retail finance[1]

8/4/2019 Retail Finance[1]

1/44

After a lull of two years, Indian retail finance industry is set for a smart turnaround. With less clutter and

focus on niches, pricing power has returned to lenders, and subventions paid to manufacturers/ dealers

have been cut drastically. In-house sourcing of loans and collection has also tilted the risk-reward in favor

of lenders. Importantly, emergence of the credit bureau goes a long way in protecting asset quality. The

tribulations of the recent past, we believe, would prompt a rational stance on pricing. We expect the huge

latent demand and a rebound in profitability to drive 25% CAGR in annual disbursements to a whopping

Rs4.9trn over FY10-13. Within the space, we prefer lenders with strong product understanding, cost

efficiencies or presence in niche geographies. Private sector banks like IndusInd Bank and HDFC Bank

and specialized NBFCs like Shriram City Union, Bajaj Finance, Mahindra Finance and Shriram Transport

fit the bill. The ongoing mayhem in the markets offers a good opportunity to play this long-term theme.

Retail finance shining again! Predatory competition, high reliance on DSAs, willful defaults due to

regulatory forbearance and the economic downturn had taken the sheen off the lucrative retail finance

industry (8% CAGR over FY08-10; ~50% over FY05-08). As profitability eroded, many players were forced to

close shop. With this, competitive intensity is lower and, hence, incumbents as also new players can be

expected to adopt a reasonable stance on pricing.

Profitable growth ahead: Return of pricing power to the lenders and changed mechanics of sourcing and

collections (negligible subventions and in-house origination of loans) have turned the risk-reward in favor of

lenders. With huge latent demand, we see 25% CAGR in disbursements over FY10-13 with mortgages

remaining the largest contributor (~55% of the mix in FY13).

Niche business models offer a combination of growth and value: Financiers that offer cost efficiency, strong

product understanding or are present in niche geographies will be the key beneficiaries of the upturn in retailfinance industry. In this backdrop, IndusInd Bank, HDFC Bank, Shriram City Union, Bajaj Finance, Mahindra

Finance and Shriram Transport offer tremendous growth potential as also high visibility on earnings. With the

recent steep correction in stock prices (25-30% over the past three months), we see them as bargain bets.

INDIA RESEARCH

IT services

IDFC Securities Ltd.Naman Chambers, C-32, G- Block, Bandra-Kurla Complex, Bandra (East), Mumbai 400 051 Tel: 91-22-6622 2600 Fax: 91-22-6622 2501

SEBI Registration Nos.: INB23 12914 37, INF23 12914 37, INB01 12914 33, INF01 12914 33

For Private Circulation only Important disclosures appear at the back of this report

22 February 201

BSE Sensex: 1829

Retail FinanceLife comes full circleFinancials

Key valuation metrics

Price Mkt Cap 2yr EPS cagr RoE (%) PE (x) P/Adj. Book Value

21st Feb 2011 (Rs bn) FY11E-FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

Bajaj Auto Finance 634 23 35.9 17.9 21.4 23.4 9.8 7.0 5.3 1.8 1.5 1.2

HDFC 648 943 19.0 21.4 22.2 23.1 27.1 22.9 19.1 5.5 4.8 4.1

HDFC Bank 2,202 1,012 31.3 17.0 19.1 21.5 25.8 19.8 14.9 4.0 3.5 2.9

ICICI Bank 1,038 1,194 25.8 9.9 11.8 13.5 22.7 17.7 14.4 2.2 2.0 1.9Indusind Bank 230 107 33.8 19.4 19.2 21.7 18.5 13.6 10.3 2.8 2.4 2.0

Mah & Mah Finance 719 70 28.3 22.2 21.8 22.7 15.7 12.1 9.5 2.8 2.3 1.8

Shri Ram Transport 764 172 29.4 28.3 29.4 29.5 14.0 10.6 8.4 3.5 2.7 2.2

Shriram City Union Finance 510 25 28.8 22.4 24.2 24.9 10.3 7.8 6.2 2.1 1.6 1.3

State Bank of India 2,792 1,772 22.3 16.5 17.7 18.6 15.3 12.4 10.2 1.9 1.6 1.3

Source: IDFC Securities Research and Bloomberg

Pathik [email protected] 2525

Chinmaya [email protected] 2563

Kavita [email protected] 2558

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2/44

FEBRUARY 2011 2

IDFC Securities

CONTENTSInvestment Argument .....................................................................................................3

Retail Finance FY03-09: Boom and bust.........................................................................3

However, Pricing Power is Back with Financiers.........................................................6

A BIG MarketGetting BIGGER ...................................................................................9

Identifying the Target Populace ...................................................................................11

The Beneficiaries .............................................................................................................13

The Retail Loan Market ...............................................................................................16

Gold loans: Increasing share of organized players to drive growth........................17

Mortgages: A lucrative opportunity ............................................................................18

CV loans: Piggy riding the economic rebound...........................................................19

Auto loans: Low asset penetration to drive growth...................................................20

2-wheelers loans: Momentum to sustain .....................................................................21

Consumer durables: Changing business dynamics ...................................................22

Credit cards: Outstandings to rise................................................................................23

Personal loans: Treading the growth path again ........................................................24

Companies .....................................................................................................................25

Bajaj Auto Finance ..........................................................................................................26

HDFC................................................................................................................................28

HDFC Bank......................................................................................................................30

ICICI Bank .......................................................................................................................32

Indusind Bank ................................................................................................................. 34

Mahindra & Mahindra Finance ....................................................................................36

Shri Ram Transport ........................................................................................................38

Shriram City Union Finance..........................................................................................40

State Bank of India..........................................................................................................42




3/44

FEBRUARY 2011 3

IDFC Securities

INVESTMENT ARGUMENT

The shakeout of FY08-10 has reduced competition in retail financing and

imparted pricing power to incumbents

Changed mechanics of sourcing and collections have turned the risk-reward infavor of lenders

Consumption is rising owing to higher income levels; asset penetration

remains low (~30% for 2-wheelers and 21% for passenger cars) a key positive

Huge underlying demand and a rebound in financiers profitability should

spur 25% CAGR in retail finance disbursements over FY10-13 to ~Rs4.9trn

New private sector banks (IndusInd Bank and HDFC Bank) and specialized

NBFCs (Shriram City Union Finance, Bajaj Finance, Mahindra Finance and

Shriram Transport) our key picks to play the potential boom

Exhibit 1: Retail finance from boom to bust to recovery

Source: IDFC Securities

Retail Finance FY03-09: Boom and bust

Falling interest rates, increased availability of finance and favorable changes in

income demographics led to a boom in Indias retail finance in FY03-08. However,profitability plummeted as intense competition dented yields. Also, reliance on DSAs

for loan origination, RBIs regulatory forbearance on recoveries triggering willful

defaults and the cyclical downturn in the economy led to a sharp rise in credit costs.

As a result, growth fell to just 8% CAGR over FY08-10 vs ~50% CAGR over FY05-08.

A dream run in FY03-08

Retail consumer finance space expanded by a whopping 50% CAGR over FY03-08

driven by structural factors including; (i) increasing household incomes, (ii) higher

product affordability, (iii) falling interest rates and thereby attractive financing

options, (iv) low asset penetration, and (v) favorable age demographics. Besides, the

2.0%

6.0%

10.0%

14.0%

18.0%

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY10

Personal loans /durable loans Two-wheelers

The Bust

Fierce pricing wars amongst competitors

grossly mispriced products

Compromise on prudent lending practices

Faulty sourcing strategy

The Comeback

Limited competition stable

yields

Revamped sourcing and

collections driving down

potential loan losses

Emergence of credit bureau -

a game changer

The aftermath

Interest ratesinch-up driving

up

delinquencies

The Boom

Changing income demographics high income

groups growing faster

Underpenetrated consumer finance sector

banks make entry into an NBFC dominated

space

Falling interest

rates to end-

consumers; entry ofcompetition

Declined productprofitability Players exit

business

Improvedproduct

profitability

GE Countrywide, ICICI Bank, Citifinancial, Stanchart-

Grindlays, Bajaj Auto Finance (BAF), Ashok LeylandFinance, HDFC Bank, HSBC, certain PSU Banks, SCUF,

Ford credit (Kotak Primus)

Certain PSU Banks, BAF,

HDFC Bank, SCUF

Regulatory forbearance against forceful collection of dues triggers willful

defaults in certain segments

DSA-led model for loan sourcing

CIBIL lending only to eligible

customers potentiallyreduced loan loss rates

In-house loan sourcing as well

as collections

Players

Dynamics




4/44

FEBRUARY 2011 4

IDFC Securities

influx of banks in the consumer loan segments facilitated availability of cheap finance

and further catalysed the boom.

