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INSTITUTIONAL RESEARCH

HDFC sec Investor Forum

Mid Size Financials: Key Takeaways

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

Pranav Gupta [email protected] +91-22-6171-7337

Kaushik Utpat [email protected] +91-22-6171-7334

Participating Companies Mkt Cap (Rs bn)

Aptus Value Housing Finance UNLISTED

AU Small Finance Bank 212

Cashpor Micro Credit UNLISTED

City Union Bank 143

DCB Bank 53

Karur Vysya Bank 75

Mahindra and Mahindra Financial 299

MAS Financial Services 32

Northern Arc Capital UNLISTED

Participating Companies Mkt Cap (Rs bn)

PNB Housing Finance 225

Reliance Nippon Life Asset Management 145.0

RBL Bank 265

Shriram City Union Finance 131

Shriram Transport Finance 298

Suryoday Small Finance Bank UNLISTED

Ujjivan Financial Services 43

Vaya Finserv Private Ltd UNLISTED

Vistaar Financial Services UNLISTED

5 Sep 2018

Page | 2

Mid-size Financials Investor Forum : Key Takeaways

CMP as on 3rd Sep 18

CV PANEL DISCUSSION

India’s CV market has been booming over the last couple of years, and rightly so. Return of replacement demand, de-bottlenecking of supplies post GST, greater connectivity and better roadways and strong demand from rural India has led to this ramp up. Viewed as the barometer of the country’s economy, it is firing on all cylinders. Total CV sales hit ~856K, topping a previous high of ~809k in FY12. Persistent talks of stricter scrappage policies has also preponed some demand.

While most OEMs and CV financiers continued to believe growth will sustain (despite some moderation on a high base), there were serious doubts given the recent announcement on axle load norms. Given the topicality of the matter, we grabbed the opportunity to invite veterans from the CV finance industry to discuss the issue and provide investors with their valuable insights. The illustrious panel comprised of Mr R Sridhar (CEO, Indostar Capital), Mr Umesh Revankar, (MD & CEO, Shriram Transport) and Mr Kaushik Banerjee (President and CEO of Asset Finance, Magma Fincorp). From the discussion on various issues, we observed the following:

ON THE MUCH TALKED SCRAPPAGE NORMS

Given that the talk of scrapping old vehicles has been around for some time now, many users have already replaced old vehicles with newer ones.

As older CVs get scrapped, the user is expected to buy a relatively new vehicle. As each user shifts up the value chain, a huge demand for vehicles between 5-12 years will be generated. Used CV financiers are expected to be hugely benefitted from the same.

To encourage the scrapping of older vehicles, the government will have to create an incentive for users.

ON THE IMPLEMENTATION OF BS-VI The implementation of BS-VI in 2020 seems unlikely given that

manufacturers and oil producers will need to incur huge costs (CAPEX) to meet production requirements.

Selling BS-VI vehicles will be challenging as selling one vehicle will need the entire value chain to move one notch upwards.

BS-VI compliant vehicles will cost higher and hence the prices of older vehicles will also increase as demand goes up (beneficial for used CV financiers).

ON GROWTH PROSPECTS As infrastructure activities in the economy are picking up, the demand

for CVs will continue to increase.

Rising rural incomes and better cash flows are spurring demand in these regions. Higher disposable incomes and consequent discretionary spends will lead to greater need for transportation and fuel CV sales.

Greater penetration by e-commerce players is also creating higher demand for transportation services.

The advent of technology has enabled aggregators to make transportation more efficient. Applications that aid truckers to procure a return load are making it increasingly viable to run the business.

Improving efficiency of newer vehicles largely covers the EMI delta between a new and old vehicle hence fueling higher demand

ON OVERLOADING AND AXEL NORMS

Manufacturers will have to modify designs which will take some time. Additionally, these norms are only applicable to a small segment (5-7% of vehicles) restricting the overall impact.

Many goods owners have stringent conditions under which goods have to be transported which further limits the scope of overloading

Incase of older vehicles, it is usually unviable for a transporter to overload the vehicle as efficiencies reduce and the time taken may also increase

Page | 3



Aptus Value Housing Finance (UNLISTED)

Founded by M Anandan, an ex-Chola MD, Aptus Value Housing Finance (AVHF) is primarily focused on low cost housing and small business loans to self employed individuals. Post its inception in FY11, AVHF kept business growth under check, slowly moving forward learning the business and its nuances. However, over the past 2 years, the focus has shifted to rapid growth. AVHF has doubled its book over FY16-18 and is aiming to double it over the next two years as well. With marquee investors on both, the equity (Westbridge) and debt (HDFCB, AXSB etc.), AVHF will remain well funded to attain its growth targets. AVHF essentially offers 2 major products i.e. Home loans and

mortgage/business loans. Home loans range between Rs 0.5mn and Rs 2.5mn with the asset value capped at ~Rs 4mn. A chunk of these loans are for self construction on land owned by the customer and hence effective LTVs are even lower. The remaining ~35% is business loans with self occupied property as a security.

AVHF has kept its entire operations in-house implying that credit, legal and technical functions are carried by own employees. This keeps each employee accountable in case of any lapse. Additionally, as a principle, AVHF only lends to a borrower if 40-50% of the past 4 years income has been invested in tangible assets (eg. FD, insurance). Hence, credit standards are not violated and asset quality is maintained. AVHF had NNPAs of merely 40bps as on Mar-18.

Given the segment of customers, yields are typically higher. The mix of SME/business loans also provides an additional boost. With controlled opex (~4%) and sizable fees (~2%), margins and consequent profitability is a given. Though credit costs may be slightly higher hereon (given seasoning and low coverage), profitability should remain intact.

