.70% 3.88% 3.92% Yield on advances 13.3% 12.5% 12.2% 12.0% 11.6% Yield on investments 7.2% 7.2% 6.7% 7.1% 7.1% EPS (Diluted) 26.4 33.3 38.5 50.0 62.6 RoA 1.8% 1.8% 1.9% 1.9% 1.9% RoE 16.9% 18.2% 16.2% 15.7% 16.9% Avg. Cost of Deposits 7.6% 7.7% 6.8% 6.3% 6.0% Operating ratios (%) Credit to Deposit 91.1% 92.8% 91.1% 90.2% 92.0% Cost to income 45.7% 46.8% 45.8% 45.4% 44.8% CASA 32.5% 34.1% 36.5% 38.7% 40.2% Investment / Deposit 35.6% 33.5% 31.5% 30.3% 29.7% Non interest income / Total income

39.5% 41.3% 41.1% 38.1% 38.2%

Capitalization Ratios (%) Equity / Assets 10.4% 9.8% 12.9% 11.8% 11.1% Loans / Assets 63.3% 63.0% 62.3% 62.3% 63.3% Investments / Assets 24.8% 22.8% 21.5% 20.9% 20.5% Dividend payout 13.3% 12.0% 11.5% 11.0% 10.0% Capital adequacy (%) Tier I (Rs mn) 85,510.0 99,750.3 178,290.4 205,018.9 238,862.1 Tier II (Rs mn) 7,540.0 7,760.0 9,312.0 11,174.4 13,409.3 Total capital (Rs mn) 93,050.0 107,510.3 187,602.4 216,193.3 252,271.4 Total risk wgt. assets (Rs mn) 672,600.0 889,290.0 1,145,109. 1,382,426. 1,669,830.7 Tier-1 capital adequacy ratio 12.7% 11.2% 15.6% 14.8% 14.3% Tier-2 capital adequacy ratio 1.1% 0.9% 0.8% 0.8% 0.8% Total capital adequacy ratio (Basel III)

13.8% 12.1% 16.4% 15.6% 15.1%

Particulars FY14 FY15 FY16E FY17E FY18E Asset Quality ratios (%) Gross NPA 1.1% 0.8% 0.8% 1.0% 1.1% Net NPA 0.3% 0.3% 0.2% 0.3% 0.3% Coverage Ratio 70.3% 62.6% 70.0% 70.0% 70.0% Slippage Ratio Per Share Data (Rs) EPS (Diluted) 26.4 33.3 38.5 50.0 62.6 DPS 3.5 4.0 4.4 5.5 6.3 BVPS 169.4 197.7 297.0 341.6 398.0 Adjusted BVPS 166.0 193.8 293.7 336.4 390.1 Valuation ratios (%) P/E (x) 33.1 26.2 22.7 17.5 14.0 P/BV (x) 5.2 4.4 2.9 2.6 2.2 P/ABV (x) 5.3 4.5 3.0 2.6 2.2 Growth Ratios (%) Advances 24.3% 24.8% 25.4% 25.2% 26.7% Deposits 11.8% 22.5% 27.7% 26.4% 24.2% Net interest income 29.5% 18.3% 32.2% 32.0% 26.9% Interest income 18.2% 17.4% 19.7% 23.5% 22.2% PAT 32.7% 27.4% 28.9% 29.9% 25.2% Operational data Profit per branch (Rs mn) 23.4 22.4 23.1 25.0 26.9 Business per branch (Rs mn) 1,920.3 1,784.3 1,809.0 1,897.1 2,038.8

es

24

INITIATING COVERAGE

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BUY Absolute Return >15%

Accumulate Absolute Return Between 10-15%

Hold Absolute Return Between 0-10%

Reduce Absolute Return 0 To Negative 10%

Sell Absolute Return > Negative 10%

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