Exhibit 2: Consumer loans clocked 50% CAGR that doubl ed their share to ~25% of bank credit over FY03-08

Source: RBI

But lure of high returns

In the initial years (FY03-04), retail loan products offered far superior risk-adjusted

returns than corporate loans (especially top-tier), which encouraged banks to increase

share in this fast expanding market. With competitive rates offered on such products,

banks gained ground in a considerably short time span. While new NBFCs were also

foraying into the business, banks armed with a wider reach took market share

away from incumbent NBFCs. Besides personal loans, private banks started offering

loans for low-ticket items like consumer durables and 2-wheelers. At the same time,

state-owned banks became more aggressive in the car and mortgage loan segments.

Exhibit 3: Product profitability envisaged in 2003

As % of average assets Mortgages Car loans 2-wheeler loans Personal loans Credit cards

Yield 11.0 13.3 22.0 17.0 23.5

Interest cost (loaded for SLR/ CRR) 6.7 6.7 6.7 6.7 7.0

Lending spread 4.3 6.6 15.3 10.3 16.5

Yield on net worth* 0.4 0.7 0.7 0.7 0.7

Net interest margin 4.7 7.3 16.0 11.0 17.2

Fees/Commissions 0.5 - - 1.0 2.0

Total revenues 5.2 7.3 16.0 12.0 19.2

Operating expenses 2.5 3.2 7.5 5.0 8.0

of which DSA commissions 1.2 1.2 2.0 4.0

Provisions 0.3 1.0 3.0 3.0 6.0

PBT 2.4 3.1 5.5 4.0 5.2

Tax 0.7 0.9 1.7 1.2 1.6PAT 1.7 2.1 3.9 2.8 3.6

Leverage (x) 19 10 10 10 10

Tier I CAR 10 10 10 10 10

RoE 34 24 42 31 40

Risk weight 50 100 100 100 100

Source: IDFC Securities Research

Outstanding consumer loans for Indian Banking system

0

1500

3000

4500

6000

FY03 FY04 FY05 FY06 FY07 FY08

(Rs bn) Outstanding consumer loans for Indian Banking system

0

1500

3000

4500

6000


(Rs bn) Consumer loans as % of non-food credit

0

8

15

23

30


(%) Consumer loans as % of non-food credit

0

8

15

23

30


(%)




5/44

FEBRUARY 2011 5

IDFC Securities

led to predatory competition

The influx of numerous players in the consumer finance market led to intense

competition, and thereby pricing wars. As a result, yield on consumer assets tumbled

by 300-400bp over FY03-07. Dealer and manufacturer subventions (which increased

up to 5% of loans sourced) further affected yields. The lower lending rates, in turn,

mispriced the risk inherent in these products.

Delinquencies soar

Regulatory changes prevented forcible recoveries through agents and triggered

willful defaults. A spike in interest rates from FY08 exacerbated loan losses. Across

the industry, unsecured portfolios turned bad while delinquencies also rose in the

consumer durables segment. Delinquencies for some of the inefficient players soared

to ~10% of the overall consumer portfolio with the industry average at 5-6%.

Outsourced origination and dilution of lending standards

To garner a higher market share, financiers started relying heavily on outsourced

channels for loan origination. Outsourced agents (DSAs and DMAs), compensated

with hefty commissions at the time of disbursement (up to 3% of assets sourced),

paid little heed to the quality of borrowers. Focus on market share also led to lax

underwriting standards without enough regard for the borrowers repayment

capability.

Regulatory forbearance on recovery practices

After a spate of arm-twisting tactics adopted by bank recovery agents on defaulting

borrowers, the RBI prohibited the use of recovery agents (forceful collections) on

such cases. This left banks with little recourse on unsecured loans and set off willful

defaults on products like credit cards, personal loans, 2-wheelers, consumer durables.

As a result, delinquencies rose to as high as 20-30% in some of these portfolios.

Exhibit 4: Surge in delinquencies Profitabili ty plummeted


Growth potential and lucrativereturns led to influx of myriad

players in the space

Landscape turned ugly withunsecured loans turning bad

and delinquencies rising inconsumer durables

Unsavory practices likeforcible recoveries prompted

the RBI to intervene

Delinquencies in consumer durables & personal loans

8.0

14.9

3.6

3.0

0.0

4.0

8.0

12.0

16.0

2006 2007 2008 2009

(%) Product RoA

3.6

1.5

3.92.8

1.91.2

(1.6)(0.6)

(0.2)

-2.0

3.0

8.0

13.0

Personal Loans 2 Wheelers Credit Cards

FY03 FY06 FY08 FY10

12.0

(%)




6/44

FEBRUARY 2011 6

IDFC Securities

However, Pricing Power is Back with Financiers

Competition in consumer financing space stands reduced significantly which has

meant return of pricing power to financiers. New entrants, only a handful so far,

have not been predatory and the stance is likely to be maintained in view of the

industrys fresh-in-mind experience. Higher yields, changed sourcing mechanics

and lower operating expenses have turned the risk-reward in favor of financiers.

Consolidation in the industry

Stress on yields (a function of competition), higher operating expenses (DSA

commissions and dealer payouts) and credit costs sharply eroded retail financiers

profitability. Losses soared in these portfolios with some lenders taking write-offs till

as late as FY10. Saddled with losses in multiple consumer portfolios, many players

chose to exit the business.

imparts pricing power to financiers

Pricing has improved significantly due to reduced competition and the cautiousstance adopted by incumbents. With players focusing on profitability, product yields

now build in high operating costs as also credit losses, recognizing the inherently

risky nature of consumer lending. This is evident from the fact that even as funding

costs fell to multi-year lows in FY10, players still did not relent on pricing.

Exhibit 5: Product yields have rebounded

2.0

6.0

10.0

14.0

18.0


Personal loans / durable loans Two-wheelers

Source: Industry estimates; IDFC Securities Research

In-house sourcing check on credit costs

Having realized the perils of the DSA model, players are now entrusting sourcingand collections to their own staff. These employees are generally housed in a separate

subsidiary, which enables the lenders to control credit quality, as agents are paid on

business acquired as well as serviced. The role of DSAs, thus, has been significantly

curtailed.

In-house sourcing as againstDSAs earlier ensures bettecredit quality

Benign competition andprudent strategies have

increased financiersprofitability

Many NBFCs and some largeprivate banks went downunder in these portfolios




7/44

FEBRUARY 2011 7

IDFC Securities

Exhibit 6: The proportion of loans sourced through DSAs has come off significantly

DSA expense (% of loans)

1

2

3

3 3 3

2

1

0.0

0.7

1.4

2.1

2.8

3.5


(%)


Check on sourcing costs

Subventions paid to manufacturers and dealers have disappeared as financiers have

realized that product profitability leaves no room for such paybacks. The Indian

market is gradually moving towards the global practice of manufacturer subsidizing

financier to reduce end-consumer borrowing costs (rather than vice versa). Fees

charged on disbursements now largely compensate for sourcing costs.

Exhibit 7: Subventions have declined

5,000

6,500

5,000

3,000

5.0

4.0

2.0

1.8

0

1,700

3,400

5,100

6,800

FY03E FY08E FY09E FY10

0.0

1.5

3.0

4.5

6.0

Manufacturer subventions per car (Rs - LHS) Dealer payouts (% - RHS)


Extensive use of credit bureau curtails willful defaultsCredit bureaus (the biggest being CIBIL) have gained significant relevance in the past

few years. CIBIL has ~90m customers and ~160m consumer trade lines that cover

most of the borrower populace in the top 50 cities of India. While CIBILs penetration

is still low in commercial lending (~45%), it is improving as members contribute to

the database. Financiers increasing reliance on credit bureau reports is leading to a

substantial reduction in potential loan loss rates. Hit rates for credit records have

crossed 70% in certain segments (~20% two years ago) and CIBIL reports are

emerging as a primary eligibility criterion in the consumer financing segment.

CIBILs extensive databasehas been critical in helping

lenders take effective creditdecisions

Manufacturer subsidizing

financier model has helpedreduce costs for the borrower




8/44

FEBRUARY 2011 8

IDFC Securities

The database covers credit history and credit score of customers, which can be

accessed by the lenders. With an instant query to CIBIL, lenders can now ensure that

customers have the right credit history. Use of CIBIL reports deters concurrent

borrowings and serial defaulters, enabling informed and objective credit decisions.

CIBIL the largest credit bureauPromoted by SBI and HDFC (40% stake each), D&B Information Services (10%) and TransUnion International (10%),

Credit Information Bureau of India (CIBIL) was established in 2002 on the recommendations of a working group of

RBI. TransUnion and Dun & Bradstreet are the equity and technical partners respectively. The shareholding pattern

has now been diversified to include various entities representing varied categories of credit grantors. CIBILs business

model is based on the principle of reciprocity, which means that only members that have submitted all their credit

data may access credit information reports from CIBIL.

As of September 2010, CIBIL had an information base of ~160m consumer trades and 6m commercial trades. CIBIL

now has a member base of 280+ institutions including banks, FIs, NBFCs, credit card companies, Housing Finance

Companies and state financial institutions. CIBIL has enabled lenders to access centralized, comprehensive and

reliable borrower information, thereby enabling them to make informed decisions. Members send their data on a

monthly/ quarterly basis to CIBIL in a specific format.