KEY FINANCIALS

Source: Company, HDFC sec Inst Research

Rs mn FY16 FY17 FY18

Net Interest Income 490 854 1,530

PPOP 262 580 1,085

PAT 175 372 702

AUM 5,267 8,463 14,114

EPS (Rs) 2.82 4.73 8.93

ROAE (%) 8.61 10.07 12.64

ROAA (%) 3.96 5.38 6.20

Adj. BVPS (Rs) 34.1 65.9 74.3

GNPA (%) 0.40 0.45 0.48

NNPA (%) 0.34 0.34 0.40

CRAR (%) 74.8 98.1 63.9

Name of the shareholder %

M Anandan 22.6

Padma Anandan 7.5

Westbridge Cross Over Fund LLC 43.4

India Financial Inclusion Fund 10.2

Granite Hill India Opportunities Fund, Mauritius 5.1

Aravali Investment Holdings 3.0

Others 8.1

Total 100.0

SHAREHOLDING PATTERN


Page | 4



From a business correspondent for HDFC Bank, AUBANK has grown leaps and bounds into one of India’s fastest growing SFB’s with an AUM of ~Rs 172bn. With market acumen in vehicle finance and MSME lending, AUBANK has delivered a loan CAGR of ~48% over FY13-18. Since converting into a bank, AUBANK has swiftly gathered deposits (now fund ~48% of the B/S) and gained meaningful traction in fee income. While Rajasthan remains a key geography, the mgt is focused on expanding into newer regions and de-risk the B/S to region specific risks.

The mgt sees a huge opportunity in the MSME slice given the inherent organizational capabilities and govt’s push for financial inclusion. The tight grip on asset quality in this segment and decent performance of SME borrowers in its home state gives the mgt confidence of growing this slice profitably.

AUBANK is gaining immense traction in its liability franchise through a strong brand recall. While higher interest rates have played a huge part in attracting SA and FD customers, the mgt expects the recent introduction of internet banking portal for corporate clients to push CA deposits. AU is focussed on offering a tailor made value proposition for each client.

Through the use of technology, AUBANK aims to make each transaction easier for the customer. Through an internally developed system, a liability customer can be identified by their mobile number where as an asset customer (VF) can be identified by his registered vehicle number. Hence, they do not need a deposit/EMI slip respectively.

AU Small Finance Bank (CMP Rs 729, MCap Rs 212bn, NEUTRAL)

KEY FINANCIALS


Rs mn FY17 FY18 FY19E FY20E

Net Interest Income 7,837 9,405 14,165 18,920

PPOP 5,705 5,759 8,117 11,437

APAT 3,051 2,920 4,078 5,874

AUM 107,339 160,380 214,734 282,654

EPS (Rs) 10.7 10.2 14.1 19.6

ROAE (%) 20.46 13.76 15.19 16.13

ROAA (%) 3.80 2.04 1.81 1.87

Adj. BVPS (Rs) 66.9 73.3 101.5 133.3

P/ABV (x) 10.90 9.94 7.18 5.47

P/E (x) 67.91 71.32 51.84 37.25

GNPA(%) 1.64 2.01 1.82 1.68

NNPA(%) 1.22 1.27 1.09 0.89

CRAR (%) 23.0 18.4 15.2 15.9

Page | 5



Cashpor Micro Credit (UNLISTED)

KEY FINANCIALS (CONSOLIDATED)

Source: Company, HDFC sec Inst Research; *Reported

Cashpor Micro Credit (CMC) is a non-profit organization started in 1997. CMC is focussed on serving the legitimate needs of the poor rather than acquiring new customers. Given its focus and non for profit status, CMC started its operations from the Mirzapur District in UP (one of India’s poorest states). Now CMC has spread across various states through 504 branches. However, its core principles remain unchanged and are reflected in its type of credit (~39% of borrowers in animal husbandry and ~30% are micro enterprises).

In order to serve the most needy, CMC has created a Cashpor Housing

index based on the living conditions of borrowers and it targets only the

poor and very poor categories. CMC is a sole lender to 70-80% of its

borrowers.

On its inception in 1997, CMC was mainly present in urban and semi-

urban regions. However, as competition intensified in these regions, CMC

drifted into rural areas of UP.

Despite being a non-profit entity, CMC is focusing on digitisation. Now, all

its loans are disbursed directly to bank accounts of borrowers. Going

100% cashless has aided CMC too, leading to lower costs and increasing

oplev.

Currently CMC offers 3 products: 1) Income generating loans: for

business purposes, with the ticket size ranging from Rs 2,000-70,000, 2)

Non income generating loans: for upliftment of living standards of poor,

with a max ticket size of Rs. 10,000 and 3) Flexi Loan: A top-up of Rs

30,000 on an income generating loan.

In addition to its own MFI activities, CMC works as a BC for banks

(Indusind, Kotak, IDBI and ICICI) to earn fee income.

Rs mn FY16 FY17 FY18

Net Interest Income 825 1,089 1,367

PPOP 143 234 481

PAT 135 213 319

AUM 10,142 13,297 18,124

EPS (Rs) 24.99 39.57 59.26

ROAE* (%) 1.19 1.55 2.74

ROAA* (%) 12.89 16.21 18.90

Adj. BVPS (Rs) 150.3 211.6 302.5

PAR (%) 0.21 0.38 0.21

CRAR (%) 17.90 17.09 19.19

Page | 6



City Union Bank (CMP Rs 195, MCap Rs 143bn, BUY)

Our bull thesis on CUBK was reconfirmed during our recent interaction with the bank’s MD, Dr Kamakodi. CUBK is ready to capture the unique MSME opportunity in its home state where its share is below ~4% given its deep presence (69% of branches in TN) and receding competition from floundering PSBs. With a tight leash on costs, oplev should also play out over FY18-20E. We continue to like CUBK for its calibrated approach (15-20% loan CAGR) towards growth, prudent provisioning on stress (holds a PCR of ~40% on O/S SRs) and customer oriented focus.

