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Preface

Preface
Financial services: The next wave of services-led growth We, at Edelweiss, believe that banking, financial services and insurance (BFSI) is the third wave of growth in India, after software (IT) and telecom services. The BFSI space is continuously evolving, offering immense opportunities to financial intermediaries to create substantial value by constantly redefining boundaries, entering into adjacent markets, and innovating. Core to our hypothesis is our belief that over the next three years, nominal GDP (ex-agri) is expected to grow at 14-15% and revenues from the financial services sector (which will lead this growth) are expected to grow at 22% during FY08-11E. We believe that the current stage of economic growth in India, where savings and capital formation are at ~32% of GDP, offers serious opportunities in financial intermediation through banks, mutual funds, insurance companies, pension funds, brokers, and investment banks to create substantial value. How to cash in on this opportunity? In the past 12 months, specialty finance companies have returned 127%, private sector banks 76%, and the Bankex 51%, compared to the Sensexs return of 37%. Both value (PSU banks) and growth (private banks, brokerages, and NBFC) opportunities are available in the BFSI space, and we are overweight on growth stocks considering the emergence of high growth sub-segments like insurance, brokerage, debt capital market, and distribution. We also believe that the consolidation theme among banks will play out over the following two years and therefore, re-rating of small private banks offers serious return potentials. At current valuations, we like Kotak Mahindra Bank, State Bank of India, Yes Bank, and SREI Infrastructure. Lending: Momentum to continue After a scorching pace of 30% plus in the past two years, credit growth has normalized to 23% currently, which is still on the higher side. The competitive landscape amongst banks has changed in the past two years with PSU banks upgrading their technology and product portfolio and giving private peers stiff competition. We expect credit growth of 20-22% over the next two years with retail and corporate lending leading the demand. Specialty finance companies have been able to post strong disbursement growth with banks slowing down in selected segments like mortgages. Equity brokerage: Strong pick up likely Over the past four years, institutional volumes (FIIs and MFs) have outpaced retail volume growth, registering 70% plus CAGR over FY04-07 (against industry-wide volume growth of 40%), now constituting roughly 35% (estimated) of the total trading volumes. We expect the institutional growth trajectory to remain strong and pick up higher share of trading volumes, along with higher retail participation. We expect market cap/GDP to improve further with more companies raising money. Investment banking: Favourable outlook with healthy pipeline The outlook for investment banking appears favourable, considering the robust M&A pipeline, healthy issuance calendar, and conducive capital market environment. We believe investment banking activities will be supported by Indias long-term structural growth story, rapid scale up in capital goods/ infrastructure investments (clearing off historical backlog), and increased proportion of global savings pool being directed towards emerging markets (particularly India).

Profile of participating companies

Asset management: Leveraging the platform The mutual fund (MF) industry is one of the fastest-growing sectors in the Indian financial market. The industry has recorded ~50% CAGR in the past three years, managing over INR 5.5 tn (USD 139 bn) of assets as at October 2007. Despite this stupendous growth, household savings invested in MFs are less than 1% of total financial assets. Industry-wide AUMs constitute ~10% of GDP, against 30-60% in developed countries. We expect 29% CAGR over FY07-10E in domestic AUMs on the back of high savings rate, per capita income growth, and favourable demographics. Life insurance: Upside risks exist Emergence of Unit Linked Plans (ULIPs), aggressive distribution strategies adopted by private players, and buoyant capital markets attracted greater share of household savings in life insurance premiums (penetration is relatively low at ~3% of GDP). Consequently, APE recorded 35% CAGR during FY0307 and 54% in H1FY08 over H1FY07. Going forward, we expect APE to grow at 28% CAGR over FY07-10E. This growth will be driven by ballooning ticket size, innovative product launches, expansion in distribution network, and deeper insurance penetration.

Contents

CONTENTS
Preface ...................................................................................................................................................... 1 COMPANIES Axis Bank .................................................................................................................................................................... 5 Bank of India ............................................................................................................................................................... 9 City Union Bank ........................................................................................................................................................ 13 Cholamandalam DBS Finance ................................................................................................................................... 17 Dewan Housing Finance ............................................................................................................................................ 21 Geojit Financial Service .............................................................................................................................................. 25 HDFC ........................................................................................................................................................................ 29 IDBI ........................................................................................................................................................................... 33 ING Vysya Bank ........................................................................................................................................................ 37 IndusInd Bank ........................................................................................................................................................... 41 Indian Overseas Bank ............................................................................................................................................... 45 Kotak Mahindra Bank ................................................................................................................................................ 49 Mahindra & Mahindra Financial Services .................................................................................................................... 53 Reliance Capital ......................................................................................................................................................... 57 Religare Enterprise. ................................................................................................................................................... 61 Shriram City Union Finance ........................................................................................................................................ 65 SREI Infrastructure Finance ....................................................................................................................................... 69 Shriram Transport Finance ......................................................................................................................................... 73 State Bank of India .................................................................................................................................................... 77 Union Bank of India ................................................................................................................................................... 81
3

Profile of participating companies

4
M Cap M Cap Price P/B FY08E (x) (x) (INR) (%) (x) (x) (x) P/B FY09E EPS FY08E ROE FY08E P/E FY08E P/E PE / G FY09E FY07-09 P/PPOP FY08E Rating (INR) bn USD mn (INR) EPS CAGR FY07-09 (x) (%) Div yield FY08E (%) 48 81 61 187 1,194 1,021 50 86 2,094 170 1.5 1.3 21 21 8 7 1,222 96 1.3 1.1 14 22 7 6 1.8 0.4 25,532 1,989 2.1 1.9 153 18 13 11 0.7 29,126 2,269 3.3 2.9 113 18 20 18 0.9 22 20 4 23 4,560 593 1.6 1.4 60 17 10 9 0.7 14 1,485 243 1.1 0.9 33 15 7 6 1.1 7 1,980 149 1.7 1.4 21 26 7 6 0.5 14 2.01 0.76 1.69 0.62 0.70 2.92 2.06 1,177 108 1.1 1.0 18 20 6 5 0.6 10 2.78 3.6 4.4 4.8 5.4 7.8 6.8 4.1 3.9 BUY BUY ACCUM. BUY BUY BUY BUY BUY 328 80 53 593 1,272 842 388 25 62 1,381 222 5.2 3.3 6 601 203 1.8 1.6 16 9,455 1,127 6.1 5.1 26 20,530 769 1.8 1.7 37 11 20 15 16 31,021 1,162 2.7 2.6 37 11 14,468 1,677 4.8 4.2 46 17 37 32 21 38 12 39 1,297 311 1.3 1.2 24 15 13 1,951 43 3.5 3.3 1 12 37 8,006 919 3.8 3.4 27 16 34 28 26 12 28 25 17 30 10 25 1.7 0.8 1.2 1.2 2.1 1.4 1.1 0.8 0.6 20 45 11 30 15 15 34 15 62 0.49 1.29 0.42 0.86 1.30 0.06 1.72 18.2 12.0 7.2 17.0 14.5 9.6 68.4 6.2 20.8 BUY BUY BUY BUY ACCUM. ACCUM. BUY ACCUM. BUY 750 494 28 254 270 560 20 14 338 492 185 355 13,647 2,278 6,579 235 6,187 196 4.6 2.6 9.6 3.4 3.4 675 326 1.5 12,049 1,771 6.2 18,285 2,688 7.3 6.0 5.3 1.4 4.1 2.3 8.9 3.6 2.4 70 70 33 5 12 25 10 20 24 24 18 13 14 11 19 23 39 25 10 43 20 92 19 17 33 22 8 26 17 75 15 12 2.7 1.8 1.0 1.5 0.6 0.7 0.5 14 14 10 29 32 0 27 35 0.33 0.51 2.45 0.51 1.49 0.54 0.85 ACCUM. ACCUM. BUY ACCUM. ACCUM. REDUCE BUY BUY

At a Glance

State Owned Banks Allahabad Bank

Indian Overseas Bank

Oriental Bank

Pun. Natl. Bank

SBI (stand alone)

SBI (Cons)

Syndicate Bank

Union Bank (I)

Private Sector Banks

Axis Bank

Centurion Bank

Federal Bank

HDFC Bank

ICICI Bank

ICICI Bank#

Kotak Mahindra Bank#

Karnataka Bank

Yes Bank

Speciality Finance

HDFC Ltd

HDFC Ltd#

LIC HF

IDFC

Power Finance Corporation

Reliance Capital

SREI

Shriram City Union Finance

# adjusted for subsidiaries

India Equity Research | Banking and Financial Services

AXIS BANK
Future perfect
Loan growth ahead of industry

INR 919

Axis Bank has registered buoyant loan growth on a balanced portfolio, skewed towards corporate advances than retail (compared to private peers). Retail advances contributed 24% to the total loan portfolio in FY07. Thus, the bank has relatively better scope for aggressively expanding across segments where it has a low presence. It is also spreading across geographies, targeting presence in more than 75% of Indias districts in the next five years. Its loan book is expected to grow at a brisk pace of 40% plus in FY08E with SME, agri, housing, and personal loan segments likely to be the key growth engines. Axis Bank continues to target opportunities emerging in corporate banking, especially in SME and agri business. Also, expanding its international presence is a high priority. Improving margins to boost bottom line Axis Banks margin is relatively low compared to peers. It is, however, making efforts to narrow the gap by improving the CD ratio and developing high-yield assets. The bank has a healthy deposit franchise with 45% (Q2FY08) being low-cost deposits. On a conservative basis, we expect the bank to improve its interest margins from the current level of 2.6%. Strong non-interest income growth Rapidly growing franchise and new product offerings, specifically credit cards, are likely to drive growth in retail fee income. The bank is also intensifying efforts to penetrate the remittance business by aggressively spreading its international operations. Among other key contributors to fee income will be project advisory, debt syndication, and third party distribution of insurance. New ventures for the bank include launching an infrastructure private equity fund and an asset management business. We expect the banks overall fee income to grow at ~35% CAGR in the next two years. Best-in-class asset quality Axis Bank continued to maintain extremely low gross NPA ratio of 0.95% and net NPA ratio of 0.55% in Q2FY08. We expect asset quality to remain in this range for the next two years. Valuations

November 29, 2007

Reuters Bloomberg

: :

UTBK.BO AXSB IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : 1,025 / 399 356.5

:327.5 / 8,231.6 1,046.8

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%)

The bank completed its capital raising plans in the previous quarter (raised INR 45 bn) and we expect it to deliver 13-15% RoE and 20% EPS CAGR during FY07-09E.The stock is currently trading at 3.4x FY09E book and 28x FY09E earnings.
Financials Year to March Revenues (INR mn) Rev growth (%) Net interest income (INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) Price to PPOP (x) ROE (%)
Promoters MFs, FIs & Banks FIIs Others : : : : 43.3 8.8 32.7 15.2

FY06 17,169 49.7 10,782 4,851 292.1 16.6 35.9 55.0 9.3 30.8 18.3

FY07 24,115 40.5 15,671 6,590 290.6 22.7 36.6 40.3 7.8 20.3 21.0

FY08E 36,055 49.5 22,527 9,675 356.0 27.2 19.9 33.6 3.7 18.1 16.0

FY09E 47,115 30.7 31,273 11,623 356.0 32.7 20.1 28.0 3.4 13.0 12.6

1,100 900
(INR)

10,000 7,500 5,000 2,500 0 Nov-07


('000)

700 500 300 Dec-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description Axis Bank is the third-largest private sector bank in terms of asset size, with a balance sheet size of INR 732 bn. It has a network of 574 branches and extension counters across India. The bank earns substantial fee income from transaction and merchant banking activities. The key promoter UTI-I (special undertaking) holds 27.5% in the bank, followed by LIC at 10.4%; the remaining equity is largely held by FIIs and public. Key risks Change in management may affect the pace of growth and profitability. Any modification in the shareholding pattern could also affect the banks management structure.

Axis Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net Interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY05 19,242 11,930 7,312 4,158 3,316 468 374 11,470 5,814 1,769 4,045 5,656 618 162 (37) 493 5,038 1,692 3,346 3,346 12.2 2.8 22.9 FY06 28,888 18,106 10,782 6,386 5,792 223 372 17,169 8,141 2,402 5,738 9,028 1,714 1,718 0 (4) 7,314 2,464 4,851 4,851 16.6 3.5 21.1 FY07 45,604 29,933 15,671 8,444 9,073 449 -1,078 24,115 12,146 3,813 8,333 11,969 2,004 1,979 0 25 9,965 3,375 6,590 6,590 22.7 4.5 19.8 FY08E 66,668 44,141 22,527 13,528 12,640 588 300 36,055 17,812 5,963 11,850 18,243 3,614 3,614 0 0 14,629 4,954 9,675 9,675 27.2 5.0 18.4 (INR mn) FY09E 88,269 56,996 31,273 15,842 16,726 716 -1,600 47,115 23,707 8,801 14,906 23,408 5,834 5,834 0 0 17,574 5,951 11,623 11,623 32.7 5.0 15.3

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Reported PAT EPS DPS Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth Opex growth PPOP growth PPP growth Provisions growth PAT growth FY05 26.7 79.6 38.7 50.4 (19.0) (77.0) 20.2 FY06 47.5 74.7 40.0 63.9 59.6 177.3 45.0 FY07 45.3 56.6 49.2 50.7 32.6 16.9 35.9 FY08E 43.7 39.3 46.6 37.5 52.4 80.3 46.8 FY09E 38.8 32.3 33.1 39.4 28.3 61.4 20.1

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY05 7.8 7.1 6.6 2.5 4.1 4.1 6.6 2.5 50.7 33.6 FY06 8.1 7.2 7.1 2.6 4.4 4.3 7.4 2.7 47.4 33.7 FY07 9.1 7.2 7.8 2.7 5.1 5.0 7.8 2.7 50.4 33.9 FY08E 10.1 7.3 8.2 2.8 5.7 5.5 8.1 2.5 49.4 33.9 FY09E 10.3 7.4 8.6 3.0 5.9 5.7 8.5 2.7 50.3 33.9 7

Profile of participating companies

Balance sheet As an 31st March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed Assets Other Assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) 8 FY05 12.2 1.7 88.4 82.9 74.7 10.3 11.0 0.3 FY06 16.6 35.9 98.3 93.1 55.0 9.3 9.8 0.4 FY07 22.7 36.6 116.8 110.3 40.3 7.8 8.3 0.5 FY08E 27.2 19.9 244.8 236.8 33.6 3.7 3.9 0.5 FY05 2.5 1.3 0.1 4.0 (2.0) (0.2) (0.6) (2.8) 1.2 6.1 18.8 FY06 2.6 1.5 0.1 4.2 (2.0) (0.4) (0.6) (3.0) 1.2 6.5 18.3 FY07 2.7 1.6 (0.2) 4.1 (2.1) (0.3) (0.6) (3.0) 1.1 5.4 21.0 FY08E 2.8 1.6 0.0 4.5 (2.2) (0.4) (0.6) (3.3) 1.2 7.5 16.0 FY05 FY06 FY07 FY08E

(INR mn) FY09E

2,738 21,478 24,216 7,886 317,120 17,814 10,401 377,437 156,029 75,384 67,366 52,762 5,184 20,712 377,437 86.0 51.3 54.1 22.5 69.7 38.0 1.4 1.4 57.4 12.7 8.9

2,921 25,935 28,722 17,886 401,135 26,809 22,624 497,311 223,142 117,898 97,376 36,418 5,677 16,800 497,311 32.2 26.5 35.1 27.5 72.9 40.0 1.3 1.0 41.9 11.1 7.3

2,906 31,116 33,932 35,014 587,856 51,956 23,724 732,572 368,765 164,308 104,663 69,183 6,732 18,921 732,572 50.0 46.5 48.9 25.7 74.6 39.9 0.9 0.7 45.7 11.6 6.4

3,560 83,578 87,137 43,514 729,283 56,900 19,377 936,210 531,021 182,321 119,959 79,967 7,489 15,454 936,210 40.5 24.1 29.2 25.0 84.5 42.4 1.1 0.8 41.9 16.9 10.7

3,560 93,239 96,799 43,514 944,035 62,591 25,083 1,172,022 716,879 188,807 134,802 103,515 8,015 20,004 1,172,022 32.6 29.4 25.3 20.0 86.5 42.6 1.4 0.9 47.1 14.1 9.2

FY09E 3.0 1.7 (0.2) 4.6 (2.3) (0.6) (0.6) (3.5) 1.1 8.9 12.6

FY09E 32.7 20.1 271.9 259.9 28.0 3.4 3.5 0.5

India Equity Research | Banking and Financial Services

BANK OF INDIA
Consistent performer
Business growth sustained on a consistent basis

INR 330

Bank of India (BoI) has grown its balance sheet by 19% CAGR from FY04-07 to INR 1.414 bn (INR 1,500 bn for Q2FY08) to become the fifth largest PSU bank in India. Loan growth has been impressive at 23% to ~INR 850 bn (INR 960 bn for Q2FY08), while total deposit growth has been lower at 19% to INR 1,200 bn (INR 1,295 bn for Q2FY08) in this period. International business contributes 20% to the balance sheet. While contribution of international deposits to the deposit book has been increasing from 16% in FY04 to 20% in FY07, international credit books contribution to total loan book has decreased from 24% in FY04 to 20% in FY07, thereby helping improve the margins. Consistent improvement in operating parameters Despite CASA ratio declining by 230bps to 32% in the past two years, BoI has been able to improve its margins by ~40bps to 2.9%. After providing for higher provisions for investments in FY05 and aided by lower provisioning requirements, the banks RoA has improved from 0.4% in FY05 to 0.9% in FY07. With the current high leverage, the bank posted RoE of 21% for FY07. Significantly, gross NPA has declined in absolute value from INR 37 bn (5.5%) in FY05 to INR 20 bn (2.0%) in Q2FY08. Slippages have declined from ~3% in FY05 to 1.5% in FY07. As of Q2FY08, net NPA was at 0.75% giving comfort in provision coverage at 74%. Active recoveries during the past few years led to lower provisioning requirements as it has declined by 7% in this period despite strong growth in balance sheet. Equity capital raising plans in place BoI had announced Tier 1 equity capital (7.1% for Q2FY08) raising plans, which will dilute ~5% of governments holding. This dilution will help in raising ~INR 6 bn of capital, but given the recent appreciation of the stock, we believe the dilution will be much lower than expected. Valuations The bank is currently trading at 2.8x FY07 book and 14.0x FY07 earnings. It has posted H1FY08 profits of INR 7.4 bn compared to INR 11 bn in FY07. Given the higher equity leverage, the bank posted RoE 21% for FY07 which will reduce post dilution. We like the bank for its current business model which focuses on India as well as abroad, strong balance sheet which we believe can support larger transaction critical for cross border deals, its extensive branch network, and clean asset quality.
Financials Year to March Revenues (INR mn) FY05 33,927 FY06 38,164 FY07 50,034

November 29, 2007

Reuters Bloomberg

: :

BOI.BO BOI IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) Avg. Daily Vol. BSE : : 415 / 132 487.4

: 161.0 / 4,0484 : 2,481.0

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 69.5 5.4 16.4 8.7

500 400 300

3,750 3,000 2,250 1,500 750 0 Nov-07

Rev growth (%) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) Book value (INR) P/E (x) Price to book (x) ROE (%)

(15.0) 3,400 488.1 7.0 (66.3) 88.1 47.3 3.7 8.4

12.5 7,014 488.1 14.4 106.3 98.9 22.9 3.3 15.4

31.1 11,232 488.1 23.0 60.1 117.7 14.3 2.8 21.2

200 100 0 Dec-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description BoI is one of the leading public sector banks with a pan-India presence and higher concentration in western and eastern India. Its branch network exceeds 2,600 in India and it also has 25 overseas branches. It is one of the pioneers in building an international business model which contributes ~20% to the total business. It has made rapid progress on the technology front with 2,618 branches fully computerized and 85% of total business covered under the Core Banking System. Key risks With asset quality reaching its peak, we believe provisioning requirement for the bank will rise from current levels. Focus on building a balanced sheet could result in margin compression given the competitive environment outside India.