The promise of higher profitability

A revamped sourcing model and benign competition have imparted strong pricing

power to financiers which, along with lower loss rates and curtailed opex, has driven

a marked improvement in profitability in the consumer finance space. RoEs on

consumer loans now range from 20% to 60%. Going forward, we expect that the

fresh in mind outcome of cut-throat competition would prompt players to maintain

a rational stance on pricing even as new players enter the business.

Exhibit 8: Product profitability has seen a marked improvement

(%) Mortgages LAP Cars Consumer Durables Personal Loans (cross sell) 2 wheelers

Yield 9.5 11.8 10.5 27.0 33.0 24.0

Interest cost 7.0 7.0 7.0 7.0 7.0 7.0

Lending spread 2.5 4.8 3.5 20.0 26.0 17.0

Yield on net worth 0.5 0.5 0.5 0.5 0.5 0.5

NIM 3.0 5.3 4.0 20.5 26.5 17.5

Fees 0.2 1.2 1.0 0.0 0.7 1.5

Total revenue 3.2 6.5 5.0 20.5 27.2 19.0

Operating expenses 0.8 2.3 2.0 15.0 5.0 10.0

Provisions 0.5 0.4 1.0 4.0 7.0 4.0

PBT 2.0 3.8 2.0 1.5 15.2 5.0

Tax 0.6 1.3 0.7 0.5 5.0 1.7

PAT 1.3 2.5 1.3 1.0 10.2 3.4Tier I CAR 9.0 9.0 9.0 15.0 15.0 15.0

Risk weight on loans 75.0 100.0 100.0 125.0 125.0 125.0

Leverage 14.8 11.1 11.1 5.3 5.3 5.3

RoE 20.7 30.8 16.2 6.4 64.5 21.2





9/44

FEBRUARY 2011 9

IDFC Securities

A BIG Market Getting BIGGER

With one of the worlds youngest population, India offers a perfect ground for

growth of retail finance. Though improving income demographics, and thereby

higher affordability, have led to a rise in penetration of retail assets it remains low.

We expect the huge untapped demand and rebound in profitability for financiers tospur a boom in retail finance in the coming years. We expect annual disbursements to

clock a high 25% CAGR over FY10-13 to a significant ~Rs4.9trn in FY13.

Young population, with a huge appetite for spending

About 480m Indians (41% of the population) are between 15 and 40 years of age and

have high material aspirations unlike their previous generations. Traditionally, most

Indians have been wary of credit. That is changing as young people take loans to buy

things they cannot otherwise afford.

Exhibit 9: Burgeoning midd le income HHs ideal market for retail loans!

Source: Asian Demographics; IDFC Securities Research

Higher-income bracket growing faster

Over the past couple of years, household incomes have grown on the back of the 8-

9% GDP growth. Meanwhile, income distribution has significantly changed, with

higher-income categories growing much faster than lower income ones. This creates a

large and growing base of middle and upper income households an ideal target

market for retail loans. The number of households in the lowest category has

declined in absolute terms from 41m to 31m over FY05-10. According to Asian

Demographics, the two lowest income categories should decline from 46% of the total

to 36% over the next five years.

Improving affordability leads to higher demand

Over the past five years, the increase in per capita income and reduction in prices of

entry level consumer durables have led to a surge in addressable households for such

products.

17.1 18.1 12.8 11.2 9.3

39.4 39.7

33.230.6

27.0

31.0 30.0

35.236.5

37.6

7.5 7.310.6 11.9

13.9

4.1 4.0% 6.6 7.7 9.6

0.5 0.5% 0.8 1.0 1.30.4 0.4% 0.8 1.0 1.4

0

25

50

75

100

2000 2005 2010 2012 2015

0 - 54,381 54,382 - 108,763 108,764 - 217,526 217,527 - 326,289

326,290 - 652,578 652,579 - 870,104 870,105 plus2010

0 to 14

31%

15 to 24

18%

65 plus

6%

25 to 64

45%

A credit-hungry youngergeneration spells betterdynamics for financiers

Middle and high incomehomes, the ideal target spacefor retail loans, are increasing

Proportion of HHwith annual incomebelow Rs10m fallingto 36% from 46% over

FY10-15




10/44

FEBRUARY 2011 10

IDFC Securities

Exhibit 10: Asset prices stable affordability rising


Asset penetration is still low

The target population is still significantly underpenetrated. Penetration has been low

so far given the largely credit-averse mindset of the Indian populace and because

loans have not been easily available at affordable rates. Penetration levels in most

asset products have been expanding over the past six years but there is a lot of room

to grow.

Exhibit 11: Penetration leaves ample scope to expand


Penetration of finance in cars

and 2-wheelers still offersscope for growth in the next

few years

Weighted avg vehicle price (adjusted for inflation)

3.2

2.8

2.6 2.72.7

2.5

2.3 2.1

2.0

0.0

0.7

1.4

2.1

2.8

3.5

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

(Rs m)

Prices (Rs) FY05 FY10

Color TVs 20,000 6,000

Refrigerators 12,000 7,000

ACs 20,000 20,000

Washing Machines 17,000 12,000

Cars penetration in India

1620

21

0.0

7.5

15.0

22.5

FY05 FY10 FY12E

(%)

20

25

28

27

38

43

22

30

33

0.0 10.0 20.0 30.0 40.0 50.0 (%)

FY05

FY10

FY12E

Rural Urban Total

1.6

122.0

10.0

235.0

0

50

100

150

200

250

India Korea Malaysia USA

Credit cards / total population(%)

Mortgage/ GDP

7

26

29

84

0

30

60

90

(%)

India Korea Malaysia USA




11/44

FEBRUARY 2011 11

IDFC Securities

Identifying the Target Populace

Mapping retail loan products to households

Based on disposable income of each category of consumers, we have identified the

target population for retail finance products. Most financiers also have internal

qualification norms stipulating minimum household income and debt servicingcapacity.

Exhibit 12: The affordability matrix target households for retail products

HH income (Rs p.a.) Financial products that can be marketed

0 - 54,000 Top 35% for consumer durables and 2-wheelers

54,000 110,000 Mortgages, 2-wheelers, consumer durable loans

110,000 - 220,000 Personal loans, consumer durables, mortgages, 2-wheelers, cars

220,000 - 330,000 All products

330,000 650,000 All products

650,000 - 870,000 All products except loans for small-ticket durables that may be bought without

financing

870,000 plus All products except loans for small-ticket durables & 2-wheelers that may bebought without financing


Loan installment for products

Our discussions with financiers indicate that they look for a loan installment to gross

income ratio of 35-50%. The lower end of this range is for smaller assets like

consumer durables and 2-wheelers, which may not be as necessary as a mortgage.

Mortgage financiers typically stipulate an income to installment ratio of 50%. This

ratio is often higher for high-value loans (e.g., cars) as many borrowers (especially

small businessmen) have large amounts of unaccounted income which financiers

factor in to determine their debt-servicing capacity.

Exhibit 13: Monthly installments for various products

Installment Loan amount Tenor IRR Min annual income Fraction to service loan

(Rs) (years) (%) of target HH (Rs) (%)

Mortgages 2,418 225,000 15.0 10.0% 64,476 45%

Car loans 4,948 225,000 5.0 11.5% 197,933 30%

Two-wheelers 871 23,450 3.0 20.0% 34,859 30%

Consumer durables 768 8,000 1.0 27.0% 46,088 20%


Quantifying the target populace

We have quantified the target segment based on the income distribution ofhouseholds. We have taken a part (or whole) of each segment depending on the

ability to repay loans. In the lowest income category, only the top 35% represent a

target market for retail loans, and that too only for consumer durables and 2-

wheelers.

Financiers set qualifiers basedon minimum income and debt

servicing capacity




12/44

FEBRUARY 2011 12

IDFC Securities

Exhibit 14: Mapping the retail loan products to target households

Household income

(Rs p.a.) % HH Average Avg monthly Max Inst as Target Households (%)

(m #) income inc a % of Inc Mortgages Cars 2w CD PL CC

0 - 54,000 12.8 31.3 27,191 2,266 25 - - 35 15 - -

54,000 110,000 33.2 81.2 81,573 6,798 35 80 - 100 100 - -

110,000 - 220,000 35.2 86.1 163,145 13,595 40 100 15 100 100 50 -

220,000 - 330,000 10.6 26.0 271,908 22,659 40 100 100 100 100 100 100

330,000 450,000 3.9 9.6 380,671 31,723 40 100 100 100 100 100 100

450,00 - 650,000 2.7 6.5 543,815 45,318 40 100 100 100 100 100 100

650,000 - 870,000 0.8 2.0 761,341 63,445 50 100 100 100 - 100 100

870,000 plus 0.8 2.0 1,000,000 83,333 50 100 100 - - 100 100


A large and growing target population

We have identified a target population for retail loans for each class of assets based

on the criteria already discussed. The target population for retail loan products has

been expanding at 8-15% across various retail asset products. We estimate 10-15%CAGR in the target population across categories over the next couple of years. This is

likely to be driven by a burgeoning middle class, changing income demographics and

an increasing propensity to take credit.