Despite various micro and macro headwinds, CUBK has displayed

resilience and grown comfortably. Though ~64% of the advances are in

TN and ~51% are in the MSME segment, there is ample room for CUBK to

expand market share (sub 4% in TN as on 1QFY19). Capital starved PSBs

withdrawing from the market and deep customer relationships will

provide a unique growth opportunity, that we expect CUBK to pounce

on.

Though we have been expecting a compression owing to a higher share

of floating rate loans (~95%) and increasing competition, NIMs have been

surprisingly resilient (4%+ for past 8 qtrs) largely due to falling COF. With

a gradual rise in COF in sight, we believe NIMs should see some pressure.

CUBK’s conservative approach has served well as net impaired assets

stand at a mere 1.7% (vs. 2.3% for FB, 3.3% for SIB and 7.6% for KVB).

Unlike peers, CUBK has no exposures under any restructuring

dispensations revoked by RBI. Continuous provisioning on O/S SRs and a

miniscule restructured book safeguards CUBK from future jolts.

KEY FINANCIALS




PPOP 9,937 12,078 12,912 14,632

PAT 5,028 5,920 6,837 7,990

Advances 238,327 278,528 331,448 397,738

EPS (Rs) 8.4 8.9 9.4 10.9

ROAE (%) 15.18 15.31 15.21 15.32

ROAA (%) 1.51 1.57 1.58 1.56

Adj. BVPS (Rs) 52.6 55.5 59.7 69.9

P/ABV (x) 3.71 3.52 3.27 2.80

P/E (x) 23.35 21.93 20.89 17.87

GNPA (%) 2.83 3.04 2.78 2.48

NNPA(%) 1.71 1.70 1.39 1.24

CRAR (%) 15.8 16.2 16.0 15.5

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DCB Bank (CMP Rs 171 , MCap Rs 53bn, BUY)

KEY FINANCIALS




PPOP 4,182 5,250 6,640 7,950

PAT 1,997 2,453 3,171 3,912

Advances 158,176 203,367 256,771 317,374

EPS (Rs) 7.0 8.0 10.3 12.7

ROAE (%) 10.00 9.79 10.76 11.98

ROAA (%) 0.93 0.90 0.95 0.97

Adj. BVPS (Rs) 63.9 78.2 87.7 98.1

P/ABV (x) 2.68 2.19 1.95 1.74

P/E (x) 24.44 21.47 16.62 13.47

GNPA(%) 1.59 1.79 1.52 1.44

NNPA(%) 0.79 0.72 0.54 0.52

CRAR (%) 13.8 16.5 14.6 13.2

DCB Bank (DCBB) is an emerging new generation private sector bank which operates in 19 states and 3 union territories through a network of 323 branches. The bank has a philosophy of doubling its balance sheet every 3-3.5 years. Major business segments for the bank include mortgages, LAP, SME loans and corporate lending. Post an aggressive branch expansion over the last 2 years, DCBB will now focus on optimizing these branches and improve efficiency.

DCBB’s loan book (albeit a small base) has grown swiftly, delivering a

CAGR of 25% over FY13-18. The bank’s core competency lies in mortgage

and LAP lending which forms ~40% of total advances as on 1QFY19. With

a well capitalized B/S and completion of branch expansion, DCBB has all

the growth engines in place.

DCBB has mainly concentrated on tier II to tier VI cities. In the last 2

years, the bank has almost doubled its branches, taking the total network

to 323 branches with ~45% of the branches in rural and semi-rural

regions. DCBB will start benefitting from oplev in the coming years, we

believe.

DCBB has kept a tight leash on asset quality, with G/NNPAs in the desired

range of 1-1.5% consistently. This is largely owing to strong underwriting

practices in retail loans and an extremely cautious attitude in corporate

/SME banking.

Despite factoring in a dip in margins, we believe DCBB’s maturing branch

network, focus on improving productivity, and robust growth will lead to

a 7bps uptick in RoAA over FY18-20E.

Page | 8



KVB’s recovery path has largely been in line with management’s guidance. Though the overall stress guidance was doubled by Mr Seshadri (the new MD appointed in Oct-17), it is encouraging to see NPA accretion was in the specified range. Furthermore, as stress peaks out, the benefits of new initiatives will start kicking in for KVB. A ramp up in growth is imminent given the digital push and the focus on its core competency of SME lending will keep asset quality under control. We expect a stark improvement in return ratios as credit costs ease out and oplev kicks in.

While corporate slippages were in line with expectations, the large slip in

SME loans (~Rs 2.4bn) was a bit of a shocker. The mgt attributed this

jump to various industry and geography specific issues. Though the large

slippages derailed faith in KVB’s ability to control stress, the mgt’s

assurance that slippages should be substantially lower (SME slippages

were in low single digit as on dates) instill some confidence.

The mgt is focused on building out a digitally enabled retail franchise.

With the first set of completely automated products (Home loans, PL,

LAP and WC renewal) and some more in the pipeline, we believe retail

assets should grow swiftly. Asset quality should also hold up given better

underwriting on the basis of new scorecards

KVB has now introduced a new incentive structure which enables each

employee to earn an incentive for any business originated and completed

by them. With this new system, the responsibility of generating new

business lies with each employees rather than being concentrated with

the branch manager. The mgt believes that this system will improve

productivity without a significant inflation in costs.