10

Bank of India

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Extraordinaries Reported PAT EPS DPS Payout ratio (%) FY04 57,959 35,945 22,014 17,920 5,883 2,469 9,568 39,934 17,515 11,724 5,791 22,419 8,910 6,554 421 1,935 13,509 3,426 10,083 0 10,083 20.7 3.0 14.5 FY05 60,315 37,946 22,369 11,558 6,734 3,019 1,805 33,927 19,323 12,632 6,691 14,604 9,993 3,817 4,942 1,234 4,610 1,210 3,400 0 3,400 7.0 2.0 28.7 FY06 70,287 43,967 26,320 11,844 7,013 3,687 1,144 38,164 21,151 13,281 7,870 17,012 7,856 6,241 913 701 9,157 2,142 7,014 0 7,014 14.4 3.4 23.7 (INR mn) FY07 91,803 57,399 34,405 15,630 8,208 5,213 2,209 50,034 26,084 16,140 9,944 23,950 8,621 7,741 133 747 15,328 4,097 11,232 0 11,232 23.0 3.5 15.2

Growth ratios (%) Year to March NII growth Fees growth Operating profit growth PPP growth Opex growth PAT growth FY04 8.1 7.2 6.2 7.9 2.4 12.2 FY05 1.6 14.5 10.3 (34.9) 12.2 (66.3) FY06 17.7 4.1 9.5 16.5 (21.4) 106.3 FY07 30.7 17.0 23.3 40.8 9.7 60.1

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Cost of funds Cost of deposits Cost of borrowings Spread Cost-Income Tax rate FY04 7.5 8.4 7.4 4.7 4.6 7.5 2.8 43.9 25.4 FY05 7.1 8.0 7.0 4.4 4.2 9.0 2.5 57.0 26.2 FY06 7.5 7.5 7.0 4.4 4.0 10.2 2.6 55.4 23.4 FY07 8.5 7.6 7.5 4.7 4.3 11.0 2.7 52.1 26.7

11

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted Book Value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) 12 FY04 20.7 12.2 78.6 49.0 15.94 4.19 6.72 0.9 FY05 7.0 (66.3) 88.1 65.8 47.26 3.74 5.00 0.6 FY06 14.4 106.3 98.9 85.0 22.91 3.33 3.87 1.0 FY04 2.83 1.07 1.23 5.13 (2.25) (1.14) (0.44) (3.84) 1.30 4.62 28.04 FY05 2.58 1.13 0.21 3.91 (2.23) (1.15) (0.14) (3.52) 0.39 4.69 8.36 FY06 2.63 1.07 0.11 3.81 (2.11) (0.78) (0.21) (3.11) 0.70 4.56 15.37 FY04 FY05 FY06

(INR mn) FY07

4,881 33,472 38,353 22,082 714,824 40,415 31,182 846,857 458,559 196,744 74,885 85,579 6,243 24,847 846,857 9.4 11.5 10.1 24.9 68.0 33.4 7.9 4.5 44.8 13.0 7.5

4,881 38,111 42,993 24,467 788,214 59,620 33,832 949,126 560,126 211,431 70,595 75,263 6,486 25,225 949,126 20.5 10.3 12.5 29.5 74.4 34.5 5.5 2.8 50.8 11.5 7.1

4,881 43,384 48,265 32,967 939,320 58,939 41,677 1,121,169 651,737 239,401 78,417 114,460 6,526 30,628 1,121,169 16.1 19.2 18.2 28.6 72.6 35.0 3.7 1.5 60.9 10.8 6.8

4,881 52,578 57,459 47,589 1,198,817 66,208 44,801 1,414,875 849,359 266,120 88,807 174,055 6,398 30,135 1,414,875 29.3 27.6 27.2 26.3 73.6 32.2 2.4 0.7 69.9 11.6 6.5

FY07 2.79 1.09 0.18 4.06 (2.12) (0.70) (0.33) (3.15) 0.91 4.29 21.25

FY07 23.0 60.1 117.7 108.6 14.31 2.80 3.03 1.1

India Equity Research | Banking and Financial Services

CITY UNION BANK


On the growth path
Robust business growth

INR 234

November 29, 2007

City Union Bank (CUBK) has grown its balance sheet impressively by 19% CAGR from FY0407 to INR 53 bn (INR 61 bn for H1FY08). In this period, the bank grew its loan book by 29% CAGR to INR 33 bn (INR 38 bn for H1FY08) and deposits by 18% to INR 47 bn (INR 54 bn for H1FY08). Unlike most other banks that had a weak H1FY08, CUBKs YTD growth has been impressive in the loan book as well as in the deposit book at ~15-16%. Above average operating metrics CUBK enjoys higher than peer margins which is maintained at ~3.6%, despite its balance sheet growth. This is mainly due to the higher pricing power it enjoys in its asset book which is focussed on SME segment. CASA ratio is in line with regional players at 24%. As of Q2FY08, gross NPA of the bank was at 2%, declining from 10% in FY04, while net NPA is currently at 0.85% from 6.4% in FY04. Capital raising gives adequate head room for growth CUBK has had Tier 1 capital in of 10% for FY04-07 and in Q2FY08 the bank diluted ~26% of pre-issue equity capital to fund balance sheet growth increasing its networth by INR 1.25 bn through a mix of preferential allotment to L&T, LIC, and QIP. We do not expect any plans to raise capital in the next two-three years.
Reuters : : CTBK.BO CUBK IN

Valuations The stock is currently trading at 1.7x FY07 book and 8.0x FY07 earnings. The bank reported PAT of INR 718 mn in FY07, a CAGR of 24% for FY05-07. The bank has consistently delivered RoEs in excess of 24% from FY05-07 despite having lower leverage of (7.5x FY07) than its peers, making it one of the more attractive regional banks in the system.

Bloomberg

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 278 / 133 25.2 5.9 / 148.1 46.8

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs : : : : 0.0 5.2 7.6 87.3

Financials Year to March Revenues (INR mn) Rev growth (%) Net interesrt income(INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) Price to PPOP (x) ROE (%)

Others

FY05 1,508 (7.3) 1,108 463 24.0 19.3 (18.8) 12.1 2.9 20.9

FY06 1,841 22.1 1,398 564 24.0 23.5 21.7 10.0 2.2 21.4

FY07E 2,275 23.5 1,675 718 25.2 28.5 21.3 8.2 1.7 22.0

FY08E 2,676 17.6 2,075 859 32.0 26.9 (5.7) 8.7 1.4 18.5

300

400

250

300

200

200

150

100

100 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description CUBK is one of the strong performing regional banks in India. As of FY07, the bank has over 160 branches, with ~90% being in South India (70% of the total branches in Tamilnadu). As of FY07, the bank has a balance sheet of INR 53 bn. It has consistently generated one of the highest returns on assets, which is ~1.6% for FY05-07, because of its higher pricing power to its borrowers. Key risks Competition pressure can force the bank to grow at the cost of margins, which is one of the highest in the industry. Further rise in interest rates can lead to deterioration of asset quality from current levels and higher provisioning requirements. Operating costs/assets remain one of the highest in the industry.

14

City Union Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY04 2,762 1,799 962 665 194 123 348 1,628 449 250 200 1,178 408 365 24 19 770 200 570 0 570 23.8 7.0 29.5 FY05 2,907 1,798 1,108 400 257 209 -65 1,508 561 309 251 948 415 225 29 161 533 70 463 0 463 19.3 4.0 20.7 FY06 3,264 1,866 1,398 444 177 185 81 1,841 702 363 338 1,140 445 330 11 104 695 131 564 0 564 23.5 4.0 17.0 (INR mn) FY07 4,001 2,326 1,675 600 183 382 35 2,275 901 444 457 1,374 385 200 48 137 989 271 718 0 718 28.5 4.0 14.0

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Extraordinaries Reported PAT EPS DPS Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth Opex growth PPP growth Provisions growth PAT growth FY04 44.9 8.3 12.6 46.5 49.6 70.9 FY05 15.2 32.1 24.7 (19.6) 1.5 (18.8) FY06 26.1 (31.0) 25.2 20.3 7.3 21.7 FY07 19.8 3.6 28.4 20.5 (13.5) 27.4

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY04 11.5 9.8 9.9 3.5 6.6 6.9 4.2 3.3 27.6 25.9 FY05 10.4 8.5 9.1 3.5 5.8 6.0 2.4 3.3 37.2 13.1 FY06 10.7 7.1 9.0 3.9 5.3 5.6 4.8 3.8 38.1 18.9 FY07 10.5 7.3 8.9 3.7 5.3 5.5 9.8 3.6 39.6 27.4

15

Profile of participating companies

Balance sheet Year to March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) to Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY04 23.8 70.9 84.5 55.8 9.8 2.8 4.2 3.0 FY05 19.3 (18.8) 100.3 80.5 12.1 2.3 2.9 1.7 FY06 23.5 21.7 119.2 104.7 10.0 2.0 2.2 1.7 FY04 3.5 1.1 1.3 5.9 (1.6) (1.5) (0.7) (3.8) 2.1 6.6 31.0 FY05 3.5 1.5 (0.2) 4.7 (1.7) (1.3) (0.2) (3.3) 1.4 6.9 20.9 FY06 3.9 1.0 0.2 5.1 (1.9) (1.2) (0.4) (3.5) 1.6 7.3 21.4 FY04 FY05 FY06

(INR mn) FY07

240 1,587 2,029 0 28,467 296 1,123 31,914 15,470 11,828 962 2,395 241 1,019 31,914 25.3 22.8 23.2 40.4 57.4 20.5 10.4 6.4 41.2 13.4 10.7

240 1,965 2,407 0 30,952 222 1,373 34,954 20,130 10,108 915 2,268 314 1,220 34,954 28.0 8.7 9.0 32.4 67.6 21.9 6.3 3.4 52.2 12.2 10.1

240 2,420 2,862 0 35,177 752 2,480 41,271 25,495 9,015 1,560 2,664 360 2,176 41,271 25.6 13.6 15.9 25.1 74.8 22.9 4.3 2.0 55.3 12.3 10.8

252 3,020 3,657 0 46,993 199 2,781 53,630 33,292 11,498 1,572 4,839 392 2,037 53,630 29.0 33.6 32.2 24.4 72.2 24.3 2.6 1.1 79.0 12.6 10.9

FY07 3.7 1.3 0.1 5.1 (2.0) (0.9) (0.6) (3.5) 1.6 7.2 22.0

FY07 28.5 21.3 145.1 135.1 8.2 1.6 1.7 1.7

16

India Equity Research | Banking and Financial Services

CHOLAMANDALAM DBS FINANCE


Aiming high
Pact with DBS Bank of Singapore: A big leap

INR 202

November 29, 2007

In the first full year of its operations after the Murugappa Group joined hands with DBS Bank of Singapore, Cholamandalam DBS Finances disbursements grew 96% to INR 25.6 bn in FY07 and its AUMs grew 95% to INR 45 bn. Such a big leap in disbursements over FY02-06 was buoyed by significant growth in consumer finance business (personal loans and business finance) and pilot launch of home equity business in four metros. We believe the gained traction will continue going forward with improved market share in used vehicle financing, and further scale up in consumer finance and home equity loan businesses. Product mix being managed prudently to improve spreads In the vehicle finance business, the company is actively pursuing a strategy to improve the share of used vehicles and mini light commercial vehicles in overall disbursements to benefit from higher yields, while continuing to leverage market growth in the new vehicles market. In FY07, new vehicle disbursements remained more or less flat at INR 7.5 bn, while used vehicles and three-wheeler disbursements grew by 88% to INR 9.7 bn. The company is also focused on increasing the proportion of personal loans, enterprise loans, and home equity loans (incremental yield of 13-14%) in its loan portfolio. Fee-based businesses to be new focus area With strategies in place to set up its fund-based business on a new growth trajectory, the company will now focus on improving growth and value contribution from its fee-based businessesasset management, distribution, and securities broking. Growth in the consumer finance business and substantial increase in customer base will provide immense opportunities to cross-sell various fee based-products and services. Valuations We believe the companys operating performance will improve going forward considering its ability to leverage on the expertise of DBS, scale up in distribution network, improved productivity from recently launched branches, better asset growth in consumer financing and home equity loans, and higher fee income providing significant kicker to its RoEs. In H1FY08, the company grew its revenues and profits Y-o-Y by almost three fold to INR 2.4 bn and INR 208 mn, respectively. This compares with INR 2.6 bn of revenues and INR 274 mn of profits in FY07. The stock is currently trading at 28.0x FY07 earnings and 2.5x FY07 book.
Financials Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) EPS (INR) EPS growth (%) Book value per share (INR) Price to book (x) Price to earnings (x) ROE (%)
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 75.0 0.1 1.7 23.2 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 239 / 101 52.2 10.5 / 265.1 29.4 Reuters Bloomberg : : CHLA.BO CDFL IN

Avg. Daily Vol. BSE/NSE (000) :

FY04 1,618 6.1 310 12.2 (9.4) 92.5 2.2 16.6 14.2

FY05 1,473 (8.9) 308 8.1 (33.6) 78.5 2.6 24.9 11.6

FY06 1,465 (0.6) 356 9.4 15.5 79.3 2.5 21.6 11.9

FY07 2,580 76.2 274 7.2 (23.0) 81.3 2.5 28.0 9.0
300 225
(INR)

300 225 150 75 0 Nov-07


('000)

150 75 0 Dec-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description Incorporated in 1978, Cholamandalam DBS began its operations as a non-banking finance company (NBFC) offering equipment finance to small and medium sized companies in South India. The company today is one of Indias premier NBFCs with assets under management of more than INR 45 bn. Cholamandalam DBS, along with its subsidiaries, offers vehicle finance, personal loans, business finance, home equity loans, loans against shares, mutual funds, securities trading, and distribution of financial products. Vehicle financing continues to dominate its loan portfolio with an asset deployment share of 52%. The personal loans business has achieved significant growth in FY07 and now accounts for 17% of the loan book. Business financing grew by over 150% in FY07, which currently accounts for 20%. The company operates from over 180 locations across India. It has built up a high quality portfolio and has an unbroken dividend payment record of over 25 years. The company moved from being a deposit taking NBFC to a non-deposit taking NBFC in FY07. Its subsidiaries include DBS Cholamandalam Asset Management, the investment manager of DBS Chola MF which manages AUMs of INR 52 bn. DBS Cholamandalam Distribution is the financial products (in-house and third-party) distribution arm of the Group and mobilises more than INR 20 bn of investments in a year. DBS Cholamandalam Securities offers stock broking and equity advisory services to institutional investors and retail customers. Key risks Increased focus on used vehicle financing and increase in interest rates may lead to higher rate of defaults and higher NPAs. Personal loan and home equity loan businesses are at a nascent stage and competition from leading players may pressurise margins and growth. Performance and growth will depend on how fruitfully the company is able to leverage on expertise and risk management abilities of DBS. Execution risk will be a key as the company is aiming a giant leap in its businesses and asset base post joining hands with DBS.

