Sector Update Jun 18 - Emkay PDF

BFSI
India Equity Research | BFSI

June 12, 2018
Sector Update Emkay
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Refer to important disclosures at the end of this report
Better to light a candle than to curse

the darkness
 Margin compression to be gradual, may surprise positively - REPO hike to create Bajaj Finance BUY
level playing field: We firmly believe that market is too pessimistic about pressure on CMP Target Price
margins for NBFCs. Conversely, we are of the opinion that the REPO hike will level the 2,250 2,375
playing field for NBFCs, as cost of funds for Banks would start rising however long term
bond yields expected to remain flat, benefiting NBFCs. Also, given the reshuffle in the Cholamandalam Fin ACCUMULATE
borrowing profile and rating upgrades of past years, we might see lower-than-expected rise
CMP Target Price
in the cost of funds, resulting in positive surprises on the margin front.
1,574 1,762
 Prefer price makers and not price takers; Inability of PSB‘s to lend under PCA is yet
another kicker: NBFCs in various sectors like Vehicle Financing (Used Vehicles), MSME Edelweiss Financial Services BUY
lending, Tractor financing etc are able to determine pricing based on the risks involved,
CMP Target Price
their growing reach and sector expertise. With many regional PSBs already under RBI’s
316 361
Prompt Corrective Actions (PCA), they are technically unable to lend incrementally. This
further benefits NBFCs, not only on the growth front but also on the pricing front since
competition from major price disruptors has diminished. HDFC HOLD
CMP Target Price
 Govt’s push for financial inclusion to aid growth further: Government has been
1,840 2,171
pushing aggressively to improve financial inclusion, whereby more villages/rural areas are
being brought under formal banking channels. However, while analyzing this data little
further, we observe that at most times, such aggressive growth in financial inclusion is being L&T Finance Holdings BUY
driven by establishments of business correspondents instead of building formal bank CMP Target Price
branches. Accordingly, this represents nothing but just conversion of unbanked areas into 168 238
under-banked areas. These areas remain key growth catalysts for NBFCs.
 Vehicle Finance: A story to bank up on: We continue to remain optimistic on Vehicle LIC Housing Finance HOLD
Finance players in spite of rising probability for discontinuation of overloading ban mainly CMP Target Price
considering uptick in CV demand due to increased government spending on infrastructure, 499 572
growing rural penetration (due to better reach) and unique positioning to withstand
competition from Banks. In past 2 years, 50% of Vehicle Finance business in India has Magma Fincorp BUY
managed by NBFCs and they faced fairly limited pressure from rising competition.
CMP Target Price
 Asset quality trends stable; Implementation of Ind AS already underway: Concerns 167 225
have been raised over the recent steep rise in fuel prices and fleet operators’ inability to
raise freight charges. But, empirical evidence suggests that freight charges tend to rise with Mahindra Finance ACCUMULATE
a lag. Although the implementation of Ind AS is uncertain for now, many NBFCs are doing
CMP Target Price
it. Since the provisioning charge will be based on Expected Credit Loss (ECL), we might
488 515
see initial surge in credit costs. However, with favourable credit cycle and superior
underwriting practices, there is fairly limited probability for major negative surprises.
Shriram City Union Finance HOLD
 Asset Financing Companies continue to remain our preferred choice. We remain
CMP Target Price
cautious on Mono-line HFCs. We prefer Bajaj Finance, Shriram Transport Finance,
2,313 2,449
L&T Finance, Edelweiss and Magma Fin Corp in the NBFC space.
Financial Snapshot (Consolidated)
Shriram Transport Finance BUY
EPS P/E Adj BPS P/ABV
(Rs mn) CMP Target Price
FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E
1,463 1,818
Bajaj Finance 61.2 82.0 36.8 27.4 333 403 6.8 5.6
Cholamandalam Fin 81.4 99.8 19.3 15.8 347 434 4.5 3.6 This report is solely produced by Emkay Global. The
following person(s) are responsible for the
Edelweiss Fin Serv 13.8 18.6 22.9 17.0 84 100 3.8 3.2 production of the recommendation:
HDFC 60.8 68.6 30.3 26.8 330 370 5.6 5.0

Jignesh Shial
L&T Finance Holdings 10.7 14.4 15.6 11.7 65 79 2.6 2.1 jignesh.shial@emkayglobal.com
LIC Housing Finance 47.1 54.7 10.6 9.1 279 324 1.8 1.5 +91-22-66242468
Magma Fincorp 10.9 14.5 15.4 11.5 100 116 1.7 1.4 Kushan Parikh
Mahindra Finance 21.2 28.7 23.0 17.0 150 173 3.3 2.8 kushan.parikh@emkayglobal.com
+91-22-266242431
Shriram City Union Fin 128.6 162.4 18.0 14.2 858 972 2.7 2.4
Shriram Transport Fin 105.4 129.7 13.9 11.3 568 671 2.6 2.2
Source: Company, Emkay Research
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,its respective connected and associated corporations and affiliates are the distributors of the research reports, please refer
to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors,Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore
ED: HEMANT MARADIA SA: DHANANJAY SINHA

BFSI India Equity Research | Sector Update
Index
Margin compression gradual, not instant ...................................................................... 3
Prefer price makers over price takers ........................................................................... 5
Margin decline inevitable, positive surprises likely ....................................................... 7
NBFCs are key beneficiaries of financial inclusion ....................................................... 8
Vehicle Finance: A story to bank upon .......................................................................10
Growth trend encouraging, diversification likely .........................................................12
Asset quality: In a sweet spot .....................................................................................13
Cost efficiency provides decisive edge .......................................................................14
Earnings review Q4FY18: Consistent performance....................................................15
Our Top Picks .............................................................................................................16
Relative Valuations .....................................................................................................17
Companies
Bajaj Finance ..............................................................................................................18
Cholamandalam Finance ............................................................................................22
Edelweiss Financial Services ......................................................................................26
HDFC ..........................................................................................................................31
LIC Housing Finance...................................................................................................36
L&T Finance Holdings .................................................................................................40
Magma Fincorp ...........................................................................................................44
Mahindra Finance .......................................................................................................48
Shriram City Union Finance ........................................................................................52
Shriram Transport Finance .........................................................................................56
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd,its respective connected and associated corporations and affiliates are the distributors of the research reports, please refer to the
last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors,Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore
ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |2

Margin compression gradual, not instant

For quite a while, markets have been perturbed about margin pressure that NBFCs would face
due to the tightening of monetary policy by RBI. Although we are also building in a gradual decline
in NBFC margins for FY19/20E, we believe that market pessimism about over pressure on
spreads/margins seems overdone.
On the contrary, we are of the opinion that the gradual tightening of policy rates by RBI
would bring about a level-playing field for NBFCs.
With each REPO hike, the cost of funds for Banks would also start rising, in line with NBFCs that
anyhow had been facing the heat due to rising bond yields. Thus, with the REPO hike, Banks
and NBFCs would be on an even keel. We explain this further as follows.
REPO hike is typically followed by rise in deposit rates

Firstly, monetary tightening is generally followed by a rise in deposit rates, which in turn makes
cost of borrowings for Banks more expensive. Thus, Banks would lose their low-cost borrowing
advantage and NBFCs will get a level-playing field on lending rates.
Exhibit 1: Rise in REPO is generally followed by rise in Term Deposit rates, making overall cost of funds more expensive for banks
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
01-04-2002
01-10-2009
01-08-2015
01-06-2016
01-02-2018
01-09-2002
01-02-2003
01-07-2003
01-12-2003
01-05-2004
01-10-2004
01-03-2005
01-08-2005
01-01-2006
01-06-2006
01-11-2006
01-04-2007
01-09-2007
01-02-2008
01-07-2008
01-12-2008
01-05-2009
01-03-2010
01-08-2010
01-01-2011
01-06-2011
01-11-2011
01-04-2012
01-09-2012
01-02-2013
01-07-2013
01-12-2013
01-05-2014
01-10-2014
01-03-2015
01-01-2016
01-11-2016
01-04-2017
01-09-2017
Repo Rate SBI 1yr TD Rate SBI 3yr TD Rate
Source: Bloomberg, Company, Emkay Research
Bond yields likely to remain stagnant, providing further comfort

Secondly, with the beginning of the monetary tightening cycle, bond yields generally remain
stagnant, which in turn supports overall cost of borrowings for NBFCs. This could also be due to
NBFCs’ gradual switch towards bank borrowings from capital market borrowings in order to lock
in their overall cost of funds for a longer period of time.
Exhibit 2: Historically, with the beginning of monetary tightening cycle, bond yields have remained stagnant
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
01-04-2002
01-10-2009
01-08-2015
01-06-2016
01-02-2018
01-09-2002
01-02-2003
01-07-2003
01-12-2003
01-05-2004
01-10-2004
01-03-2005
01-08-2005
01-01-2006
01-06-2006
01-11-2006
01-04-2007
01-09-2007
01-02-2008
01-07-2008
01-12-2008
01-05-2009
01-03-2010
01-08-2010
01-01-2011
01-06-2011
01-11-2011
01-04-2012
01-09-2012
01-02-2013
01-07-2013
01-12-2013
01-05-2014
01-10-2014
01-03-2015
01-01-2016
01-11-2016
01-04-2017
01-09-2017
10yr Gsec Repo Rate 10yr AAA Corp Bond

Exhibit 3: As bank’s raise lending rates, NBFCs switch to bank borrowings to cap overall cost of borrowings for a longer tenure
100% 9.0
15%
16%
18%
18%
18%
20%
20%
22%
22%
22%
90% 8.5
80% 8.0
70% 7.5
42%
48%
43%
43%
45%
48%
60% 7.0
50%
52%
52%
57%
50% 6.5
40% 6.0
30% 5.5
42%
39%
39%
37%
37%
32%
20% 5.0
30%
26%
26%
20%
10% 4.5
0% 4.0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Bank borrowings Capital market borrowings Others Repo Rate %
Rating upgrades in recent past would be yet another savior

The growing scale of business, along with consistency in profitability and improving return ratios
has resulted in rating as well as outlook upgrades for many NBFCs in the recent past. This would
surely benefit them in raising money at relatively superior rates in spite of the monetary tightening
scenario.
Exhibit 4: Credit rating upgrades of select NBFCs

Company Y/E March Rating Action
Bajaj Finance 2017 Long term debt and NCD programme ratings upgraded to AAA / Stable by CRISIL and CARE.
2014 Long Term Perpetual Debt and Sub-ordinated Debt ratings were upgraded by CARE.
2015 Long Term Sub-ordinated Debt ratings were upgraded by India Ratings.
Cholamandalam Finance
2016 Long Term Sub-ordinated Debt ratings were upgraded by CRISIL.
2017 ICRA revised the Long Term Debt rating outlook from Stable to Positive in July 2016.
2015 Long Term and Sub-debt ratings upgraded to AAA / Stable by India Ratings and Brickwork Ratings India.
Mahindra Finance
2017 Achieved highest ratings across all debt instruments.
CRISIL revised outlook to Positive from Stable on LT Bank Loans, NCDs, Sub-debt and FDs and India Ratings
Shriram Transport 2015
upgraded NCDs and Sub-debt to AA+ with stable outlook.
Finance
2016 CRISIL reverted outlook to Stable from Positive on LT Bank Loans, NCDs, Sub-debt and FDs.

Prefer price makers over price takers

NBFCs in various sectors are gradually turning out to be price makers instead of price takers.
However, HFCs still continue to remain price takers. In segments like Vehicle Financing (Used
Vehicles), MSME lending, Tractor financing etc, NBFCs are able to determine pricing based on
the risks involved, their widening reach and sector expertise.
Product specialization commands superior pricing

NBFCs, irrespective of AFCs or HFCs, always focus on product specialization. Later on with
gradual success, they expand into various other product categories. Unlike Banks, the NBFCs
don’t deal in a lot of products and instead opt for specialization in a specific product, providing
them with the necessary edge over Banks.
Exhibit 5: NBFC focused product profile
100% 4%
7% 18% 23%
80% 15%
70% 70% 20% 61%
60% 73%
30% 88%
56% 100% 95%
40%
58%
20% 44% 18% 39%
25% 23% 30%
12% 13% 5%
0% 3%
BAF SCUF SHTF CIFC MMFS MGMA HDFC LICHF LTFH EDEL
Consumer Finance/Retail Lending SME Business / Business Finance Commercial/Wholesale Rural Housing / LAP Vehicle Finance
Being product experts, NBFCs are always able to price their risks appropriately with sufficient
space for any probable loss or delinquencies. This also makes them price makers and allows
them to command desired pricing. The recent hike by HDFC Limited for its housing finance
products also underscores HFCs’ ability to pass on cost pressures to the end customers.
 Major price disruptors are already out of the game for now
Since a key target area for most NBFCs has been Rural/Semi Urban areas, the main competitor
for most of them had been mid-sized regional PSBs and other NBFCs and not large PSBs/Private
Banks. PSBs have been instrumental in being the price disruptors in order to gain market share
where NBFCs used to enjoy almost a monopoly position.
However, there had been several instances whereby these PSBs failed to price the risks
associated with a particular product appropriately, resulting in large delinquencies in a particular
segment. This not only impacted the particular PSB, but also other players in that space.
Exhibit 6: List of 11 PSBs under PCA Exhibit 7: Market share in lending for PSBs under PCA is falling
rapidly – This is surely advantageous for NBFCs
Allahabad Bank IDBI Bank PCA Banks advances as a % of total SCBs advances
Bank of India Indian Overseas Bank
27% 26% 26% 26% 26% 26%
Bank of Maharashtra Oriental Bank of Commerce 25% 25% 24%
25%
Central Bank of India UCO Bank 22%
23%
Corporation Bank United Bank of India 21% 20%
Dena Bank 19%
Source: Company, Emkay Research 17%
15%
With many of the regional PSBs already under RBI’s PCA, they are technically unable to lend
incrementally. This further benefits NBFCs not only on the growth front but also on the pricing
front since competition from major price disruptors has diminished.