Karur Vysya Bank (CMP Rs 94, MCap Rs 75bn, BUY)

KEY FINANCIALS




PPOP 15,710 17,773 19,001 22,001

PAT 6,060 3,457 3,924 7,992

Advances 409,077 448,001 517,610 605,588

EPS (Rs) 9.9 4.8 5.4 11.0

ROAE (%) 12.61 6.12 6.20 12.23

ROAA (%) 1.00 0.54 0.56 1.01

Adj. BVPS (Rs) 65.7 60.6 63.2 73.9

P/ABV (x) 1.42 1.54 1.48 1.26

P/E (x) 9.39 19.63 17.29 8.49

GNPA (%) 3.63 6.73 6.47 4.48

NNPA (%) 2.53 4.16 3.48 2.14

CRAR (%) 12.5 14.4 13.4 12.3

Page | 9



Mahindra and Mahindra Financial (CMP Rs 485, MCap Rs 299bn, BUY)

KEY FINANCIALS




PPOP 19,291 25,344 33,851 39,977

PAT 4,002 8,269 14,180 17,127

AUM 467,760 560,974 675,974 804,409

EPS (Rs) 7.1 14.5 23.1 27.9

ROAE (%) 6.37 11.30 14.50 15.81

ROAA (%) 0.94 1.78 2.39 2.44

Adj. BVPS (Rs) 86.3 119.3 141.6 163.4

P/ABV (x) 5.61 4.06 3.42 2.97

P/E (x) 68.41 33.38 21.00 17.38

GNPA (%) 9.00 8.50 7.95 7.45

NNPA(%) 3.60 3.80 2.51 1.86

CRAR (%) 17.6 22.0 20.1 18.9

MMFS is one of the leading vehicle finance NBFCs in India with products spanning across the CV and PV space. Unlike most players, MMFS is largely focussed on the rural and semi urban regions with a chunk of its 1,291 branches in these areas. With consecutive good monsoons, buoyancy in rural cash flows and growth in construction/infra activity across the country, we believe MMFS can deliver robust AUM growth. The eventual transition to BS-VI and stricter overloading norms are additional drivers. Relentless focus on collections, subsequent asset quality improvement and the recent fund raise puts MMFS in a comfortable position to achieve superlative growth here on.

Despite the seasonality in 1Q, MMFS saw substantially lower

deterioration in asset quality when compared to previous years. The mgt

attributed this to the relentless focus on collections and recent change in

organizational structure. We also observed this trend in our ground

reality checks as documented in our report (Three States’ dated Nov-17).

Though CoF have jumped owing to the rise in interest rates, MMFS has

been able to curtail the drop in margins. This is largely due to their ability

to pass the additional interest cost to customers. However, the

management believes, in the event of a further up move in interest rates

MMFS’ margins will remain sticky given the pull back in asset quality

(lower interest reversals).

A comfortable capital position (CRAR of 21.9% post the fund raise), deep

presence (1,291, 108 opened in the last 12 months) and rural focus,

MMFS will be one of the biggest beneficiaries of improving rural macros

and a good monsoon.

https://www.hdfcsec.com/hsl.docs//Three%20States%20-%20A%20financial%20drive%20through%20Southern%20India%20-%20HDFC%20sec-201711291121103295131.pdf

Page | 10



MAS Financial Services (CMP Rs 591, MCap Rs 32bn, Not Rated)

MASFIN is a Gujarat-based NBFC with business operations in six states and AUM of Rs 41.1bn. Through its unique business model, MASFIN combines granular loans to small and middle income customers and institutional lending to almost 110 FIs spanning across HFCs, NBFCs and MFIs. Though MAS has delivered a robust disbursal/AUM CAGR of 33% over FY13-17, it has raised capital merely twice over the last 2 decades. The promoters will persist with their strategy of funding growth through internal accruals over the foreseeable future and still own 73%+ (despite the recent dilution) in the company. Given that ~60% of its AUM is towards smaller lenders and MASFIN aids

these institutions in improving their underwriting practices and operational processes, there are apprehensions surrounding its ability to scale up. However, the mgt stated that their current set of FI borrowers are growing at 30-40% and MASFIN can grow this slice by merely lending to these institutions. However, newer relationships will also to fuel the growth in this segment.

For its granular businesses, MASFIN plans to grow through reaching new geographies (plan to open 10 branched sin FY19). A strong presence in the marketplace will also aid growth. Hence, ~50% of total employees of MASFIN are sales executives.

Though the management expects funding costs to inch up slightly (25-30bps given the rising interest rates), they believe sustaining margins will not be a challenge given the pricing power in its focus segments. Additionally, ~85% of the book is on floating rates which will also aid MASFIN to sustain yields.

KEY FINANCIALS


Rs mn FY15 FY16 FY17 FY18


PPOP 812 1,021 1,332 2,087

PAT 400 508 685 1,068

AUM 20,996 25,650 31,561 41,145

EPS (Rs) 25.0 31.8 16.0 19.2

ROAE (%) 44.07 41.95 32.44 20.87

ROAA (%) 2.96 2.89 3.31 4.14

Adj. BVPS (Rs) 54.3 71.5 59.1 124.5

P/ABV (x) 10.89 8.27 10.01 4.75

P/E (x) 23.66 18.61 37.05 30.83

GNPA (%) 0.99 1.03 1.06 1.15

NNPA(%) 0.81 0.89 0.92 0.91

CRAR (%) 17.1 18.4 22.9 31.3

Page | 11



Northern Arc Capital (UNLISTED)

Northern Arc Capital (NARC) is a NBFC that provides access to debt for under-banked individuals and businesses in India. It essentially works with 157 partner institutions that cater to financially excluded households and enterprises across the country. Though NARC has more than 120 investors, the company typically shares 10% of the risk in each portfolio giving its skin in the game and enabling responsible and sound decisions. The AUM growth of NARC’s associated financiers (from ~Rs 116.6bn in FY13 to ~Rs 836.2bn in FY17) is reflective of its success. Over the years, NARC has consistently been successful in raising funds for

its partners. Starting from a relatively smaller base (~Rs 19.3bn) in FY13, NARC enabled financing of ~Rs 122.3bn for its partners in FY17.