Exhibit 15: A huge target population base

Target HH (m)

Finance product FY05 FY10 FY13E

Mortgages 185.5 197.3 202.2

Cars 54.8 59.1 73.2

2-W 192.7 222.5 235.4

CD 201.9 214.2 228.2PL 61.6 89.2 127.0

CC 61.6 46.1 56.3


Disbursements to register 25% CAGR over FY10-13E

We expect 25% CAGR for the retail finance market over the next two years, led by

robust demand for mortgages, car loans and 2-wheelers. Backed by CIBIL, we also

expect unsecured segments like credit cards and personal loans to increase gradually.

Consumer durables financing will also continue to grow, though slower due to the

limited number of financiers and short tenure of the products.

Target segment for retailloans has been expanding




13/44

FEBRUARY 2011 13

IDFC Securities

Exhibit 16: Retail finance disbur sement growth to accelerate


The Beneficiaries

Among the prime requirements for succeeding in the retail finance business are a

well-managed cost structure, relationships with borrowers/ manufacturers, presence

in rural and semi-urban areas (characterized by under-developed banking habits)

and robust operating processes. Tight control on operating costs and lower credit

defaults would ensure profitability even in low-yield segments like mortgage.

Growth with profitability to drive valuations

We like financiers that offer either cost efficiency or strong product understanding, or

have established presence in niche geographies. Such competencies empower thelenders to pass on higher costs to borrowers and maintain profitability across

business cycles. Therefore, we prefer new private sector banks and specialized

NBFCs to ride the opportunity in the sector. These players, we believe, offer

tremendous growth potential with high visibility on earnings.

Current valuations offer an attractive opportunity to accumulate

The stocks have corrected sharply (25-30%) over the past couple of months, and are

now trading at their long-term average valuations. Prevailing concerns over margin

sustainability as also growth, we believe, are overplayed and, after the recent

correction, valuations are extremely attractive.

FY10

CVs12.8%

Mortgages55.3%

Car finance

12.6% UtilityVehicles

3.7%

2 Wheelers3.5%

Credit cards8.2%

Personal Loans3.2%

Consumerdurables0.7%

We believe players with strongcost structures and presence

in under-penetrated areasstand the best chance to win

Concerns are overdone andcurrent valuations are very

attractive; accumulate

FY13E

CVs13.7%

Mortgages55.4%

Car finance

13.2%Utility Vehicles

4.1%

2 Wheelers3.1%

Credit cards6.6%

Personal Loans2.9%

Consumerdurables

1.0%




14/44

FEBRUARY 2011 14

IDFC Securities

Exhibit 17: Valuations off their peaks


Our preferred picks

We reiterate our positive bias and recommend accumulating these stocks to play the

long-term growth potential of the retail finance industry. New private sector banks

(e.g., IndusInd Bank and HDFC Bank) and NBFCs (Shriram City Union Finance, Bajaj

Finance, Mahindra Finance and Shriram Transport) are our key picks to play the

potential upturn in retail finance.

0.0

1.0

2.0

3.0

4.0

5.0

Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Feb-11

Axis Bank PB (x) Average

0.0

1.5

3.0

4.5

6.0


HDFC Bank PB (x) Average

0.0

0.5

1.0

1.5

2.0

2.5


SBI PB (x) Average

0.0

1.0

2.0

3.0

4.0

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Feb-11

ICICI Bank PB (x) Average

0.0

0.5

1.0

1.5

2.0

Mar -04 Mar -05 Mar-06 Mar-07 Mar-08 Mar -09 Mar-10 Feb-11

PNB PB (x) Average

0.0

0.5

1.0

1.5

2.0

Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Feb-11

Union PB (x) Average

Axis Bank 1 yr fwd P/B (x) HDFC Bank 1 yr fwd P/B (x)

SBI 1 yr fwd P/B (x) ICICI Bank 1 yr fwd P/B (x)

Pun ab National Bank 1 r fwd P/B x Union Bank 1 r fwd P/B x




15/44

FEBRUARY 2011 15

IDFC Securities

Exhibit 18: Valuation metrics

Price Mkt Cap 2yr EPS cagr RoE (%) PE (x) P/Adj. Book Value

21st Feb 2011 (Rs bn) FY11E-FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E

Bajaj Auto Finance 634 23 35.9 17.9 21.4 23.4 9.8 7.0 5.3 1.8 1.5 1.2

HDFC 648 943 19.0 21.4 22.2 23.1 27.1 22.9 19.1 5.5 4.8 4.1

HDFC Bank 2,202 1,012 31.3 17.0 19.1 21.5 25.8 19.8 14.9 4.0 3.5 2.9ICICI Bank 1,038 1,194 25.8 9.9 11.8 13.5 22.7 17.7 14.4 2.2 2.0 1.9

Indusind Bank 230 107 33.8 19.4 19.2 21.7 18.5 13.6 10.3 2.8 2.4 2.0

Mah & Mah Finance 719 70 28.3 22.2 21.8 22.7 15.7 12.1 9.5 2.8 2.3 1.8

Shri Ram Transport 764 172 29.4 28.3 29.4 29.5 14.0 10.6 8.4 3.5 2.7 2.2

Shriram City Union Finance 510 25 28.8 22.4 24.2 24.9 10.3 7.8 6.2 2.1 1.6 1.3

State Bank of India 2,792 1,772 22.3 16.5 17.7 18.6 15.3 12.4 10.2 1.9 1.6 1.3

Source: Bloomberg and IDFC Securities Research

Exhibit 19: The Indian retail fin ance market a snapshot

(Rs bn) Annual disbursements FY08-10 Major financiers/ Market Annual disb ursements FY10-13E

FY10 CAGR (%) share (%) FY10 FY13E CAGR (%)

Car finance

Car sales value (Rs bn) 822 16 HDFC Bank: 30-35% 1,541 23

Finance penetration (%) 68 SBI: 25-30% 71

Car finance market (Rs bn) 415 ICICI Bank: 10-12% 850 27

yoy growth (%) 40 8 23

Housing finance

Organized housing finance 1,404 9 HDFC: 23% 2,720 25

market (Rs bn) SBI: 25%

ICICI Bank: 12%

LIC Housing: 11%

Personal loans

Personal loans (Rs bn) 80 26 HDFC Bank: 40-45% 143 21

SBI: 20%

Credit cards

Annual spends (Rs bn) 618 3 ICICI bank: 27% 1,005 18

Credit card loans outstanding (Rs bn) 207 4 HDFC Bank: 22% 322 16

SBI: 10%

Axis Bank: 3%

Two-wheelers

Sales (Rs bn) 375 17 HDFC Bank, Bajaj Finance 679 22

Financing penetration (%) 35 IndusInd Bank, Kotak Bank 32

Two-wheeler credit (Rs bn) 88 (9) SCUF 152 20

Commercial vehicles

Sales (Rs bn) 409 3 HDFC Bank, ICICI Bank 801 25

Financing penetration (%) 96 SBI, IndusInd Bank, Sundaram Finance 97

CV credit (Rs bn) 324 (1) Tata Motor Fin, Shriram Transport 671 27Consumer durables (AC/ refrigerator/ CTV)

Sales (Rs bn) 263 13 Bajaj Finance: 50-60% 429 18

% financing 7 11

Consumer durable financing (Rs bn) 18 13 47 37

Total annual retail asset market (Rs bn) 2,538 8 4,906 25





16/44

FEBRUARY 2011 16

IDFC Securities

THE RETAIL LOAN MARKETSIEmergingMarketsPDF in-ladderup from 122.169.101.224 on 2011-09-19 07:35:27 EDT. DownloadPDF.



17/44

FEBRUARY 2011 17

IDFC Securities

Gold loans: Increasing share of organized players to drive grow th

Industry sources estimate a stock of ~20,000 tonnes of gold with Indian households, of which ~10% is expected to have

been monetized in the form of gold loans. Of this, organized financiers penetration (NBFCs and banks) is estimated at

only ~25% while the remaining 75% lies with unorganized money lenders and pawn brokers. Going forward, as

NBFCs and banks penetrate deeper into rural and semi-urban geographies, a significant portion of this market is

expected to move from unorganized to the organized segment. While the recent RBI directive excluding gold loans

from agriculture loans for the purpose of priority sector lending is likely to impact NIMs of NBFCs, growth rates are

unlikely to be impacted materially. We expect organized market to see ~27% CAGR over FY10-13E to reach a portfolio

size of Rs1,259bn.

The organized market is dominated by players such as Manappuram Finance, Muthoot Finance, Shriram City Union

Finance and select banks. Decline in gold prices and slower growth remain the key risks to valuations of these

financiers.