HFCs relatively vulnerable on ALM front

To gain maximum advantage of the easing monetary phase of the past few years, most HFCs
had reshuffled their borrowing portfolios towards shorter duration loans. With liabilities getting
re-prized faster compared to assets, the margin profile of HFCs remains favorable during the
monetary easing phase. However, with G-Sec yields moving northwards, the scenario turns
adverse for HFCs. With rising bond yields, pressure on margins is inevitable and to sustain
profitability in such a scenario HFCs are bound to increase their lending rates.
Exhibit 8: Top HFCs borrowing maturity profile – ex HDFC Exhibit 9: Top HFCs lending maturity profile – ex HDFC
100% 100%
27% 24% 23% 22% 24%
80% 80%
60% 59% 60% 55% 52%
21% 21% 24% 24% 22% 60%
60%
40% 34% 30% 29% 32% 40% 15% 16%

32% 13% 14% 14%
20% 20% 18% 17% 17% 19% 20%
20% 20% 22% 25% 22%
9% 10% 9% 11% 11%
0% 0%
Upto 1 year Over 1 year to 3 years Upto 1 year Over 1 year to 3 years
Over 3 to 5 years Over 5 years Over 3 to 5 years Over 5 years
Source: Company, Emkay Research Source: Company, Emkay Research
As of March’17, ~22% of HFCs liabilities were maturing in under 1 year as opposed to ~11% of
their lending books maturing in less than 1 year. Similarly, ~54% of overall borrowings are
expected to mature within 3 years from March’17 as against ~31% asset book maturities.
Although on a downward trajectory on a yoy basis, the proportion of longer tenure lending (more
than 5 years) is still elevated at ~52% against ~24% for maturity of liability.
AFCs better placed in terms of ALM profile

AFCs, primarily those engaged in Vehicle Financing, have a relatively balanced maturity
portfolio, which safeguards their margins during a volatile interest rate scenario.
Exhibit 10: AFCs – Borrowings incl. deposits Exhibit 11: AFCs – Advances
100% 7% 7% 100%
9% 8% 9% 13% 13% 10% 10% 9%
7% 8% 13% 16% 15% 10% 13% 13%
80% 80% 10% 11%
60% 42% 40% 60% 40%

46% 40% 44% 45% 42% 40% 39%
40% 40%
20% 42% 44% 38% 20% 33% 34% 40% 38% 38%
32% 34%
0% 0%
Upto 1 year Over 1 year to 3 years Upto 1 year Over 1 year to 3 years
Over 3 to 5 years Over 5 years Over 3 to 5 years Over 5 years
Source: Company, Emkay Research Source: Company, Emkay Research
Note: AFCs incl. BAF, CIFC, MGMA, MMFS, SHTF.
All AFCs under our coverage universe have well balanced ALM profile, which is making them
less vulnerable to the gradually tightening monetary policy. This further reinforces our preference
for AFCs over HFCs, as probability of healthier margins is higher in AFCs vis-à-vis HFCs.
Although AFCs, especially Vehicle Finance companies, have a higher proportion of fixed rate
loans, with faster churn and favorable ALM profile, the impact on margins would be fairly limited.

Margin decline inevitable, positive surprises likely

Summing up all our previous arguments, we expect some pressure on spreads/ margins for all
NBFCs (AFC/HFC/Diversified) under our coverage universe. But, the extent of margin pressure
varies depending on numerous factors. Re-pricing of previous year liabilities may continue to
support margins in H1FY19 and real margin pressure would be visible during the latter part of
FY19.
We also believe that markets’ concerns about margin pressure are little exaggerated. The
enhanced pricing power of NBFCs in recent times, along with their better liability management
capabilities may support spreads/margins in FY19.
Exhibit 12: NIM % Expectations
13.6%
13.5%
13.2%
12.1%
11.7%
11.4%
16%
14%
8.4%
8.3%
8.2%
8.1%
8.1%
8.1%
12%
8.0%
7.9%
7.8%
7.7%
7.6%
7.5%
7.5%
7.5%
7.3%
6.6%
6.5%
6.4%
10%
8%
3.3%
3.2%
3.2%
2.5%
2.5%
6% 2.4%
4%
2%
0%
BAF CIFC EDEL HDFC LICHF LTFH MGMA MMFS SCUF SHTF
FY18 FY19E FY20E

Exhibit 13: Spread % Expectations
10.9%
10.6%
10.4%
10.2%
9.4%
9.4%
12%
8.8%
8.2%
8.1%
7.9%
7.6%
7.6%
7.5%
10%
6.0%
5.9%
5.8%
5.7%
5.7%
5.6%
5.4%
5.4%
5.2%
5.1%
8%
4.8%
6%
2.4%
2.3%
2.3%
1.2%
1.1%
1.1%
4%
2%
0%
FY18 FY19E FY20E


NBFCs are key beneficiaries of financial inclusion

Government has been pushing aggressively to improve financial inclusion, whereby more
villages/rural areas are brought under formal banking channels. Growth in total banking outlets
in villages from FY10 to FY17 has been phenomenal, validating the government’s efforts towards
the same.
Exhibit 14: Total Banking Outlets in Villages / Rural Locations
700,000
586,307 598,093
600,000
500,000
400,000
300,000
200,000
100,000 67,694
0
FY10 FY16 FY17
Source: RBI, Emkay Research
However, after analyzing this data further, we observed that at most times, such aggressive
growth in financial inclusion is driven by establishment of business correspondents instead of
building formal bank branches.
Exhibit 15: Banking Outlets in Villages / Rural Locations in FY10 Exhibit 16: Banking Outlets in Villages / Rural Locations in FY17
Total locations - 67,694 Total locations - 598,093
9%
Branches Branches
49%
51%
Business Correspondents Business Correspondents
91%
Source: RBI, Emkay Research Source: RBI, Emkay Research
Improvement in financial inclusion emanating from such expansion (business correspondents)

represents nothing but a conversion of unbanked areas into under-banked areas. Such villages
have limited traction in formal banking products and are utilized by banks more for liability
generation rather than asset creation. However, NBFCs have a different approach.
Expansion into Under-banked areas with limited competition

In the recent past, most NBFCs have expanded presence across geographies, mainly in order
to increase penetration in unbanked and more importantly under-banked areas. For NBFCs,
there is a lot of potential given the underpenetrated markets. Since they are able to better satisfy
the borrowers (whether because of their superior local knowledge, domain expertise, tailor-made
services and a flexible approach, there is huge scope for future business prospects.
Light branches with more emphasize on optimum productivity

Over the past two years, NBFCs have managed to grow their branch and sales network
considerably. Having specifically built the innovative and low-cost business models driven by
technology platforms and low operating expenses, room for growth is ample. NBFCs essentially
first identify a ‘hub’, a regional branch well-connected to nearby villages. Alternatively, NBFCs
set up small kiosks, or a small office in a specific geography, which are connected to the main
branch, or they contract Direct Selling Agents (DSAs), who are licensed sellers of NBFC products
to customers in a specific region.

Exhibit 17: Financial inclusion - branch expansion

Branches - Nos. FY15 FY16 FY17 FY18
BAF 393 659 915 1,332
- Rural 232 397 538 602
- Urban 161 262 377 730
CIFC 534 534 703 873

- Rural 379 374 534 690
- Urban / Semi-urban 155 160 169 183
MGMA 232 234 284 305

- Rural 85 82 91 92
- Urban / Semi-urban 147 152 193 213
MMFS 1,108 1,167 1,182 1,284
SHTF 741 853 918 1,213

- Rural 366 583
- Urban 552 630
Since NBFCs are expanding their footprint aggressively in rural/semi urban areas, they would be
able to notch comfortable and sustainable growth for a long time to come.

Vehicle Finance: A story to bank upon

We have been optimistic on Vehicle Finance players since quite a while considering the uptick
in CV demand due to increased government spending on infrastructure, growing rural
penetration (due to better reach) and unique positioning built in recent years, which allows them
to withstand competition from Banks.
Exhibit 18: FY18 Vehicle Finance market share %
HDFC Bank
15% State Bank of India
16%
ICICI Bank
4% Indusind Bank
4% 12% Shriram Transport
Mahindra Finance
5%
6% 8%
Tata Motors Finance
8% 6% Sundaram Finance
Kotak Mahindra Prime
16%
Others
There has been consistent trepidation over the growing presence of Commercial Banks
(especially private banks), which will grab sizeable market share in Vehicle Finance. However,
our analysis suggests that NBFCs are still able to hold their ground in Vehicle Financing against
the rising competition.
Exhibit 19: FY18 Vehicle Finance market share %
100%
80%
51% 50%
60%
40%
49% 50%
20%
0%
FY17 FY18
Banks NBFCs
In past 2 years, 50% of Vehicle Finance business in India has managed by NBFCs and they
faced fairly limited pressure from rising competition. In pure retail lending segments like 2
Wheeler Finance and Car Finance etc, Banks will have an upper hand. However, in CV Finance
and Tractor Finance, NBFCs are able to sustain strong growth momentum.
CV momentum sustainable – Used CV remains the key

For the past few months, CV demand across segments has witnessed a decent run. Riding on
government’s push for infrastructure development along with few tailwinds like overloading ban
etc, CV financiers have been able to report healthy numbers.
Although the New CV space has remained competitive with few large and medium sizes private
banks already present there, flexible operations, quicker turnaround times and improved
capability to understand clients’ needs give some edge to the NBFCs.
Used Vehicle (CV/Tractors/Cars) is a key focus area for NBFCs where competition (especially
from Banks) is limited and pricing is superior, mainly due to the risks involved and sticky nature
of the customers.
ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 | 10

Exhibit 20: CV Financiers have decent presence in New CV as well as Used CV segments
100%
12%
80%
60% 74% 78%

91%
40% 88%
20%
26% 22%
0% 9%
Cholamandalam Magma Fincorp Mahindra Finance Shriram Transport
Finance
Used vehicle New vehicle
The sustainability of CV demand has always remained questionable considering the volatility in
CV cycle and multiple variables driving the same, like government’s infrastructure spending,
private capex cycle, interest rate environment etc.
However, we remain optimistic about the sustainability of the current CV cycle, considering the
government’s consistent push to increase infrastructure spending, change in emission norms
and implementation of the vehicle scrappage policy by 2020.
Fear of spike in defaults due to steep increase in fuel prices is real. But, freight charges are
typically expected to increase with a lag.
There have been a lot of discomfiture over the recent steep rise in fuel prices and fleet operators’
inability to raise freight charges. However, our analysis of empirical data clearly suggests that
freight charges tend to rise in tandem with fuel prices, but with a lag.
Exhibit 21: Freight rates rise with increase in fuel charges but with some lag
2.4 1.5
2.3 1.4
1.3
2.2
1.2
2.1
1.1
2.0 1.0
1.9 0.9
Jul-14
Jul-15
Jul-16
Jul-17
Nov-15
Sep-17
Jan-18
Nov-13
Jan-14
Sep-14
Jan-16
Sep-16
Mar-14
Nov-14
Jan-15
Sep-15
Mar-15
Mar-16
Nov-16
Jan-17
Mar-17
Nov-17
Mar-18
May-14
May-15
May-16
May-17
Avg freight rate (per km per tonne) Fuel cost (per km per tonne)
Source: Industry, Company, Emkay Research
Hence, we believe that the concerns over rising delinquencies due to the steep rise in fuel prices
and the inability of operators to increase freight charges is overdone. We expect the rise in freight
charges to come thorough soon.

Growth trend encouraging, diversification likely

Summing up all our previous arguments over AUM growth, we expect AFCs to report robust
growth in FY19, albeit with the increasing focus on diversification in the overall portfolio mix. With
diversification in the lending profile, overall risk to growth has diminished and the probability of
cross selling has increased, which further boosts the non-interest income of NBFCs.
We remain structurally negative on Mono-line HFCs considering the risk to their overall business
model amid stunted growth and pressure on margins, along with rising competition from private
banks as well as newly formed NBFC-HFCs. However, considering the recent correction in their
stock prices, HFCs can provide an attractive trading opportunity as and when the large banks
announce considerable hike (~25/50bps) in their lending rates (MCLR), as it would allow HFCs
to command better pricing for their current as well as incremental lending.
Exhibit 22: AUM growth %

52%
60%
40%
50%
35%
33%
30%
27%
40%
26%
25%
25%
25%
25%
24%
21%
21%
20%
19%
19%
19%
19%
19%
19%
19%
18%
18%
17%
16%
16%
30%
15%
15%
20%
10%
0%
-10% -3%
FY18 FY19E FY20E


Asset quality: In a sweet spot

With the 90-dpd NPL recognition transition completed by Mar’18 by all players, the deterioration
in asset quality appears to have abated for now. With forecast of normal monsoon and a
favorable CV cycle, we may witness a gradual improvement in asset quality trends, especially
for AFCs with steady improvement in their credit costs.
NBFCs have flexible lending operations and faster turnaround times. Also, overall understanding
of clients’ profiles is superior and hence NPAs have been contained. Thus, compared to formal
banking channels, NBFCs are much better placed, which further justifies their valuation premium
over Banks (including private banks).
Exhibit 23: Asset quality - NBFCs
20% 100% 120%

100%
15% 74% 69% 80%
60% 62%
51% 55%
10% 44% 45% 60%
26% 40%
5%
2.9%
9.2%
1.5%
0.4%
1.7%
1.8%
0.7%
1.1%
0.0%
0.8%
0.4%
4.8%
2.3%
7.0%
8.5%
3.8%
9.0%
3.4%
2.8%
5.2%
20%
0% 0%
GNPA % NNPA % PCR %
Exhibit 24: Asset quality - Banks
30% 69% 80%

25% 58% 70%
55% 55% 54%
50% 48% 50% 60%
20% 46% 45%
39% 50%
36%
15% 40%
10% 30%
12.3%
15.7%
16.6%
11.8%
18.4%
11.2%
10.9%
20%
8.4%
8.3%
2.2%
5.5%
5.7%
6.8%
3.4%
1.3%
0.4%
8.8%
4.8%
1.2%
0.5%
1.0%
1.3%
0.6%
7.5%
5% 10%
0% 0%
BOB BOI CBK PNB SBIN UNBK AXSB HDFCB ICICIBC IIB KMB YES
GNPA % NNPA % PCR %

Implementation of Ind AS – Uncertainty persists, negative impact unlikely

The implementation of Ind AS remains yet another uncertain event for the BFSI sector in general.
Although RBI has deferred the implementation of Ind AS for Banks by a year, it is applicable for
NBFCs from April 1, 2018. NBFCs will have to compute their Q1FY19 results accordingly.
Ind AS is a global accounting practice that NBFCs are mandated to adopt, which may lead to
initial credit losses. The practice is on par with the International Financial Reporting Standard
(IFRS) 9. The provisioning requirements under IFRS 9 would be higher, as NBFCs will have to
provide for expected losses rather than incurred losses.
Although the implementation of Ind AS is uncertain for now, many NBFCs have already started
implementing the same. Since the provisioning charge will differ from rule-based recognition to
Expected Credit Loss (ECL) model, we might see some initial surge in overall credit costs of
NBFCs. However, considering the favourable credit cycle and relatively better underwriting
practices, there is fairly limited probability for major negative surprises on the credit cost front.