NARC caters to financiers with a wide range of products which includes microfinance, affordable housing, small business loans, agri loans, vehicle finance, and loans to small enterprises. NARC is adequately diversified across asset classes with MFI (~34%) and business loan (~22%) lenders having the maximum share.

Of NARC’s 157 partners, about 44 are MFI lenders while 33 provide small business loans.

Additionally, NARC has reduced concentration as the contribution from top 5 states has fallen to ~51% in FY18 vs. ~76% in FY14. The share of the top state has also fallen from ~25% to ~16% over the same period.

KEY FINANCIALS

Source: Company; *reported

Rs mn FY18 FY19E FY20E

Net Interest Income 720 1,190 1,590

Total Income 1,270 1,930 2,365

PPOP 930 1,320 1,585

PAT 600 640 865

Total Assets 18,490 29,430 36,260

ROE* (%) 23.82 17.18 15.54

CRAR (%) 16.4 17.2 17.2


IFMR Holdings Private Limited 58.6

Leapfrog Financial Inclusion India Holdings Limited 34.3

FIL Capital Investments (mauritius) (II) Limited 2.5

Standard Chartered Bank (Singapore Branch) 4.6

Total 100.0


Source: Company

Page | 12



PNB Housing Finance (CMP Rs 1,346 , MCap Rs 225bn, Not Rated)


PNBHF is one of India’s fastest growing HFC’s clocking an AUM CAGR of 45% over FY16-18. Despite the rapid growth, asset quality remains impeccable with GNPAs at merely 30bps. PNBHF has managed to remain completely independent from its parent (PNB) with none of the sourcing, employees, deposits or borrowings coming from PNB on a preferential basis. While the management aspires to continue the superlative growth, it will not come at the cost of lowering profitability. Given the immense opportunity, and the govt’s push on housing for all, PNBHF can grow swiftly. Despite rapid growth over the past few years, the mgt aspires to grow

the book at 1.5-2x of the housing finance industry (estimated to grow at 18-20% for 5 years). PNBHF has almost doubled its presence over the past 24 months. However, newer branches generate only ~30% of incremental business. The next leg of growth will primarily be driven by improving efficiencies and greater oplev.

The use of technology has aided PNBHF to retain customers. In case any borrower enquires about a loan at any other lender using CIBIL, PNBHF will get an intimation from the bureau on which they can act and retain the customer. This has helped in keeping balance transfers under control and maintaining healthy growth

While interest rates have hardened over the last few months, PNBHF has managed to curtail margin pressure owing to efficient liability management (CoF flat sequentially). The mgt expects margins to remain stable as higher priced legacy borrowings (~30%) mature over the next year and yields see an uptick driven by the recent hike (25bps in Aug-18) in base rates. The greater focus on self employed segment will also help.



PPOP 3,326 5,854 9,069 14,779

PAT 1,941 3,276 5,237 8,307

AUM 168,093 271,944 406,843 567,117

EPS (Rs) 18.7 25.8 31.6 49.9

ROAE (%) 15.45 17.60 13.56 13.98

ROAA (%) 1.27 1.35 1.58 1.83

BVPS (Rs) 150.9 166.0 333.2 369.9

P/BV (x) 8.92 8.11 4.04 3.64

P/E (x) 72.04 52.16 42.58 27.00

GNPA (%) 0.20 0.22 0.22 0.33

NNPA (%) 0.07 0.14 0.15 0.25

CRAR (%) 13.34 12.7 21.6 16.68

KEY FINANCIALS

Page | 13



Reliance Nippon Asset Management (RNAM) is one of the largest AMC in India with an overall AUM of ~Rs 4.1tn, a mutual fund AUM of ~Rs 2.3tn (57% of total AUM) and a leadership in retail assets with AUM of ~Rs 780bn. RNAM’s granularity is visible in its SIP book with an average ticket size of Rs 3,000 (vs. an industry average of Rs 4,000). Extensive expansion to newer locations and industry leading B30 AUM (16.3% vs 14.1% for other peers) augurs well for RNAM. Given the massive under-penetration in India, there is enough scope for AMC’s like RNAM to continue to expand profitably.

RNAM’s overall AUM remains well diversified with ~37% in equities

within which ~85% is retail. RNAM also has one of the highest

proportions of assets from B-30 cities (~16% of the total AAUM vs. ~14%

industry average).

RNAM has a strong SIP inflow which is a key driver for AUM expansion,

with monthly SIP inflow of ~Rs 8.3bn as on June-18. RNAM’s total SIP

book grew ~62% YoY to ~Rs 100bn with an overall customer base of

2.8mn. These flows should persist given that ~75% of incremental SIPs

are for durations in excess of 5 years.

While RNAM’s overall AUM remains granular, its distribution structure is

equally diversified with IFAs, banks and national distributors accounting

for 49%, 32% and 19% of the business respectively. Concentration risk is

limited as no single distributor contributes more than 4.5% of AUM.

Reliance Nippon Life Asset Management (CMP Rs 233, MCap Rs 143bn, Not Rated)

KEY FINANCIALS



Investment mgt fees 8,202 11,581 12,676 15,363

Total revenue 9,551 13,138 14,359 18,15 0

Total Opex 4,913 8,114 8,546 10,890

PBT 4,639 5,024 5,813 7,260

PAT 3,545 3,764 4,020 5,220

Total Avg AUM (Rs bn) 2,293 2,694 3,476 3,844

Avg Domestic AUM (Rs bn) 1,294 1,461 2,036 2,261

Equity (%) 35.3 32.5 30.0 37.2

Debt (%) 49.2 51.1 48.4 42.1

Liquid & Others (%) 15.4 16.3 21.6 20.7

Mcap / AAUM (%) 11.04 9.77 7.02 6.32

RoE (%) 23.2 25.5 24.5 25.3

Page | 14



RBL Bank (CMP Rs 625, MCap Rs 265bn, BUY)