18

Cholamandalam DBS Finance

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income FY04 2,212 833 1,379 239 151 37 29 21 1,618 1,093 190 903 524 53 471 162 310 4 305 12.2 5.0 41.4 FY05 2,090 839 1,252 221 137 28 44 12 1,473 971 232 739 502 15 487 180 308 (1) 309 8.1 5.0 61.5 FY06 2,168 993 1,175 289 27 55 179 29 1,465 885 276 609 580 103 477 122 356 9 347 9.4 5.0 54.7 (INR mn) FY07 4,178 1,890 2,289 291 47 106 24 115 2,580 1,963 536 1,427 617 162 456 182 274 11 263 7.2 4.0 57.7

- Fee income - Dividend income - Investment profits - Other income Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions PBT Taxes PAT Extraordinaries Reported PAT EPS (INR) DPS (INR) Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth PPP growth Opex growth PAT growth FY04 1.3 37.2 4.7 6.8 33.0 FY05 (9.2) (9.3) (4.2) (11.2) 1.0 FY06 (6.1) (80.6) 15.5 (8.9) 12.4 FY07 94.8 74.9 6.4 121.9 (24.2)

Operating ratios (%) Year to March Yield on advances Yield on assets Cost of funds Spread Cost-Income Tax rate FY04 14.1 15.9 6.8 9.0 67.6 34.3 FY05 12.9 13.5 6.4 7.1 65.9 36.8 FY06 12.2 12.1 6.5 5.6 60.4 25.5 FY07 15.5 15.3 7.7 7.6 76.1 39.9

19

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Preference share capital Reserves Net worth Deposits Borrowings Deferred tax liability Total Assets Investments Current assets - Loans and advances Current liabilities Net current assets Fixed Assets Other Assets Total Balance sheet details Disbursements (INR) Disbursement growth Credit growth Deposit growth EA growth Gross NPA ratio Net NPA ratio ROA decomposition (%) Year to March Net interest income/Assets Fee income/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS (INR) EPS growth (%) Book value (INR) DPS (%) PE (x) Price/ BV (x) Dividend yield (%) 20 FY04 12.2 (9.4) 92.5 5.0 16.6 2.2 2.5 FY05 8.1 (33.6) 78.5 5.0 24.9 2.6 2.5 FY06 9.4 15.5 79.3 5.0 21.6 2.5 2.5 FY04 9.9 1.5 0.2 11.6 7.9 0.4 1.2 9.4 2.2 15.2 14.2 FY05 8.1 1.1 0.3 9.5 6.2 0.1 1.2 7.5 2.0 16.9 11.6 FY06 6.6 0.6 1.0 8.2 4.9 0.6 0.7 6.2 2.0 16.5 11.9 FY04 FY05 FY06

(INR mn) FY07

254 230 1,862 2,346 1,896 10,982 44 15,267 552 17,622 16,743 3,344 14,278 325 112 15,267 9,980 (1.0) 14.0 13.9 15.8 0.0 1.4

380 100 2,505 2,985 1,632 11,723 21 16,360 1,039 16,647 15,622 1,626 15,021 233 67 16,360 11,270 12.9 (6.7) 3.7 7.9 1.7 1.2

380 0 2,634 3,014 1,201 15,761 32 20,008 371 21,198 19,862 1,948 19,250 293 94 20,008 13,070 16.0 27.1 27.0 22.2 1.2 0.6

380 0 2,709 3,089 698 31,491 52 35,329 505 37,565 34,104 3,273 34,292 413 120 35,329 25,600 95.9 71.7 89.8 77.1 0.7 0.4

FY07 8.4 1.0 0.1 9.4 7.2 0.6 0.7 8.4 1.0 11.0 9.0

FY07 7.2 (23.0) 81.3 4.0 28.0 2.5 2.0

India Equity Research | Banking and Financial Services

DEWAN HOUSING FINANCE


Niche player
Retail focus; concentrating on low and middle income households

INR 155

November 29, 2007

Dewan Housing Finance (DHFL) distinguishes its business model from other leading housing financiers by providing housing loans to primarily low and middle income households in tier II and III cities. Its disbursements grew by 37% over FY03-07 (higher than industry average of 32%) to INR 14.7 bn and outstanding loan book in FY07 was at INR 33 bn. To achieve scale in a short span of time, it has targeted potential customers belonging to low income groups like municipal and union workers. Loan funds: Dominated by bank loans The company maintained NIMs at 2.8% in FY07 as yield on advances improved ~60bps to 10.5%; but this was partially offset by equivalent rise in cost of funds. Its average funding cost was 8.5% in FY07 as term loans from banks and financial institutions is the major source, constituting more than 67% of its borrowings at the end of FY07. The loans availed from banks qualify for priority sector lending and are drawn at spreads below prime lending rates. Investments explain more than 50% of its market cap DHFL recently picked up 19.9% stake in Wadhawan Food Retail (WFRPL), a promoter group company which currently operates 91 convenience retail stores across the country under the

Spinach brand. WFRPL plans to aggressively increase its retail stores to 1,500 over the next
four-five years and tap the capital market in the next 12-18 months. Our first-cut valuation for WFRPL at INR 11.3 bn translates the value of this investment into INR 37 per share for DHFL. It also holds 1.26% stake in HDIL valued at INR 2 bn (INR 32 per share) at current market price. Market value of other quoted investments and book value of unquoted and MF/VC investments is INR 957 mn (INR 16 per share). Valuations The company has grown its revenues and PAT by 24% and 30% CAGR, respectively, for FY0407 and reported revenue of INR 651 mn and profit of INR 303 mn in H1FY08. The companys net worth stands at INR 4 bn and it generates RoE in the 17-19% range. After adjusting the value of its investments, the stock is currently trading at 1.0x FY07 book and 8.8x FY07 EPS.
Financials Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) Shares outstanding (mn) Diluted EPS (INR) Book value (INR) EPS growth (%) P/E (x) Price to book (x) Adj price to book (x)* Adjusted P/E (x) * ROE (%)
*Adj for value of investments

Reuters Bloomberg

: :

DWNH BO DEWH IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 164 / 57 57.1 8.9 / 222.6 546.0

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs : : : : 53.9 0.9 16.2 28.9

FY05 663 16.1 295 50.1 6.2 39.0 (10.9) 24.7 4.0 1.8 11.2 19.3

FY06 896 35.1 403 50.1 6.7 51.2 7.7 23.0 3.0 1.4 10.4 20.2

FY07 1,084 21.0 517 50.1 7.9 69.1 18.1 19.5 2.2 1.0 8.8 17.9

Others

200 160 120

4,000 3,200 2,400 1,600 800 0 Nov-07

80 40 0 Dec-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description DHFL, incorporated in 1984, is a private sector housing finance company offering housing loans, lease rental financing, and reverse mortgage loans to retail customers. Its main focus is on providing loans to the lower and middle income households in tier II and III cities for acquisition or construction of residential properties. The company has introduced Indias first reverse mortgage scheme called Saksham mainly targeted at senior citizens who want to supplement their income without selling their home. It has also ventured into international markets by opening representative offices in Dubai and UAE to cater to the needs of non-resident Indians there. The company also offers property insurance, free accident risk cover, and earthquake protection cover to its customer. As of FY07, DHFL operates in 155 locations comprising 53 main branches, 67 service centres, and 35 camps. Its distribution network is primarily concentrated in western and southern India and it has entered in to an agreement with the Punjab & Sind Bank to increase its presence in North India. Key risks DHFL provides loans to low and middle income households where competition is less intense due to absence of large private banks. Entry of large players in these segments may lead to loss in market share and impact the companys revenue growth and margins. The risk of default is relatively high for the company due to its focus on low and middle income groups, which can be significantly impacted by slowdown in the economy or decline in income levels. The company relies on term loans from banks and financial institutions for funding taken at floating rates and therefore, higher-than-expected rise in interest rates can affect the companys margins.

22

Dewan Housing Finance

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income FY05 1,686 1,147 539 124 89 0 11 24 663 243 97 146 420 27 393 80 313 18 295 6.2 2.3 38.9 FY06 2,246 1,605 641 255 57 2 125 71 896 316 108 209 580 29 551 95 456 53 403 6.7 2.7 33.4 (INR mn) FY07 3,393 2,488 905 179 118 27 4 30 1,084 364 132 231 720 57 663 125 538 22 517 7.9 2.6 25.7

- Fee income - Dividend income - Investment profits - Other income Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions PBT Taxes PAT Extraordinaries Reported PAT EPS (INR) DPS (INR) Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth PPP growth Opex growth PAT growth FY05 20.4 13.7 16.0 16.3 24.0 FY06 19.0 (36.3) 38.1 30.0 36.9 FY07 41.2 107.2 24.2 15.0 28.1

Operating ratios (%) Year to March Yield on advances Yield on assets Cost of funds Spread NIMs Cost-Income Tax rate FY05 11.5 10.5 7.8 2.7 3.4 36.7 20.3 FY06 10.8 9.9 7.7 2.2 2.8 35.3 17.2 FY07 11.2 10.5 8.4 2.1 2.8 33.5 18.8 23

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Preference share capital Reserves Networth Deposits Borrowings Current liabilities Total Assets Loans Investments Current assets Fixed assets Other assets Total Balance sheet ratios (%) Credit growth Borrowings growth EA growth Net NPA ratio FY05 FY06

(INR mn) FY07

501 0 1,452 1,954 1,123 15,566 552 19,195 16,701 1,070 1,120 306 (2) 19,195 32.8 35.5 35.5 1.5

501 177 2,063 2,564 1,009 23,363 646 27,759 24,868 833 1,630 448 (21) 27,759 48.9 46.0 45.3 1.3

501 242 2,963 3,464 697 33,706 805 38,914 35,532 823 2,142 453 (35) 38,914 42.9 41.2 41.0 1.2

RoE decomposition (%) Year to March Net interest income/Assets Fee income/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE FY05 3.4 0.7 0.1 4.1 1.5 0.2 0.5 2.2 1.9 10.1 19.3 FY06 2.8 0.6 0.6 4.0 1.4 0.1 0.4 1.9 2.0 10.0 20.2 FY07 2.8 0.5 0.0 3.3 1.1 0.2 0.4 1.7 1.7 9.3 17.9

Valuation parameters (%) Year to March EPS (INR) EPS Y-o-Y growth (%) Book value per share (INR) P/E (x) P/BV (x) Adjusted P/BV (x) * Adjusted P/E (x) *
*Adj for value of investments

FY05 6.2 (10.9) 39.0 24.7 4.0 1.8 11.2

FY06 6.7 7.7 51.2 23.0 3.0 1.4 10.4

FY07 7.9 18.1 69.1 19.5 2.2 1.0 8.8

24

India Equity Research | Banking and Financial Services

G EOJIT FINANCIAL SERVICE


Strategic partnership to add value
Strong retail presence in South India; scaling up international operations

INR 46

November 29, 2007

Geojit Financial Service (Geojit) offers equity, commodity broking services, PMS, and third party distribution of financial products to retail investors and has strong presence in South India. It had a network of 392 offices and a client base of 0.45 mn in FY07 and is planning to grow in North and West India. To facilitate greater participation from women, Geojit launched Indias first women-only branches in 2005. It caters to international clients in UAE (primarily NRIs) looking to invest in the Indian market through its joint venture with the Al Saud Group (Barjeel Geojit Securities) in which it has 30% stake. It recently entered into a joint venture with Bank of Bahrain and Kuwait (BBK) for providing investment services to NRIs. Strategic partnership with BNP Paribas Geojit entered into a strategic partnership with BNP Paribas in March 2007 with the latter acquiring 27% stake in Geojit through preferential allotment (which will eventually increase to 34% after warrant conversion). The company will utilize the money raised to expand its operations in India and the Middle East and expects to leverage the international expertise, brand name, superior technology, and management capabilities to attract institutional and foreign investors. Venturing in institutional brokerage business and international markets The company is planning to enter the institutional brokerage business through its joint venture with BNP Paribas, in which it has 50% stake. Its partnership with BNP will help it get empanelment from domestic as well as institutional investors. It has recently formed a 30:70 JV with the Al Johar Group of Saudi Arabia to offer retail broking services for capital markets in Saudi Arabia. Geojit will manage the operations of this joint venture and expects to corner 7-10% share in this market. Valuations The companys revenue and PAT growth was 50% and 41%, respectively, over FY04-FY07, and it reported revenue of INR 510 mn and profit of INR 246 mn in H1 FY08. The stock is currently trading at 28.7x FY07 EPS.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 58.6 4.7 2.2 34.5 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 54 / 28 209.0 9.6 / 242.3 462.3 Reuters Bloomberg : : GEOJ.BO GFSL IN

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn) Revenue growth (%) PAT (INR mn) PAT growth (%) EPS (INR) P/E (x) P/B (x) Price / Revenues (x) RoE (%)

FY05 544 35.5 101 13.2 0.72 64.1 21.4 12.9 39.4

FY06 1,020 87.4 227 125.0 1.49 30.9 14.5 6.9 55.8

FY07 1,361 33.5 252 11.0 1.60 28.7 4.4 7.1 18.7

60

1,600

50

1,200

40

800

30

400

20 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description Geojit, incorporated in 1987, offers a bouquet of financial products and services to retail investors equity and commodity broking, portfolio management services, and third party distribution of mutual funds and insurance. The company has established a strong network in South India and is planning to increase its presence in West and North India. It caters to 0.45 mn customers through its network of 392 offices. While brokerage income remains a major contributor to revenue and profitability, income from commodity and distribution business is gaining traction. The company also provides portfolio management services and manages a corpus of more than INR 500 mn. It offers commodity broking through its subsidiary Geojit Commodities. Value-added services like customized finance and structured credit facilities in association with Geojit Credits Private had its impact in the volume building exercise. Promoters hold 58% (including C J George and Shiny George at 22%), KSIDC 9%, and BNP Paribas 27%), while FIIs have 2.2% stake in the company. Key risks The companys businesses are highly dependent on conditions of the capital market and any unfavorable developments in the market affecting investor sentiments can significantly hamper revenue growth. The Indian brokerage industry is highly competitive and competitive pressure can affect the companys market share and margins.

26

Geojit Financial Service

Financial Statements
statement Income statement Year to March Operating income - Brokerage related income - Financial product distribution - Portfolio management services - Others Total operating income Other income Total revenues Expenses - Operating expenses - Employee cost - Administrative and other expenses Total expenses EBITDA Interest and other financing charges Depreciation PBT Taxes PAT Add : Share of profit from associates Dividend on preference share capital (net of tax) Adjusted PAT EPS (INR) FY05 FY06 (INR mn) FY07

514.9 12.9 3.5 2.4 533.7 10.6 544.2 151.5 98.4 110.9 360.7 183.5 0.0 25.3 158.2 54.1 104.1 3.1 100.9 0.7

911.5 65.2 16.0 17.6 1,010.2 9.4 1,019.6 281.2 194.1 173.9 649.3 370.4 0.1 39.1 331.1 106.9 224.3 2.8 227.1 1.5

1,148.8 95.5 20.8 47.3 1,312.4 48.6 1,361.1 391.9 287.7 249.5 929.0 432.1 2.3 51.9 377.9 133.8 244.1 8.1 252.1 1.6

Growth ratios (%) Year to March Revenue growth Expenses growth EBITDA growth PBT growth PAT growth FY05 35.5 52.7 11.1 8.3 13.2 FY06 87.4 80.0 101.8 109.4 125.0 FY07 33.5 43.1 16.7 14.1 11.0

Operating ratios (%) Year to March Broking income / Total income Operating expenses/ Total income Employee cost / Total income Other expenses / Total income EBITDA margin PBT margin PAT margin FY05 94.6 27.8 18.1 20.4 33.7 29.1 18.5 FY06 89.4 27.6 19.0 17.1 36.3 32.5 22.3 FY07 84.4 28.8 21.1 18.3 31.7 27.8 18.5 27

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Networth Secured loans Deferred tax liability Total Assets Fixed assets Investments Current assets - Sudry debtors - Cash and bank balances - Loans and advances - Others Current liabilities - Current liabilities - Provisions Net current assets Goodwill Miscellaneous expenses not written off Total FY05 FY06

(INR mn) FY07

152 176 328 13 341 134 121 164 285 418 3 697 90 82 4.1 0 341

152 333 486 19 504 220 118 352 487 960 2 1,448 192 162 3.8 504

209 1,997 2,206 24 2,231 253 413 409 1,826 1,139 18 1,561 271 1,559 4.8 2,231

Valuation parameters Year to March RoA (%) RoE (%) EPS (INR) EPS growth (%) Book value per share (INR) P/E (x) P/B (x) Price/Revenues (x) FY05 37.6 39.4 0.7 10.1 2.2 64.1 21.4 12.9 FY06 53.7 55.8 1.5 107.6 3.2 30.9 14.5 6.9 FY07 18.4 18.7 1.6 7.5 10.6 28.7 4.4 7.1

28

India Equity Research | Banking and Financial Services

HDFC
Premium frenchise, premium valuation
Most venerable play on Indian mortgages

INR 2,688

November 29, 2007

HDFC has an unbeatable track record of steady, regular, and predictable growth in asset size, earnings, and profitability. We expect the banks loan book, with its strong brand recall and superior real estate knowledge, to grow by 25% CAGR in FY07-09E. Consequently, we expect its revenue and PAT to grow by 26% and 21% CAGR, respectively, over FY07-09E. Spreads likely to be maintained at 2.3-2.5% level HDFC has been proactive in maintaining healthy margins, and with superior pricing power it has been able to pass on the increased cost of funds. Its interest spreads improved to 3.0% due to improvement in yields and decline in the cost of funds due to repaying of high cost borrowings in Q2FY08. We expect its interest spreads to remain at the 2.3-2.5% level over FY08-09E and margins to improve to 3.2-3.4%. Investment in subsidiaries explains ~35% of market cap Besides the core business, HDFCs life and general insurance, AMC, and banking businesses are also growing at a rapid pace. We value HDFCs investments at INR 921 per share with stake in HDFC Bank contributing INR 488 per share, life insurance INR 320 per share, asset management INR 71 per share, general insurance INR 10 per share, and venture capital INR 18 per share. It has recently proposed a 74:26 tie up with a Munich Re Group companyErgo International. The partnership will enable it to gain traction in its general insurance business, which has remained muted over the past two-three years. Valuations After adjusting for the value of the investments, the stock is trading at 5.3x FY09E book and 22.9x FY09E EPS. On SOTP basis the stock is valued at INR 2,763 per share in FY09E and INR 3,217 per share in FY10E.
Reuters Bloomberg : : HDFC.BO HDFC IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : 2,965 / 1,397 : 278.9

: 749.7/18,840.6 697.5

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks : : : : 0.0 6.7 79.9 13.4

Financials Year to March Net revenues (INR mn) Rev growth (%) Net profit (INR mn) Profit growth (%) Shares outstanding (mn) Book value per share (INR) EPS (INR) P/E (x) P/BV (x) Adjusted P/E (x) * Adjusted P/BV (x) *
* Adjusted for value on investments/subsidiaries

FIIs

FY06 17,054 27.5 12,572 20.2 250 179 50.4 53.4 15.0 36.7 12.9

FY07 21,977 28.9 15,705 24.9 253 219 62.1 43.3 12.3 29.7 10.5

FY08E 30,998 41.0 20,503 30.6 279 403 73.6 36.5 6.7 25.0 6.2

FY09E 34,856 12.4 22,839 11.4 284 481 80.5 33.4 5.6 22.9 5.3

Others

3,250

3,000

2,500
(INR)

2,000
('000)

1,750

1,000

1,000 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description HDFC is Indias largest provider of housing finance, primarily focusing on retail housing. It has widened its distribution network to 243 offices in India. It also covers over 90 locations through its outreach programme, which has helped the corporation disburse housing loans in more than 2,400 towns and cities in the country. It has also supplemented the distribution channel through the appointment of direct selling agents (DSA). Besides the core business of mortgages, HDFC has evolved into a financial conglomerate diversifying into other businesses through its subsidiaries viz., HDFC Standard Life Insurance (81.9%), HDFC Asset Management Company (60.1%), HDFC Bank (23.33%), and HDFC General Insurance Company (74%). Currently, ~80% of the shares are held by foreign institutional investors/foreign direct investments and 11% by individuals. Key risks Loss of market share to commercial banks and other housing finance companies. Higher-than-expected increase in funding cost. Risk of fraud and NPA accretion due to increase in interest rates and fall in property prices is inherent to the mortgage business.