Cost efficiency provides decisive edge

A big reason for the success of NBFCs in India of late has been their unique value proposition.
Most NBFCs, whether online or offline, leverage alternative and tech-driven credit appraisal
methodologies to gauge the creditworthiness of prospective borrowers.
This differentiated approach allows them to meet loan requirements of

individuals and businesses left traditionally underserved by banks. The use of
technology to optimise business processes also contains costs, enabling credit to be availed at
highly competitive interest rates. Hence, lower cost to income/cost to assets have been one of
the key drivers of superior RoAs of NBFCs.
Exhibit 25: Cost to income %
60%
50%
40%
30%
20%
50.4%
20.7%
41.8%
41.3%
40.4%
41.4%
40.3%
39.4%
50.5%
48.6%
39.7%
38.3%
37.4%
39.7%
39.9%
40.2%
21.3%
21.3%
10%
0%
BAF CIFC MGMA MMFS SCUF SHTF
FY18E FY19E FY20E

Exhibit 26: Opex to assets %
6%
5%
4%
3%
2%
3.7%
5.0%
4.9%
4.7%
3.5%
3.3%
5.1%
4.9%
4.6%
3.3%
3.2%
3.2%
5.1%
5.1%
5.0%
1.8%
1.8%
1.8%
1%
0%
BAF CIFC MGMA MMFS SCUF SHTF
FY18E FY19E FY20E

Given the advancement in banking technology, we expect further improvement in these metrics,
which would in turn drive further improvement in return ratios. Manual lending methods are
already being shifted to TAB-based approvals for most consumer-centric lending. Cross-selling
of existing products and generation of fee-based income have also been among the other
emerging trends, which we believe would be additional drivers to improve return ratios.

Earnings review Q4FY18: Consistent performance

In Q4FY18, NBFCs under our coverage universe delivered largely positive results. Asset
financing NBFCs witnessed stability in asset quality and pick-up in growth momentum. HFCs
also witnessed stability in their growth and margins.
Growth on track for Asset Financiers, HFCs still facing dilemma

Growth appears to be returning for asset financiers, with companies like Bajaj Finance,
Cholamandalam Finance, Magma Fincorp, Shriram Transport and L&T Finance reporting
healthy disbursements growth. Apart from Tractors, growth momentum is picking up in both New
CV as well as Used CV segments.
On the other hand, HFCs are still seeing muted growth and barring a few companies growth in
the Individual Home Loan segment is clearly sluggish. Incrementally, we are seeing HFCs with
tepid individual home loan growth getting more aggressive in Construction Finance and LAP
segments to drive growth. However, the HFC space is getting more competitive amid the
tightening of policy interest rates by RBI and strengthening of newly formed NBFC-HFCs.
Margin trend healthy but gradual decline likely

For AFCs, NIMs continued to expand yoy on the back of falling cost of funds and higher share
of the current book. However, sustainability of the same remains debatable, as interest rates
appear to be hardening, which can have an adverse impact on NIMs. For HFCs, NIMs have
remained largely steady sequentially, as the share of non-individual home loans has risen.
However, considering the adverse ALM profile for most of them, NIMs could be under pressure
in the future.
Asset quality trends encouraging, further improvement likely

Asset quality is stabilizing on the back of better monsoon and improving outlook for the
Infrastructure and Rural sectors. With the transition to 90-dpd NPL recognition completed by
Mar’18 for all players, the deterioration in asset quality appears to have abated for now. We
prefer to remain cautious on the asset quality trends of HFCs, especially in the case of Developer
Finance portfolios considering the weak growth and tightening of the interest rate cycle. We
believe that if the asset quality deteriorates further, it could act as an added pressure on the
profitability of HFCs.

Our Top Picks

AFCs continue to remain our preferred choice - We remain cautious on Mono-
line HFCs
Going forward, we expect the healthy growth momentum to continue for Asset Financing NBFCs.
We remain cautious on HFCs given the intensely competitive landscape and longer-than-
anticipated delay in growth recovery for most HFCs (barring a few). Even under the much touted
Affordable Housing segment, growth remains lackluster due to supply side constraints.
We continue to prefer Bajaj Finance, Shriram Transport Finance, L&T Finance, Edelweiss
and Magma Fincorp in the NBFC space.
 Bajaj Finance: Although investments in geographical expansion and future growth are
expected to keep opex elevated, BAF has consistently clocked superior growth (FY11-18:
41%/40% AUM/PAT CAGR) vis-à-vis peers without compromising on asset quality. We
believe that its foray into Housing Finance and ongoing expansion into Rural geographies
will further reinforce its growth impulses. The stock trades at 5.4x FY20E Adj. BV and 26x
FY20E EPS, for a return profile of average 3.5%+ ROAs / 20%+ ROEs. We maintain BUY
with a TP of Rs2,375.
 Shriram Transport Finance: Healthy AUM growth, aided by a favorable CV cycle,
improved demand for Used CVs and reduced credit cost (post 90-day NPA recognition)
make SHTF one of the most preferred stocks in our NBFC coverage universe. The stock
still remains at a comfortable discount to most peers (Cholamandalam, Sundaram etc.),
which according to us should narrow gradually. We recommend BUY with a TP of Rs1,818,
corresponding to ~2.7x P/Adj FY20E book with superior RoA of 2.6% and RoE of 18.5%
for FY20E.
 L&T Finance: We believe that LTFH’s successful turnaround of the lending business and
focus on realization of the book will aid in sustainably improving its profitability and return
ratios. Consolidated ROE has improved from 10% in FY16 to ~15% in FY18. Being a
diversified financial services player, LTFH has multiple levers of growth. Moreover, a robust
and sustainable fee income franchise helps it to maintain profitability. We expect this will
enable LTFH to clock consolidated PAT CAGR of 40% over FY18-20E. However, the drag
from the Wholesale business is likely to endure in the near term. Given the favorable risk-
reward on balance, we maintain BUY with a TP of Rs238.
 Edelweiss: We believe that the company would continue to pursue aggressive growth in
superior RoE businesses, which in turn will result in healthy PAT CAGR of 35%+ over
FY18-20E. We are factoring in improvement in consolidated RoE (post dilution) to ~20%
and RoA at ~2% by FY20E. EDEL is currently trading at ~3.3x P/Adj book on FY20E, which
is quite attractive considering its robust growth profile, healthy profitability and improving
return ratios. We are valuing the company on SOTP basis, assigning separate value for
each sizeable business. Accordingly, we have arrived at a TP of Rs361, corresponding to
3.6x P/Adj book on FY20E.
 Magma Fincorp: The professional management brought in by Magma Fincorp (MGMA)
has focused on improving asset quality and bring in underwriting discipline. Structural
changes implemented in the recent past have started paying off in the form of declining
asset quality pressures and management’s ability to kick-start growth again. Further
improvement in asset quality, return of growth and an overall superior loan portfolio at fairly
cheap valuation make MGMA attractive. ROA is expected to touch 2% going forward. The
stock trades at ~1.5x FY20E Adj. BV and ~12x FY20E EPS for average ROEs of 11%/12%
over FY19E/20E. We recommend BUY with a TP of Rs225.

Relative Valuations
Exhibit 27: FY18 P/B to FY19 ROE Exhibit 28: FY19 P/B to FY20 ROE
8.5 7.5
7.5 y = 0.3187x - 1.6838 6.5 y = 0.2798x - 1.6268
R² = 0.32 R² = 0.2344 BAF
6.5 BAF 5.5
FY18 P/B
5.5
4.5
FY19 P/B
4.5 EDEL EDEL
HDFC
HDFC 3.5 CIFC
3.5 MMFS CIFC MMFS
2.5 SHTF
2.5 MGMA LTFH
LTFH SCUF SHTF
1.5 MGMA 1.5 SCUF
LICHF LICHF
0.5 0.5
11.0 13.0 15.0 17.0 19.0 21.0 23.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0
FY19 RoE FY20 RoE
Source: Bloomberg, Company, Emkay Research Source: Bloomberg, Company, Emkay Research
Exhibit 29: FY18 P/B to FY19 ROA Exhibit 30: FY19 P/B to FY20 ROA
8.5 7.5
y = 1.5311x - 0.0502 y = 1.1856x + 0.3587
7.5 R² = 0.3962 6.5 R² = 0.285
6.5 BAF 5.5 BAF
5.5
FY18 P/B
FY19 P/B
4.5
4.5 EDEL EDEL
3.5 HDFC
HDFC CIFC
3.5 MMFS CIFC
2.5 MGMA SHTF
2.5 LTFH LTFH
SHTF SCUF
1.5 SCUF 1.5 MMFS
LICHF MGMA LICHF
0.5 0.5
1.0 1.5 2.0 2.5 3.0 3.5 4.0 1.0 1.5 2.0 2.5 3.0 3.5 4.0
FY19 RoA FY20 RoA

Source: Bloomberg, Company, Emkay Research Source: Bloomberg, Company, Emkay Research

Bajaj Finance
Company Update
June 12, 2018
Emkay
©

CMP Target Price
The compounding story Rs 2,250

as of (6/12/2018)
Rs 2,375 (■)
12 months
Rating Upside
BUY (■) 5.5 %
Bajaj Finance’s (BAF) focus on creating an even more granular portfolio as Change in Estimates
well as broadening its geographic presence has resulted in industry-beating EPS Chg FY19E/FY20E (%) -/-
growth on a consistent basis. At the same time, superior risk management Target Price change (%) NA
processes have ensured excellent credit quality even in challenging business Target Period (Months) 12
environments. We believe that the recent foray into Housing Finance further Previous Reco BUY
strengthens its current dominance as a retail lender, and along with Rural Emkay vs Consensus
Consumer Lending, opens up new growth avenues. EPS Estimates
 Diverse product portfolio ensures consistent high growth: Bajaj Finance’s (BAF) well FY19E FY20E
diversified product portfolio (~36 product lines under 4 business verticals) and low product- Emkay 61.2 82.0
specific penetration ensure top quartile growth. BAF’s geographical expansion from urban- Consensus 61.3 80.9
centric to Rural Consumer Lending as well as foray into Housing Finance will open up new Mean Consensus TP (12M) Rs 2,186
growth avenues. FY13-18 AUM CAGR is 37%, while the share of Rural and Consumer Stock Details
Lending increased to 54% in FY18 from 41% in FY13. Bloomberg Code BAF IN
 Impressive retail franchise - the proverbial moat: Robust new-to-Bajaj customer Face Value (Rs) 2
additions (6.1mn in FY18, up 50% yoy) despite a large existing customer base (26.2mn at Shares outstanding (mn) 578
end-Mar’18) is clear evidence of a well-established retail franchise. Additionally, BAF 52 Week H/L 2,197 / 1,314
manages to cross-sell to 15.4mn customers, i.e. 3 out of every 5 Bajaj customers. A large M Cap (Rs bn/USD bn) 1,254 / 18.69
EMI card franchise of 12.9mn cards-in-force (as at end-Mar’18) enables BAF to leverage Daily Avg Volume (nos.) 1,230,982
technology to better serve its large customer base. Daily Avg Turnover (US$ mn) 35.5
 Sound underwriting practices, limited concentration prevent asset quality gaffes: A Shareholding Pattern Mar '18
granular loan portfolio that limits concentration risks, coupled with excellent credit Promoters 55.1%
underwriting practices keep asset quality under control. (GNPA – 1.48%, PCR – 74.3% as FIIs 19.5%
at Mar’18). This is amply demonstrated in its collection efficiencies and stable asset quality DIIs 9.0%
maintained even during difficult times.
Public and Others 16.4%
 Valuations and view: Although investments in geographical expansion and future growth
Price Performance
are expected to keep opex elevated, BAF has consistently clocked superior growth (FY11-
(%) 1M 3M 6M 12M
18: 41%/40% AUM/PAT CAGR) vis-à-vis peers without compromising on asset quality.
Absolute 14 34 29 62
We believe that its foray into Housing Finance and ongoing expansion into Rural
Rel. to Nifty 14 26 22 45
geographies will further reinforce its growth impulses. The stock trades at 5.4x FY20E Adj.
BV and 26x FY20E EPS, for a return profile of average 3.5%+ ROAs / 20%+ ROEs. We Relative price chart
2275 Rs % 50
maintain BUY with a TP of Rs2,375.
2080 38
1885 26
1690 14
1495 2
1300 -10
Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18
Bajaj Finance (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Financial Snapshot (Standalone)
This report is solely produced by Emkay Global. The
(Rs mn) FY16 FY17 FY18 FY19E FY20E following person(s) are responsible for the production
of the recommendation:
Net income 44,065 61,999 87,442 115,255 150,406
Jignesh Shial
Net profit 12,785 18,366 26,467 35,172 47,191
jignesh.shial@emkayglobal.com
EPS (Rs) 23.9 33.7 46.6 61.2 82.0
+91-22-66242468
ABV (Rs) 136.4 170.6 284.5 333.0 403.2
Kushan Parikh, CFA
RoA (%) 3.2 3.3 3.6 3.6 3.6
kushan.parikh@emkayglobal.com
RoE (%) 20.9 21.6 20.3 19.5 21.7
+91-022-66242431
PE (x) 90.8 64.4 46.6 35.5 26.4

Bajaj Finance (BAF IN) India Equity Research | Company Update
Key Financials (Standalone)

Income Statement
Y/E Mar (Rs mn) FY16 FY17 FY18 FY19E FY20E
Net interest income 38,006 51,349 87,028 108,173 141,388
Other income 6,060 10,650 415 7,082 9,017
Fee income 0 0 0 0 0
Net income 44,065 61,999 87,442 115,255 150,406
Operating expenses 18,991 25,642 36,579 47,605 60,719
Pre provision profit 25,074 36,357 50,863 67,650 89,687
PPP excl treasury 25,074 36,357 50,863 67,650 89,687
Provisions 5,429 8,182 10,302 13,539 17,085
Profit before tax 19,646 28,175 40,561 54,111 72,602
Tax 6,861 9,810 14,094 18,939 25,411
Tax rate 35 35 35 35 35
Profit after tax 12,785 18,366 26,467 35,172 47,191
Balance Sheet
Y/E Year End (Rs mn) FY16 FY17 FY18 FY19E FY20E
Equity 1,071 1,094 1,150 1,150 1,150
Reserves 73,195 94,909 164,033 195,051 236,704
Net worth 74,266 96,003 165,183 196,201 237,854
Deposits 0 0 0 0 0
Borrowings 370,247 492,495 615,670 844,546 1,171,934
Total liabilities 469,730 637,246 836,290 1,104,120 1,482,093
Cash and bank 13,292 3,565 2,287 (13,255) (27,748)
Investments 10,341 40,747 36,605 42,227 58,597
Loans 438,309 582,394 783,478 1,059,217 1,432,899
Others 4,919 6,928 9,274 10,356 11,654
Total assets 469,730 637,246 836,290 1,104,120 1,482,093
Key Ratios (%)

Y/E Year End FY16 FY17 FY18 FY19E FY20E
NIM 9.9 9.8 12.1 11.0 10.7
RoA 3.2 3.3 3.6 3.6 3.6
RoAE 20.9 21.6 20.3 19.5 21.7
GNPA (%) 1.2 1.7 1.5 1.5 1.4
NNPA (%) 0.3 0.5 0.5 0.4 0.4
Per Share Data (Rs) FY16 FY17 FY18 FY19E FY20E

EPS 23.9 33.7 46.6 61.2 82.0
BVPS 138.7 176.0 290.6 341.1 413.6
ABVPS 136.4 170.6 284.5 333.0 403.2
DPS 2.5 3.6 4.0 6.0 8.0
Valuations (x) FY16 FY17 FY18 FY19E FY20E