Exhibit 20: Growth rates to be sustained

Source: Manappuram, IDFC Securities Research

Exhibit 21: NBFCs have an edge over banks


Organized market share (Rs bn)

416

616

798

1,017

1,259

0

300

600

900

1200

1500

2009 2010 2011E 2012E 2013E

Organized players 25% market share

Specialized NBFCs Manappuram & Muthoot Finance

Other NBFCs SCUF, Reliance Consumer Finance,

Mahindra & Mahindra Finance

Banks Indian Bank, Indian Oversees Bank, Federal Bank

Cooperative banks

Organized players 25% market share

Specialized NBFCs Manappuram & Muthoot Finance

Other NBFCs SCUF, Reliance Consumer Finance,

Mahindra & Mahindra Finance

Banks Indian Bank, Indian Oversees Bank, Federal Bank

Cooperative banks

(% ) NBFCs Bank

Yield 24.0 12.0

Interest cost 10.0 5.0

Lending spread 14.0 7.0

NIM 15.0 7.0

Fees - 0.2

Total revenue 14.0 7.2

Operating expenses 7.0 2.5

Provisions 0.5 0.5

PBT 6.5 4.2

Tax 2.1 1.4

PAT 4.4 2.8

27%CAGR FY10-13E

Higher interest rates in lieu of

Lower turnover time

Cash disbursal ability

Minimum documentation

Host of product features

Segment more profitable forNBFCs

Provisions expensesremain low due to highliquidity value ofunderlying collateral

Market size: Rs.1,259bn (FY13E)

FY10-13E CAGR: 27%

IRR: 24-25%

Market size: Rs.1,259bn (FY13E)

FY10-13E CAGR: 27%

IRR: 24-25%




18/44

FEBRUARY 2011 18

IDFC Securities

Mortgages: A lucrative opportunity

Though the housing industry is flourishing, supply has generally lagged demand led by; (i) rising disposable incomes,

(ii) increasing nuclearization of families, and (iii) easy availability of finance and tax sops. Housing shortage in India is

estimated to be ~80m units (20.5m units of urban and 59m units of rural housing) as of end-2010. After a minor blip in

2009, housing finance segment grew rapidly in FY10 supported by favorable interest rates, increase in transaction

volumes and increasing property prices. We expect socio-economic changes like rapid urbanization, shrinking size of

families and rising consumer affordability to be the key drivers affecting volume growth and, hence, housing finance

demand in the long term. We expect mortgage disbursements to increase at ~25% CAGR over FY11-13.

Exhibit 22: Housing short age in India estimated at 79.7m uni ts by end-2010

Urban housing shor tage Rural housing shor tage

Source: CRISIL

Exhibit 23: Macroeconomic factors suppor ting housing demand


0.8

2.6 2.6 3.2 3.1

15.1

18.419.3

20.521.7

0

6

12

18

24

2001E 2005E 2008E 2010E 2014E

Immediate shortage Total shortage(m units)

Improved affordability

Rising disposable incomes

Tax incentives (interest and principal repayments

deductible)

Affordable interest rates

Favorable demographics

60% of Indias population below 30 years of age

Rapid rise in new households

Increasing urbanization

Currently, only 28% of the Indian population lives in cities

Improved affordability

Rising disposable incomes

Tax incentives (interest and principal repayments

deductible)

Affordable interest rates

Favorable demographics

60% of Indias population below 30 years of age

Rapid rise in new households

Increasing urbanization

Currently, only 28% of the Indian population lives in cities

3430.1

26.7 26

19.7

6259.4 59.2

64.3

53.8

0

17

34

51

68

2001E 2005E 2008E 2010E 2014E

Immediate shortage Total shortage(m units)

Mortgage Disbursements

768866

1,0971,188 1,170

1,404

1,755

2,194

2,720

0

500

1,000

1,500

2,000

2,500

3,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

(Rs bn)

See 25% CAGRahead

Market size: Rs2,720bn (FY13E)

FY10-13E CAGR: 25%

IRR: 9-10%

Key players: HDFC, LICHF, SBI, ICICI Bank

Market size: Rs2,720bn (FY13E)

FY10-13E CAGR: 25%

IRR: 9-10%

Key players: HDFC, LICHF, SBI, ICICI Bank




19/44

FEBRUARY 2011 19

IDFC Securities

0

100

200

300

400

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

(000)MHCV Trucks LCV truck sales

CV loans: P iggy riding the economic rebound

Slow economic growth and weak industrial production had significantly reduced CV sales, leading to a decline in CV

finance disbursements in FY09. Sales rebounded sharply in FY10, which led to ~41% yoy growth in CV disbursements.

With the economic revival also reducing the uncertainty associated with transporters earnings and their ability to

spend, LTV for such loans is on the rise. Robust growth in underlying CV sales (we see a ~20% CAGR) and higher

LTVs are likely to drive 27% CAGR in CV disbursements over FY10-13. Finance penetration in the CV market is at

historic high levels (~90% of vehicles are financed) and is expected to remain elevated even in the long term. Small and

first-time fleet operators remain the riskier segment, and hence serviced by niche financiers only.

Exhibit 24: Robust sales outlook ov er the next few years

Source: SIAM; IDFC Securities Research

Exhibit 25: LTVs to rise Traction in CV sales to propel the disbursement momentum


Sales bounced back inFY10; expected torow at 25% CAGR

90 90 91

87 87 8889 90

60 60

76

73 7375

77 78

50

60

70

80

90

100

(%)


MHCVs LTV LCVs LTV New CV financing market (Rsbn)

206

298332

222

324

441

553

671

0

150

300

450

600

750


27%CAGR

Market size: Rs671bn (FY13E)

FY10-13E CAGR: 27%

IRR: 14-15%

Key players: New private banks, NBFCs


FY10-13E CAGR: 27%

IRR: 14-15%

Key players: New private banks, NBFCs




20/44

FEBRUARY 2011 20

IDFC Securities

Auto loans: Low asset penetration to drive growth

Autos (cars and utility vehicles) witnessed a healthy 17% CAGR over FY06-08. Led by liquidity constraints and

concerns around weak asset quality as also the slowdown in auto sales, auto finance penetration and LTV declined to

68% and 72% respectively in FY09. After stagnating in 2009, higher consumer confidence and rising incomes led to a

rebound in auto sales in FY10. We expect the ongoing robust vehicle sales and favorable finance scenario to increase

finance penetration and LTV to 71% and 78% by 2013. We expect cars and UV disbursements to witness 27% CAGR

over FY10-13 to Rs850bn.

Exhibit 26: Robust sales outloo k over the next two years % of cars financed also set to rise

Source: Industry research; IDFC Securities Research

Exhibit 27: Financiers profitabil ity has revived with lower sourcing costs Expect 27% CAGR in disbursements over FY10-13


5,000

6,500

5,000

3,000

5.0

4.0

2.0

1.8

0

1,700

3,400

5,100

6,800

FY03E FY08E FY09E FY10

0.0

1.5

3.0

4.5

6.0

Manufacturer subventions per car (Rs - LHS) Dealer payouts (%- RHS)

55 56

4035 34 33 32

75

70 65 67 6870 70

55 55

75 75

0

20

40

60

80


%Financed LTV %

2 Wheeler Finance market

88

103

119

107

75

88

111

133

152

0

40

80

120

160


(Rs bn)

820 8821,077

1,204 1,220

1,527

1,908

2,271

2,680

241 261 303330 332

423533

618717

0

600

1,200

1,800

2,400

3,000


('000)Cars UVs


FY10-13E CAGR: 27%

IRR: 10-12%

Key players: HDFC Bank, SBI, ICICI Bank, IndusInd Bank, Kotak Bank


FY10-13E CAGR: 27%

IRR: 10-12%

Key players: HDFC Bank, SBI, ICICI Bank, IndusInd Bank, Kotak Bank




21/44

FEBRUARY 2011 21

IDFC Securities

2-wheelers loans: Momentum to sustain

High interest rates and strict lending norms led to a significant reduction in credit sales of 2-wheelers, and thereby

decline in 2W finance penetration to 40% in FY09 from 56% in FY08. Over the next couple of years, we expect finance

penetration to stabilize at lower levels of ~34% as an increasing proportion of 2W sales will come from the rural

markets where cash deals abound. Higher provisioning expenses and declining yield on loans drove a decline in 2W

finance in FY08. We expect profitability to increase in the near future as stringent underwriting norms are likely to

curtail credit expenses and fewer players in the market are likely to keep yields high.

In FY10, 2W sales grew by a strong 26% yoy led by i) buoyant rural demand, ii) Sixth Pay Commission payout, and iii)

a benign interest rate regime. We expect a robust sales CAGR of 19% over FY10-13 (though finance penetration would

come-off) to drive a 20% CAGR in disbursements over FY10-13.