30

HDFC

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Total non interest income -Fee income -Dividend income -Investment profits -Income from investments Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions PBT Taxes PAT FY05 28,423 19,575 8,848 4,528 1,017 872 1,741 898 13,376 1,814 601 1,213 12,802 144 12,657 2,202 10,455 FY06 37,066 24,911 12,155 4,899 675 1,080 2,362 783 17,054 2,146 746 1,400 15,727 154 15,572 3,000 12,572 FY07 53,141 36,669 16,472 5,505 686 1,179 3,253 388 21,977 2,366 913 1,454 19,929 250 19,679 3,974 15,705 FY08E 74,802 51,234 23,568 7,430 754 1,365 4,885 426 30,998 2,923 1,278 1,645 28,335 343 27,991 7,488 20,503 (INR mn) FY09E 90,656 62,722 27,934 6,923 830 1,624 4,000 469 34,856 3,399 1,533 1,866 31,717 428 31,289 8,450 22,839

Growth ratios (%) Year to March NII growth Non-int income growth Opex growth PPP growth Provisions growth PAT growth FY05 66.6 -1.7 9.3 35.7 26.6 38.2 FY06 37.4 8.2 18.3 22.8 7.1 20.2 FY07 35.5 12.4 10.3 26.7 62.0 24.9 FY08E 43.1 35.0 23.5 42.2 37.3 30.6 FY09E 18.5 -6.8 16.3 11.9 24.5 11.4

Operating ratios (%) Year to March Gross NPA ratio CAR Loan spread Net interest margin Cost-income Tax rate FY05 1.1 13.4 2.1 2.5 13.6 17.4 FY06 1.0 15.0 2.3 2.7 12.6 19.3 FY07 1.0 12.9 2.1 2.9 10.8 20.2 FY08E 1.0 15.6 2.5 3.4 9.4 26.8 FY09E 1.0 14.7 2.3 3.2 9.8 27.0

Loan sactions and disbursements Year to March FY05 FY06 256,340 206,790 80.7 27.6 30.0 FY07 333,320 261,780 78.5 26.6 30.0 FY08E 423,316 324,607 76.7 24.0 27.0 FY09E 541,845 405,759 74.9 25.0 28.0

Sanctions (INR mn) 197,150 Disbursemenrs (INR mn) 162,070 Disbursemenrs to sanction ratio (%) 82.2 Disbursemenrs growth (%) 27.6 Sanctions growth (%) 29.6

31

Profile of participating companies

Balance sheet As on 31st March LIABILITIES Equity capital Share premium Reserves Net worth Total deposits Borrowings Total liabilities ASSETS Loans Equity & MF Interest bearing investments Gilts Net current assets Fixed assets Other assets Total assets FY05 FY06 FY07 FY08E

(INR mn) FY09E

2,491 7,343 28,997 38,831 78,401 288,073 405,305 360,115 12,481 15,491 3,328 10,247 2,948 694 405,305

2,496 6,659 35,528 44,683 87,414 379,799 511,897 449,901 16,811 18,735 3,217 19,985 2,473 774 511,897

2,530 11,300 41,684 55,514 103,844 468,083 627,446 565,114 19,311 14,134 3,217 22,308 2,131 1,231 627,446

2,785 52,694 56,786 112,266 122,655 537,261 772,181 706,963 40,182 7,714 3,217 10,510 2,056 1,540 772,181

2,836 59,804 73,718 136,359 155,293 667,624 959,276 881,782 49,926 7,340 3,217 13,109 1,982 1,921 959,276

ROA decomposition (%) Year to March Net interest income / assets Fee income/assets Dividend income/assets Investment profits/assets Other income/assets Net op revenues/ assets Non op income/ assets Net revenues/ assets Operating expense/assets Provisions/assets Taxes/assets Total costs/assets ROA Equity/assets ROE FY05 2.5 0.3 0.2 0.5 0.3 3.7 0.3 4.1 0.5 0.0 0.6 1.2 2.9 10.1 28.7 FY06 2.7 0.1 0.2 0.5 0.2 3.7 0.2 3.9 0.5 0.0 0.7 1.2 2.8 9.2 30.1 FY07 2.9 0.1 0.2 0.6 0.1 3.9 0.1 3.9 0.4 0.0 0.7 1.2 2.8 8.8 31.3 FY08E 3.4 0.1 0.2 0.7 0.1 4.5 0.0 4.5 0.4 0.0 1.1 1.5 2.9 12.0 24.4 FY09E 3.2 0.1 0.2 0.5 0.1 4.0 0.0 4.1 0.4 0.0 1.0 1.4 2.6 14.4 18.4

Valuation parameters Year to March EPS (INR) EPS YoY growth (%) Book value per share (INR) ROE (%) ROA (%) P/E (x) P/BV (x) Adjusted P/E (x) Adjusted P/BV (x) 32 FY05 42.0 36.8 155.9 28.7 2.9 64.0 17.2 43.6 14.3 FY06 50.4 20.0 179.0 30.1 2.8 53.4 15.0 36.7 12.9 FY07 62.1 23.2 219.4 31.3 2.8 43.3 12.3 29.7 10.5 FY08E 73.6 18.6 403.1 24.4 2.9 36.5 6.7 25.0 6.2 FY09E 80.5 9.4 480.7 18.4 2.6 33.4 5.6 22.9 5.3

India Equity Research | Banking and Financial Services

IDBI
Cruising along
Strength in investment book; recoveries likely to boost bottom line

INR 158

Novemver 29, 2007

The legacy investments of erstwhile IDBI include a few strategic investments in listed and unlisted entities whose valuations have increased multifold in the past couple of years. Significantly, with every stake sale by other investors setting higher benchmarks, we believe there is substantial steam left in these investments. Unlocking value in these unlisted entities notably that of NSE, NSDL, CARE, SHCL etc., will continue to be a substantial trigger for the stock. The bank has written off accounts of INR 40 bn, of which the management perceives nearly 40-50% as recoverable. However, most of these accounts are sticky in nature and resolving them will take some time. The bank has guided for recoveries of INR 7 bn during the current fiscal. Margin pressure likely to recede IDBI posted net interest margins of 0.75% in FY07, marginally ahead of 0.5% in FY06, but still lower compared to its peers due to the following reasons: (a) investments of INR 90 bn in SASF bonds as part of its NPA restructuring, on which it does not earn any interest; (b) the larger balance sheet of standalone IDBI was funded through high cost market borrowings, which continue to remain on the balance sheet; and (c) slow growth of balance sheet as deposit growth helping re-price borrowings. Network expansion to bring down cost of deposits UWB merger (a substantial part of the merger has been completed) has added 230 branches to IDBIs network, taking the latters total network to ~450. It is in the process of relocating a few of the branches to other places. Also, it has 45 licenses in hand, which the bank plans to utilize in the next two months and take the total branch network to ~500. After opening of these branches, the bank will apply for 100 more branch licenses in the next calendar year. We believe this will help the bank reduce its cost of funds, which was 6.4% for FY07. Valuations Given the current fundamental outlook on interest margins, highly efficient operating metrics (the lowest in the industry because of its legacy balance sheet at less than 1%), and its highly attractive investment book, the return ratios are expected to improve from current levels. The stock is currently trading at 1.8x FY07 book and 2.1x FY07 adjusted book.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 52.7 17.5 10.5 19.2 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : 181 / 67 724.1 Reuters Bloomberg : : IDBI.BO IDBI IN

:114.5 / 2,881.0 11,975.5

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn)

FY05 8,150 (29.0) 1,879 2,990 721.8 8.3 16.3 19.1 1.9 5.1

FY06 16,603

FY07 16,851
200 160 120 11,000 8,800 6,600 4,400 2,200 0 Nov-07

Rev growth (%) Net interesrt income(INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) ROE (%)

103.7 3,799 5,204 724.0 7.2 (56.6) 22.0 1.8 8.5

1.5 6,579 6,303 724.4 8.7 21.1 18.2 1.8 10.0

80 40 0 Dec-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description IDBI, which was established as Development Financial Institution (DFI), merged its subsidiary IDBI with itself in FY05. Post this merger, the company expanded its reach from ~220 to ~450 branches with the acquisition of loss making United Western Bank. The government of India has 52.7% stake in the bank, while LIC holds 5.6%. The bank has a balance sheet of more than INR 1,000 bn, while its market capitalization is less than INR 120 bn. Key risks Expansion of branch network will remain a key execution criterion to replace its high cost borrowings before we see growth in balance sheet. Ability to unlock value will remain a sticky issue given the legal hazards.

34

IDBI

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Extraordinaries Reported PAT EPS DPS Payout ratio (%) FY04 68,430 70,803 -2,373 13,857 1,003 1,397 11,457 11,484 5,748 1,817 3,931 5,735 1,120 0 0 1,120 4,615 -35 4,650 0 4,650 7.1 1.5 21.1 FY05 26,557 24,679 1,879 6,271 1,590 1,197 3,484 8,150 4,622 1,575 3,046 3,528 725 -342 -16 1,083 2,803 -188 2,990 0 2,990 8.3 0.8 9.1 FY06 53,807 50,008 3,799 12,805 3,310 2,397 7,097 16,603 8,595 3,185 5,410 8,008 2,060 1,673 387 0 5,948 744 5,204 0 5,204 7.2 1.5 20.9 (INR mn) FY07 63,454 56,875 6,579 10,272 3,116 2,228 4,928 16,851 7,785 2,829 4,956 9,066 2,119 2,233 -114 0 6,947 644 6,303 0 6,303 8.7 1.5 17.2

Growth ratios (%) Year to March NII growth Fees growth Operating profit growth PPP growth Opex growth PAT growth FY04 (170.8) 7.9 40.4 8.7 55.2 15.8 FY05 (179.2) 58.5 (19.6) (38.5) (35.3) (35.7) FY06 102.2 108.2 86.0 127.0 184.0 74.0 FY07 73.2 (5.9) (9.4) 13.2 2.9 21.1

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Cost of funds Cost of deposits Cost of borrowings Spread Cost-Income Tax rate FY04 14.5 6.2 11.7 12.4 0.0 13.7 (0.7) 50.1 (0.8) FY05 11.2 3.4 3.9 3.7 3.7 8.4 0.2 56.7 (6.7) FY06 8.6 7.6 6.7 6.3 4.4 16.0 0.4 51.8 12.5 FY07 8.5 9.0 7.1 6.4 5.7 7.9 0.7 46.2 9.3 35

Profile of participating companies

Balance sheet As on 31st March iabilities L iabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net Interest Income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY04 7.1 15.8 89.4 79.9 22.2 1.8 2.0 0.9 FY05 8.3 16.3 82.1 73.9 19.1 1.9 2.1 0.5 FY06 7.2 (56.6) 88.0 82.6 22.0 1.8 1.9 0.9 FY04 (0.4) 0.4 2.0 2.0 (1.0) (0.2) 0.0 (1.2) 0.8 11.0 7.3 FY05 0.3 0.4 0.5 1.2 (0.7) (0.1) 0.0 (0.8) 0.4 8.7 5.1 FY06 0.5 0.7 0.9 2.1 (1.1) (0.3) (0.1) (1.4) 0.7 7.7 8.5 FY04 FY05 FY06

(INR mn) FY07

6,528 51,821 58,349 0 38,645 483,847 57,814 638,655 328,680 90,000 152,431 19,392 9,067 39,086 638,655 (28.9) (10.8) 2.6 17.2 850.5 0.0 0.0 2.7 18.2 14.9

7,218 52,045 59,263 38,778 151,026 500,055 65,180 814,303 454,136 148,983 101,564 56,532 8,894 44,195 814,303 54.3 290.8 28.9 22.9 335.8 38.3 2.7 1.9 30.3 15.5 11.9

7,240 56,474 63,714 38,043 260,009 475,303 49,655 886,724 527,385 161,799 91,706 53,628 8,110 44,096 886,724 12.7 72.2 9.6 22.0 221.1 29.5 2.1 1.1 49.5 14.8 11.7

7,244 55,112 62,356 52,707 433,540 424,044 45,103 1,017,750 624,708 162,086 94,667 69,111 7,141 60,037 1,017,750 15.7 66.7 13.9 18.9 153.3 25.4 2.0 1.2 41.4 13.7 9.1

FY07 0.7 0.6 0.6 1.9 (0.9) (0.2) (0.1) (1.2) 0.7 7.1 10.0

FY07 8.7 21.1 86.1 79.1 18.2 1.8 2.0 0.9

36

India Equity Research | Banking and Financial Services

INDUSIND BANK
In fine fettle

INR 119

Asset book with a higher focus on vehicle financing; SME lending on the rise
November 29, 2007

IndusInd Bank (IIB) has been growing its asset book conservatively at 15% CAGR from FY0407 relative to its peers. In Q2FY08, its loan book was at INR 120 bn, compared to INR 110 bn in FY07. Vehicle financing fromed 57% of loan book in Q2FY08 (up from 40% of the asset book in FY06 ). CVs and UVs form ~70% of the total vehicle financing book. IIB is also consciously increasing its exposure to SMEs (at 12% as of Q2FY08 from 9% in FY06), while simultaneously reducing its high risk uncollateralized personal loan book (less than 1% of loan book) and low yielding corporate segment (~31% of loan book). Steady increase in liability franchise likely to offset high cost of funds IIB has been steadily increasing its branch network to offset the high cost deposits with more stable and less expensive funds. As in Q2FY08, it had 172 branches, compared to 137 in FY07. Post acquisition of Ashok Leylands finance division(AFL), which will help IIB cross-sell its products; IIB plans to convert a part of AFLs branches into its network. CASA ratio, despite being lower than industry, has increased steadily to 17% in Q2FY08 from 15% in FY07. Upsides on interest margins and asset quality from current levels The banks margins have been subdued at ~1.25-1.5%, mainly due two factorsdependence on high cost deposits and fixed rate in the vehicle financing book. We believe the banks continuous expansion will reduce the dependence on high cost deposits, while re-pricing of older loans at higher rates will help improve margins. The bank is also active in building its fee income with broking income, forex trading, and distribution of third party products. On the asset quality, the bank has booked one off item of ~ INR 1.27 bn as NPAs, which has led to GNPA being at 3.05% for Q2FY08, compared to 2.3% in Q2FY07. Going forward, we expect this to improve with focus on recoveries. Valuations The stock is currently trading at 4.0x FY07 book and 4.4x adjusted book. With the current tier 1 capital of ~7%, the bank may raise capital in the near future to fund growth. We believe IIBs margins are likely to expand from current levels, while focus on fee income is likely to improve RoAs from the current level of ~0.4%.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 28.5 3.3 18.4 49.8 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 123 / 37 290.7 34.5 / 866.8 2,624.5 Reuters Bloomberg : : INBK.BO IIB IN

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn) Rev growth (%) Net interest Income (INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) ROE (%)

FY05 6,663 0.4 4,155 2,101 290.5 7.2 (20.4) 16.5 5.3 25.8

FY06 5,039 (24.4) 3,151 368 290.5 1.3 (82.5) 93.9 4.7 4.3

FY07 5,155 2.3 2,714 682 319.8 2.1 68.3 55.8 4.4 7.1
160 6,000

120

4,500

80

3,000

40

1,500

0 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description Promoted by the Hinduja Group in 1994, which has a 28% stake in the bank, IIB is one of the new generation private sector banks in India. It currently has a network of ~170 branches, spread over 27 states and Union territories. In addition, IIB also has a representative office each in Dubai and London. The bank raised 9% capital in FY06 through a GDR issue. The banks balance sheet is ~INR 219 bn and more than 60% of its loan book is exposed to vehicle financing. CASA ratio is at 17%. The bank is strengthening its network to reduce dependence on high cost deposits. Key risks Risk of sharper deterioration of asset quality due to high exposure to vehicle financing. Margin improvement hinges on the banks ability to replace market borrowings with low cost deposits.

38

Indus Ind Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense - Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Extraordinaries Reported PAT EPS DPS Payout ratio (%) FY04 9,861 6,693 3,169 3,469 342 924 2,204 6,638 2,171 504 1,668 4,467 1,740 1,607 -30 163 2,727 86 2,641 0 2,641 9.1 2.3 24.7 FY05 11,344 7,189 4,155 2,508 458 1,533 516 6,663 2,650 602 2,049 4,012 1,407 675 630 103 2,605 504 2,101 0 2,101 7.2 1.8 24.9 FY06 11,883 8,732 3,151 1,888 511 1,661 -283 5,039 3,166 848 2,318 1,873 1,281 1,034 76 171 592 224 368 0 368 1.3 0.0 0.0 (INR mn) FY07 15,003 12,288 2,714 2,441 874 2,059 -491 5,155 3,440 963 2,477 1,716 642 657 23 -38 1,074 392 682 0 682 2.1 0.6 28.1

Growth ratios (%) Year to March NII growth Fees growth Operating profit growth PPP growth Opex growth PAT growth FY04 71.8 (29.9) 84.2 35.0 (25.8) 172.9 FY05 31.1 34.1 22.0 (10.2) (19.1) (20.4) FY06 (24.2) 11.4 19.5 (53.3) (9.0) (82.5) FY07 (13.9) 71.2 8.6 (8.4) (49.9) 85.3

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Cost of funds Cost of deposits Cost of borrowings Spread Cost-Income Tax rate FY04 11.0 7.6 8.6 5.7 5.1 11.7 2.9 32.7 3.2 FY05 10.0 7.2 8.1 4.9 5.7 8.3 3.1 39.8 19.3 FY06 9.3 6.6 7.8 5.5 6.7 8.5 2.3 62.8 37.8 FY07 10.2 7.0 8.4 6.7 7.9 12.9 1.7 66.7 36.5 39

Profile of participating companies

Balance sheet As on 31st March Liabilities Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest Income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted vook value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY04 9.1 106.1 27.6 22.4 13.1 4.3 5.3 1.9 FY05 7.2 (20.4) 28.5 22.7 16.5 4.2 5.3 1.5 FY06 1.3 (82.5) 29.8 25.1 93.9 4.0 4.7 0.0 FY04 2.8 1.1 1.9 5.8 (1.9) (1.5) (0.1) (3.5) 2.3 6.1 37.7 FY05 2.9 1.4 0.4 4.7 (1.9) (1.0) (0.4) (3.2) 1.5 5.8 25.8 FY06 2.1 1.4 (0.2) 3.3 (2.1) (0.8) (0.1) (3.1) 0.2 5.6 4.3 FY04 FY05 FY06

(INR mn) FY07

2,904 5,100 8,004 2,040 112,003 23,104 5,714 150,865 73,012 37,930 6,898 21,710 2,984 8,332 150,865 29.5 30.3 54.5 27.9 66.7 11.2 3.5 2.9 18.1 12.8 8.9

2,905 5,387 8,292 4,720 131,143 6,106 5,959 156,220 89,998 34,288 6,404 11,546 3,245 10,740 156,220 22.1 17.1 1.9 25.0 69.5 10.7 3.5 2.7 23.8 11.6 7.2

2,905 5,755 8,661 6,391 150,063 5,349 5,761 176,225 93,105 45,857 8,242 14,805 3,396 10,821 176,225 3.8 14.4 13.9 29.5 63.0 12.9 2.9 2.1 27.5 10.5 6.8