PER 90.8 64.4 46.6 35.5 26.4
P/BV 16.2 12.8 7.7 6.6 5.4
P/ABV 16.5 13.2 7.9 6.8 5.6
Dividend Yield (%) 0.1 0.2 0.2 0.3 0.4

Growth (%) FY16 FY17 FY18 FY19E FY20E

NII 35.6 35.1 69.5 24.3 30.7
PPOP 44.0 45.0 39.9 33.0 32.6
PAT 42.4 43.6 44.1 32.9 34.2
Loans 38.7 32.9 34.5 35.2 35.3
Quarterly (Rs mn) Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18

NII 16,886 20,484 19,586 23,724 23,651
NIM (%) 11.5 12.7 11.1 12.6 11.7
PPOP 9,794 12,071 10,833 14,230 13,731
PAT 4,492 6,020 5,569 7,668 7,210
EPS (Rs) 8.17 10.99 9.69 13.34 12.53
Shareholding Pattern (%) Jun-17 Sep-17 Sep-17 Dec-17 Mar-18

Promoters 57.9 55.3 55.3 55.3 55.1
FIIs 18.6 21.2 21.2 20.4 19.5
DIIs 5.9 7.0 6.5 8.1 9.0
Public and Others 17.5 16.6 17.1 16.2 16.4
Source: Capitaline

RECOMMENDATION HISTORY TABLE RECOMMENDATION HISTORY CHART

Closing Period
Date TP Rating Analyst BUY Hold Sell
Price (months) Accumulate Reduce Price
Target Price
29-May-18 2,077 2,375 12m Buy Jignesh Shial 2375
17-May-18 2,067 2,375 12m Buy Jignesh Shial
1990
10-Apr-18 1,926 2,284 12m Buy Jignesh Shial
1605
2-Feb-18 1,629 2,200 12m Buy Umang Shah
1220
16-Oct-17 1,886 2,000 12m Accumulate Umang Shah
18-Sep-17 1,912 2,000 12m Accumulate Umang Shah 835
19-Jul-17 1,542 1,750 12m Accumulate Umang Shah 450
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
18-May-17 1,315 1,450 12m Accumulate Umang Shah
30-Jan-17 1,055 1,360 12m Buy Umang Shah
22-Dec-16 765 1,020 12m Buy Umang Shah Source: Bloomberg, Company, Emkay Research
27-Oct-16 1,105 1,100 12m Hold Umang Shah
6-Sep-16 1,127 1,100 12m Hold Umang Shah
27-Jul-16 979 1,100 12m Hold Umang Shah
25-May-16 734 792 12m Hold Umang Shah
4-Feb-16 634 792 12m Accumulate Umang Shah
21-Oct-15 536 603 12m Accumulate Umang Shah
15-Sep-15 525 602 12m Accumulate Umang Shah
22-Jul-15 513 602 12m Accumulate Umang Shah

Company Update
June 12 2018
Emkay
©

CMP Target Price
Performance justifies premium Rs 1,574

as of (6/12/2018)
Rs 1,762 (■)
12 months
Rating Upside
ACCUMULATE (■) 12.0 %
Cholamandalam Finance (CIFC) has de-risked its product portfolio, which has Change in Estimates
insulated it from the CV down cycle. Among the CV financiers, it has the most EPS Chg FY19E/FY20E (%) -/-
diversified lending portfolio compared to most peers. The company has Target Price change (%) NA
reported robust sales growth, along with stable asset quality. Elevated Target Period (Months) 12
leverage has resulted in superior RoEs, resulting in the stock trading at a Previous Reco ACCUMULATE
premium to peers. However, we also believe that consistently higher earnings Emkay vs Consensus
growth and better ROEs do justify premium valuations. We maintain EPS Estimates
ACCUMULATE with a TP of Rs1,762, valuing it at 3.6x P/Adj. Book on FY20E. FY19E FY20E
 Recovery in CV cycle and low market share to help CIFC outpace peers: CIFC de- Emkay 81.4 99.8
risked its business model by diversifying into Home Equity (LAP) business, which helped Consensus 80.0 99.3
it to navigate the CV downturn during FY13-16. We believe that the recovery in the CV Mean Consensus TP (12M) Rs 1,826
cycle and the low market share will throw up immense growth opportunities for CIFC Stock Details
despite rising competition. As at Mar’18, CIFC enjoys ~6% market share in the overall Auto Bloomberg Code CIFC IN
Financing space. Face Value (Rs) 10
 Home Equity business to return to normalcy in FY19: In FY17, CIFC’s HE portfolio Shares outstanding (mn) 156
witnessed pressure, both on asset quality as well as growth front due to demonetization. 52 Week H/L 1,761 / 1,016
Gross NPLs rose to 5.5% as at Mar’17 under 90-dpd NPL recognition and credit costs for M Cap (Rs bn/USD bn) 247 / 3.68
FY17 averaged ~85bps. Going forward, we expect this trend to normalize, as the Daily Avg Volume (nos.) 283,561
management is looking at resolution under SARFAESI. Overall GNPLs in HE declined in Daily Avg Turnover (US$ mn) 6.6
Q4FY18 and credit cost also averaged lower at ~60bps for FY18. Moreover, with
Shareholding Pattern Mar '18
expansion in its distribution reach, growth too is likely to pick up pace in FY19.
Promoters 53.1%
 Conservative asset quality while maintaining profitability: Over the past two years, FIIs 20.3%
CIFC has fortified its recovery efforts, making it among the few large AFCs to have adopted
DIIs 16.5%
the 90-dpd NPL recognition a year ahead of implementation deadline. As at end-Mar’18,
its GNPLs stood at 2.9% on 90-dpd NPL recognition basis. Notably, despite following a
conservative approach, CIFC has been able to maintain / improve its profitability. Price Performance
(%) 1M 3M 6M 12M
 Valuation and view: CIFC trades at 3.6x FY20E Adjusted Book for average ROEs of
Absolute (5) 12 23 51
~22% over FY18-20E. While CIFC trades at a premium to some of its larger peers, one
Rel. to Nifty (6) 5 16 36
needs to view its valuation premium in the context of the superior earnings growth, better
ROEs and stellar execution track record. We maintain ACCUMULATE with a TP of Relative price chart
1750 Rs % 50
Rs1,762, corresponding to ~4.0x P/Adj. Book on FY20E.
1610 38
1470 26
1330 14
1190 2
1050 -10
Cholamandalam Invest. & Finance (LHS)
Source: Bloomberg
Net income 21,429 24,295 31,179 38,720 47,176
Jignesh Shial
Net profit 5,685 7,187 9,241 12,743 15,610
EPS (Rs) 37.6 46.0 62.3 81.4 99.8
+91-22-66242468
ABV (Rs) 214.4 229.7 281.7 347.0 433.9
Kushan Parikh, CFA
RoA (%) 2.2 2.5 2.8 2.8 2.8
RoE (%) 18.0 18.0 20.6 22.3 22.5
+91-022-66242431
PE (x) 41.9 34.3 25.4 19.4 15.8

Cholamandalam Finance (CIFC IN) India Equity Research | Company Update

Income Statement
Other income 83 143 0 0 0
Net income 21,429 24,295 31,179 38,720 47,176
Provisions 4,272 3,106 3,951 3,528 4,562
Tax 3,023 3,868 5,092 6,862 8,406
Tax rate 35 35 36 35 35
Profit after tax 5,685 7,187 9,241 12,743 15,610
Balance Sheet
Equity 1,562 1,563 1,564 1,564 1,564
Reserves 35,012 41,565 49,938 61,035 74,632
Net worth 36,574 43,129 51,502 62,599 76,196
Deposits 0 0 0 0 0
Borrowings 225,762 242,068 319,023 409,811 515,279
Total liabilities 278,883 307,211 395,046 501,802 625,001
Cash and bank 4,905 4,870 3,925 7,097 9,117
Investments 666 2,385 3,190 2,049 2,576
Loans 260,146 285,836 374,132 477,817 597,325
Others 12,053 12,720 12,191 13,071 14,038
Total assets 278,883 307,211 395,046 501,802 625,001
Key Ratios (%)

NIM 7.8 7.6 8.1 8.0 7.8
RoA 2.2 2.5 2.8 2.8 2.8
RoAE 18.0 18.0 20.6 22.3 22.5
GNPA (%) 3.7 5.0 4.3 3.5 3.0
NNPA (%) 2.1 3.4 2.7 2.4 1.9

EPS 37.6 46.0 62.3 81.4 99.8
BVPS 242.1 275.9 329.2 400.1 487.0
ABVPS 214.4 229.7 281.7 347.0 433.9
DPS 4.5 5.5 6.5 9.0 11.0

PER 41.9 34.3 25.4 19.4 15.8
P/BV 6.5 5.7 4.8 3.9 3.2
P/ABV 7.3 6.9 5.6 4.5 3.6
Dividend Yield (%) 0.3 0.3 0.4 0.6 0.7
ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12 2018 | 23


NII 24.9 13.1 29.1 24.2 21.8
PPOP 32.2 9.1 29.1 26.5 23.5
PAT 30.6 26.4 28.6 37.9 22.5
Loans 16.8 9.9 30.9 27.7 25.0

NII 6,657 6,938 7,392 7,930 8,915
NIM (%) 8.0 8.0 8.3 8.4 8.7
PPOP 3,905 4,162 4,304 4,694 5,125
PAT 2,196 2,066 2,273 2,492 2,911
EPS (Rs) 14.04 13.21 14.54 15.94 18.61
Shareholding Pattern (%) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Promoters 53.1 53.1 53.1 53.1 53.1
FIIs 20.7 21.5 21.6 19.3 20.3
DIIs 15.9 15.1 15.6 17.1 16.5
Source: Capitaline


Closing Period
Target Price
29-May-18 1,543 1,762 12m Accumulate Jignesh Shial 1775
24-Apr-18 1,650 1,762 12m Accumulate Jignesh Shial
1536
10-Apr-18 1,564 1,464 12m Accumulate Jignesh Shial
1297
31-Jan-18 1,286 1,450 12m Accumulate Umang Shah
1058
1-Nov-17 1,225 1,350 12m Accumulate Umang Shah
18-Sep-17 1,169 1,350 12m Accumulate Umang Shah 819
28-Jul-17 1,180 1,350 12m Accumulate Umang Shah 580
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
2-May-17 1,092 1,350 12m Accumulate Umang Shah
29-Dec-16 988 1,135 12m Accumulate Umang Shah Source: Bloomberg, Company, Emkay Research
28-Oct-16 1,185 1,370 12m Buy Umang Shah
6-Sep-16 1,109 1,370 12m Buy Umang Shah
1-Aug-16 1,152 1,370 12m Buy Umang Shah
2-May-16 851 1,000 12m Buy Umang Shah
27-Oct-15 602 790 12m Buy Umang Shah
15-Sep-15 618 825 12m Accumulate Umang Shah

Edelweiss Financial Services
June 12, 2018
Company Update Emkay
©

CMP Target Price
Firing on all cylinders Rs 316

as of (6/12/2018)
Rs 361 (■)
12 months
Rating Upside
BUY (■) 13.9 %
We maintain BUY on Edelweiss Financial Services (EDEL), as we believe that Change in Estimates
the company would continue to pursue aggressive growth in superior RoE EPS Chg FY19E/FY20E (%) -/-
businesses, which in turn will result in healthy PAT CAGR of 35%+ over FY18- Target Price change (%) NA
20E. We are factoring in improvement in consolidated RoE (post dilution) to Target Period (Months) 12
~20% and RoA at ~2% by FY20E. Previous Reco BUY
 Funds Business – Diversification on the cards; Retail to take driver’s seat: Although Emkay vs Consensus
the company has successfully ventured into Corporate Lending to reduce sector EPS Estimates
concentration & earnings volatility and to increase portfolio of better-rated assets, the FY19E FY20E
company plans to increase the share of the Retail portfolio. We are assuming robust growth Emkay 13.6 16.8
in Retail assets against consolidation in Wholesale, resulting in the share of retail rising to Consensus 13.6 17.4
~45% in FY20E. Mean Consensus TP (12M) Rs 358
 EDEL ARC – Best placed to capitalise on opportunities: Capital infusion for PSBs, Stock Details
along with upcoming NCLT admissions has finally increased the probability of stressed Bloomberg Code EDEL IN
asset resolutions for Indian banks. This in turn is the most opportunistic time for well Face Value (Rs) 1
capitalized ARCs like EDEL. Shares outstanding (mn) 917
 Franchise business continues to witness robust traction – Overall contribution to 52 Week H/L 342 / 170
profitability on the rise: Asset management and capital market businesses had a strong M Cap (Rs bn/USD bn) 304 / 4.53
quarter given the macro tailwinds in these businesses. Overall Assets under Advice (wealth Daily Avg Volume (nos.) 2,544,449
management + MF + alternative assets) stood at Rs1.2trn, up 52% yoy. The PAT Daily Avg Turnover (US$ mn) 10.8
contribution from this businesses has increased to ~35% in FY18 which further reiterates
our positive stance in franchise business.
Promoters 33.6%
 Life insurance business witnessing steady growth – General insurance business on FIIs 27.9%
the initial stages: In the life insurance business, the gross premium income grew 52%
DIIs 4.4%
yoy to Rs3.1bn. However, the business continues to remain in the investment mode though
the quantum of losses been declining for FY18 stood at Rs1.1bn vs. Rs1.36bn for FY17.
The management also remains confident of developing its general insurance business Price Performance
without any partnership for now. (%) 1M 3M 6M 12M
 Healthy margins, improving C/I ratio to accelerate profitability: With the rising share Absolute 14 31 18 68
of better yielding Retail Lending book and a consistent decline in cost of funds (due to its Rel. to Nifty 14 23 11 51
borrowing profile), we expect consolidated margins to remain healthy. This coupled with Relative price chart
the improvement in Cost-to-Income ratio (due to increasing operational efficiencies) would 350 Rs % 60
allow the company to witness PAT CAGR of ~35%+ over FY18-20E. 310 46
 Attractively priced – Maintain BUY: EDEL is currently trading at ~3.3x P/Adj book on 270 32
FY20E, which is quite attractive considering its robust growth profile, healthy profitability 230 18
and improving return ratios. We are valuing the company on SOTP basis, assigning 190 4
separate value for each sizeable business. Accordingly, we have arrived at a TP of Rs361,
150 -10
corresponding to 3.6x P/Adj book on FY20E. Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18
Edelweiss Financial (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Net income 26,480 38,091 51,158 66,135 82,192
Jignesh Shial
Net profit 4,144 6,093 8,901 12,356 15,225
EPS (Rs) 5.0 7.0 9.8 13.6 16.8
+91-22-66242468
ABV (Rs) 43.2 48.8 72.5 83.9 98.1
Kushan Parikh, CFA
RoA (%) 1.5 1.6 1.8 1.8 0.0
RoE (%) 12.1 15.2 16.2 17.2 18.1
+91-022-66242431
PE (x) 66.7 47.1 33.8 24.4 19.8