Exhibit 28: Rising income levels to drive robus t sales Finance penetration to decline

Source: SIAM; IDFC Securities Research

Exhibit 29: Tighter underwriting & less clutter drive profit ability improvement Expect 21% CAGR in disbursements over FY10-13


Domestic 2w (# )

6,2097,056

7,8727,249 7,438

9,371

11,714

13,705

15,761

0

4,000

8,000

12,000

16,000


('000)

RoA3.9

1.9

(0.6)

3.3

(1.0)

-

1.0

2.0

3.0

4.0

FY03 FY06 FY08 FY10

2 Wheeler Finance market

88

103

119

107

75

88

111

133

152

0

40

80

120

160


(Rs bn)

55 56

4035 34 33 32

75

7065 67

68 70 70

55 55

75 75

0

20

40

60

80


%Financed LTV %


FY10-13E CAGR: 20%

IRR: 24-25%

Key players: HDFC Bank, SCUF, BAF, IndusInd Bank, SBI, NBFCs


FY10-13E CAGR: 20%

IRR: 24-25%

Key players: HDFC Bank, SCUF, BAF, IndusInd Bank, SBI, NBFCs




22/44

FEBRUARY 2011 22

IDFC Securities

Consumer durables: Changing business dynamics

Profitability in consumer durables financing has improved significantly due to low competition and caution exercised

by existing players. Product yields are now a high 24-25% (17-20% earlier), protecting lenders against potential credit

losses (5-6% on the higher side) and raising RoAs to ~1% (from losses earlier). Many NBFCs and banks exited

consumer durables in 2008, which led to a decline in finance penetration to a meager 2%. However, the current

scenario is different as benign competition has increased the pricing power of active players. Backed by a huge latent

demand, increased finance availability is expected to improve finance penetration to 11% by FY13. We expect the

macro-economic improvement and increased availability of consumer finance to drive an 18% CAGR in consumer

durable sales and 37% CAGR in disbursements over FY10-13.

Exhibit 30: Profitability rebounds

Source: Industry research; IDFC Securities Research

Exhibit 31: Growth ahead


Segment turns profitable1.1(5.6)PAT

Lower credit costs due to better

borrower 'selection'

Higher technology and fixed

costs

Sharp improvement as dealer

payouts have disappeared

Comments

16.58.5Lending spread

NowThen(% of assets)

25.017.0*Yield

(8.3)

8.0

10.0

9.7

0.0

9.7

1.2

1.7

4.0

12.0

17.7

0.0

17.7

1.2

PBT

Fees

Total revenue

Operating expenses

Provisions

NIM

Yield on networth

Segment turns profitable1.1(5.6)PAT

Lower credit costs due to better

borrower 'selection'

Higher technology and fixed

costs

Sharp improvement as dealer

payouts have disappeared

Comments

16.58.5Lending spread

NowThen(% of assets)

25.017.0*Yield

(8.3)

8.0

10.0

9.7

0.0

9.7

1.2

1.7

4.0

12.0

17.7

0.0

17.7

1.2

PBT

Fees

Total revenue

Operating expenses

Provisions

NIM

Yield on networth

157173 186

206229

263

308

364

429

12

1415

7

2

7

910

11

0

125

250

375

500


(Rs bn)

0

4

8

12

16Consumer durable sales (LHS) Finance penetration (% - RHS) Consumer durable Finance market

19

24

28

14

5

18

28

36

47

0

10

20

30

40

50


(Rs bn)


FY10-13E CAGR: 37%

IRR: 25-27%

Key players: SCUF, BAF, select regional NBFCs


FY10-13E CAGR: 37%

IRR: 25-27%

Key players: SCUF, BAF, select regional NBFCs




23/44

FEBRUARY 2011 23

IDFC Securities

Credit cards: Outstandings to rise

The credit-card industry saw intense competition in FY05-07. Banks, to garner incremental market share, increasingly

used DSA agents and relaxed card issuance standards, leading to a sharp increase in number of cards issued over

FY05-06. However, the ethos of the industry has changed since then. The economic downturn and incidence of willful

defaults in 2009 generated high losses for card issuers, compelling many NBFCs and banks to exit the segment. The

credit-card market is now dominated by private banks with ICICI Bank and HDFC Bank constituting 49% of the total

segment. Services of credit bureaus like CIBIL have also gained prominence, which deters willful defaults. To keep

credit losses in check, banks have decreased the use of DSA agents and have been largely cross-selling products to

own customers using the branch network. Over FY10-13, we expect a mere 5% CAGR in the number of credit cards

issued. Rising disposal incomes and greater acceptability of credit cards would lead to 18% CAGR in average spend

over FY10-13E. Overall, we expect credit card outstandings to increase by 16% over FY10-13.

Exhibit 32: The market still dominated by private banks Rising volumes

Source: RBI; banks, IDFC Securities Research

Exhibit 33: and a steady rise in spends to drive growth in portf olios

Source: RBI, IDFC Securities Research

13.0

17.3

23.1

27.5

24.7

18.3 18.319.2

21.210.0

9.0

7.3

8.3

10.5

12.8

0

8

15

23

30

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E0

4

7

11

14Number of cards (m - LHS) No of transactions per card (RHS)Credit cards outstanding

ICICI Bank

27%

HDFC Bank

22%SBI

10%

Axis Bank

3%

Others

38%

64

91

134

193

280

207

189

236

322

26.8

42.8

33.531.0

32.025.0

32.4 33.2

30.0

-

100

200

300

400


0

11

22

33

44Credit card outstanding (Rs bn) Revolver (%)

See 13% CAGR an impact ofcross selling to internal

consumers and use of CIBIL

19,759 19,55717,888

21,049

26,461

33,727 34,401

39,561

47,474

-1.0

-8.5

17.7

25.7 27.5

2.0

15.0

20.0

0

15,000

30,000

45,000

60,000

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E-10

0

10

20

30Average spends (Rs - LHS) yoy growth (%- RHS)


FY10-13E CAGR: 16%

IRR: ~40%

Key players: ICICI Bank, HDFC Bank, SBI, foreign banks


FY10-13E CAGR: 16%

IRR: ~40%

Key players: ICICI Bank, HDFC Bank, SBI, foreign banks




24/44

FEBRUARY 2011 24

IDFC Securities

Personal loans: Treading the growth path again

Personal loan portfolios faced significant losses over FY08-09, as stringent collection norms by the RBI led to a surge in

willful defaults in the segment. Consequently, a number of players exited the sector which imparted pricing power to

existing players. Banks and other financials companies have increasingly started using services of CIBIL to choose

customers with good repayment history. Banks (which have the larger share of the market) are now focusing on their

existing client base than depending on DSA agents to source new customers. Though the segment remains one of the

most profitable for banks, we expect them to expand cautiously in the near term. We expect personal loan

disbursement to increase by 21% over FY10-13.

Exhibit 34: HDFC Bank the pro fit leader

Source: Banks, IDFC Securities Research

Exhibit 35: Increasing reliance on CIBIL to curtail credit costs Cautious growth ahead


Increasing use of CIBIL

Banks now lend only to customers with a healthy

credit history

Curtail of willful defaults

Focus on existing customers only

Check on repayment capacity and earnings along

with credit history

Internal sourcing only as against DSAs and DMAs

earlier

Increasing use of CIBIL

Banks now lend only to customers with a healthy

credit history

Curtail of willful defaults

Focus on existing customers only

Check on repayment capacity and earnings along

with credit history

Internal sourcing only as against DSAs and DMAs

earlier

Personal loans

HDFC Bank

45%

Axis Bank

10%

Others

26%

ICICI Bank

19%

3

4

10

7

2.8

1.19

-0.21

10.2

0

3

6

9

12

FY03 FY06 FY08 FY10

(4)

-

4

8

12Provisioning cost (%- LHS) RoA (%- RHS)

80.088

110

143

200.0188

204

245

0

65

130

195

260

FY10 FY11E FY12E FY13E

Personal loan disbursements (Rs bn) Personal loan outstandings (Rs bn)

Market size: Rs143bn (FY1 3E)

FY10-13E CAGR: 21%

IRR: 30-35%

Key players: HDFC Bank, SBI, PNB, SCUF, BAF, foreign banks


FY10-13E CAGR: 21%

IRR: 30-35%

Key players: HDFC Bank, SBI, PNB, SCUF, BAF, foreign banks




25/44

FEBRUARY 2011 25

IDFC Securities

COMPANIESSIEmergingMarketsPDF in-ladderup from 122.169.101.224 on 2011-09-19 07:35:27 EDT. DownloadPDF.



26/44

FEBRUARY 2011 26

IDFC Securities

Bajaj Auto Finance (BAF), a diversified retail financier, is working to gain scale and grow its

assets ~3.9x by FY13E. BAF, with its focused distribution network in Indias top ~70 cities and a

capable management, has captured a slot among the top-3 in 2W and consumer durables. It is

now foraying into secured business lines to build a balanced risk book. While the unsecured

loan book is expected to clock ~30% CAGR over FY10-13, secured assets (~65% of total loans in

FY13E) will help the balance sheet achieve scale. Driven by growing volumes and steady credit

costs, we expect BAF to deliver 70% CAGR in earnings and a jump in RoE from 8% in FY10 to

23% in FY13. Current valuations of 1.5x FY12E and 1.2x FY13E adjusted BV are attractive in

context of the stellar growth and peer valuations. We reiterate Outperformer on the stock with a

12-month price target of Rs990 (8x FY13E earnings and 1.9x FY13E adjusted BV).