3,198 7,368 10,566 8,460 176,448 5,927 7,870 209,271 110,842 48,509 10,408 25,954 3,696 9,863 209,271 18.5 17.6 20.8 26.6 63.5 14.9 3.1 2.5 20.1 12.5 7.3

FY07 1.5 1.6 (0.3) 2.9 (1.9) (0.4) (0.2) (2.5) 0.4 5.4 7.1

FY07 2.1 68.3 33.0 27.0 55.8 3.6 4.4 0.5

40

India Equity Research | Banking and Financial Services

INDIAN OVERSEAS BANK


Healthy growth
Strength of business model continues

INR 158

November 29, 2007

Indian Overseas Bank (IOB) is the ninth-largest public sector bank in terms of balance sheet size (~INR 820 bn; ~INR 870 bn for Q2FY08) and the fifth most profitable bank in FY07 in India. Amongst PSU banks, it is only behind Syndicate Bank in balance sheet growth in the past two years, which has averaged ~27%. IOB has consciously developed a business model which lends to the high margin SME segment (~40% of loan book). Acquisition of Bharat Overseas Bank has helped the bank scale up its fee income, especially from trade and remittance businesses. IOB has had pressure on margins in the past to fund this strong growth with CASA ratio declining from 32% in Q2FY08 from 39% in FY05. As of Q2FY08, the bank is comfortable on its CD ratio, which implies that there will be reduced pressure to mobilize high cost deposits. Higher than industry profitability IOBs net interest margin was at ~3.7% for FY07 (the highest for any PSU bank), but has declined marginally by ~30bps in Q2FY08, mainly due to decline in low cost deposits. We expect to see some improvement from current levels given sufficient cushion available in the CD ratio and relatively subdued credit outlook from last year. Fee income growth was marginally lower at 16% CAGR for FY05-07 and we believe this will change with the banks focus on increasing core fee income of trading and remittances (with the acquisition of Bharat Overseas Bank) and distribution of third party products. We have forecasted a growth of 20% in core fee income for FY08. Despite the strong growth in balance sheet over the past few years, IOBs balance sheet is healthy with gross NPA (2.1% for Q2FY08) adequately provided (provision coverage of ~83% for Q2FY08) giving net NPA at very comfortable levels of 0.35%. Valuations The stock is currently trading at 1.8x FY08E book and 7.6x FY08E earnings. We like the bank for its high RoE of 25% and RoAs of ~1.25% for FY08E. Given the current cushion in Tier 1 capital, we do not expect the bank to raise capital in the next two years. We expect the bank to generate 23-26% RoE and 13.4% EPS CAGR over FY07-09E.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 61.2 6.0 18.6 14.2 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) Avg. Daily Vol. BSE (000) : : 166 / 89 544.8 Reuters Bloomberg : : IOBK.BO IOB IN

: 85.9 / 2.160.2 : 457.0

Financials Year to March Revenues (INR mn) Rev growth (%) Net interesrt income(INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) Price to PPOP (x) ROE (%)

FY06 26,418 10.0 20,672 7,831 544.8 14.4 59.3 11.0 2.8 0.1 28.5

FY07 32,036 21.3 25,608 10,084 544.8 18.5 28.8 8.5 2.2 0.1 29.1

FY08E 36,893 15.2 28,697 11,351 544.8 20.8 12.6 7.6 1.8 0.1 26.1

FY09E 41,861 13.5 32,355 13,183 544.8 24.2 16.1 6.5 1.5 0.1 24.6

170

800

150

600

130

400

110

200

90 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description IOB is a mid-sized PSU bank with balance sheet size of ~INR 850 bn. It has 1,556 domestic branches and over 300 ATMs, and currently 389 branches are under core banking. It is dominantly present in four southern states of Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka. The bank has six overseas branches and aims to grow its share in trade finance and remittance market through BhoB. The banks focus traditionally has been on SME lending, which forms 40% of total credit, which explains its high margins. Government holding is at 61% and foreign holding at maximum permissible 20%. Key risks Aggressive credit growth may lead to higher than estimated NPA, while the loan book bias towards SME could lead to higher risk of asset quality deterioration. More than expected compression in net interest margin with industry wide contraction of low cost deposits.

42

Indian Overseas Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY05 39,510 20,955 18,555 5,459 3,521 -250 2,189 24,014 11,585 8,435 3,151 12,429 4,308 3,129 877 302 8,121 3,205 4,916 4,916 9.0 2.4 26.6 FY06 44,063 23,391 20,672 5,746 3,808 -834 2,772 26,418 12,616 8,936 3,680 13,802 3,948 1,938 1,738 272 9,854 2,023 7,831 7,831 14.4 2.6 18.1 FY07 58,321 32,713 25,608 6,428 4,739 -709 2,398 32,036 13,878 9,311 4,567 18,157 4,424 2,168 2,412 (156) 13,734 3,650 10,084 10,084 18.5 3.0 16.2 FY08E 76,597 47,900 28,697 8,196 5,686 510 2,000 36,893 16,259 10,878 5,381 20,634 4,418 4,314 104 0 16,216 4,865 11,351 11,351 20.8 3.0 14.4 (INR mn) FY09E 92,108 59,753 32,355 9,506 6,653 1,353 1,500 41,861 17,444 11,261 6,183 24,417 5,585 5,085 500 0 18,833 5,650 13,183 13,183 24.2 4.0 16.5

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Reported PAT EPS DPS Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth Opex growth PPOP growth PPP growth Provisions growth PAT growth FY05 16.0 19.3 14.2 20.8 (0.7) (6.3) (4.1) FY06 11.4 8.2 8.9 7.7 11.0 (8.4) 59.3 FY07 23.9 24.4 10.0 42.9 31.6 12.0 28.8 FY08E 12.1 20.0 17.2 18.2 13.6 (0.1) 12.6 FY09E 12.7 17.0 7.3 23.0 18.3 26.4 16.1

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY05 9.2 9.3 8.3 3.9 4.5 4.6 6.5 4.6 48.2 39.5 FY06 8.8 9.1 8.3 3.9 4.5 4.6 6.8 4.2 47.8 20.5 FY07 9.5 8.2 8.5 3.7 4.9 4.9 9.4 4.7 43.3 26.6 FY08E 10.0 8.2 8.8 3.3 5.7 5.6 9.4 4.4 44.1 30.0 FY09E 10.1 8.0 9.0 3.1 6.0 5.9 9.6 4.2 41.7 30.0 43

Profile of participating companies

Balance sheet As an 31st March Liabilities Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios (%) Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters to Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY05 9.0 (4.1) 44.7 40.6 17.5 3.5 3.9 1.5 FY06 14.4 59.3 56.1 53.2 11.0 2.8 3.0 1.6 FY07 18.5 28.8 71.1 67.8 8.5 2.2 2.3 1.9 FY08E 20.8 12.6 88.5 88.2 7.6 1.8 1.8 1.9 FY05 3.9 0.7 0.5 5.1 (2.4) (0.9) (0.7) (4.0) 1.0 4.6 22.5 FY06 3.9 0.6 0.5 5.0 (2.4) (0.7) (0.4) (3.5) 1.5 5.1 28.5 FY07 3.7 0.6 0.3 4.7 (2.0) (0.6) (0.5) (3.2) 1.5 5.0 29.1 FY08E 3.3 0.7 0.2 4.2 (1.9) (0.5) (0.6) (2.9) 1.3 5.0 26.1 FY05 FY06 FY07 FY08E

(INR mn) FY09E

5,448 18,886 24,334 11,327 442,412 5,907 22,752 506,732 252,052 162,189 27,959 49,540 3,105 11,888 506,732 21.2 6.7 7.6 36.2 62.5 38.9 5.3 1.3 77.0 14.2 7.1

5,448 25,104 30,552 20,827 505,293 7,366 28,317 592,356 347,562 160,418 29,105 37,072 3,355 14,843 592,356 33.3 14.2 16.8 31.3 72.9 39.9 3.4 0.6 81.7 13.0 8.5

5,448 33,276 38,724 22,300 687,404 28,962 43,998 821,389 470,603 212,534 27,211 89,793 3,927 17,321 821,389 32.0 36.0 39.4 29.7 70.7 34.9 2.3 0.5 77.0 13.3 8.2

5,448 42,793 48,241 23,300 824,885 39,118 17,709 953,254 611,784 218,583 32,294 78,970 4,651 6,972 953,254 29.7 20.0 17.7 25.0 76.5 33.7 1.7 0.0 97.4 13.4 8.9

5,448 53,531 58,979 24,300 973,364 51,710 21,011 1,129,364 746,376 238,349 37,776 93,308 5,283 8,271 1,129,364 22.0 18.0 18.5 23.0 79.1 34.2 1.6 0.0 104.2 12.7 8.8

FY09E 3.1 0.8 0.1 4.1 (1.7) (0.5) (0.5) (2.8) 1.3 5.2 24.6

FY09E 24.2 16.1 108.3 108.3 6.5 1.5 1.5 2.5

44

India Equity Research | Banking and Financial Services

ING VYSYA BANK


Best of both worlds
Strong regional player; glimpses of a foreign bank in the making

INR 317

November 29, 2007

In contrast to domestic banks limited international presence, and foreign banks lacking reach in semi-urban and rural areas, ING Vysya Bank has a unique advantage as it has simultaneous access to INGs global network and Vysya Banks strong reach in the South India market. The South-based bank has traditionally been strong in SME and retail lending due to its Vysya Bank linkages and has now added private banking and wealth management to its new business initiatives. Most of the operational issues like high cost, technology, employee unionization that were daunting the bank are being/have been taken care of and the asset growth is expected to pick up. Regaining operating normalcy with improved performance in H1FY08 After lower-than-industry growth in the past years (15% in FY07 and 9% in FY06), ING Vysya Bank reported improved Q2FY08 numbers buoyed by provisioning write back and strong balance sheet growth. Historically, the bank has posted lower-than-industry growth rates due to a combination of cautious approach and capital constraint, but with new management team firmly set in place we believe the bank will be able to utilize its strong presence in South India to regain its aggressive growth path. Cost ratios one of the highest; operating leverage to kick in as balance sheet expands Cost to assets ratio at 3.02% in FY07, though has declined from 3.47% in FY06, still remains one of the highest in the industry. This is due to low asset growth over past few years and also due to investment in restructuring of human resources and technology implementation that the bank had undertaken. With bulk of the expenses undertaken, the bank is likely to expand its assets with no commensurate increase in operating expenses. Valuations Given its higher than peer margins and declining cost to assets, RoAs are likely to improve from current levels of 0.53% in FY07. The bank has raised INR 3.5 bn through preferential allotment of ~6 mn shares to ING and QIP of 7.47 mn shares at INR 310. Post this issue, the book value has increased to ~INR 138. The stock is trading at 2.3x present book value and 20.3x annualized FY08E earnings.
Financials Year to March Revenues (INR mn) Rev growth (%) Net interesrt income(INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) Price to PPOP (x) ROE (%) FY06 6,074 5.6 2,441 590 22.7 26.0 (31.8) 12.2 1.4 9.4 9.8 FY07UA 4,773 (21.4) 3,568 (381) 22.7 (16.8) (164.4) (18.9) 1.6 (6.7) (6.3) FY08E 6,756 41.6 4,812 91 90.7 1.0 (105.9) 317.4 3.7 (21.1) 1.2 FY09E 8,018 18.7 5,421 889 90.9 9.8 879.4 32.4 3.2 147.0 9.4
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 44.1 12.9 23.9 19.1 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 340 / 149 91.0 28.8 / 725.0 94.5

Reuters Bloomberg

: :

VYSA.BO VYSB IN

Avg. Daily Vol. BSE/NSE (000) :

400 300

500 375 250 125 0 Nov-07

200 100 0 Nov-06

May-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description ING Vysya Bank was formed by coming together of Vysya Bank, a private sector bank with a strong presence in South, and Dutch Financial major ING in October 2002. The bank currently has 406 branches with 100% of the business under CBS. The bank has been traditionally strong in SME and retail lending, which explains its higher than peer margins. CASA ratio is also respectable at 29% as on Q2FY08. ING took controlling stake in the bank prior to finalizing of foreign shareholding guidelines by RBI and therefore, is the only Indian bank with more than 5% holding by a foreign bank. Key risks Due to high exposure to the SME segment, sharp slowdown in economic growth may result in deterioration in asset quality. Lower-than-expected decline in cost to assets can impact RoA progression.

46

ING Vysya Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net Interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY04 9,242 6,801 2,441 3,633 1,298 481 1,853 6,074 3,456 1,676 1,780 2,618 1,873 519 442 912 745 155 590 26.0 5.0 19.2 FY05 9,906 6,338 3,568 1,205 916 280 9 4,773 3,801 1,761 2,040 972 1,706 525 819 363 -734 -353 -381 (16.8) 0.0 0.0 FY06 12,224 7,413 4,812 1,945 1,855 343 -253 6,756 5,229 2,342 2,887 1,527 1,313 534 569 210 215 124 91 1.0 0.0 0.0 (INR mn) FY07 14,014 8,593 5,421 2,598 1,674 622 302 8,018 5,104 2,385 2,719 2,915 1,639 695 0 945 1,275 386 889 9.8 0.7 6.6

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT EPS DPS Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth Opex growth PPP growth Provisions growth PAT growth FY04 12.5 6.8 3.6 8.2 58.5 (31.7) FY05 46.2 (29.5) 10.0 (62.9) (8.9) (164.6) FY06 34.9 102.5 37.6 57.2 (23.1) (123.8) FY07 12.7 (9.8) (2.4) 90.9 24.9 881.3

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY04 8.9 7.2 8.2 2.2 5.9 5.9 8.4 2.3 56.9 20.8 FY05 8.1 6.5 7.5 2.7 4.7 4.5 9.4 2.8 79.6 48.1 FY06 8.5 7.2 8.1 3.2 4.9 4.8 8.7 3.2 77.4 57.8 FY07 8.6 7.5 8.3 3.2 5.1 5.0 9.3 3.2 63.6 30.3 47

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed Assets Other Assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY04 26.0 (31.8) 277.2 220.5 12.2 1.1 1.4 1.6 FY05 (16.8) (164.4) 260.7 201.1 (18.9) 1.2 1.6 0.0 FY06 1.0 (105.9) 100.1 86.2 317.4 3.2 3.7 0.0 FY04 2.2 1.6 1.6 5.4 (3.1) (1.7) (0.1) (4.8) 0.5 5.3 9.8 FY05 2.7 0.9 0.0 3.6 (2.9) (1.3) 0.3 (3.9) (0.3) 4.6 (6.3) FY06 3.2 1.5 (0.2) 4.5 (3.5) (0.9) (0.1) (4.4) 0.1 5.0 1.2 FY04 FY05 FY06

(INR mn) FY07

227 4,097 6,278 3,500 104,781 9,644 6,832 131,034 69,367 29,473 11,379 11,146 2,149 7,519 131,034 19.4 14.1 15.8 25.5 74.7 24.9 2.7 2.6 0.0 11.1 6.1

227 3,718 5,919 3,500 125,693 8,308 8,976 152,396 90,806 33,976 6,875 12,314 1,965 6,459 152,396 24.3 20.0 18.6 25.4 77.3 24.2 2.1 2.1 0.0 9.1 5.2

907 3,812 9,081 5,740 133,353 11,075 7,303 166,551 102,315 37,531 6,193 11,233 2,939 6,341 166,551 9.7 6.1 9.2 26.0 79.9 27.0 1.8 1.8 0.0 10.7 7.1

909 4,634 9,925 6,376 154,186 8,436 12,832 191,755 119,762 40,450 4,828 15,917 2,852 7,947 191,755 15.2 15.6 15.1 24.9 79.6 28.9 1.1 1.0 0.0 10.6 6.4

FY07 3.2 1.4 0.2 4.7 (3.0) (1.0) (0.2) (4.2) 0.5 5.6 9.4

FY07 9.8 879.4 109.2 100.4 32.4 2.9 3.2 0.2

48

India Equity Research | Banking and Financial Services

KOTAK MAHINDRA BANK


At vantage point
Kotak Mahindra Group best-positioned financial intermediary

INR 1,127

November 29, 2007

We believe the Kotak Mahindra Group is the best-positioned financial intermediary to capture the existing and emerging market opportunities in the financial services space due to its ability to enter into adjacent markets. We expect Kotak Mahindra Bank (Kotak) to capitalize its strong position in the rapidly expanding brokerage (8% market share) and investment banking businesses, and extend market share in commercial banking, asset management, and life insurance businesses. Revenues likely to grow at 40% CAGR; shift from agency to annuity business We expect Kotaks consolidated revenues (excluding insurance) to attain 40% CAGR over FY07-10E. In our view, its revenue stream will be dominated by annuity businesses (commercial banking, insurance, and asset management) over the next three years. A growing pie of commercial banking and increasing thrust on fee-based revenues from alternate asset and wealth management services are likely to reduce volatility in Kotaks earnings and valuations. Q2FY08 numbers reaffirm our belief in the stock Kotaks Q2FY08 results were strong100% plus growth in commercial banking business and three-fold rise in profits from securities and investment banking businesses. Its securities business remained buoyant with strong industry wide volume growth and we believe recent P-note guidelines will benefit domestic institutional brokers as it will expand their commission pool. It has a strong investment banking pipeline~INR 70 bn of pending M&A transactions and 12 IPOs in the pipeline including Reliance Power, Titagarh Wagoms, Future Capital, among others.
Market Data Reuters Bloomberg : : KTKM.BO KMB IN

Valuations We like Kotak for its diversified business mix, which offers growth from capital markets in the medium term and strong annuity businesses in the long term. After stripping off life insurances value, the stock is trading at 4.7x FY09E book and 26x FY09E earnings. We arrive at fair value per share on SOTP basis at INR 1,159 in FY09E and INR 1,357 in FY10E. Possible upsides to our fair value can flow from increased stressed assets recovery, better-than-expected investment banking and securities trading volume.
Financials FY09E Value per share (INR) 350 73 363 165 56 31 26 42 55 1,159 FY10E Value per share (INR) 416 88 413 188 67 43 37 50 55 1,357

52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn)

: :

1,245 / 365 327.0

: 368.5/9,.261.7 828.6

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs : : : : 55.4 5.2 22.1 17.3

Businesses

Valuation methodology P/E P/E P/B Appraisal value % of AUM % of AUM % of AUM P/B P/B

Multiple (x)

Others

Securities Invt banking Banking Life insurance Domestic asset management Offshore AM Private equity & VC Car lending Excess networth TOTAL

25.0 25.0 3.5 22.9 5.0 7.4 15.0 2.0 2.0

1,200

4,500

600

1,500

300 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

900
(INR)

3,000

Profile of participating companies

Company description Kotak is Indias leading full services financial conglomerate, dominating the securities and investment banking space; it is currently focused on growing its banking, asset management, and insurance businesses. It began operations in 1986 as a bill discounting and leasing NBFC under Kotak Mahindra Finance and converted itself into a bank in 2003. The group has a widespread presence across 320 cities and services close to 2.9 mn customer accounts. Kotak Securities has a network of 856 offices, Kotak Mahindra Bank has 133 branches, and Kotak Life has 93 branches. The group has a decent platform to cross sell its products across the group, given its presence through the financial spectrum. Kotak Securities has 8.1% market share in the overall market volumes and is one of the prominent domestic investment bankers. Amongst commercial banks, it is still in a nascent stage with 0.67% share in advances and 0.46% share in deposits. It is developing its presence in asset management and insurance businesses, where it has 3-4% market share. Key risks More than one-third of Kotaks revenues and almost half of its profits are derived from capital marketlinked businesses. Therefore, we believe the key industry risk includes any unfavourable developments in the capital market such as a downturn in Indias equity, reduced foreign interest, decline in trading volumes, investment banking pipeline failing to materialize, and lower AUM flows, which could adversely affect our growth assumptions and hence, valuations. We believe intense competition from global and local players in equity markets may pose a major challenge for Kotak to maintain its market share and leadership position. Loss of key personnel could disrupt the companys operations and client relationships. Our numbers build in expansion in branch network, and therefore, improvement in the low-cost deposit franchise. Delay in execution of these plans could impact our earnings estimates.