Edelweiss Financial Services (EDEL IN) India Equity Research | Company Update
Exhibit 31: SOTP of Rs361 per share

Business Stake (%) Value (Rs m) Value of EDEL Stake (Rs m) % contribution Valuation basis
Credit business 100% 189,146 189,146 57% 2.5x FY20E Book Value
Franchise business 100% 130,685 130,685 40% 20x FY20E PAT
Life Insurance 51% 20,680 10,547 3% 2x FY17 Embedded Value
Total value 330,378 100%
O/s no of shares (in mn) 916
Value per share 361

Key Financials (Consolidated)

Income Statement
Other income 14,257 25,173 25,078 30,130 36,338
Fee income 10,836 18,012 17,551 21,150 25,615
Net income 26,480 38,091 51,158 66,135 82,192
Provisions 808 1,109 1,869 2,969 4,227
Tax 2,354 3,947 5,598 8,026 9,938
Tax rate 41 42 39 40 40
Profit after tax 4,144 6,093 8,901 12,356 15,225
Balance Sheet
Equity 814 833 916 916 916
Reserves 42,903 52,047 76,709 87,045 100,046
Net worth 43,717 52,879 77,624 87,960 100,961
Deposits 0 0 0 0 0
Borrowings 277,731 333,790 464,097 571,639 675,413
Cash and bank 19,340 26,182 39,259 37,966 23,962
Investments 26,964 68,777 90,754 108,905 130,686
Loans 167,803 200,995 281,422 351,778 422,133
Others 148,794 144,902 216,162 269,768 336,774
Total assets 369,846 448,234 635,135 776,332 921,866
Key Ratios (%)

NIM 7.0 5.4 7.5 7.5 7.5
RoA 1.5 1.6 1.8 1.8 0.0
RoAE 12.1 15.2 16.2 17.2 18.1
GNPA (%) 1.4 1.6 1.8 2.4 2.6
NNPA (%) 0.5 0.6 0.7 0.5 0.5

EPS 5.0 7.0 9.8 13.6 16.8
BVPS 44.0 49.9 73.4 85.2 99.8
ABVPS 43.2 48.8 72.5 83.9 98.1
DPS 1.3 1.0 1.3 1.5 1.7

PER 66.7 47.1 33.8 24.4 19.8
P/BV 7.2 6.3 4.3 3.7 3.1
P/ABV 7.3 6.5 4.4 3.8 3.2
Dividend Yield (%) 0.4 0.3 0.4 0.5 0.5


NII 62.2 5.7 101.9 38.1 27.4
PPOP 5.2 61.7 54.8 41.2 26.2
PAT 26.1 47.0 46.1 38.8 23.2
Loans 24.6 19.8 40.0 25.0 20.0

NII 12,039 10,770 11,308 11,861 16,575
NIM (%) 7.7 7.6 7.5 7.5 7.7
PPOP 2,546 3,358 3,580 3,608 3,637
PAT 1,700 1,963 2,092 2,364 2,482
EPS (Rs) 2.04 2.36 2.45 2.58 2.71

Promoters 36.9 36.1 36.0 33.7 33.6
FIIs 28.6 27.6 26.3 27.7 27.9
DIIs 2.1 2.5 2.3 4.4 4.4
Source: Capitaline


Closing Period
Target Price
29-May-18 339 361 12m Buy Jignesh Shial 375
4-May-18 292 361 12m Buy Jignesh Shial
308
10-Apr-18 264 354 12m Buy Jignesh Shial
241
7-Nov-17 279 368 12m Buy Umang Shah
174
4-Aug-17 225 280 12m Buy Umang Shah
Source: Company, Emkay Research 107
40
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15

HDFC
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Headwinds ahead Rs 1,840

as of (6/12/2018)
Rs 2,171 (■)
12 months
Rating Upside
HOLD (■) 18.0 %
Given the asset quality challenges and slowdown in demand for corporate Change in Estimates
credit, Housing Finance has been the obvious choice for banks to fall back on EPS Chg FY19E/FY20E (%) -/-
during the easing interest rate scenario. However, during a tightening Target Price change (%) NA
monetary cycle, pure HFCs are the most vulnerable compared to other NBFCs. Target Period (Months) 12
HDFC is already facing pressure in the form of higher pre-payments and Previous Reco HOLD
margin compressions. We remain conservative towards HFCs considering the Emkay vs Consensus
sluggish housing demand and rising exposure to Developer Finance. We EPS Estimates
maintain HOLD with a TP of Rs2,171, corresponding to ~6.0x P/Adj book on
FY19E FY20E
FY20E.
Emkay 59.4 66.9
 Developer Loans seeing pick-up in demand: While demand in the Individual Home Consensus 57.9 66.7
Loan segment remains tepid, growth in the Corporate Loan and Other Loan segments Mean Consensus TP (12M) Rs 2,149
has seen some traction over the past few quarters. Demand in this segment is mainly Stock Details
driven by Developer Loans and Rental Discounting, while Corporate Loans continue to Bloomberg Code HDFC IN
witness some pressure. We expect demand in this segment to improve gradually, which Face Value (Rs) 2
is also positive for HDFC’s spreads. However, in FY18, the share of retail loans in
Shares outstanding (mn) 1,680
incremental growth stood at 75% vs. 71% in FY17.
52 Week H/L 1,986 / 1,591
 Affordable Housing – the next big opportunity?: Government has sharpened its focus M Cap (Rs bn/USD bn) 3,136 / 46.75
on Affordable Housing and has announced a slew of measures (CLSS scheme, tax Daily Avg Volume (nos.) 2,787,708
incentives for borrowers and fiscal sops for developers engaged in Affordable Housing) Daily Avg Turnover (US$ mn) 76.5
to revive the housing sector. Regulatory sops have been announced to boost demand
and supply (for developers) for Affordable Housing. We believe these measures could
result in higher demand in the medium term. But, in the near term, demand in the home Promoters -%
loan segment is likely to remain sluggish. FIIs 74.0%

DIIs 12.6%
 NIMs and asset quality to remain stable: Despite continuously shifting its exposure
towards the relatively low-yielding Individual Home Loans, HDFC has been able to
maintain its spreads in the band of 220-230bps, which is commendable. With some uptick Price Performance
in Corporate Loans, we expect HDFC’s spreads to remain stable. Asset quality remains (%) 1M 3M 6M 12M
best in class. Absolute (3) 6 13 17
 Valuation and view: HDFC's growth momentum has moderated given the limited Rel. to Nifty (3) - 6 5
opportunities in the Corporate Loan segment and slowing pace of retail loans. While NIMs Relative price chart
1975 Rs % 10
and asset quality are likely to remain stable, revival in growth will be crucial. Further
announcements to unlock value in subsidiaries could drive up valuations. We maintain 1900 6
HOLD with a TP of Rs2,171, corresponding to ~6.0x P/Adj book on FY20E. 1825 2
1750 -2
1675 -6
1600 -10
HDFC (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Net income 115,821 122,634 129,949 159,478 178,796
Jignesh Shial
Net profit 70,931 74,426 121,637 101,639 114,574
EPS (Rs) 44.9 46.8 72.6 59.4 66.9
+91-22-66242468
ABV (Rs) 214.4 248.0 371.9 433.5 473.2
Kushan Parikh, CFA
RoA (%) 2.7 2.4 3.1 2.4 2.3
RoE (%) 21.8 20.2 22.1 15.2 15.1
+91-022-66242431
PE (x) 41.6 39.8 25.7 31.5 27.9

HDFC (HDFC IN) India Equity Research | Company Update
Exhibit 32: SoTP Valuation – FY20E based (Rs)

Value per share
Particulars Stake (%) % of total Rationale
(Rs)
Core business 100.0% 1,133 52% 3.5x FY20E P/BV
HDFC Bank 21.5% 828 38% 4x FY20E P/BV

HDFC Standard Life 51.7% 309 14% MCAP basis
HDFC General Insurance 50.8% 16 1% 2x FY20E P/BV
HDFC AMC 57.4% 69 3% 5% FY20E AUM
Gruh Finance 58.0% 76 3% MCAP basis
Value of Subsidiaries / Associates 1,297
Less: 20% holding discount 259 12%
Value of Subsidiaries / Associates (post hold. co. discount) 1,037 48%
Target Value Post 20% Holding Company Discount 2,171 100%



Income Statement
Other income 28,875 23,094 16,822 24,985 18,703
Fee income 3,742 3,462 1,448 1,592 1,783
Net income 115,821 122,634 129,949 159,478 178,796
Provisions 7,150 7,000 4,550 3,000 2,500
Tax 30,150 32,840 31,000 44,184 49,808
Tax rate 30 31 27 30 30
Profit after tax 70,931 74,426 84,821 101,639 114,574
Balance Sheet
Equity 3,160 3,177 3,352 3,425 3,425
Reserves 337,540 392,766 610,170 720,985 787,475
Net worth 340,700 395,943 613,522 724,409 790,900
Deposits 2,377,629 2,797,322 3,199,121 3,772,012 4,424,200
Borrowings 0 0 0 0 0
Total liabilities 2,888,766 3,363,579 4,016,744 4,720,933 5,462,062
Cash and bank 54,925 64,617 13,714 99,831 38,641
Investments 153,454 204,101 305,325 320,591 336,621
Loans 2,592,244 2,964,718 3,594,420 4,191,124 4,971,011
Others 81,498 123,719 96,840 102,877 109,215
Total assets 2,888,766 3,363,579 4,016,744 4,720,933 5,462,062
Key Ratios (%)

NIM 3.4 3.4 3.2 3.2 3.3
RoA 2.7 2.4 3.1 2.4 2.3
RoAE 21.8 20.2 22.1 15.2 15.1
GNPA (%) 0.7 0.8 0.8 0.8 0.7
NNPA (%) 0.5 0.6 0.5 0.5 0.5

EPS 44.9 46.8 72.6 59.4 66.9
BVPS 215.7 249.2 366.1 423.0 461.9
ABVPS 214.4 248.0 371.9 433.5 473.2
DPS 17.0 18.0 20.0 22.0 24.0

PER 41.6 39.8 25.7 31.5 27.9
P/BV 8.6 7.4 4.9 4.2 3.9
P/ABV 11.3 9.4 6.9 5.6 5.0
Dividend Yield (%) 0.9 1.0 1.1 1.2 1.3


NII 8.7 14.5 13.7 18.9 19.0
PPOP 23.1 5.6 5.3 23.6 12.1
PAT 18.4 4.9 14.0 19.8 12.7
Loans 13.6 14.4 21.2 0.0 0.0

NII 28,524 25,852 26,108 29,287 32,110
NIM (%) 3.8 3.4 3.3 3.4 3.4
PPOP 30,862 24,437 30,021 29,099 36,909
PAT 20,442 15,557 21,011 56,702 28,462
EPS (Rs) 12.87 9.77 13.17 35.49 16.98

Promoters - - - - -
FIIs 77.3 77.6 76.0 74.8 74.0
DIIs 10.4 11.4 12.9 13.9 12.6
Source: Capitaline


Closing Period
Target Price
29-May-18 1,810 2,171 12m Hold Jignesh Shial 2175
30-Apr-18 1,883 2,171 12m Hold Jignesh Shial
1944
1713
1482
30-Jan-18 1,938 2,161 12m Hold Umang Shah
31-Oct-17 1,707 1,700 12m Hold Umang Shah 1251
26-Jul-17 1,633 1,670 12m Hold Umang Shah 1020
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
4-May-17 1,564 1,528 12m Hold Umang Shah
2-May-16 1,092 1,295 12m Accumulate Umang Shah Source: Bloomberg, Company, Emkay Research
28-Jan-16 1,148 1,300 12m Hold Sohail Halai
27-Oct-15 1,275 1,330 12m Hold Sohail Halai
28-Jul-15 1,304 1,348 12m Hold Sohail Halai

LIC Housing Finance
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Tough times to persist Rs 499

as of (6/12/2018)
Rs 572 (■)
12 months
Rating Upside
HOLD (■) 14.7 %
We continue to remain conservative on LIC Housing Finance’s (LICHF) Change in Estimates

slowing growth and increasing non-core housing book. However, considering EPS Chg FY19E/FY20E (%) -/-
limited downside on valuations, we maintain HOLD with TP of Rs572, Target Price change (%) NA
corresponding to ~1.8x P/Adj. Book on FY20E. Target Period (Months) 12
 Adversely affected due to rising yields and increasing competition: Given the asset Previous Reco HOLD
quality challenges and slowdown in demand for corporate credit, Housing Finance has Emkay vs Consensus
been the obvious choice for banks to fall back on as a safe haven during an easing interest EPS Estimates
rate scenario. However, during a tightening monetary cycle, pure HFCs like LICHF are the FY19E FY20E
most adversely affected compared to other NBFCs. The company is already facing Emkay 47.1 54.7
pressure in the form of higher pre-payments and margin compressions. Although being Consensus 45.7 53.2
primarily wholesale funded, LICHF has derived the maximum advantage from the recent Mean Consensus TP (12M) Rs 621
fall in yields, going forward rising yields would be a major headwind along with increasing Stock Details
competition, especially from large banks. Bloomberg Code LICHF IN
 Growth likely to remain subdued: In FY18, LICHF’s loan book grew by 15.1%, as core Face Value (Rs) 2
Individual Home Loans grew at a slower pace of ~11%. The moderation in growth can be Shares outstanding (mn) 505
attributed to sluggish demand environment and stiff competition. The repayment/pre- 52 Week H/L 794 / 463
payment rate for LICHF remains elevated. Given the stiff competition in the Housing M Cap (Rs bn/USD bn) 249 / 3.71
Finance space, growth is unlikely to spurt meaningfully in the near term. Daily Avg Volume (nos.) 1,846,921
Daily Avg Turnover (US$ mn) 14.3
 NIMs under pressure despite better growth in high yielding loans and lower costs:
In FY18, LICHF recorded 32bps contraction in NIM to 2.38%, despite: 1) Better growth in Shareholding Pattern Mar '18
relatively high-yielding non-individual loans - indicates the inability of the management to Promoters 40.3%
price risks appropriately and 2) 19bps fall in calculated cost of funds. Rising competition FIIs 32.9%
along with LICHF’s inability to command better pricing power resulted in overall spreads
DIIs 8.3%
getting compressed. Going forward, we expect NIMs to remain stable.
 Asset quality to remain stable: LICHF’s asset quality remains largely stable, mainly
Price Performance
driven by the strong asset quality performance in Individual Home Loans. Moreover, the
(%) 1M 3M 6M 12M
company has made all necessary provisions towards NPLs in the Developer Loans
Absolute (4) - (12) (33)
segment. Hence, we do not foresee any major pressure on asset quality/credit costs. The
management has remained confident of recovering bad loans in the Individual Home Loan Rel. to Nifty (5) (5) (17) (40)
segment. However, recoveries from corporate NPLs may take a few quarters. Relative price chart
800 Rs % 0
 Valuation and view: Heightened competition in the Individual Home Loan segment could 730 -10
put pressure on LICHF’s growth/margins. Considering this, pure Housing Finance
660 -20
companies like LICHF have faced pressure in the form of higher pre-payments and margin
compressions. Although being primarily wholesale funded, LICHF has gained the 590 -30
maximum advantage from the recent fall in yields, we continue to remain conservative due 520 -40
to the company’s slowing growth and increasing non-core housing book. We maintain our 450 -50
HOLD with a TP of Rs572, corresponding to ~1.8x P/Adj. FY20E book. LIC Housing Finance (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Net income 31,787 38,488 39,482 47,585 55,629
Jignesh Shial
Net profit 16,608 19,310 19,896 23,761 27,620
EPS (Rs) 32.9 38.2 39.4 47.1 54.7 +91-22-66242468
ABV (Rs) 177.2 216.5 241.6 279.0 324.0
Kushan Parikh, CFA
RoA (%) 1.4 1.4 1.2 1.3 1.3 kushan.parikh@emkayglobal.com
RoE (%) 19.6 19.1 16.7 17.4 17.5 +91-022-66242431
PE (x) 15.0 12.9 12.5 10.5 9.0