Building a sustainable consumer franchise: Historically focused on 2W and consumer durable

loans, BAF has added four more segments personal and small business loans, loans against

property (LAP), loan against shares (LAS) and construction equipment to its portfolio. Emphasis

on affluent customers and enhanced usage of credit bureau have ensured better asset quality even

in the riskier segments. A strong risk management framework, wide distribution network and

cross-selling strategy have also helped BAF generate superior profitability in unsecured businesses.

Robust growth outlook: With focus on building a diversified consumer franchise, BAF is looking

to attain balance sheet scale via secured segments. Entry into new secured product segments is

expected to drive 62% CAGR in loans over FY10-13. These segments would form ~65% of the loan

book by FY13E from ~30% currently. While margins would likely soften hereon due to entry into

secured segments, robust business traction (41% CAGR in disbursements) is expected to drive animpressive 43% CAGR in NII over FY10-13.

Preferred play on consumer finance; Outperformer: NII momentum, coupled with steady credit

costs, would drive 70% CAGR in BAFs earnings over FY10-13E. Also, increasing leverage would

lead to a steep rise in RoE to 23% by FY13E. We see BAF as an attractive vehicle to ride the upturn

in consumer financing.


Year to 31 Mar FY09 FY10 FY11E FY12E FY13E

Net profit (Rs mn) 339 894 2,367 3,329 4,370

yoy growth (%) 68.6 163.6 164.8 40.6 31.3

Shares in issue (mn) 36.6 36.6 36.6 36.6 36.6

EPS (Rs) 9.3 24.4 64.7 91.0 119.4

EPS growth (%) 68.6 163.6 164.8 40.6 31.3

PE (x) NM 25.9 9.8 7.0 5.3

Book value (Rs/share) 297.5 314.9 360.7 425.0 509.5

P / BV ( x) 2.1 2.0 1.8 1.5 1.2

ROAE (%) 3.1 7.8 17.9 21.4 23.4

Source: IDFC Securities Research, Priced as of 21st Feb, 2011

Price performance

Bloomberg: BAF IN 6m avg daily vol. (m): 0.09

1-yr High/ Low (Rs): 839 / 283 Free Float (%): 44.5

Reason for report: Company update

Rs634

Mkt Cap: Rs23.2bn; US$514m

OUTPERFORMER

Bajaj FinanceThe surv ivor


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FEBRUARY 2011 27

IDFC Securities

Income statement

Year to 31 Mar (Rs m) FY09 FY10 FY11E FY12E FY13E

Net interest income 3,452 6,080 9,173 13,712 17,785

yoy growth (%) 44.3 76.1 50.9 49.5 29.7

Other income 899 1,065 1,205 1,635 2,091

yoy growth (%) (3.5) 18.5 13.2 35.6 27.9Net revenue 4,350 7,145 10,379 15,346 19,876

yoy growth (%) 30.9 64.2 45.3 47.9 29.5

Operating expenses 2,204 3,196 4,629 6,882 8,517

yoy growth (%) 14.1 45.0 44.8 48.7 23.8

Provisions 1,636 2,606 2,216 3,495 4,836

PBT 510 1,343 3,533 4,969 6,523

yoy growth (%) 70.2 163.1 163.1 40.6 31.3

Provision for tax 171 449 1,166 1,640 2,152

PAT 339 894 2,367 3,329 4,370

yoy growth (%) 68.6 163.6 164.8 40.6 31.3

Balance sheet


Loan book on BS 23,704 40,258 80,614 123,051 171,748

yoy growth (%) (18.1) 69.8 100.2 52.6 39.6

Total assets 30,164 48,226 90,294 135,195 187,236

yoy growth (%) (22.7) 59.9 87.2 49.7 38.5

Networth 10,887 11,525 13,200 15,556 18,647

Loan funds 16,114 32,268 69,114 107,671 150,635

Gearing (no of times) 2.8 4.2 6.8 8.7 10.0

Ratio Analysis


Net int. margin/avg assets 10.0 15.5 13.2 12.2 11.0Non-fund rev./avg assets 2.6 2.7 1.7 1.4 1.3

Operating exp./avg assets 6.4 8.2 6.7 6.1 5.3

Cost/Income 50.7 44.7 44.6 44.8 42.9

Prov./avg b/s loan assets 6.2 8.1 3.7 3.4 3.3

PBT/Average assets 1.5 3.4 5.1 4.4 4.0

RoA 1.0 2.3 3.4 3.0 2.7

RoE 3.2 8.0 19.1 23.2 25.6

Tax/PBT 33.6 33.4 33.0 33.0 33.0

Provisioning coverage 32.1 55.0 80.0 93.7 102.7

Growth in loan assets (18.1) 69.8 100.2 52.6 39.6

Growth in loan funds (3.1) 100.2 114.2 55.8 39.9

Disbursements composition

0

25

50

75

100

(%)

FY09 FY10 FY11 FY12 FY13

Consumer Durables 2 &3-WheelerPersonal & Small Bus. Loans Mortgages + LAP

Construction Equipment Loan against Securities

Disbursements growth

Disbursements (Rs m)

0

7500

15000

22500

30000

Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11

Shareholding pattern

11.5%

55.2%

13.0%

6.7%

113.6%

Foreign

Promoters

Institutions

Non PromoterCorporate Holding

Public &Others

As of December 2010




28/44

FEBRUARY 2011 28

IDFC Securities

HDFC Bank, backed by a strong liability franchise and experienced management, has consistently

delivered the best risk-adjusted returns in the retail finance space. The bank has a dominant

presence across a comprehensive suite of secured as well as unsecured retail products. Scale (1,780

branches as of December 2010) has enabled the bank to cross-sell for loan origination, which has

also imparted resilience to asset quality across interest rate cycles. With pricing sufficiently

cushioned for credit costs, NIMs have sustained at elevated levels of 4-4.2%. We expect robust loan

growth and stable NIMs which, coupled with high CASA and lower provisions, will drive a 32%

CAGR in PAT over FY10-13E. At 3.5x FY12E adjusted book, we reiterate Outperformer with a 12-

month price target of Rs2,610 (4.1x FY12E adjusted BV ).

Consistent growth with profitability a rare combination: Owing to its strong CASA deposit base,HDFC Banks funding costs are the lowest in the retail finance business. This imparts significant

pricing power to the bank, and thereby the ability to gain market share. However, the bank has

chosen a prudent pricing strategy and registered a steady and above-industry rise in retail loans.

Contained delinquencies and high yields maximize the risk-adjusted returns on the portfolio.

Presence across product spectrum: Retail finance constitutes 57% of HDFC Banks total loan book.

The bank has a dominant presence across product retail finance categories like auto, commercial

vehicle loans, loan against securities, 2-wheeler, personal loans and credit cards. The bank has

leveraged on its large customer base and strong brand name to achieve healthy profitability even in

unsecured categories.

Attractive valuations; Outperformer: Robust credit growth, steady margins, high CASA ratio and

lower provisioning are expected to drive a 32% CAGR in HDFC Banks PAT over FY10-12. We expect

credit costs to normalize from ~110bp to ~70bp in FY11-13, which would further improve RoA over

FY10-13E. We see further synergies from the CBoP merger (in terms of fee income and expenses)

fructifying over the next few quarters. At 3.5x FY12E adjusted book, we reiterate Outperformer with a

12-month price target of Rs2,610.