50

Kotak Mahindra Bank

Financial Statements
statement Income statement Year to March FY06 FY07 FY08E FY09E (INR mn) FY10E

Income Interest income 11,633 Interest expenses 5,397 Net interest income 6,236 Equity brokerage and related income 4,371 Fee income 3,968 Financial adv. & transactional services 960 Investment management fees 354 Portfolio advisory fees 26 Income from investments 52 Other income 638 Total income 16,604 Payments to employees 3,791 Other expenses 5,743 Total operating expenditure 9,534 Operating profit 7,071 Provision 399 EBIT 6,672 Provision for tax 2,076 Net profit before extraordinaries 4,596 Less: Adjustments (833) Add: Associates 23 Net profit 3,786

20,413 10,826 9,588 5,098 5,249 894 455 72 126 1,525 23,006 5,765 7,458 13,223 9,783 1,327 8,457 2,504 5,953 (137) 144 5,960

30,120 16,632 13,488 7,387 8,051 2,003 772 119 64 2,170 34,054 8,265 9,819 18,084 15,971 2,017 13,953 4,239 9,714 (200) 50 9,564

39,732 22,091 17,641 8,646 11,438 1,989 1,201 186 64 2,515 43,681 10,889 12,322 23,211 20,471 2,140 18,331 5,642 12,689 (200) 50 12,539

49,864 27,557 22,307 10,100 14,393 2,299 1,431 253 65 3,446 54,293 13,649 14,566 28,216 26,077 2,388 23,689 7,301 16,388 (200) 50 16,238

Growth ratios (%) Year to March Revenues growth Operating profit growth PAT growth Operating margin PAT margin FY06 69.2 85.5 77.9 42.6 22.8 FY07 38.6 38.4 57.4 42.5 25.9 FY08E 48.0 63.2 60.5 46.9 28.1 FY09E 28.3 28.2 31.1 46.9 28.7 FY10E 24.3 27.4 29.5 48.0 29.9

51

Profile of participating companies

Balance sheet As on 31st March Assets Bal. with banks & money at call Investments Advances Fixed assets Other assets G/W on consolidation Total assets Liabilities Capital Reserves and surplus Networth Minority interest ESOP pending Deposits Borrowings Others liabilities and provisions Total liabilities FY06 FY07 FY08E FY09E

(INR mn) FY10E

6,180 42,190 104,199 1,619 12,179 34 170,475 3,093 20,528 23,621 2,709 118 56,167 58,026 29,834 170,475

13,506 78,220 155,734 2,174 15,130 34 271,794 3,262 30,747 34,009 309 284 96,610 101,665 38,917 271,794

18,672 79,103 206,692 2,478 20,918 34 337,568 3,423 54,895 58,318 150 284 144,915 85,716 48,185 337,568

24,236 80,732 257,557 2,597 27,151 34 404,861 3,423 66,577 70,000 150 284 182,592 57,744 94,089 404,861

29,762 80,732 316,282 2,390 33,342 34 477,958 3,423 81,654 85,076 150 284 205,416 38,971 148,060 477,958

Valuation parameters Year to March RoE (%) RoA (%) EPS (INR) EPS growth (%) Book value (INR) DPS (INR) P/E (X) P/BV (X) P/E (adjusted for insurance) (X) P/BV (adjusted for insurance) (X) FY06 19.8 3.3 15 (27.5) 76.4 0.6 75.8 14.8 67.3 13.1 FY07 20.7 2.7 18 22.8 104.3 0.7 61.7 10.8 54.8 9.6 FY08E 20.7 3.2 28 55.5 170.4 1.5 39.7 6.6 34.6 5.8 FY09E 19.5 3.4 37 30.6 204.5 2.1 30.4 5.5 26.0 4.7 FY10E 20.9 3.7 48 29.1 248.6 2.9 23.5 4.5 19.6 3.8

52

India Equity Research | Banking and Financial Services

MAHINDRA & MAHINDRA FINANCIAL SERVICES


Rural focus

INR 260

Focused on rural segment; poised to take advantage of auto industry growth


November 29, 2007

Mahindra & Mahindra Financial Services (MMFS) finances purchase of utility vehicles, tractors, and cars, particularly in rural and semi-urban areas. Around 80% of its branches are in rural areas. We believe the company is well poised to take advantage of the estimated 16% CAGR growth in the organized auto finance market over FY07-11, on the back of immense domain experience and 11-year experience of lending in rural markets. Diversifying product mix to scale up business model The company started its operations by financing Mahindra & Mahindra (M&M) vehicles exclusively and has maintained leadership in financing products of its parent company. To reduce its dependence on parents products, it has entered the car finance space and has tied up with Maruti Suzuki India. It is also diversifying into financing two wheelers. Presently, only ~65% of its loan book comprises M&M products. Ventured in insurance broking, retail financing, and third-party distribution To leverage its wide distribution network, large client base of 0.7 mn, to scale up its business growth beyond 20%, and become an integrated rural financial services company, MMFS is taking several initiativeshas ventured into the insurance broking business, third party distribution of mutual fund products, financing two wheelers and personal loans on pilot basis, and has recently commenced mortgage financing. Valuations We believe MMFS is moving towards becoming an integrated rural finance player in the coming years and poised for better future growth considering its rural domain knowledge, extensive branch network, strong parent brand; it is diversifying its product portfolio and also exploring new adjacent markets. It generated RoA and RoE of 2.6% and 18-19% in FY06-07, respectively, and maintained its NIMs in the 8-9% range. The stock is currently trading at 2.8x FY07 and 16.0x FY07 earnings.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 70.0 0.1 25.2 4.8 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 299 / 212 86.0 22.3 / 561.7 100.9 Reuters Bloomberg : : MMFS.BO MMFS IN

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) EPS (INR) EPS growth (%) P/E (x) Book value per share (INR) Price to book (x) ROE (%) FY04 2,159 31.5 652 10.8 47.0 24.1 41.5 6.2 28.7 FY05 2,736 26.7 840 12.0 11.3 21.6 50.9 5.1 27.6 FY06 3,786 38.4 1,091 13.1 9.4 19.8 82.2 3.1 20.9 FY07
320 800

5,260 38.9 1,347 16.0 22.4 16.2 93.1 2.8 18.4

290

600

260

400

230

200

200 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description MMFS finances purchase of utility vehicles, tractors and cars, particularly in rural and semi-urban areas. Around 80% of its branches are in rural areas and 21% in semi-urban areas. It is leveraging well on its close association with M&M and its 1,500 plus auto dealer relationships, retaining leadership in financing Mahindra products. Currently, it has a network of over 415 branches covering 25 states and an employee strength of 2,791. The company has also tied up with Maruti Suzuki India for financing Maruti products. On the back of increased demand in UV, tractors, and car segment, MMFS has delivered strong growth in customer contracts, asset size, and profitability. Its asset book grew by 46% CAGR over FY04-07, aiding 41% CAGR in revenues and 25% CAGR in profitability. In the recent past, MMFS has diversified its product portfolio to include insurance brokerage, mutual fund business, and financing two wheeler and personal loans. Promoters hold 68% in the company, stake of FIIs is 25%, and only 5% is with the public. Key risks Currently, private players presence in rural and semi urban India is limited. Entry of large players may impact the companys revenue growth and profitability. The company is highly dependant on parents portfolio and is currently trying to diversify its sources of revenue by entering into new businesses and tie ups with other auto companies. However, most of these initiatives are still at a nascent stage and therefore, subject to execution risks. The company needs to maintain credit rating to avail funds at competitive rates.

54

Mahindra & Mahindra Financial Services

Financial Statements
statement Income statement Year to March Income from operations Interest income Interest expense Net interest income Income from securitisation/assignment Income from insurance business Other operating income Total operating income Other income Total revenues Operating expenses - Employee expense - Other operating expense - Depreciation/amortization Preprovision profit Provisions & write-offs PBT Taxes PAT EPS (INR) Growth ratios (%) Year to March NII growth Revenue growth Opex growth PPP growth PBT growth PAT growth Operating ratios (%) Year to March Yield on assets Cost of funds Spread Net interest margins Cost-income Tax rate Balance sheet ratios (%) Year to March Disbursements (INR mn) Disbursements growth (%) Credit growth (%) Borrowings growth (%) EA growth (%) Gross NPA ratio (%) Net NPA ratio (%) FY04 23,027 43 78.0 38.9 19.7 FY05 33,434 45 74.3 56.9 49.8 6.2 3.0 FY06 44,779 34 55.3 61.4 59.8 4.8 2.3 FY07 54,409 22 30.4 23.3 37.9 5.5 2.5 55 FY04 13.5 7.2 6.3 7.3 52.8 36.0 FY05 14.9 6.6 8.3 9.2 31.8 38.0 FY06 13.9 6.9 7.0 8.0 35.0 33.7 FY07 14.9 7.4 7.5 8.6 37.4 34.8 FY04 2,836.9 31.5 23.4 42.0 42.0 47.0 FY05 89.8 26.7 (23.7) 83.1 33.1 28.8 FY06 38.7 38.4 52.1 32.0 21.4 29.9 FY07 48.5 38.9 48.7 33.7 25.6 23.4 FY04 FY05 FY06 (INR mn) FY07

2,098 969 1,129 258 695 2,082 78 2,159 1,141 180 915 46 1,019 1,019 367 652 10.8

3,475 1,332 2,143 193 21 301 2,658 77 2,736 870 272 560 39 1,865 510 1,356 516 840 12.0

5,165 2,194 2,971 489 38 169 3,667 119 3,786 1,324 415 858 52 2,462 816 1,646 555 1,091 13.1

7,652 3,240 4,412 538 77 102 5,128 132 5,260 1,969 684 1,210 74 3,291 1,223 2,068 720 1,347 16.0

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Preference share capital Reserves Networth Secured loans Unsecured loans Total loans Total Assets Fixed assets Investments Current assets - Loans and advances - Cash and bank balances - Sudry Debtors - Others Current Liabilities - Current liabilities - Provisions Net current assets Deferred tax assets Miscellaneous expenses not written off Intangible assets Total assets RoE decomposition (%) Year to March Net interest income/Assets Operating income/assets Other income/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) EPS (INR) EPS growth (%) P/E (x) Book value per share (INR) Price to book (x) Price to earnings (x) ROE (%) FY04 2,159.5 31.5 652.0 10.8 47.0 24.1 41.5 6.2 24.1 28.7 FY05 2,735.7 26.7 840.0 12.0 11.3 21.6 50.9 5.1 21.6 27.6 FY06 3,786.1 38.4 1,091.3 13.1 9.4 19.8 82.2 3.1 19.8 20.9 FY04 7.3 13.4 0.5 13.9 7.3 0.0 2.4 9.7 4.2 14.6 28.7 FY05 9.2 11.4 0.3 11.8 3.7 2.2 2.2 8.1 3.6 13.1 27.6 FY06 8.0 9.9 0.3 10.2 3.6 2.2 1.5 7.2 2.9 14.0 20.9 FY04 FY05 FY06

(INR mn) FY07

606 1,911 2,517 13,234 2,480 15,715 18,232 136 448 16,627 38 1,068 1,802 2,073 125 17,336 311 2 18,232

702 500 2,872 3,573 22,036 2,502 24,538 28,611 168 363 28,974 1,129 137 22 2,153 399 27,710 364 6 28,611

833 500 6,018 6,851 34,837 3,978 38,815 46,166 230 2,977 44,994 1,495 28 9 3,499 548 42,480 467 12 46,166

840 6,981 7,821 45,803 3,291 49,093 56,914 276 264 58,663 2,840 23 20 5,116 808 55,622 744 8 56,914

FY07 8.6 10.0 0.3 10.3 3.8 2.4 1.4 7.6 2.6 14.3 18.4

FY07 5,259.6 38.9 1,347.2 16.0 22.4 16.2 93.1 2.8 16.2 18.4

56

India Equity Research | Banking and Financial Services

RELIANCE CAPITAL
Business momentum intact
Pure play on high growth segments

INR 2,278

We believe Reliance Capital is a pure play on the fastest-growing segments of the Indian financial services spaceoffering mutual funds, life insurance, general insurance, retail broking, and consumer financing. We expect sustained growth in the companys asset management business and hyper growth in life insurance, broking, and general insurance businesses going forward. Leader in existing businesses; growth likely to sustain going forward Reliance Capital is the market leader in the domestic asset management business and third largest private player in the general insurance business. We expect its AUMs to grow by 45% over FY07-10E. Its general insurance business gained significant traction with 17-18% market share among private players. We expect its written premium to grow by 100% CAGR over FY07-10E. Reliance Capital is investing aggressively to grow its life insurance business and it now commands 5.6% share among private players. We expect its market share in life insurance to improve significantly to 11% in FY10E with 88% CAGR in APE over FY07-10E. Growing broking and consumer financing businesses Reliance Capitals retail broking venture, launched under the brand Reliance Money in April 2007, has grown aggressively and had more than 0.2 mn customers and average daily trading volume of INR 16.5 bn in Q2FY08. In contrast to other brokers, the company has not started off with margin funding and IPO financing services as of now, but plans to venture into them in the near future. The company has launched retail financing businessReliance Consumer Fi-

November 29, 2007

Reuters Bloomberg

: :

RLCP.BO RCFT IN

nance and has disbursed INR 22.8 bn in Q2FY08 through 11 locations. It plans to expand its
distribution network and grow loan book to INR 50 bn by FY08E and INR 200 bn by FY09E. Valuations We are positive on the companys performance, but believe the stock has priced-in 12-month growth targets in existing businesses and also captures the expected scale up in new businesses. Our SOTP methodology gives us the base case fair value of INR 1,850 on FY09E and INR 2,148 on FY10E. We have not built in any possible upsides from minority or strategic stake sale in any of its businesses and valuations of possible future businesses. We recommend investors from long term horizon to remain invested on these possible upsides.
Financials FY09E Value per share (INR) 274 23 6 150 633 115 215 77 142 1,850 FY10E Value per share (INR) 343 29 8 225 728 36 215 115 234 2,148
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs : : : : 52.4 2.7 29.7 15.2 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 2,421 / 530 245.6 560 / 14,071 2,597.4

Avg. Daily Vol. BSE/NSE (000) :

Businesses

Valuation

Others

Asset management PMS Offshore AUMs General insurance Life insurance Excess networth Unrealised gain on investment Retail broking business Consumer finance business Fair value

% of AUMs % of AUMs % of AUMs Economic profit multiple Appraisal value PB Market value PE PB

3,000

6,000

2,250

4,500

1,500

3,000

750

1,500

0 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

(INR)

Profile of participating companies

Company description Reliance Capital has been actively pursuing growth opportunities in the Indian financial services sector, post demerger and reorganization of the Reliance Group, to become a leading financial powerhouse. It has undergone significant strategy changes in the past one year, with focus shifting to fast-growing segments in the financial services space, viz., asset management, insurance, brokerage, and consumer financing business from leasing and infrastructure financing. Reliance Capital is Indias largest mutual fund (AUMs of INR 800 bn), and the third-largest general insurer (in terms of gross written premium of INR 9.5 bn in H1FY08). Currently, it is aggressively investing to grow its life insurance business by expanding its distribution franchise and increasing its agent force. The company has recently launched a retail broking venture under the brand Reliance

Money and retail financing business under Reliance Consumer Finance.


Key risks Execution failure is a key business risk, as its value driving businesses are at a nascent stage (life insurance, retail broking, and consumer financing). We have assigned 100% value to its life insurance and broking businesses in our valuation estimates based on our discussions with the management. Though Reliance Capital has 100% economic interest, technically it holds only 16% in Reliance Life and has no direct stake in Reliance Money. Growth in asset management, life insurance, and broking businesses is highly dependant on the conditions in capital markets. Any unfavorable development in markets going forward may hamper our growth assumptions and consequently impact valuations negatively. Intense competitive pressures in any business segment may affect the expected market share and/or margins.