KEY FINANCIALS




PPOP 9,204 13,311 17,609 22,912

PAT 4,460 6,351 8,955 12,032

Advances 294,490 402,678 541,107 720,624

EPS (Rs) 11.1 15.1 21.3 28.7

ROAE (%) 12.18 11.53 12.71 15.23

ROAA (%) 0.95 1.15 1.28 1.34

Adj. BVPS (Rs) 110.4 151.8 170.5 194.8

P/ABV (x) 5.67 4.13 3.67 3.22

P/E (x) 56.31 41.41 29.37 21.86

GNPA (%) 1.20 1.40 1.23 1.00

NNPA (%) 0.64 0.78 0.47 0.30

CRAR (%) 11.4 13.6 11.9 10.5

RBL Bank (RBK) is India’s fastest growing private sector bank (~56% loan CAGR over FY10-18). It is adequately diversified across geographies and has a reasonable fix on asset quality. Beyond its corporate focus, RBK has selectively ventured into lucrative retail segments with high growth potential. Industry leading growth (albeit on a smaller base), improving margin trajectory and a tight fix on asset quality drive our positive stance on RBK. While capital (Tier I of 13.1%) is not a hindrance in the near term, a book accretive fund raise (expected in 2HFY20E) will create comfort on valuations.

The cards business has been doing extremely well for RBK with the

customer base hitting 1mn. Acquisition is primarily driven by vendor

partnerships (Bookmyshow, Moneytap etc in addition to Bajaj Finance)

and vendor specific offerings. In addition to growing assets, cross selling

to card customers is a huge contributor (25-30%) to fee income. The mgt

believes cross selling liability products to this customer set will create

greater synergy, oplev and further boost fee income.

Though RBK was a late entrant, it has managed to keep asset quality

under check (when compared to most large corporate lenders) due to a

clear focus on what not to do. While the bank has limited their exposures

to certain sectors (power, infra etc.), they have also stayed away from

businesses with huge government receivables.

The mgt stated that retail expansion will continue to outpace corporate

growth. With faster retail growth, the mix will move to 50:50 over the

next few years. As the retail businesses scale up, RBK will see greater

efficiencies which will lead to better profitability. Additionally, margins

could see a further up move as the retail share grows and CoF top out.

Page | 15



Shriram City Union Finance (CMP Rs 1,989 , MCap Rs 131bn, BUY)

SCUF is a diversified NBFC with a gamut of lending products that include MSME, 2Ws, gold and auto loans. With a significant skew towards SME lending, SCUF is in a sweet spot given the government’s focus on this sector. We believe expansion outside its home turf (southern india) optimizing branch productivity and the maturing system of standardized sourcing and underwriting will provide a further fillip to growth. We will not reinstate our earlier target multiple of 2.5x despite gaining some comfort on the exposure to SVL.

The transition to IND AS has led to a reduction in the coverage for SCUF.

However, PCR is not expected to meaningfully change hereon as the co

will continue to provide as per the ECL methodology. The mgt expects

provisioning to smoothen out over the next year as the data on PD and

LGD stabilizes.

SCUF is working with a completely revamped, IT enabled and analytics

driven underwriting process that aims to help it scale up its MSME

lending business sustainably. It is deploying this scoring system across

states, verticals and new/old clients to streamline the lending process,

price credit appropriately and make the most of cross sell opportunities.

The mgt believes that this vertical can clock a CAGR of ~25%+ on a

sustainable basis.

As underwriting standards are streamlined, the mgt expects asset quality

to improve too. SCUF has been relentlessly focusing on collections which

is visible in falling LGDs. The improving environment in its home state

will also help in asset quality healing.

KEY FINANCIALS




PPOP 17,643 20,715 24,876 29,279

PAT 5,562 6,647 8,890 11,412

AUM 231,320 274,611 332,374 391,447

EPS (Rs) 84.4 100.8 134.8 173.0

NIM (%) 13.11 13.14 12.48 12.15

ROAE (%) 11.56 12.55 14.96 16.79

ROAA (%) 2.45 2.48 2.80 3.04

BVPS (Rs) 700.4 701.6 845.1 1001.9

P/BV (x) 2.84 2.83 2.35 1.99

P/E (x) 23.58 19.74 14.76 11.50

GNPA (%) 7.34 9.81 8.89 8.36

NNPA(%) 1.92 3.71 2.44 1.85

CRAR (%) 23.9 22.0 20.7 20.3

Page | 16



Shriram Transport Finance (CMP Rs 1,311, MCap Rs 298bn, BUY)

Shriram Transport Finance (SHTF) is a niche CV financer with focus (and market leadership with ~25% share) in the used CV segment. SHTF has over 1.97mn customers, a network of 1,230 branches and tie ups with over 500 private financiers. As on June-18, SHTF’s AUM stood at Rs 1,010bn, well diversified between various segments i.e. HCV (~47%), M&LCV (21%), PV (23%) and Tractors (4%). Despite the asset quality healing over the last few quarters, SHTF has conservatively maintained a coverage in excess of 70%. We believe SHTF’s dominance in the used CV space and market acumen will continue to drive return ratios (71bps over FY18-20E) for the foreseeable future.

SHTF’s sustained growth despite being a monocline NBFC is reflective of

its dominance. Presence across geographies and differentiated market

acumen coupled with adequate capital (CRAR at ~17%) will enable SHTF

to deliver high growth (CAGR of 18% over FY18-20E) even on its high

base.

Post the shift to 90DPD, SHTF’s GNPA spiked to Rs 73bn i.e. 9.15%.