.Key valuation metrics


Net profit (Rs m) 22,449 29,487 39,199 51,029 67,732

yoy growth 41.2 31.3 32.9 30.2 32.7

Shares in issue (m) 425 458 460 460 460

EPS (Rs) 53 67 85 111 147

EPS growth (%) 17.6 26.5 28.0 29.9 32.7

PE (x) 41.7 33.0 25.8 19.8 14.9

Adj. Book Value (Rs/share) 353.1 473.7 544.3 636.7 755.8

P/ Adj Book (x) 6.2 4.6 4.0 3.5 2.9

RONW (%) 16.1 16.1 17.0 19.1 21.5


Price performance

Bloomberg: HDFCB IN 6m avg daily vol. (m): 0.93

1-yr High/ Low (Rs): 2540/1629 Free Float (%): 76.6


Rs2202

Mkt Cap: Rs1008bn; US$22.4bn

OUTPERFORMER

HDFC BankThe profit leader


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FEBRUARY 2011 29

IDFC Securities

Income statement

Year to 31 Mar (Rs bn) FY09 FY10 FY11E FY12E FY13E

Net interest income 74.2 83.9 106.1 131.5 168.2

yoy growth (%) 42.0 13.0 26.5 23.9 28.0

Other income 33.2 38.1 41.4 52.1 62.2

yoy growth (%) 50.5 14.7 8.6 25.9 19.4Trading profits 4.1 3.5 -0.8 1.5 1.5

Non trading income 29.0 34.6 42.2 50.6 60.7

Net revenue 107.4 121.9 147.5 183.6 230.4

yoy growth (%) 44.5 13.5 20.9 24.5 25.5


yoy growth (%) 47.7 4.2 20.2 25.0 19.7

Provisions 19.1 21.4 19.7 20.8 25.7

PBT 33.0 42.9 58.5 76.2 101.1

yoy growth (%) 44.7 30.0 36.4 30.2 32.7

Provision for tax 10.5 13.4 19.3 25.1 33.4

PAT 22.4 29.5 39.2 51.0 67.7

yoy growth (%) 41.2 31.3 32.9 30.2 32.7

Balance sheet


Customer assets 1,053.5 1,330.8 1,777.1 2,287.0 2,914.0

yoy growth (%) 9.2 26.3 33.5 28.7 64.0

SLR portfolio 521.6 510.5 520.0 689.6 949.1

Cash & bank balances 175.1 299.4 254.5 330.9 430.1

Total assets 1,832.7 2,224.6 2,639.9 3,410.2 4,412.2

Networth 150.5 215.2 246.6 287.4 341.6

Deposits 1,428.1 1,674.0 2,024.4 2,674.4 3,517.8

yoy growth (%) 18.6 17.2 20.9 32.1 73.8

- Current (%) 19.9 22.2 19.0 19.0 19.0

- Savings (%) 24.4 29.8 31.0 31.0 31.0- Term (%) 55.6 48.0 50.0 50.0 50.0

Borrowings 91.6 129.2 142.1 198.9 278.5

Ratio Analysis

Year to 31 Mar (%) FY09 FY10 FY11E FY12E FY13E

Net int. margin/avg assets 4.4 4.1 4.4 4.3 4.3

Non-fund rev./avg assets 1.9 1.9 1.7 1.7 1.6


Cost/Income 51.5 47.3 47.0 47.2 45.0

Prov./avg customer assets 1.7 1.6 1.0 0.8 0.8


RoA 1.3 1.5 1.6 1.7 1.7

RoE 16.1 16.1 17.0 19.1 21.5

Tax/PBT 32.0 31.3 33.0 33.0 33.0

Tier I Capital adequacy 10.6 13.3 11.4 10.3 9.6

GrossNPA 2.0 1.4 1.3 1.1 1.2

Net NPA 0.6 0.3 0.2 0.1 0.2

Provisioning coverage 68.4 78.4 87.2 91.9 87.1

Growth in customer assets 9.2 26.3 33.5 28.7 27.4

Growth in deposits 18.6 17.2 20.9 32.1 31.5

Retail loan composition

0

25

50

75

100

(%)

FY06 FY07 FY08 FY09 FY10 9MFY11

Auto Loans Personal Loans CVs 2-Wheelers

Business Banking Credit Cards Home Loans Others

Retail loans proportion

0

25

50

75

100

(%)

FY07 FY08 FY09 FY10 9MFY110

15

30

45

60

Corporate loans (LHS)

Retail loans (LHS)

Retail loan (%- RHS)


48.5%23.5%

10.2%

8.5%

9.3%

ForeignPromoters

Institutions


Public &Others

As of December 2010




30/44

FEBRUARY 2011 30

IDFC Securities

HDFC, Indias leading mortgage financier, has shown remarkable consistency with a 25-30% yoy

increase in disbursements and sanctions over the past decade. Despite fewer branches vis--vis

banks and a wholesale funding mix, the lender has maintained its competitive edge on the back

of: (i) focus on a single product line, (ii) ~30% of its loans disbursed to developers, and (iii)

distribution through direct selling agents and its associate, HDFC Bank. A strong brand and AAA

credit rating have helped the company create a diversified funding profile, which has bolstered

spreads to a high of 2.0-2.5% even in adverse business cycles. We expect robust growth in

disbursals and stable margins to drive 34% CAGR in NII over FY10-13. Valuing the core business

at 4.2x FY12E book and attributing Rs170 per share of value to subsidiaries, we assign a 12-month

price target of Rs750. Reiterate Outperformer.

Robust growth in disbursements: HDFC registered a strong 25% CAGR in disbursements over

FY07-10, driven by high demand in the mortgage industry, improved affordability, increased

urbanization and favorable demographics. With demand drivers in place and a more benign

competitive scenario, we expect disbursements to jump 20%, and thereby the loan book to expand

by 20% CAGR, over FY10-13.

Margins likely to remain stable: Given its dynamic funding mix (proportion of low cost retail

funding increases in a rising interest rate environment), we expect HDFCs borrowing costs to

remain largely immune to rising wholesale rates. With the recent withdrawal of teaser rate loans

reducing competitive intensity, we expect the lender to regain its pricing power, which will further

support margins. We expect margins to remain stable at 3.8% over FY11-12.

An attractive proposition; Outperformer: Strong growth in the loan book and stable margins are

estimated to drive 20% CAGR in PAT with average RoE of 22% over FY10-13. At 4.8x FY12 P/BV,

HDFC offers immense value and is one of our top picks in the financials space. Further, given the

recent negative news flow on the mortgage finance industry, HDFC stands to benefit with its clean

image. A severe slowdown in residential real estate volumes and a sharp spike in interest costs are

key risks to our call.



Net profit (Rs m) 22,825 28,265 34,798 41,214 49,260

yoy growth (%) (6.3) 23.8 23.1 18.4 19.5

Shares in issue (m) 1,422 1,436 1,455 1,455 1,455

EPS (Rs) 16 20 24 28 34

EPS growth (%) (6.4) 22.7 21.5 18.4 19.5

PE (x) 40.4 32.9 27.1 22.9 19.1

Book value (Rs/share) 92 106 119 136 157

P/ BV (x) 7.0 6.1 5.5 4.8 4.1

RONW (%) 18.2 20.0 21.4 22.2 23.1


Price performance

Bloomberg: HDFC IN 6m avg daily vol. (m): 3.37

1-yr High/ Low (Rs): 861/489 Free Float (%): 100


Rs648

Mkt Cap: Rs950bn; US$21.1bn

OUTPERFORMER

HDFCSteady performer


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FEBRUARY 2011 31

IDFC Securities

Income statement


Net interest income 34.1 38.1 47.4 57.3 68.4

yoy growth (%) 20.8 11.8 24.4 20.9 19.4

Other income 1.5 4.7 5.2 4.6 5.3

yoy growth (%) (81.7) 200.3 12.1 (11.9) 15.8Trading profits 0.3 2.1 2.7 1.5 1.5

Non trading income 1.3 2.6 2.5 3.1 3.8

Net revenue 35.6 42.8 52.6 61.9 73.7

yoy growth (%) (2.9) 20.0 23.1 17.6 19.1


yoy growth (%) 2.4 21.8 21.8 10.5 14.1

Operating profit 32.7 39.7 48.9 57.8 69.1

yoy growth (%) (4.0) 21.6 23.1 18.2 19.4

Provisions 0.5 0.6 0.6 0.6 0.7

PBT 32.2 39.2 48.3 57.2 68.4

yoy growth (%) (4.6) 21.7 23.4 18.4 19.5

Provision for tax 9.4 10.9 13.5 16.0 19.2

PAT 22.8 28.3 34.8 41.2 49.3yoy growth (%) (6.3) 23.8 23.1 18.4 19.5

Balance sheet


Loan book 852.0 979.7 1,175.6 1,410.7 1,692.9

yoy growth (%) 16.2 15.0 20.0 20.0 20.0%

Investment portfolio 104.7 107.3 114.0 119.8 125.9

out of which equity 48.4 86.0 86.9 87.9 89.0

Total assets 1,016.6 1,166.4 1,377.2 1,626.9 1,924.6

Networth 131.4 152.0 172.9 198.1 229.0

Total Debt 838.6 965.7 1,146.7 1,360.7 1,615.1

Gearing 6.4 6.4 6.6 6.9 7.1

Ratio Analysis

Year to 31 Mar (%) FY09 FY10 FY11E FY12E FY13E

Net int. margin/avg assets 3.66 3.49 3.73 3.81 3.85

Non-fund rev./avg assets 0.17 0.43 0.41 0.31 0.30


Cost/Income 8.88 7.57 7.49 7.04 6.74

Prov./avg assets 0.05 0.05 0.05 0.04 0.04


RoA 2.45 2.59 2.74 2.74 2.77

RoE 18.20 19.95 21.42 22.22 23.07

Tax/PBT 29.09 27.82 28.00 28.00 28.00

Disbursement growth

0

250

500

750

1000


-

7.5

15.0

22.5

30.0Disbursements (Rs bn - LHS) yoy growth (%- RHS)

Advances composition (%)

0

25

50

75

100

(%)

FY06 FY07 FY08 FY09 FY10 Q3FY11

Individuals Corporates Other


74.5%

13.3%

1.5% 10.7%

Foreign

Institutions


Public &Others

As of December 2010




32/44

FEBRUARY 2011 32

IDFC Securities

After two years of a cautious stance, ICICI Bank is geared to accelerate growth in its retail

portfolio. The bank has redrawn its strategy to focus on collateralized as against unsecured loans

earlier. It has changed tack from price aggression

retail finance[1]

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