58

Reliance Capital

Financial Statements
statement Income statement Year to March FY05 FY06 205 895 1,872 6,498 9,471 446 2,151 12 2,609 6,862 452 256 6,154 336 5,819 (105) 5,714 218 26.2 713 100 FY07 3 1,925 10,312 9,338 21,579 1,472 11,412 1 12 12,897 8,682 427 140 8,115 1,118 6,997 35 7,032 230 30.6 860 146 FY08E 1 3,601 25,190 3,920 10,064 42,777 2,723 26,116 723 10 29,571 13,206 2,666 129 10,411 2,062 8,349 10 8,359 246 34.0 980 135 (INR mn) FY09E 5,035 43,085 13,204 8,751 70,074 4,242 43,400 2,434 50,075 19,999 7,997 117 11,885 2,894 8,991 10 9,001 246 36.6 1,103 152

INCOMELease rental & other charges 289 Invem. mangt., advisory and trustee fee 443 General ins. prem. & commi. earned 1,959 Consumer financing income Other income 2,849 Total income 5,540 Operating expenditure Payment to & provision for employees Administrative and other expenses Bad debts written off Provision for consumer financing Impairment loss Miscellaneous exp written off Total expenditure EBITDA Interest & finance charges Depreciation PBT Provision for tax PAT before extraordinary items Minority interest & share of associate Adjusted PAT Diluted number of shares (in mn) Diluted EPS Proposed div. on equity share capital Dividend tax thereon 223 2,129 81 (81) 16 2,368 3,173 1,511 296 1,366 128 1,238 (879) 359 127 2.8 382 55

Growth ratios (%) Year to March Income growth EBITDA growth PBT growth PAT growth FY05 21.0 (14.3) 6.8 1.2 FY06 70.9 116.3 350.5 370.1 FY07 127.9 26.5 31.9 20.3 FY08E 98.2 52.1 28.3 19.3 FY09E 63.8 51.4 14.2 7.7

Operating ratios (%) Year to March EPS (INR) EPS growth (%) Book value per share (INR) Price/Earnings (x) Price/ BV (x) Dividend yield (%) Price to income (x) FY05 2.8 (79.2) 116 807.1 19.7 0.1 52.3 FY06 26.2 827.8 188 87.0 12.1 0.2 52.5 FY07 30.6 16.9 215 74.4 10.6 0.2 24.2 FY08E 34.0 11.0 245 67.0 9.3 0.2 13.1 FY09E 36.6 7.7 277 62.2 8.2 0.2 8.0

59

Profile of participating companies

Balance sheet As on 31st March ASSETS Gross block Less : Depreciation Lease Adjustment A/c Net block Capital work in progress Investments Current assets, loans & advances Stock in trade Sundry debtors Cash & bank balances Other current assets Loans & advances Current liabilities and provisions Liabilities Provisions Net current assets Miscelleneous exp. not written off Total assets Liabilities Paid-up share capital Reserves Warrants Net worth Minority interest Secured loans Unsecured loans Deferred tax liability (net) Total Liabilities FY05 FY06 FY07 FY08E

(INR mn) FY09E

5,521 3,114 (203) 2,203 131 17,560 3,061 137 362 4,822 1,536 619 830 8,468 69 28,432 1,278 13,653 14,862 351 13,136 14 28,432

3,906 2,463 327 1,771 131 23,938 62 777 2,016 6,189 12,239 1,024 1,232 19,027 62 44,929 2,234 39,385 495 42,052 387 1,675 744 9 44,929

3,480 2,291 1,190 199 28,531 307 2,776 2,121 1,539 37,583 3,064 4,104 37,159 50 67,129 2,462 50,562 52,974 1,450 12,580 75 67,129

2,398 1,742 100 757 133 31,100 307 4,442 213 575 86,311 4,216 10,949 76,683 108,673 2,462 57,806 60,268 30 43,450 4,914 11 108,673

2,424 1,833 100 691 134 39,657 307 5,887 (2,729) 628 153,970 5,244 18,894 133,926 174,409 2,462 65,554 68,015 60 100,918 5,404 12 174,409

60

India Equity Research | Banking and Financial Services

R ELIGARE ENTERPRISE
Gaining traction
Securities broking gaining traction; margin funding book of INR 15 bn

INR 501

November 29, 2007

Religare Enterprises (Religare) securities broking business is gaining traction, recording average daily trading volume of ~INR 25 bn in H1FY08, now enjoying 3.9% market share (compared to 2.7% in FY07). Its equity broking business is mainly retail driven, with institutional broking contributing less than 2% to total brokerage income. However, it has increasingly resorted to margin funding relative to its volume and has relatively higher margin funding book of INR 15 bn compared to its peers. The company has a strong presence in portfolio management with AUMs of INR 2.5 bn in H1FY08 and offers wealth advisory services to high net worth individuals. Aggressively expanding its distribution network Religare has added 750 branches in the past 18 months and has increased its client base fourfold to 237,000. With this, it now has a wide network of 1,217 business locations, of which 326 offices are managed by it and the balance by business associates. However, in terms of brokerage contribution, only 22% flows from business associates where it has a revenue sharing agreement of 60:40 on an average. Going forward, it plans to roll out ~100 additional branches from the IPO proceeds over the next two years. Diversifying into more stable fee-based revenue streams To leverage its wide distribution network and client relationships, the company offers financial advisory and distribution services (third party mutual funds and insurance) to its retail clients. It also ventured into consumer financing through personal loans and loans against securities and has disbursed personal loans of INR 805 mn in H1FY08. It has started investment banking activities in this calendar year and has a strong pipeline of investment banking deals, equivalent to generating revenues of INR 200 mn. The company also intends to offer life insurance and pension products through its joint venture with Aegon International. Valuations We expect the company to post 75% CAGR growth in revenues over FY07-09E and record profits of INR 821 mn in FY08E and INR 1.3 bn in FY09E. The stock is currently trading at 46.2x FY08E and 29.2x FY09E earnings.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 54.0 8.0 15.0 23.0 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 600 / 324 75.8 37.9 / 954.0 8.032.8 Reuters Bloomberg : : RELG.BO RELG IN

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn)

FY07UA 3,201

FY08E 6,633 108.8 821 10.8 178.9 12.4 46.2 6.6 5.7 18.3

FY09E 9,787

Revenue growth (%) PAT (INR mn) EPS (INR) EPS growth (%) PAT margin (%) P/E (x) P/B (x) Price / Revenues (x) RoE (%)

70.0 255 3.9


8.0 128.9 10.1 10.1 16.8

46.0 1,298 17.1 58.1 13.3 29.2 6.1 3.9 21.6

560

12,000

530
(INR)

8,000
('000)

500

4,000

470 Nov-07

0 Nov-07 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description Religare, promoted by Mr. Malvinder Singh and Mr. Shivinder Singh, promoters of Ranbaxy, offers a range of financial products and services to retail, HNI, corporate and institutional investorsequity broking, commodities broking, consumer financing, wealth management, PMS, insurance broking, and third party distribution. The company has a widespread retail presence through 1,217 business locations (owned offices and business associates) servicing 237,000 customers and enjoys ~4% market share in terms of equity trading volume. It is also increasing its presence in the online trading segment, and strategic tie up with IndusInd Bank will provide further support. It offers commodity broking services to ~23,000 customers and clocks an average trading volume of INR 4 bn. It does not have strong foothold in institutional business, which contributed less than 2% to total brokerage related revenue in H1FY08. The company is diversifying into more stable fee-based revenue streams by leveraging its client base and wide distribution network. It has ventured into consumer financing through personal loans and loans against securities and third party distribution of mutual funds and insurance products. It currently has a team of 48 people in its investment banking business and a strong pipeline of deals equivalent to generating revenue of INR 200 mn. It also offers portfolio management and wealth advisory services to high net worth individuals. The company intends to offer life insurance and pension products through its subsidiary Religare Insurance Holding Company, a joint venture with Aegon International, and art related broking and advisory services through its subsidiary Religare Arts Initiatives. Key risks Businesses of the company are highly dependent on conditions of the capital market and any unfavorable developments in the market affecting investor sentiments can significantly hamper the companys revenue growth and profitability. Highly competitive pressure in the brokerage industry can affect the companys market share and margins. Religare has higher reliance on margin funding and is expanding its consumer financing business. Its unsecured loan disbursement has grown by more than 100% in H1FY08. Any decline in the asset quality will affect the companys profitability.

62

Religare Enterprise

Financial Statements
statement Income statement Year to March Brokerage related income Interest income from operation FY07 1,633 952 711 241 251 150 215 3,201 538 638 707 709 128 2,719 482 201 281 (26) 255 (6) 1 250 3.9 FY08E 3,410 2,122 1,524 598 345 278 479 6,633 1,095 1,266 1,266 1,559 214 5,400 1,233 412 821 821 (INR mn) FY09E 4,977 3,281 2,495 787 484 416 628 9,787 1,363 1,860 1,738 2,577 300 7,838 1,949 651 1,298 1,298

- Lending activities - Delayed payments Advisory income Interest Income Other Income Total revenues Operating expense - Operating cost - Employee cost - Administrative and other expenses - Interest and finance charges - Depreciation Total operating expenses PBT Taxes PAT before minority interest Minority interest Add : Share of Profit from Associates PAT Extraordinaries Adjustment (Net of Tax) Net profit Diluted EPS (INR)

821 10.8

1,298 17.1

Growth ratios (%) Year to March Revenue growth PBT growth PAT growth FY07 70.0 8.7 (12.4) FY08E 108.8 155.8 222.3 FY09E 46.0 58.1 58.1

Operating ratios (%) Year to March Broking income / Total income Direct cost / Total income Employee cost / Total income Other administrative cost / Total income PBT margin PAT margin FY07 51.0 16.8 19.9 22.1 15.1 8.8 FY08E 51.4 16.5 19.1 19.1 18.6 12.4 FY09E 50.9 13.9 19.0 17.8 19.9 13.3

63

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Networth Deferred tax liability Minority interest Secured loans Unsecured loans Loans Total Assets Fixed assets Investments Current assets FY07 FY08E

(INR mn) FY09E

644 2,561 3,204 25 2,890 3,935 6,825 10,055 760 856 11,013 2,686 2,428 5,863 36 2,574 2,519 55 8,439 10,055

758 5,003 5,760 32 7,018 14,695 21,713 27,505 1,011 2,356 29,443.4 5,531 6,601 17,137 174 5,304 4,812 492 24,139 27,505

758 5,480 6,237 33 9,061 16,565 25,627 31,897 1,095 2,356 36,303 7,870 6,789 21,391 253 7,857 6,713 1,144 28,446 31,897

- Sudry debtors - Cash and bank balances - Loans and advances - Others Current liabilities and provisions - Current liabilities - Provisions Net current assets Total

Valuation parameters Year to March RoA (%) RoE (%) EPS (INR) EPS growth (%) Book value per share (INR) P/E (x) P/B (x) Price / Revenues (x) FY07 3.4 16.8 3.9 49.8 128.9 10.1 10.1 FY08E 4.6 18.3 10.8 178.9 76.0 46.2 6.6 5.7 FY09E 4.5 21.6 17.1 58.1 82.3 29.2 6.1 3.9

64

India Equity Research | Banking and Financial Services

SHRIRAM CITY UNION FINANCE


Small is beautiful
Unique and sound business model

INR 355

November 29, 2007

We like Shriram City Union Finance (SCUF) for its unique and sound business model, presence in high yielding, high growth, small ticket retail finance segments (consumer durable finance, auto loans, personal loans, business finance, and retail gold loans), and superior sustainable RoEs of 23% plus. In a high growth phase; significant traction in asset growth We believe that with an adequate capitalization (CAR of 24% post equity raising in December 2006), the company will be able to grow its loan book by 67% CAGR over FY07-09E. It will leverage on the customer base of Shriram Groups chit fund entities and will actively spread its wings in western and northern India to grow its personal loans, CDs, and enterprise loans. The concept of chit fund-based lending is gradually losing its sheen and SCUF aims to fill this space by lending to these customers, thereby retaining decades old relationships. Superior RoEs likely to sustain at 23% plus Operating in high yielding retail finance segments, further supported by healthy asset quality, SCUF generated RoEs of 35% plus over FY04-06 and this compressed to 25% in FY07 due to equity dilution (of 55%) and higher commissions. Going forward, we expect RoE to sustain at 23% plus levels, driven by strong operating efficiencies and increased leverage. We are building gradual compression in margins going forward. Proven risk management SCUFs customers are primarily drawn from the groups chit fund entities who are assessed for their track record and repayment capability. Most importantly, the company meets its customers (atleast once a month) to gauge their credit worthiness. Considering the groups expertise in recovery, we believe its gross NPAs are likely to remain at 2.4-2.5% over FY07-09E, and net NPAs at 1.4-1.5%. Valuations We expect the company to grow its EPS (post dilution and warrant conversion) by 35% CAGR over FY07-09E, buoyed by robust asset growth of 62% CAGR and high NIMs of 13-14%. Stock currently trades at 2.4x FY09E book and 11.9x FY09E. Considering SCUFs presence in high growth segments and high RoAs of 3.4-3.7%, we believe the stock deserves higher multiple.
Financials Year to March Net revenues (INR mn) Net profit (INR mn) EPS (INR) EPS growth (%) Book value per share (INR) P/E (x) Price/ BV (x) Dividend yield (%)
Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 365 / 138 39.1 13.9 / 348.8 17.3 Reuters Bloomberg : : SHCu.BO SCUF IN

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 50.8 1.4 3.2 44.6

FY06 1,075 318 10.9 43.9 33.4 32.5 10.6 0.8

FY07E 2,168 516 16.4 50.6 83.3 21.6 4.3 0.8

FY08E 3,729 881 20.3 23.7 104.8 17.5 3.4 1.0

FY09E 5,721 1,456 29.7 46.3 149.2 11.9 2.4 1.0

400

1,200

300
(INR)

800
('000)

200

400

100 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description SCUF was incorporated in 1986 as a deposit accepting NBFC. Prior to 2002, it was exclusively engaged in transport finance with special emphasis on financing pre-owned commercial vehicles to small road transport operators. In 2002, it extended its product lines to include small-ticket retail financing, viz., consumer durables, two wheelers, personal and enterprise loans. It deliberately went slow on disbursements in the CV segment which has become a key focus area of its group company Shriram Transport Finance. The companys operations are largely concentrated in southern states of Andhra Pradesh, Tamil Nadu, Karnataka, and western region (particularly Maharashtra). SCUF offers only small-ticket retail products (ranging from INR 25,000-100,000) with shorter tenors (12-24 months) which generate yields in excess of 20%. It leverages on the large investor base (1.2 mn investors) of Shriram Groups chit fund entities to continuously build its asset book and utilizes 465 chit fund outlets for marketing products and collecting loans. The company has been successful in keeping its default rates at lower levels by better assessment of its customers and effective collection of its loans and has maintained best in class NIMs at 14.7%. Key risks SCUF operates in the small-ticket retail finance segment in semi-urban and rural areas and may face stiff competition from banks, other financial institutions, and multinational players which have access to cheap funds. Our earnings estimates may not fructify if the company is unable to maintain its spreads at expected levels of 10-12% due to inability to maintain yields at 22-24% amidst stiff competition. Risk of frauds and NPA accretion is inherent to the retail lending business and NPA provisioning could be higher than our estimates in case of any economic slowdown or dip in income levels.

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Shriram City Union Finance

Financial Statements
statement Income statement Year to March Financing and other interest income Interest and other charges Net interest income Other income Net revenues Operating expense FY05 1,716 941 775 96 871 409 61 50 299 461 97 364 133 231 0 231 7.6 2.5 33.0 FY06 1,988 972 1,016 59 1,075 432 56 42 334 644 161 482 165 318 0 318 10.9 3.0 27.5 FY07 3,387 1,322 2,065 102 2,168 1,125 93 37 994 1,043 249 794 278 516 0 516 16.4 3.0 18.3 FY08E 6,075 2,448 3,627 103 3,729 1,807 130 41 1,635 1,922 588 1,335 454 881 0 881 20.3 3.5 17.2 (INR mn) FY09E 9,548 3,942 5,605 115 5,721 2,585 182 46 2,357 3,135 929 2,207 750 1,456 0 1,456 29.7 3.5 11.8

- Employee exp - Depreciation - Other opex Preprovision profit Provisions PBT Taxes PAT Extraordinaries Adjusted PAT EPS (excl extraordinaries) (INR) DPS (INR) Payout ratio (%)

Growth ratios (%) Year to March Net interest income growth Net revenues growth Opex growth PPP growth PAT growth FY05 15.7 13.0 (5.5) 43.6 25.8 FY06 31.1 (37.9) 5.5 39.5 37.5 FY07 103.3 72.8 160.6 62.1 62.5 FY08E 75.6 0.1 60.7 84.3 70.6 FY09E 54.5 12.6 43.1 63.1 65.3

Operating ratios (%) Year to March Yield on assets Cost of funds Spread Net interest margins Cost-income Tax rate FY05 24.8 15.8 9.0 11.2 47.0 36.6 FY06 23.8 14.1 9.7 12.2 40.1 34.1 FY07 24.1 12.6 11.6 14.7 51.9 35.0 FY08E 23.7 12.8 10.9 14.1 48.5 34.0 FY09E 23.1 12.5 10.7 13.6 45.2 34.0

67

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Subordinate debt/preference capital Secured loans Unsecured loans Deferred tax liability Total Assets Loans Investments Current assets Current liabilities Net current assets Fixed assets (net block) Miscellaneous exp written off Total Balance sheet ratios Loan growth Borrowings growth EA growth Gross NPA ratio Net NPA ratio Provision coverage ROA decomposition (%) Year to March Net interest income/Assets Other income/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS (INR) EPS growth (%) Book value per share (INR) Adjusted book value per share (INR) Price/ Earnings (x) Price/ BV (x) Price/ Adj. BV (x) Dividend yield (%) Price to Income (x) 68 FY05 7.6 (11.9) 25.9 23.6 46.8 13.7 15.0 0.7 11.0 FY06 10.9 43.9 33.4 28.1 32.5 10.6 12.6 0.8 8.9 FY07 16.4 50.6 83.3 78.7 21.6 4.3 4.5 0.8 6.4 FY08E 20.3 23.7 104.8 97.3 17.5 3.4 3.6 1.0 3.7 FY05 11.2 1.4 12.6 (5.9) (1.4) (1.9) (9.2) 3.3 9.2 36.3 FY06 12.2 0.7 12.9 (5.2) (1.9) (2.0) (9.1) 3.8 9.6 39.6 FY07 14.7 0.7 15.5 (8.0) (1.8) (2.0) (11.8) 3.7 14.8 24.8 FY08E 14.1 0.4 14.5 (7.0) (2.3) (1.8) (11.1) 3.4 15.0 22.8 FY05 FY06 FY07 FY08E

(INR mn) FY09E

271 431 702 765 5,362 620 277 7,726 7,086 16 1,538 1,520 18 605 1 7,726 11.6 0.6 6.1 2.6 1.3 51.8

271 634 905 1,128 6,826 960 317 10,135 8,510 66 3,488 2,488 1,000 558 0 10,135 20.1 30.1 34.5 3.9 2.5 38.2

426 2,831 3,257 2,235 11,205 2,042 297 19,036 17,105 66 5,084 3,776 1,307 557 0 19,036 101.0 70.1 93.0 2.4 1.5 36.6

426 4,039 4,465 3,535 21,801 3,342 305 33,448 31,539 66 6,627 5,387 1,240 603 0 33,448 84.4 89.8 77.8 2.4 1.5 40.0

485 6,747 7,232 4,785 33,503 4,592 283 50,395 47,818 66 8,877 7,050 1,826 684 50,395 51.6 51.5 51.3 2.5 1.4 45.0