LIC Housing Finance (LICHF IN) India Equity Research | Company Update

Income Statement
Other income 2,346 2,036 2,469 2,643 2,950
Fee income 1,453 1,102 1,337 1,432 1,661
Net income 31,787 38,488 39,482 47,585 55,629
Provisions 1,465 2,813 2,389 3,229 3,744
Tax 9,028 10,247 10,723 12,806 14,886
Tax rate 35 35 35 35 35
Profit after tax 16,608 19,310 19,896 23,761 27,620
Balance Sheet
Equity 1,010 1,010 1,010 1,010 1,010
Reserves 90,450 109,760 125,897 145,419 168,111
Net worth 91,460 110,770 126,907 146,429 169,121
Deposits 1,084,312 1,238,371 1,375,906 1,626,241 1,900,444
Borrowings 0 0 0 0 0
Total liabilities 1,296,869 1,499,833 1,718,520 2,028,302 2,372,828
Cash and bank 39,268 44,633 29,535 76,847 108,861
Investments 2,768 5,270 9,868 10,457 11,089
Loans 1,251,732 1,445,340 1,663,230 1,924,545 2,235,817
Others 0 0 0 0 0
Total assets 1,296,869 1,499,833 1,718,520 2,028,302 2,372,828
Key Ratios (%)

NIM 2.5 2.7 2.4 2.5 2.5
RoA 1.4 1.4 1.2 1.3 1.3
RoAE 19.6 19.1 16.7 17.4 17.5
GNPA (%) 0.5 0.4 0.8 0.9 0.9
NNPA (%) 0.2 0.1 0.4 0.4 0.4

EPS 32.9 38.2 39.4 47.1 54.7
BVPS 181.1 219.4 251.3 290.0 334.9
ABVPS 177.2 216.5 241.6 279.0 324.0
DPS 5.5 6.2 6.8 7.3 7.5

PER 15.0 12.9 12.5 10.5 9.0
P/BV 2.8 2.3 2.0 1.7 1.5
P/ABV 2.8 2.3 2.1 1.8 1.5
Dividend Yield (%) 1.1 1.3 1.4 1.5 1.5


NII 31.6 23.8 1.5 21.4 17.2
PPOP 28.5 19.4 2.0 20.6 16.2
PAT 19.8 16.3 3.0 19.4 16.2
Loans 15.5 15.5 15.1 15.7 16.2

NII 10,396 9,125 8,875 8,976 10,037
NIM (%) 3.0 2.5 2.4 2.3 2.5
PPOP 8,954 8,230 8,059 8,050 8,669
PAT 5,292 4,701 4,891 4,911 5,393
EPS (Rs) 10.48 9.31 9.69 9.72 10.68

Promoters 40.3 40.3 40.3 40.3 40.3
FIIs 32.9 34.9 33.7 34.1 32.9
DIIs 13.0 12.2 13.7 13.5 8.3
Source: Capitaline


Closing Period
Target Price
29-May-18 488 572 12m Hold Jignesh Shial 800
25-Apr-18 547 572 12m Hold Jignesh Shial
718
636
554
31-Oct-17 599 650 12m Hold Umang Shah
31-Jul-17 690 730 12m Hold Umang Shah 472
26-Apr-17 676 730 12m Hold Umang Shah 390
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
17-Jan-17 532 570 12m Hold Umang Shah
21-Oct-16 600 625 12m Hold Umang Shah
19-Jul-16 508 500 12m Hold Umang Shah Source: Bloomberg, Company, Emkay Research
20-Apr-16 467 500 12m Hold Umang Shah
19-Jan-16 470 515 12m Hold Sohail Halai
16-Oct-15 495 515 12m Hold Sohail Halai
21-Jul-15 465 515 12m Hold Sohail Halai

L&T Finance Holdings
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Diversified rural play Rs 168

as of (6/12/2018)
Rs 238 (■)
12 months
Rating Upside
BUY (■) 41.8 %
L&T Finance Holdings (LTFH) has successfully transformed its lending Change in Estimates
business to focus on ROEs and sustainable growth. Consolidated ROE has EPS Chg FY19E/FY20E (%) -/-
improved from 10% in FY16 to ~15% in FY18. Being a diversified financial Target Price change (%) NA
services player, LTFH has multiple levers of growth (~7 product lines under 3 Target Period (Months) 12
business verticals in the lending business). Moreover, a robust and Previous Reco BUY
sustainable fee income franchise helps it to maintain profitability. We expect Emkay vs Consensus
this will enable LTFH to clock consolidated PAT CAGR of 40% over FY18-20E. EPS Estimates
 Lending business transformed; focus on increasing share of retail: As part of its FY19E FY20E
business transformation, LTFH chose to reduce its dependence on the legacy Wholesale Emkay 10.7 14.4
Lending business and focus on increasing the share of Retail. This not only helped the Consensus 10.0 13.3
company to improve its overall profitability but also mitigated risks by making the portfolio Mean Consensus TP (12M) Rs 224
more granular in nature. As a result, the share of Retail has increased from 32% in FY16 Stock Details
to 42% in FY18. Moreover, the share of Retail segment’s profit in the overall lending Bloomberg Code LTFH IN
business profit too has risen to 62.5% in FY18 vs. 41% in FY16. Face Value (Rs) 10
 Management confident of maintaining high fee income growth: A strong sell-down Shares outstanding (mn) 1,996
desk and domain expertise in the Wholesale Lending business gives LTFH confidence to 52 Week H/L 214 / 130
sustain high fee income. Fees as % of AUM stood at ~20-50bps across Wholesale and M Cap (Rs bn/USD bn) 334 / 4.98
Retail businesses, enabling the management to sustain better margins. Daily Avg Volume (nos.) 4,180,067
 ROE drag from wholesale business will gradually subside: The Wholesale book
consists largely of Infrastructure loans. The provision required against this book is Rs25- Shareholding Pattern Mar '18
27bn, of which Rs14bn has already been provided for and the balance would be provided Promoters 64.0%
for in FY19. LTFH expects the Wholesale business ROE to gradually rise to 15% (current FIIs 9.6%
ROE is 8-9%). Renewables, operational Road Projects and Transmission business are the
DIIs 5.4%
new focus segments within the Wholesale business.
 Valuations and view: We believe that LTFH’s successful turnaround of the lending
Price Performance
business and focus on realization of the book will aid in sustainably improving its
(%) 1M 3M 6M 12M
profitability and return ratios. Scaling of the non-lending business will also aid in improving
Absolute (5) 6 (3) 27
profitability. However, the drag from the Wholesale business is likely to endure in the near
Rel. to Nifty (6) - (8) 14
term. Given the favorable risk-reward on balance, we maintain BUY with a TP of Rs238.
Relative price chart
225 Rs % 60
200 48
175 36
150 24
125 12
100 0
L&T Finance Holding (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Net income 33,466 39,453 51,738 64,324 78,893
Jignesh Shial
Net profit 8,567 10,422 14,595 21,905 28,343
EPS (Rs) 3.8 5.1 6.9 10.7 14.4
+91-22-66242468
ABV (Rs) 32.2 36.6 56.4 65.2 78.5
Kushan Parikh, CFA
RoA (%) 1.1 1.3 1.7 2.1 2.3
RoE (%) 9.7 12.3 13.3 15.7 18.2
+91-022-66242431
PE (x) 44.2 32.6 24.4 15.6 11.6

L&T Finance Holdings (LTFH IN) India Equity Research | Company Update

Income Statement
Other income 8,660 10,795 4,789 5,515 6,259
Net income 33,466 39,453 51,738 64,324 78,893
Provisions 7,810 15,899 18,968 20,113 21,299
Tax 3,990 364 2,050 4,212 7,548
Tax rate 32 3 12 16 21
Profit after tax 8,567 10,422 14,595 21,905 28,343
Balance Sheet
Equity 17,534 17,557 19,957 19,957 19,957
Reserves 53,237 60,201 105,542 123,677 148,417
Net worth 70,771 77,759 125,499 143,634 168,374
Deposits 0 0 0 0 0
Borrowings 516,157 598,111 715,771 898,012 1,124,230
Cash and bank 4,015 5,944 10,633 (11,196) (24,850)
Investments 35,633 60,115 48,433 53,881 61,833
Loans 560,654 616,485 782,992 997,791 1,249,144
Others 30,730 36,379 44,936 49,728 55,222
Total assets 637,993 725,112 892,306 1,095,781 1,347,205
Key Ratios (%)

NIM 4.8 4.8 6.6 6.5 6.4
RoA 1.1 1.3 1.7 2.1 2.3
RoAE 9.7 12.3 13.3 15.7 18.2
GNPA (%) 4.9 5.1 4.8 4.4 4.0
NNPA (%) 3.8 2.9 2.6 2.2 1.6

EPS 3.8 5.1 6.9 10.7 14.4
BVPS 40.9 43.7 63.8 73.0 85.6
ABVPS 32.2 36.6 56.4 65.2 78.5
DPS 0.8 0.8 1.0 1.3 1.5

PER 44.2 32.6 24.4 15.6 11.6
P/BV 4.1 3.8 2.6 2.3 2.0
P/ABV 5.2 4.6 3.0 2.6 2.1
Dividend Yield (%) 0.5 0.5 0.6 0.7 0.9


NII 16.9 15.5 63.8 25.3 23.5
PPOP 20.2 31.2 36.3 26.9 23.7
PAT 0.2 21.7 40.0 50.1 29.4
Loans 22.5 10.0 27.0 27.4 25.2

NII 10,046 10,261 10,871 12,706 13,111
NIM (%) - - - - -
PPOP 7,738 8,055 8,561 9,409 10,341
PAT 3,158 3,092 3,602 3,841 4,060
EPS (Rs) 1.60 1.56 1.83 1.96 2.13
Shareholding Pattern (%) Sep-17 Dec-17 Mar-18 Mar-18 Mar-18

Promoters 64.2 64.1 64.0 64.0 66.1
FIIs 10.9 9.7 9.2 9.6 8.9
DIIs 4.0 4.5 5.8 5.4 4.7
Source: Capitaline


Closing Period
Target Price
208
166
24-Jan-18 179 250 12m Buy Umang Shah
Source: Company, Emkay Research 124
82
40
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15

Magma Fincorp
Company Update
June 12, 2018
Emkay
©

CMP Target Price
The turnaround story Rs 167

as of (6/12/2018)
Rs 225 (■)
12 months
Rating Upside
BUY (■) 34.8 %
Change in Estimates
The professional management brought in by Magma Fincorp (MGMA) has
EPS Chg FY19E/FY20E (%) -/-
focused on improving asset quality and bring in underwriting discipline.
Target Price change (%) NA
Structural changes implemented in the recent past have started paying off in
Target Period (Months) 12
the form of declining asset quality pressures and management’s ability to
kick-start growth again. Further improvement in asset quality, return of growth Previous Reco BUY
and an overall superior loan portfolio at fairly cheap valuation makes MGMA Emkay vs Consensus
the most attractive among its peers. EPS Estimates

FY19E FY20E
 Corrective measures bearing fruits: The professional duo of Mr. Kaushik Banerjee
Emkay 10.9 14.5
(CEO, ABF business; ex-Cholamandalam) and Mr. Manish Jaiswal (CEO, Home Loans &
Consensus 12.0 15.0
SME, ex-CRISIL, Citi, Fullerton and Temasek) come with a vast industry experience. The
Mean Consensus TP (12M) Rs 209
management has introduced a branch grading policy, which means higher graded
Stock Details
branches focus on lending whereas lower graded ones focus purely on collections /
Bloomberg Code MGMA IN
recoveries. This coupled with increasing focus on select products (CV/Used Vehicles) and
consistent improvement in underwriting practices would start delivering steady results in Face Value (Rs) 2
the coming quarters. Shares outstanding (mn) 269

52 Week H/L 194 / 126
 Greenshoots of growth visible: As the asset quality pressures wane, the management
M Cap (Rs bn/USD bn) 46 / 0.69
is turning its focus on kick-starting growth. Since hitting a peak of Rs195.7bn in FY15,
Daily Avg Volume (nos.) 1,284,178
advances declined to Rs155.5bn in FY18. However, disbursements growth has picked up
(+51% yoy / +15% qoq in Q4FY18). MGMA expects AUM growth of 15% in FY19 with
focus on Used Vehicles, Tractors and Affordable Housing. As growth returns and portfolio Shareholding Pattern Apr '18
improves, steady state NIMs are expected to be ~8-8.5%. Promoters 24.4%
 Asset quality improvement likely to continue: Structural changes effected by the new FIIs 40.7%
management have helped the company to tackle asset quality troubles, as absolute DIIs 22.1%
GNPLs have declined from Rs14.6bn (10.4%) in FY16 to Rs8.5bn (7%) in FY18. The Public and Others 12.8%
company has shifted to 90-dpd NPL recognition as on Mar’18 and expects credit costs to
Price Performance
trend downwards from FY19 onwards.
(%) 1M 3M 6M 12M
 Valuations and view: Further improvement in asset quality, return of growth and an Absolute (3) 14 3 36
overall superior loan portfolio at fairly cheap valuation make MGMA attractive. ROA is Rel. to Nifty (3) 8 (2) 22
expected to touch 2% going forward. The stock trades at ~1.5x FY20E Adj. BV and ~12x Relative price chart
FY20E EPS for average ROEs of 11%/12% over FY19E/20E. We recommend BUY with a 200 Rs % 30
TP of Rs225. 180 22
160 14
140 6
120 -2
100 -10
Magma Fincorp (LHS) Rel to Nifty (RHS)
Source: Bloomberg
Net income 13,203 12,752 13,925 14,606 16,761
Jignesh Shial
Net profit 2,114 205 2,304 2,930 3,903
EPS (Rs) 9.1 0.9 9.7 10.9 14.5
+91-22-66242468
ABV (Rs) 57.8 65.3 79.1 100.1 115.6
Kushan Parikh, CFA
RoA (%) 1.4 0.1 1.7 2.0 2.2
RoE (%) 11.1 0.9 10.3 10.9 12.0
+91-022-66242431
PE (x) 18.9 199.5 17.7 15.8 11.9