However, SHTF has cautiously maintained superior PCR of ~71%, thus

leading to relatively lower NNPAs of Rs 21.3bn i.e. 2.83%. While, asset

quality in 1Q was stable, reported Gross Stage III at ~9.15% a coverage of

~58% provide enough cushion. Despite this we have factored LLP at

~260bps over FY18-20E, which provides cushion to our earnings.

Progress on exposure to SVL will be keenly watched.

The recent increase in system rates, focus on newer vehicles (vintage of

4-6yrs) and a fixed rate book are expected to be the near headwinds for

SHTF. However, the increase in lending yields (June-18) and relatively

lower interest reversals shall provide cushion to margins. We have

factored NIM compression of ~40bps over FY18-20E to ~7.2% which

provide upside risk.

KEY FINANCIALS




PPOP 43,682 54,940 61,897 70,182

PAT 12,573 15,680 24,012 29,279

AUM 787,609 953,063 1,131,916 1,327,332

EPS (Rs) 55.4 69.1 105.8 129.0

ROAE (%) 11.72 12.67 16.65 17.67

ROAA (%) 1.77 1.92 2.51 2.63

Adj. BVPS (Rs) 425.0 498.8 601.3 709.1

P/ABV (x) 3.09 2.63 2.18 1.85

P/E (x) 23.66 18.98 12.39 10.16

GNPA (%) 8.20 9.15 8.50 8.10

NNPA(%) 2.70 2.38 1.84 1.50

CRAR (%) 16.9 16.9 16.2 15.6

Page | 17



Suryoday Small Finance Bank (UNLISTED)

Suryoday Small Finance Bank’s (SSFB) journey began in FY09 with merely 11 branches and 15K customers. Over the last 9 years, SSFB has substantially grown, both in terms of distribution (226 branches) and customer base (0.86 mn). The transition into an SFB couldn’t have come a more inappropriate time (Jan-17), when SSFB was still reeling from the effects of demonetisation. SSFB was hit with the after effects (GNPAs jumped from merely 16bps in FY17 to ~6.15% in FY18) as it was in the conversion phase. Consequently, the focus was on healing the B/S rather than developing a business strategy. However, with a large part of stress recognition behind, SSFB is now poised to focus on both asset growth and creating a sustainable franchise.

As on June-18, SSFB is beginning to see the first few signs of business

revival as disbursements were up ~94% YoY to ~Rs 6.1bn while deposits

jumped multifold to ~Rs 8.6bn (vs merely ~Rs 790mn YoY).

The transition into an SFB coupled with the demonetisation hit (lower

core income) led to elevated cost structures (C/I of ~84.2% as on

1QFY18) for SSFB. However, as the focus shifts from asset quality healing

to growth, this should see some moderation.

While margins are expected to compress as the share of MFI loans

continues to dip, a reduction in CoF, better asset quality and a

moderation in operating costs will aid SSFB to maintain profitability.

KEY FINANCIALS


Net Interest Income 490 1,040 1,384 1,637

PPOP 279 463 378 704

PAT 169 274 151 101

AUM 3,260 5,820 9,830 8,340

EPS (Rs) 5.1 7.2 2.4 1.5

ROAE (%) 15.38 16.66 4.33 1.95

ROAA (%) 2.91 2.82 1.08 0.54

Adj. BVPS (Rs) 40.0 51.5 72.3 75.6

GNPA (%) 0.04 0.16 6.15 3.54

NNPA(%) 0.03 0.04 3.80 1.86

CRAR (%) 25.9 22.4 53.6 37.9


R Baskar Babu 8.0

P Surendra Pai 16.9

P S Jagdish 4.0

Sarva Capital LLC 9.1

International Financial Corporation 6.5

DWM (International) Mauritius Limited 6.4

ResponsAbility Participations Mauritius 4.7

Gaja Capital Fund II Limited 4.5

HDFC Standard Life Insurance Company Limited 3.8

Others 36.2

Total 100.0



Page | 18



Ujjivan Financial Services (CMP Rs 352, MCap Rs 43bn, Not Rated)

Primarily a microfinance lender, UJJIVAN converted into an SFB in Feb-17. The impact of demonetisation coupled with the additional costs UJJIVAN had to incur to meet RBI regulations (for the SFB transition) drastically dented profitability. While UJJIVAN still has a sizable MFI portfolio (~82% as on 1QFY19), it is slowly diversifying by venturing into affordable housing and micro enterprise loans. While UJJIVAN was caught up in the SFB transition and dealing with the demonetisation impact, it missed the wagon on gathering deposits rapidly. However the mgt is now focussed on creating a sustainable deposit franchise.

The mgt aims at achieving an overall AUM growth between 30-35%. This

will primarily be driven by affordable housing and MSE loans, albeit on a

smaller base. MFI loans, its primary focus area, is also expected to grow

at ~20%.

As the share of MFI loans continues to dip, overall yields and

consequently NIMs will come off. To compensate for this dip, the mgt

aims to prepay high cost legacy borrowings (at ~10%) of ~Rs 20bn and

replace them with combination CASA and term deposits at comparably

lower costs. With the branch expansion nearly complete by the end of

FY19, the mgt is confident of improving the CASA ratio to 20%+ over the

next 2-3 years which will provide a cushion to NIMs

While the focus on business expansion and transition to a bank will keep

costs elevated (C/I ratio in the range of ~70-75%) in near future, it will be

beneficial over the long term. We believe significant oplev may flow in

the medium term as efficiencies kicks in.