Magma Fincorp (MGMA IN) India Equity Research | Company Update

Income Statement
Other income 341 550 565 678 814
Net income 13,203 12,752 13,925 14,606 16,761
Provisions 3,750 6,069 3,739 3,159 3,115
Profit before tax 3,058 468 3,181 4,098 5,536
Tax 923 341 876 1,168 1,633
Tax rate 30 73 28 29 30
Profit after tax 2,114 205 2,304 2,930 3,903
Balance Sheet
Equity 474 474 474 539 539
Reserves 21,039 21,247 22,720 30,197 33,776
Net worth 21,513 21,721 23,194 30,736 34,315
Deposits 0 0 0 0 0
Borrowings 118,455 100,753 86,985 101,919 123,134
Cash and bank 4,084 3,533 4,179 8,521 5,787
Investments 3,997 5,465 6,485 8,154 9,851
Loans 141,341 120,624 121,692 141,595 169,888
Others 3,651 4,089 2,653 2,829 3,020
Total assets 155,245 135,952 137,013 163,243 190,841
Key Ratios (%)

NIM 6.8 7.1 8.4 8.3 8.2
RoA 1.4 0.1 1.7 2.0 2.2
RoAE 11.1 0.9 10.3 10.9 12.0
GNPA (%) 10.4 9.0 7.0 6.4 5.8
NNPA (%) 8.1 7.4 5.2 3.8 2.7

EPS 9.1 0.9 9.7 10.9 14.5
BVPS 92.4 91.5 97.7 114.0 127.3
ABVPS 57.8 65.3 79.1 100.1 115.6
DPS 0.8 0.8 0.8 1.0 1.0

PER 18.9 199.5 17.7 15.8 11.9
P/BV 1.8 1.8 1.7 1.5 1.3
P/ABV 2.9 2.6 2.1 1.7 1.4
Dividend Yield (%) 0.5 0.5 0.5 0.6 0.6


NII 14.6 (5.1) 9.5 4.2 14.5
PPOP 45.5 (4.0) 5.9 4.9 19.2
PAT 17.0 (90.3) 1,026.6 27.2 33.2
Loans 5.9 (14.7) 0.9 16.4 20.0

NII 3,038 3,090 3,032 3,593 3,645
NIM (%) 7.3 7.8 7.9 9.4 9.5
PPOP 1,677 1,594 1,545 1,942 1,838
PAT (1,140) 452 488 650 715
EPS (Rs) (4.81) 1.91 2.06 2.74 3.02
Shareholding Pattern (%) Jun-17 Sep-17 Dec-17 Mar-18 Apr-18

Promoters 27.8 27.8 27.8 27.7 24.4
FIIs 16.5 47.7 48.2 47.7 40.7
DIIs 33.4 3.1 3.3 4.1 22.1
Source: Capitaline


Closing Period
Target Price
212
174
2-Feb-18 159 230 12m Buy Umang Shah
136
10-Nov-17 175 200 12m Accumulate Umang Shah
18-Sep-17 184 200 12m Accumulate Umang Shah 98
3-Aug-17 172 175 12m Accumulate Umang Shah 60
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
12-May-17 133 150 12m Buy Umang Shah
5-Apr-17 122 150 12m Buy Umang Shah
10-Feb-17 98 115 12m Accumulate Umang Shah Source: Bloomberg, Company, Emkay Research
4-Nov-16 101 120 12m Buy Umang Shah
6-Sep-16 100 125 12m Buy Umang Shah
16-Aug-16 102 125 12m Buy Umang Shah
28-Jun-16 105 130 12m Buy Umang Shah
13-May-16 89 130 12m Buy Umang Shah
28-Mar-16 76 130 12m Buy Umang Shah

Mahindra Finance
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Riding the rural demand wave Rs 488

as of (6/12/2018)
Rs 515 (■)
12 months
Rating Upside
ACCUMULATE (■) 5.6 %
Over the past few years, Mahindra Finance (MMFS) had been reeling under the Change in Estimates
pressure of deteriorating asset quality and rising credit costs. However, the EPS Chg FY19E/FY20E (%) -/-
scenario is improving gradually. While the government’s focus on Agriculture Target Price change (%) NA
and Rural Infra along with forecast of normal monsoon will boost tractor Target Period (Months) 12
demand, pressure on credit costs will ease, as the shift to 90-day NPA Previous Reco ACCUMULATE
recognition is already completed. With demand for tractors sustaining, we Emkay vs Consensus
expect positive earnings surprise in the form of previous year’s recoveries. EPS Estimates
We recommend ACCUMULATE with a TP of Rs515, corresponding to ~3.0x
FY19E FY20E
P/Adj FY20E book.
Emkay 21.2 28.7
 Rise in tractor demand to drive growth: The government’s higher allocation towards Consensus 22.7 29.1
Rural and Agri sectors in the Union Budget should help the rural economy to gather pace. Mean Consensus TP (12M) Rs 554
The company remains a key beneficiary of an uptick in tractor demand, and with Stock Details
sustainability of the demand cycle in tractors, we may see positive earnings surprises in Bloomberg Code MMFS IN
the form of previous year’s recoveries. Face Value (Rs) 2
 Asset quality pressures likely to ease: Over the past few years, MMFS has witnessed Shares outstanding (mn) 618
a sharp uptick in its NPLs on account of back-to-back failed monsoons, lower government 52 Week H/L 538 / 322
spending and tighter regulatory norms. While monsoon and government spending started M Cap (Rs bn/USD bn) 302 / 4.45
to turn favourable in FY17, demonetization adversely affected the rural economy, thereby Daily Avg Volume (nos.) 1,827,107
worsening MMFS’ asset quality. Consequently, in FY17, post the withdrawal of the RBI Daily Avg Turnover (US$ mn) 12.9
dispensation, NPLs rose to 9% levels while the NPL recognition norms remained at 120-
dpd (same as in FY16). Even as the company migrated to 90-dpd NPL recognition in FY18,
GNPLs declined to 8.5%. Management has guided for consistent improvement in collection Promoters 51.2%
efficiencies with the rise in rural spending and favorable macro trends. Recovery from the FIIs 29.4%
previous year’s NPAs would be an added kicker for RoA improvement. DIIs 11.6%
 Valuations and view: While the government’s focus on Agriculture and Rural Infra is likely
to boost demand, completing the shift to 90-day NPA recognition will ease pressure on Price Performance
credit costs. The company remains a key beneficiary of the uptick in tractor demand, and (%) 1M 3M 6M 12M
with sustainability of this demand cycle, we may see positive earnings surprises in the form Absolute (3) 16 8 35
of previous year’s recoveries. We recommend ACCUMULATE with a TP of Rs515, Rel. to Nifty (4) 11 3 21
corresponding to ~3.0x P/Adj. FY20E book. Relative price chart
550 Rs % 40
500 30
450 20
400 10
350 0
300 -10
Mah & Mah Financial Services (LHS)
Source: Bloomberg
Net income 32,658 33,801 42,057 50,371 59,968
Jignesh Shial
Net profit 6,726 4,002 7,406 13,114 17,746
EPS (Rs) 11.8 7.0 15.3 21.2 28.7
+91-22-66242468
ABV (Rs) 91.9 94.2 139.2 150.0 172.7
Kushan Parikh, CFA
RoA (%) 1.8 0.9 1.8 2.2 2.5
RoE (%) 11.4 6.4 11.3 13.4 16.2
+91-022-66242431
PE (x) 41.2 69.3 31.8 23.0 17.0

Mahindra Finance (MMFS IN) India Equity Research | Company Update

Income Statement
Other income 3,523 4,022 590 1,674 2,730
Net income 32,658 33,801 42,057 50,371 59,968
Provisions 10,495 13,091 13,129 11,427 10,962
Tax 3,656 2,198 4,809 6,547 8,860
Tax rate 35 35 39 33 33
Profit after tax 6,726 4,002 7,406 13,114 17,746
Balance Sheet
Equity 1,129 1,130 1,229 1,229 1,229
Reserves 59,752 63,642 91,802 101,321 114,753
Net worth 60,881 64,772 93,031 102,550 115,982
Deposits 0 0 0 0 0
Borrowings 294,523 346,704 355,353 437,383 519,202
Cash and bank 5,890 5,781 4,111 16,244 7,893
Investments 14,833 18,895 18,732 21,869 25,960
Loans 366,577 425,234 510,686 604,047 722,023
Others 7,359 8,823 8,952 9,003 9,056
Total assets 395,794 459,852 543,678 652,539 766,514
Key Ratios (%)

NIM 8.4 7.7 8.3 8.3 8.3
RoA 1.8 0.9 1.8 2.2 2.5
RoAE 11.4 6.4 11.3 13.4 16.2
GNPA (%) 8.1 9.1 8.9 7.8 7.2
NNPA (%) 3.1 3.5 3.2 2.2 1.7

EPS 11.8 7.0 15.3 21.2 28.7
BVPS 107.1 113.9 159.9 166.1 187.8
ABVPS 91.9 94.2 139.2 150.0 172.7
DPS 4.0 2.4 4.0 5.0 6.0

PER 41.2 69.3 31.8 23.0 17.0
P/BV 4.6 4.3 3.1 2.9 2.6
P/ABV 5.3 5.2 3.5 3.3 2.8
Dividend Yield (%) 0.8 0.5 0.8 1.0 1.2


NII 5.6 2.2 39.2 17.4 17.5
PPOP 0.3 (7.6) 31.4 22.7 20.8
PAT (19.1) (40.5) 85.0 77.1 35.3
Loans 11.3 16.0 20.1 18.3 19.5

NII 11,117 8,597 9,110 10,711 13,050
NIM (%) 9.6 7.3 7.5 8.4 9.8
PPOP 7,252 4,894 5,636 6,553 8,261
PAT 2,341 474 780 3,420 4,245
EPS (Rs) 4.14 0.84 1.38 5.57 6.91

Promoters 51.9 51.9 51.2 51.2 51.2
FIIs 30.4 30.5 32.0 34.6 29.4
DIIs 11.8 10.5 10.2 8.5 11.6
Source: Capitaline


Closing Period
Target Price
29-May-18 473 515 12m Accumulate Jignesh Shial 550
25-Apr-18 507 515 12m Accumulate Jignesh Shial
478
10-Apr-18 488 508 12m Accumulate Jignesh Shial
406
24-Jan-18 490 520 12m Hold Umang Shah
334
26-Oct-17 417 290 12m Sell Umang Shah
18-Sep-17 436 290 12m Sell Umang Shah 262
25-Jul-17 399 290 12m Sell Umang Shah 190
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
25-Apr-17 340 290 12m Sell Umang Shah
14-Mar-17 280 240 12m Sell Umang Shah
25-Jan-17 286 240 12m Sell Umang Shah Source: Bloomberg, Company, Emkay Research
26-Oct-16 363 363 12m Accumulate Umang Shah
25-Apr-16 298 390 12m Buy Umang Shah
22-Jan-16 200 191 12m Sell Umang Shah
15-Sep-15 236 225 12m Sell Umang Shah
27-Jul-15 265 225 12m Sell Umang Shah
14-Jul-15 279 262 12m Reduce Umang Shah

Shriram City Union Finance
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Geared for growth Rs 2,313

as of (6/12/2018)
Rs 2,449 (■)
12 months
Rating Upside
HOLD (■) 5.9 %
Shriram City Union Finance (SCUF) has built a niche and diversified business Change in Estimates
model, focusing on the underserved and under-penetrated MSME segment in EPS Chg FY19E/FY20E (%) -/-
the Rural and Semi Urban areas. AUM in Q4FY18 grew by 18.7% yoy (5.3% Target Price change (%) NA
qoq) to Rs274bn in spite of relatively weak disbursements growth of 6.2% yoy, Target Period (Months) 12
mainly due to increasing tenure of existing loans across segments. Given the Previous Reco HOLD
waning of problems related to the Gold Loan business and demonetization Emkay vs Consensus
and its strong capital position, SCUF remains well poised for its next phase of EPS Estimates
growth. ROEs will improve gradually as leverage increases.
FY19E FY20E
 Getting back on the growth path: In FY17, the company weathered challenges related Emkay 128.6 162.4
to demonetization and limits imposed on cash disbursements for Gold Loans. We believe Consensus 142.2 176.0
that with both these pain points behind now, the company is back on the growth path with Mean Consensus TP (12M) Rs 2,638
demand in the SME and 2W segments returning to normalcy. The company is gradually Stock Details
expanding in the non-core segments, which is driving growth. With the portfolio realignment Bloomberg Code SCUF IN
largely done and given its strong capital position (20.6% Tier I capital as at Mar’18), we Face Value (Rs) 10
expect SCUF to get back in growth mode.
Shares outstanding (mn) 66
 Downside risks to margins limited: Despite rising NPLs as well as heightened 52 Week H/L 2,648 / 1,850
competition, SCUF has been able to protect its NIMs given its strong presence in the high- M Cap (Rs bn/USD bn) 152 / 2.24
yielding segments. Although we may witness some compression in margins on the back Daily Avg Volume (nos.) 26,598
of enhanced leverage (resulting in lower benefits of capital and large part of incremental Daily Avg Turnover (US$ mn) 0.9
growth coming from non-core markets where yields could be lower than home markets),
with interest reversal down post 90-day NPA recognition and increasing traction in 2W, we
expect margins to still remain healthy. Promoters 33.8%
FIIs 25.4%
 Credit cost likely to ease with improvement in recoveries: As at end-Mar’18, SCUF
DIIs 6.0%
shifted to 90-dpd NPL recognition. Post this, overall slippage would be in line with industry
cycle, with limited probability of major negative surprises. In our view, credit cost may fall
from FY19 on the back of overall improvement in demand and enhanced recoveries. Price Performance
(%) 1M 3M 6M 12M
 Valuation and view: SCUF’s niche business model offers high growth potential with strong
Absolute (3) 17 10 (7)
profitability and low competition. The companies target customer segments such as the
SME business segment still remain underserved by the formal banking channels, and Rel. to Nifty (4) 11 5 (17)
hence offer huge growth potential. We maintain HOLD with TP of Rs2,449, corresponding Relative price chart
2550 Rs % 10
to 2.5x P/Adj FY20E book for average ROEs of ~15% over FY19E/20E.
2410 2
2270 -6
2130 -14
1990 -22
1850 -30
Shriram City Union Finance (LHS)
Source: Bloomberg
Net income 24,726 29,001 34,339 40,629 47,161
Jignesh Shial
Net profit 5,298 5,561 6,647 8,490 10,720
EPS (Rs) 80.3 84.2 100.7 128.6 162.4
+91-22-66242468
ABV (Rs) 652.0 718.4 743.8 858.1 972.2
Kushan Parikh, CFA
RoA (%) 2.7 2.5 2.5 2.7 2.8
RoE (%) 12.3 11.7 12.5 14.4 16.0
+91-022-66242431
PE (x) 28.7 27.3 22.8 17.9 14.2

Shriram City Union Finance (SCUF IN) India Equity Research | Company Update

Income Statement
Other income 676 528 0 0 0
Net income 24,726 29,001 34,339 40,629 47,161
Provisions 6,163 9,105 10,537 11,344 11,714
Tax 2,771 2,976 3,531 4,571 5,772
Tax rate 34 35 35 35 35
Profit after tax 5,298 5,561 6,647 8,490 10,720
Balance Sheet
Equity 659 659 660 660 660
Reserves 44,457 49,625 55,002 61,948 71,124
Net worth 45,116 50,284 55,662 62,608 71,784
Deposits 0 0 0 0 0
Borrowings 144,084 170,420 188,238 228,914 280,448
Cash and bank 6,419 6,371 5,321 2,778 3,910
Investments 7,923 7,145 7,280 11,446 14,022
Loans 191,406 229,614 274,869 327,019 389,511
Others 1,947 1,453 1,425 1,495 1,572
Total assets 208,544 245,365 289,684 343,606 409,970
Key Ratios (%)

NIM 13.6 13.6 13.6 13.5 13.2
RoA 2.7 2.5 2.5 2.7 2.8
RoAE 12.3 11.7 12.5 14.4 16.0
GNPA (%) 4.7 6.3 8.5 8.3 7.8
NNPA (%) 1.4 1.7 3.2 2.5 2.7

EPS 80.3 84.2 100.7 128.6 162.4
BVPS 683.5 761.8 843.3 948.6 1,087.6
ABVPS 652.0 718.4 743.8 858.1 972.2
DPS 15.0 15.0 18.0 20.0 20.0

PER 28.7 27.3 22.8 17.9 14.2
P/BV 3.4 3.0 2.7 2.4 2.1
P/ABV 3.5 3.2 3.1 2.7 2.4
Dividend Yield (%) 0.7 0.7 0.8 0.9 0.9


NII 16.6 18.4 20.6 18.3 16.1
PPOP 9.9 24.0 17.4 17.8 15.6
PAT (5.1) 5.0 19.5 27.7 26.3
Loans 20.5 20.0 19.7 19.0 19.1

NII 7,134 8,156 8,725 9,157 8,118
NIM (%) 12.5 13.8 14.3 14.4 12.1
PPOP 4,324 4,976 5,412 5,449 4,877
PAT 120 1,939 1,983 2,255 470
EPS (Rs) 1.82 29.40 30.07 34.19 7.13

Promoters 33.8 33.8 33.8 33.8 33.8
FIIs 21.9 22.3 22.4 25.8 25.4
DIIs 6.0 5.8 5.6 5.6 6.0
Source: Capitaline


Closing Period
Target Price
29-May-18 2,146 2,449 12m Hold Jignesh Shial 2600
2080
1560
3-Nov-17 2,247 2,380 12m Hold Umang Shah
1040
18-Sep-17 2,152 - 12m UR Umang Shah
2-Aug-17 2,326 - 12m UR Umang Shah 520
13-Jul-17 2,243 - 12m UR Umang Shah 0
9-Dec-17
9-Jun-18
12-Dec-15
10-Dec-16
13-Jun-15
11-Jun-16
10-Jun-17
3-May-17 2,139 2,100 12m Hold Umang Shah
28-Oct-16 2,497 2,445 12m Hold Umang Shah Source: Bloomberg, Company, Emkay Research
28-Sep-16 2,181 2,445 12m Hold Umang Shah
24-Jun-16 1,592 1,655 12m Hold Umang Shah
28-Apr-16 1,659 1,655 12m Hold Umang Shah
30-Oct-15 1,840 2,013 12m Accumulate Umang Shah
15-Sep-15 1,700 2,013 12m Accumulate Umang Shah
14-Jul-15 1,680 2,013 12m Accumulate Umang Shah

Shriram Transport Finance
Company Update
June 12, 2018
Emkay
©

CMP Target Price
Best bet to play CV cycle Rs 1,463

as of (6/12/2018)
Rs 1,818 (■)
12 months
Rating Upside
BUY (■) 24.2 %
Change in Estimates
Healthy AUM growth, aided by a favorable CV cycle, improved demand for EPS Chg FY19E/FY20E (%) -/-
Used CVs and reduced credit cost (post 90-day NPA recognition) make SHTF
Target Price change (%) NA
one of the most preferred stocks in our NBFC coverage universe. In spite of
Target Period (Months) 12
the recent run-up, the stock remains at a comfortable discount to most peers
Previous Reco BUY
(Cholamandalam, Sundaram etc), which should narrow gradually. We
Emkay vs Consensus
recommend BUY with a TP of Rs1,818, corresponding to ~2.7x P/Adj FY20E
EPS Estimates
book with superior RoA of 2.6% and RoE of 18.5% for FY20E.
FY19E FY20E
 Ideally placed to play upswing in CV cycle: With AUM of ~Rs953bn (as on Mar’18), Emkay 105.4 129.7
SHTF is the largest asset financing NBFC in India. Due to a higher base and weak CV
Consensus 104.9 129.9
demand, SHTF reported ~12% CAGR in AUM during FY12-17 against its previous peak
Mean Consensus TP (12M) Rs 1,764
levels of ~18% CAGR. The company is able to manage its market share, especially in
Stock Details
Used CVs, which anyhow has limited competition not only from banks but also from other
Bloomberg Code SHTF IN
peers. Our recent discussions with the management as well as other industry players
Face Value (Rs) 10
suggest that the current uptick in CV demand is sustainable and well supported by the rise
Shares outstanding (mn) 227
in government spending on infrastructure (especially road sector), and improving rural-
52 Week H/L 1,671 / 898
centric activities. Hence, we expect SHTF to return to its healthy AUM growth level of ~18%
CAGR during FY18-20E. M Cap (Rs bn/USD bn) 331 / 4.94
Daily Avg Volume (nos.) 873,353
 Downside risks to margins limited: Despite rising NPLs and growing competition, SHTF Daily Avg Turnover (US$ mn) 19.5
has been able to protect its NIMs given its strong presence in the high-yielding segments
as well as effective utilization of its liability franchise. Going forward, with lower interest Shareholding Pattern Mar '18
reversal (on shift to 90-day NPL recognition), along with increasing traction in Used Promoters 26.1%
Vehicles, we expect margins to still remain healthy for FY18-20E. FIIs 49.5%
DIIs 4.0%
 Credit costs likely to ease with improvement in recoveries: As at end-Mar18, SHTF
has shifted to recognize NPLs on 90-dpd basis. From here onwards, overall slippage trend Public and Others 20.4%
would be in line with industry cycle with limited probability of major negative surprises. In Price Performance
our view, credit costs may see a declining trend from FY19 with overall improvement in (%) 1M 3M 6M 12M
demand and rising recoveries.
Absolute (7) 10 8 46
 Valuation and view: The stock still remains at a comfortable discount to most peers Rel. to Nifty (7) 4 2 31
(Cholamandalam, Sundaram etc.), which according to us should narrow gradually. We Relative price chart
recommend BUY with a TP of Rs1,818, corresponding to ~2.7x P/Adj FY20E book with 1650 Rs % 60
superior RoA of 2.6% and RoE of 18.5% for FY20E. 1500 46
1350 32
1200 18
1050 4
900 -10
Shriram Transport Finance (LHS)
Source: Bloomberg
Net income 50,295 56,432 69,825 82,508 93,561
Jignesh Shial
Net profit 11,782 12,573 15,680 23,921 29,431
EPS (Rs) 51.9 55.4 69.1 105.4 129.7
+91-22-66242468
ABV (Rs) 412.3 447.0 488.4 568.1 671.0
Kushan Parikh, CFA
RoA (%) 1.9 1.8 1.9 2.5 2.6
RoE (%) 12.2 11.7 13.1 17.6 18.5
+91-022-66242431
PE (x) 28.1 26.4 21.1 13.9 11.3

Shriram Transport Finance (SHTF IN) India Equity Research | Company Update

Income Statement
Other income 2,907 1,997 2,479 2,659 2,853
Net income 50,295 56,432 69,825 82,508 93,561
Provisions 19,008 24,443 31,221 29,231 29,153
Tax 6,032 6,666 8,038 12,263 15,087
Tax rate 34 35 34 34 34
Profit after tax 11,782 12,573 15,680 23,921 29,431
Balance Sheet
Equity 2,269 2,269 2,269 2,269 2,269
Reserves 99,272 110,753 123,454 144,080 169,943
Net worth 101,541 113,022 125,723 146,350 172,212
Deposits 0 0 0 0 0
Borrowings 497,907 531,101 633,200 737,746 867,485
Cash and bank 23,639 44,407 36,375 38,857 46,255
Investments 13,562 15,493 14,795 18,444 21,687
Loans 637,701 678,402 827,400 970,349 1,140,994
Others 3,722 4,963 4,934 4,998 5,069
Total assets 679,633 744,103 884,704 1,033,967 1,215,457
Key Ratios (%)

NIM 7.2 7.2 7.7 7.6 7.3
RoA 1.9 1.8 1.9 2.5 2.6
RoAE 12.2 11.7 13.1 17.6 18.5
GNPA (%) 6.1 8.0 8.9 8.6 8.3
NNPA (%) 1.8 2.4 2.6 2.6 2.5

EPS 51.9 55.4 69.1 105.4 129.7
BVPS 447.5 498.2 554.1 645.0 759.0
ABVPS 412.3 447.0 488.4 568.1 671.0
DPS 10.0 10.0 11.0 12.0 13.0

PER 28.1 26.4 21.1 13.9 11.3
P/BV 3.3 2.9 2.6 2.3 1.9
P/ABV 3.5 3.3 3.0 2.6 2.2
Dividend Yield (%) 0.7 0.7 0.8 0.8 0.9


NII 34.1 14.9 23.7 18.6 13.6
PPOP 27.5 18.6 25.8 19.1 12.6
PAT (4.8) 6.7 24.7 52.6 23.0
Loans 25.6 6.4 22.0 17.3 17.6

NII 14,087 15,852 16,324 17,094 18,076
NIM (%) 7.3 7.9 7.8 7.8 7.8
PPOP 11,424 12,691 13,162 13,486 15,599
PAT 1,496 4,487 4,791 4,956 1,446
EPS (Rs) 6.59 19.77 21.11 21.84 6.37

Promoters 26.1 26.1 26.1 26.1 26.1
FIIs 47.4 49.5 48.1 49.7 49.5
DIIs 2.2 3.0 4.9 3.5 4.0
Source: Capitaline


Closing Period
Target Price
29-May-18 1,526 1,818 12m Buy Jignesh Shial 1825
1460
1095
730
1-Nov-17 1,197 1,250 12m Hold Umang Shah
18-Sep-17 1,085 - 12m UR Umang Shah 365
31-Jul-17 1,017 - 12m UR Umang Shah 0
4-Jun-16
26-Nov-17
7-Dec-15
1-Dec-16
30-May-17
25-May-18
10-Jun-15
13-Jul-17 1,026 - 12m UR Umang Shah
27-Apr-17 1,041 850 12m Reduce Umang Shah
31-Jan-17 955 880 12m Reduce Umang Shah Source: Bloomberg, Company, Emkay Research
26-Oct-16 1,128 849 12m Reduce Umang Shah
6-Sep-16 1,238 849 12m Reduce Umang Shah
28-Jul-16 1,233 849 12m Reduce Umang Shah
2-May-16 1,083 849 12m Reduce Umang Shah
1-Feb-16 810 771 12m Sell Umang Shah
15-Sep-15 855 771 12m Sell Umang Shah
3-Aug-15 918 771 12m Sell Umang Shah
14-Jul-15 907 771 12m Sell Umang Shah

Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
Completed Date: 12 Jun 2018 10:33:11 (SGT)

Dissemination Date: 12 Jun 2018 10:34:11 (SGT)
Sources for all charts and tables are Emkay Research unless otherwise specified.
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Refer to important disclosures at the end of this report

Better to light a candle than to curse

HDFC 60.8 68.6 30.3 26.8 330 370 5.6 5.0

ED: HEMANT MARADIA SA: DHANANJAY SINHA

Prefer price makers over price takers ........................................................................... 5

Margin decline inevitable, positive surprises likely ....................................................... 7

NBFCs are key beneficiaries of financial inclusion ....................................................... 8

Vehicle Finance: A story to bank upon .......................................................................10

Growth trend encouraging, diversification likely .........................................................12

Asset quality: In a sweet spot .....................................................................................13

Cost efficiency provides decisive edge .......................................................................14

Earnings review Q4FY18: Consistent performance....................................................15

Our Top Picks .............................................................................................................16

Relative Valuations .....................................................................................................17

Cholamandalam Finance ............................................................................................22

Edelweiss Financial Services ......................................................................................26

LIC Housing Finance...................................................................................................36

L&T Finance Holdings .................................................................................................40

Magma Fincorp ...........................................................................................................44

Mahindra Finance .......................................................................................................48

Shriram City Union Finance ........................................................................................52

Shriram Transport Finance .........................................................................................56

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |2

Margin compression gradual, not instant

REPO hike is typically followed by rise in deposit rates

Source: Bloomberg, Company, Emkay Research

Bond yields likely to remain stagnant, providing further comfort

10yr Gsec Repo Rate 10yr AAA Corp Bond

Source: Bloomberg, Company, Emkay Research

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |3

Bank borrowings Capital market borrowings Others Repo Rate %

Source: Bloomberg, Company, Emkay Research

Rating upgrades in recent past would be yet another savior

Exhibit 4: Credit rating upgrades of select NBFCs

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |4

Prefer price makers over price takers

Product specialization commands superior pricing

Exhibit 5: NBFC focused product profile

Source: Company, Emkay Research

Source: Company, Emkay Research

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |5

HFCs relatively vulnerable on ALM front

40% 34% 30% 29% 32% 40% 15% 16%

AFCs better placed in terms of ALM profile

60% 42% 40% 60% 40%

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |6

Margin decline inevitable, positive surprises likely

Exhibit 12: NIM % Expectations

FY18 FY19E FY20E

Exhibit 13: Spread % Expectations

FY18 FY19E FY20E

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |7

NBFCs are key beneficiaries of financial inclusion

Exhibit 14: Total Banking Outlets in Villages / Rural Locations

Source: RBI, Emkay Research

Source: RBI, Emkay Research Source: RBI, Emkay Research

Improvement in financial inclusion emanating from such expansion (business correspondents)

Expansion into Under-banked areas with limited competition

Light branches with more emphasize on optimum productivity

ED: HEMANT MARADIA SA: DHANANJAY SINHA June 12, 2018 |8

Exhibit 17: Financial inclusion - branch expansion