KEY FINANCIALS




PPOP 1,356 2,973 3,970 3,227

PAT 758 1,772 2,078 73

AUM 32,187 50,644 58,712 75,597

EPS (Rs) 8.8 17.5 18.1 0.6

ROAE (%) 13.67 18.32 2.90 0.10

ROAA (%) 2.50 3.65 14.10 0.40

Adj. BVPS (Rs) 85.2 117.6 153.1 141.9

P/ABV (x) 4.14 3.00 2.30 2.48

P/E (x) 40.05 20.12 19.43 NA

GNPA (%) 0.25 0.69 0.28 3.65

NNPA(%) 0.05 0.14 0.03 0.69

CRAR (%) 24.2 24.1 18.2 23.0

Page | 19



Vaya Finserv Private Ltd (UNLISTED)

Vaya Finserv (VFIN) is a new venture started by a MFI industry veteran, Dr Vikram Ankula (the founder of BFIL, the largest MFI lender In the country). Like BFIL, VFIN was also started with an objective of providing credit to the unbanked and needy population. Though VFIN began as a business correspondent for organizations like RBL Bank, YES bank and Reliance Commercial Finance, VFIN began its own MFI lending franchise and has a current asset book of ~Rs 2.1bn. The mgt is focussed on growing the book rapidly and expanding into newer geographies.

VFIN operates with a distinct culture throughout the organizations with

all the employees trained internally for 3-6 months. Not a single

employee is hired from other MFI institutions.

VFIN has leveraged technology (tab banking and mobile connectivity) and

government programs (e-KYC and Pradhan Mantri Jan Dhan Yojana),

which has enabled them to disburse loans that are cashless and

paperless. In cases where customers do not have bank accounts, VFIN

facilitates the process.

VFIN has created an internal rating system which enables them to target

specific type of customers. The ratings range from R1 to R5 with R1 being

those who are able to fulfill their basic consumption needs. Their

preferred customer segment is R3 and R4.

Till date, VFIN has raised ~Rs 750mn with an additional ~Rs 2bn in the

pipeline. As VFIN is in the nascent stage of operations, its credit rating is

BBB-. However, VFIN will continue to raise credit facilities through term

loans and tap debt markets to meet its growing funding requirements.

KEY FINANCIALS

Source: Company, HDFC sec Inst Research; *reported


Gross Revenue 20 150 350 520

PAT (69) (47) 56 37

AUM (managed) 440 2,370 3,770 6,890

EPS Basic (Rs) (6.50) (2.20) 2.40 1.20

ROAE* (%) (40.5) 27.1 13.0

ROAA* (%) (15.8) 7.4 3.3

Adj. BVPS (Rs) 6.7 4.4 7.4 8.9

Branches 29 76 141 223


Think OFS LLC - USA 24.4

SKS Mutual Benefit Trust - Narayankhed 12.3

SKS Mutual Benefit Trust - Jogipet 12.3

SKS Mutual Benefit Trust -Sadasivpet 12.3

SKS Mutual Benefit Trust -Sangareddy 12.3

SKS Mutual Benefit Trust - Medak 12.3

R Jagadish Babu 8.9

Others 5.4

Total 100.0


Source: Company

Page | 20



Vistaar Financial Services (UNLISTED)

Vistaar Financial Services (VFIN) is a SME lender that caters to the unbanked segment of customers. VFIN was in an exponential growth phase (between FY12 and FY17) which was derailed by the demonetisation wave. VFIN had a sizable exposure in dairy related industries (~40% of advances) which was badly hit and asset quality significantly deteriorated (PAR 0 > 9%). However, VFIN has stabilized post the stutter and is now ready to capitalize on the SME growth story. VFIN will also venture into affordable housing as the mgt believes credit checks are similar to its current products. This move will also help in diversifying the B/S. VFN believes that it has the infrastructure in place to enter the next

phase of growth. With a total network of 225 branches spread across 13 states, VFIN’s expansion is largely done. The focus is now on improving efficiency in branches and increasing the average ticket size of loans (from Rs 2.5mn to Rs 5mn).

While 100% of VFIN’s book is secured, lending is purely done on the basis of cash flows and the property merely ensures repayment. Though asset quality took a hit post-demonetisation, the mgt believes it was largely due to a skewed exposure (~40%) to the dairy industry. Hence, VFIN has consciously reduced this business (down to ~18%) and is focused on lending to manufacturing businesses.

VFIN empowers its branch managers to take credit decisions and expedites the lending process. While this de-centralized decision making process enables higher growth, keeping the originator responsible for collection ensures that credit underwriting is not diluted. This process has served VFIN well as GNPAs have been in line (or better) with comparable listed players

KEY FINANCIALS



Net Interest Income 679 1,292 1,956 2,054

PPOP 177 471 835 880

PAT 142 249 334 297

AUM 5,150 8,440 11,240 12,700

EPS Basic (Rs) 2.85 3.69 4.95 4.39

ROAE (%) 9.8 6.7 6.4 5.3

ROAA (%) 3.2 3.2 2.9 2.2

Adj. BVPS (Rs) 45.5 73.8 77.7 79.5

GNPA(%) 1.39 2.35 3.28 3.95

NNPA(%) 0.93 1.92 2.72 2.71

CRAR (%) 44.9 58.2 45.3 48.3


Mr. Brahmanand Hegde 19.8

Mr. Ramakrishna Nishtala 19.8

Westbridge Crossover Fund LLC 34.9

Others 25.5

Total 100.0


Source: Company

Page | 21



Disclosure: We, Darpin Shah, MBA, Pranav Gupta, CA & Kaushik Utpat, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. Any holding in stock – No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. 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HSL and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions. HSL, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. HSL and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organizations described in this report. HSL or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. HSL or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from t date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction in the normal course of business. HSL or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither HSL nor Research Analysts have any material conflict of interest at the time of publication of this report. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. HSL may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Research entity has not been engaged in market making activity for the subject company. Research analyst has not served as an officer, director or employee of the subject company. We have not received any compensation/benefits from the subject company or third party in connection with the Research Report. HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Compliance Officer: Binkle R. Oza Email: [email protected] Phone: (022) 3045 3600 HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI Research Analyst Reg. 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Page | 22



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