FY09E 13.6 0.3 13.9 (6.3) (2.3) (1.8) (10.3) 3.5 14.2 24.9

FY09E 29.7 46.3 149.2 139.9 11.9 2.4 2.5 1.0 3.0

India Equity Research | Banking and Financial Services

SREI INFRASTRUCTURE FINANCE


Metamorphosis
Creating value out of JV with BNP Paribas

INR 185

November 29, 2007

We believe that SREI Infrastructure Finances (SREI) proposed 50:50 joint venture with the BNP Paribas Lease Group (BPLG) for equipment financing and leasing business is highly value accretive. The process is on track with necessary approvals from ROC and the high court in place and is expected to be completed over the next two-three months. Funds from BNP are expected to flow in by the end of the current financial year. The business will gain scalability in CY08 and benefits to the topline and profitability are likely to start kicking in by Q4FY08E. Operating performance likely to improve with BNPs partnership The JV will have net worth of INR 8.0 bn initially. BNP is contributing INR 7.75 bn for its 50% stake in the JV. BPLG as a strategic investor will help capture the huge growth opportunities in business with better margins. We believe the business will get re-rated with the introduction of BPLG. Historically, the stock has been trading at 1.5x trailing book, we value this business at 1.7x book (INR 16.9 bn), considering improvement in margins and RoE. Networth freed to build project financing book Post the de-merger, SREI (parent) will continue to do project financing, advisory, venture capital, investment banking, and equipment rental business (through Quipo). SREIs networth will be freed to build asset book (equivalent to current asset base) without any further dilution. We value the businesses left with SREI at 1.25x book to get INR 10.6 bn (INR 79 per share). SREI Infra has been recently allotted project management and advisory contract from the UP state government for a 1,000 km road project (estimated investment of INR 250 bn) wherein it will be one of the three-four advisors in the deal. On a rough count, total fee of INR 1.5 bn is expected to accrue over four-five years. Valuations We expect SREIs consolidated EPS to grow by 25% to INR 9.6 in FY08E and by 17% to INR 11.2 in FY09E, factoring in warrant issuance, demerger of equipment financing business, and better asset growth. The stock is currently trading at 1.7x FY09E book and 12x FY09E earnings. On SOTP methodology, we value SREIs overall business at INR 22.1 bn (INR 165 per share). Our fair value includes the value of its venture capital business at INR 1.2 bn and value of its stake in Quipo (equipment rental business) at INR 1.9 bn.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 20.1 7.4 49.1 23.4 Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : : 212 / 46 108.9 20.1 / 505.5 1,151.4 Reuters Bloomberg : : SREI.BO SREI IN

Avg. Daily Vol. BSE/NSE (000) :

SOTP Businesses Project fin, advisory Equipment finance Equipment rental Venture cap - % of AUMs Total market value Value per share (INR) Net worth (INR mn) 8,456 9,922 10,000 P/B (X) 1.3 1.7 12.0 Value (INR mn) 10,570 16,868 12,000 1,200 Stake (%) 100 50 16 100 Value (INR mn) 10,570 8,434 1,920 1,200 22,124 165

225

9,000

150
(INR)

6,000
('000)

75

3,000

0 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description SREI is primarily into financing infrastructure equipment and projects as well as renewable energy projects. The company has 52 offices across India and is a market leader in infrastructure equipment financing with a 30% market share. Equipment finance forms a major chunk of SREIs portfolio (around 93%), infrastructure project finance forms around 5-6%, with renewable energy financing making up the rest. Along with the above-mentioned financing businesses, SREI undertakes other businesses through its wholly owned subsidiaries. It is tapping emerging business opportunities in venture capital, asset management, investment banking, and insurance broking through its subsidiaries. SREI also runs a fleet management business through Quipo, to provide equipment on rental basis; it has a 15% stake in Quipo. Key risks A key risk on the upside would be better-than-expected margins and better fee income performance. Ability to refinance its growth is pivotal. Being an NBFC, source of funding for SREI is limited to wholesale funding, securitization, and equity issuance. A spike in interest rates could hamper its margins in case of its inability to pass on the hike to customers.

70

SREI Infrastructure Finance

Financial Statements
statement Income statement Year to March Interest and financing income Interest exp Net operating income Other income Net revenues Operating expenses Operating profit Provisions and contingencies PBT Provision for tax PAT Share of associates/minority interest PAT after minority interest EPS (INR) Dividend per share (INR) Dividend pay out (%) FY05 1,289 558 731 48 779 315 464 68 395 113 283 6 277 5.4 1.5 27.8 FY06 2,178 1,067 1,110 110 1,221 449 771 72 699 196 503 14 489 4.7 2.0 43.2 FY07 3,671 2,166 1,505 226 1,731 687 1,044 131 913 67 846 -3 848 7.7 1.0 12.9 FY08E 4,721 2,673 2,048 271 2,319 946 1,372 149 1,223 103 1,121 7 1,114 9.6 1.5 15.6 (INR mn) FY09E 5,722 3,089 2,633 360 2,992 1,039 1,953 133 1,820 327 1,493 10 1,483 11.2 1.5 13.4

Growth ratios (%) Year to March Net interest income Net revenues Opex Provisions PBT PAT FY05 45.4 37.1 38.5 32.0 37.0 37.4 FY06 51.9 56.6 42.4 5.6 76.8 78.0 FY07 35.5 41.8 52.9 81.6 30.5 68.1 FY08E 36.1 34.0 37.8 13.6 34.1 32.5 FY09E 28.5 29.0 9.8 (10.6) 48.7 33.2

Operating ratios (%) Year to March EPS (INR) Y-o-Y growth (%) P/E (x) Book value per share (INR) Adjusted book value per share (INR) Price to PPOP (x) Price/ bookvalue (x) Price/ Adjusted book value (x) FY05 5.4 38.0 34.3 31.1 30.7 21.3 5.9 6.0 FY06 4.7 (12.2) 39.1 38.1 38.0 26.2 4.8 4.9 FY07 7.7 63.0 24.0 46.4 45.5 19.3 4.0 4.1 FY08E 9.6 24.5 19.3 99.9 99.4 15.8 1.9 1.9 FY09E 11.2 16.5 16.5 113.2 112.5 12.7 1.6 1.6

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Profile of participating companies

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India Equity Research | Banking and Financial Services

SHRIRAM TRANSPORT FINANCE


First in second hand
To leverage on its leadership position in pre-owned CV financing

INR 310

November 29, 2007

Shriram Transport Finance (STF) has a huge opportunity to grow its asset base, considering target market potential of INR 450 bn each in new CVs and pre-owned trucks and its leadership position with market share of 20-25% and 7-8%, respectively. To tap this opportunity, STF will leverage on its strong customer base (0.5 mn plus), wide distribution network of 391 branches, and strong competencies developed over the years. Targets 25% CAGR growth in AUMs over FY07-10E It expects to double its AUMs to INR 250 bn by 2010, targeting a CAGR of 25% plus over FY0710E and increase in market share in used vehicles from 20% to 40%. This will be aided by creating a network of 500 private financiers on franchisee basis and increasing its national coverage to 100% in 12-18 months. The company is building a vertically integrated business model by scaling up new truck financing business and providing value-added services. Valuation expertise and efficient collection to be its key competitive edge The company has business specific competitive edge in terms of valuation expertise and efficient collection. To ensure efficient collection, it maintains direct contact with customers and links significant proportion (~60%) of the salary of field officers to origination and collection effectiveness. To reduce chances of defaults, it lends at relatively lower loan to value ratio of 60% and maintains client-wise and truck-wise exposure norms. Best-in-class NIMs with healthy asset quality The company generates average yield of 18-19%, with core lending yields in pre-owned CV financing at 18-24% and new CVs at 14-15%, supported by 4-5% net spread on assets securitized. It maintains strategic mix of retail deposits and institutional funding which sustains its funding cost between 10% and 11%. Consequently, it earns net interest margins of 8-9%. Valuations The outlook for the company remains strong given target market of INR 450 bn. its leadership position, strong competencies in loan origination, valuation of pre-owned trucks, and customer evaluation. The stock is currently trading at 31.5x FY07 earnings and 5.3x FY07 book.
Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 44.7 4.5 14.3 36.5 Reuters Bloomberg : : SRTRI.BO SHTF IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : 340 / 111 191.1

: 59.3 / 1,489.8 152.6

Avg. Daily Vol. BSE/NSE (000) :

Financials Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) EPS (INR) EPS growth (%) P/E (x) Book value per share (INR) Price to book (x) ROE (%)

FY05 1,830 28.5 494 6.8 (12.3) 45.4 26.4 11.7 33.9

FY06 4,936 169.7 1,419 8.6 26.3 35.9 49.6 6.3 27.3

FY07 7,019 42.2 1,916 9.9 14.1 31.5 59.0 5.3 19.8

400

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(INR)

200

2,000

100

1,000

0 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

('000)

Profile of participating companies

Company description STF is the largest asset financing NBFC with AUMs of INR 140 bn plus and live contracts of more than 500,000 customers. The company is a leader in organized high yield financing of pre-owned CVs with strategic presence in 5-12 years old trucks and having a market share of 20- 25%. In new CV financing, it enjoys a market share of 7-8%. It has a low cost pan-India presence covering 91.3% of truck owners with a network of six regional offices, 85 divisional offices, and 391 branches and employs more than 2,000 field officers. STF has successfully crossed INR 140 bn of assets marking nearly 5x growth in the past five years from INR 25 bn in FY02. With expansion in branches the company is expected to increase its customer base to 1 mn by FY10E. The company has grown its assets by 37% CAGR over FY04-07 and earnings have grown at 73% CAGR during the same period. Disbursements have grown by 62% in FY07 and pre-owned CV constituted 62% of the total disbursements in FY07. Key risks In event of an economic slowdown, there is greater risk of NPA accretion. Yields may come under pressure with increased competition in this segment. Rising interest rate scenario may have an adverse impact on its funding cost.

74

Shriram Transport Finance

Financial Statements
statement Income statement Year to March Interest Income Interest expenses Net Interest Income Non interest Income Net revenues Operating Expense FY05 2,921 1,628 1,293 538 1,830 1,012 140 825 47 818 39 779 285 493 -1 494 6.8 2.3 33.5% FY06 8,211 4,151 4,061 875 4,936 2,637 467 2,072 97 2,300 138 2,162 745 1,416 -2 1,419 8.6 2.9 33.0% (INR mn) FY07 13,844 7,239 6,605 414 7,019 3,813 717 2,968 128 3,206 314 2,892 988 1,904 -12 1,916 9.9 2.9 29.9%

- Employee exp - Other opex - Depreciation Preprovision profit Provisions PBT Taxes Reported PAT Extraordinaries Adjusted PAT EPS (INR) DPS (INR) Payout ratio (%)

Growth ratios (%) Year to March NII growth Revenue growth PPP growth Disbursement growth Opex growth PAT growth FY05 20.9 28.5 35.5 45.8 23.4 33.9 FY06 214.2 169.7 181.2 234.2 160.4 187.2 FY07 62.6 42.2 39.4 42.2 44.6 34.4

Operating ratios (%) Year to March Yield on assets Cost of funds Spread Cost-Income Tax rate NIM FY05 20.8 12.9 7.9 55.3 36.7 9.2 FY06 23.0 13.6 9.4 53.4 34.5 11.4 FY07 18.1 10.8 7.3 54.3 34.2 8.6

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Balance sheet As on 31st March Liabilities Equity capital Reserves Stock options outstanding Net worth Non covertible preference shares Borrowings Deferred tax liability Total Assets Loans Investments Fixed Assets Current assets Current liabilities Net current assets Other Assets Total Balance sheet details Disbursements (INR mn) Disbursement growth (%) Borrowing growth (%) EA growth (%) FY05 FY06

(INR mn) FY07

654 1,317 10 1,981 253 14,612 535 17,381 41 489 19,545 2,698 16,847 4 17,381 13,904 45.8 59.6 62.1

1,692 6,462 235 8,389 0 44,361 1,337 54,087 92 1,572 59,027 6,607 52,419 4 54,087 46,471 234.2 203.6 211.2

1,842 8,822 200 10,864 0 87,384 866 99,115 2,246 1,675 104,431 9,238 95,193 1 99,115 66,080 42.2 97.0 83.3

ROA decomposition (%) Year to March Net interest income/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE FY05 9.2 13.0 7.2 0.3 2.0 9.5 3.5 11.4 33.9 FY06 11.4 13.8 7.4 0.4 2.1 9.9 4.0 15.5 27.3 FY07 8.6 9.2 5.0 0.4 1.3 6.7 2.5 12.6 19.8

Valuation parameters Year to March Revenues (INR mn) Rev growth (%) Net profit (INR mn) EPS (INR) EPS growth (%) P/E (x) Book value per share (INR) Price to book (x) ROE (%) FY05 1,830.2 28.5 493.7 6.8 (12.3) 45.4 26.4 11.7 33.9 FY06 4,936.1 169.7 1,418.6 8.6 26.3 35.9 49.6 6.3 27.3 FY07 7,019.1 42.2 1,915.5 9.9 14.1 31.5 59.0 5.3 19.8

India Equity Research | Banking and Financial Services

STATE BANK OF INDIA


The big daddy
Value in balance sheet

INR 2,270

The clearance of the SBI Subsidiaries (Amendments) Bill, State Bank of Indias (SBI) capital raising proposal of INR150 bn, and plans to create holding company for its non-banking subsidiaries will lead to value unlocking in investments. Increasingly, the market is slowly focusing on SBIs balance sheet value rather than its profit and loss account, as was the case earlier. Holistic play on Indian economy We believe SBI presents a holistic play on Indian economic growth and is the proxy for the Indian banking industry. Corporate leverage, infrastructure growth, and retail spending will aid the bank grow its loan book by 21% over the next two years. Stable margins and improving fee income will help maintain RoA at ~1% level. Improved leverage will also improve RoE from current 13-14% to 19-20%. Franchise value: Ignored completely SBI has a very strong liability franchise with 39% of its deposits in low-cost deposits. The bank has the largest low-cost deposit base, where it has a 35% market share. As the CASA deposit base tends to be stickier and with improved technology implementation, the banks margins are set to improve as it improves its yield on advances and yield on investments. Life insurance business: Gaining ground SBI Life is the fourth largest life insurer amongst private players in India, with a market share of ~9%. It extensively leverages the SBI Group as a platform for cross-selling insurance products along with its numerous banking product packages such as housing and personal loans. We value the banks stake in life insurance business at INR 216 bn (USD 5.3 bn) on FY08E basis and INR 247 bn (USD 6.03 bn) in FY09E. Valuations We are positive on the bank with it being a default play on the Indian banking space. Also, the non banking subsidiaries, which are growing rapidly, are creating value for the bank. The bank is slowly and steadily regaining its past glory and consequently in our view should re-rate further. The stock is trading at 1.8x FY09E consolidated book (adjusted for subs).
Financials Year to March Revenues (INR mn) Rev growth (%) Net interesrt income (INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x)* Cons Price to book (x) * Cons Price to book (x) standalone P/E (x) standalone ROE (%)
* Price Adj. for subs.value of 280

November 29, 2007

Reuters Bloomberg

: :

SBI.BO SBIN IN

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : 2,400 / 845 562.2

: 1,194 / 30,040 2,080.8

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters : : : : 59.7 11.6 12.0 16.7

FY06 199,741 (5.2) 125,854 44,076 526.3 83.7 2.4 17.0 2.6 3.4 21.4 17.0

FY07 218,233 9.3 143,767 45,412 526.3 86.3 3.0 14.9 2.2 3.0 20.8 15.4

FY08E 249,227 14.2 164,507 62,373 631.6 98.8 14.5 13.6 1.7 2.1 18.2 14.7

FY09E 283,188 13.6 196,108 73,863 631.6 117.0 18.4 11.7 1.5 1.9 15.4 13.1

MFs, FIs & Banks FIIs Others

3,000

2,000

2,250

1,500

1,500

1,000

750

500

0 Dec-06
Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

May-07

0 Nov-07

('000)

(INR)

Profile of participating companies

Company description SBI is Indias largest commercial bank with an asset size of INR 4,600 bn. It has over 9,000 branches on standalone basis and 14,000 branches including associates. It has a market share of around 20% in advances and 28% in deposits. Over the past two years, the bank has increased its focus on retail credit to provide itself the necessary growth momentum and improve spreads. Retail credit forms 23% of its total loan book. Further, to manage operations better, SBI has integrated its treasury operations and has a common technology platform across all its seven subsidiary banks. The number of SBI branches under CBS is 4,573. This has increased synergies amongst its banking subsidiaries. It has the largest ATM network of ~5,900 and largest card base of ~24 mn. Key risks Macro economic risk is the biggest risk for SBI, given its size and exposure. Increasing geographic penetration by new private sector banks can lead to faster-than-expected decline in market share. Market risk on its investment book as 36% of investments are in the AFS category.

78

State Bank of India

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net Interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY05 324,280 184,834 139,446 71,199 40,729 12,736 17,735 210,645 100,739 69,073 31,666 109,906 44,688 13,190 23,384 8,114 65,218 22,171 43,048 43,048 81.8 12.5 15.3 FY06 327,447 201,593 125,854 73,887 49,509 18,522 5,855 199,741 117,251 81,230 36,021 82,490 13,429 5,530 8,483 -584 69,062 24,986 44,076 44,076 83.7 14.0 16.7 FY07 378,135 234,368 143,767 74,466 52,614 16,053 5,799 218,233 118,235 79,326 38,909 99,998 23,749 20,175 3,792 (218) 76,249 30,838 45,412 45,412 86.3 14.0 16.2 FY08E 474,801 310,294 164,507 84,720 58,875 16,844 9,000 249,227 130,890 87,333 43,556 118,337 22,379 21,638 741 0 95,958 33,585 62,373 62,373 98.8 16.0 16.2 (INR mn) FY09E 573,414 377,306 196,108 87,080 65,835 17,245 4,000 283,188 142,382 93,665 48,717 140,806 27,170 25,670 1,500 0 113,635 39,772 73,863 73,863 117.0 19.0 16.2

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Reported PAT EPS DPS Payout ratio (%)
Growth ratios (%) Year to March NII growth Fees growth Opex growth PPOP growth PPP growth Provisions growth PAT growth

FY05 24.7 11.4 9.0 31.4 14.5 (3.4) 17.0

FY06 (9.7) 21.6 16.4 (12.5) (24.9) (69.9) 2.4

FY07 14.2 6.3 0.8 22.2 21.2 76.8 3.0

FY08E 14.4 11.9 10.7 14.3 18.3 (5.8) 37.4

FY09E 19.2 11.8 8.8 22.3 19.0 21.4 18.4

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY05 7.2 8.5 7.9 3.4 4.5 5.0 6.6 2.2 47.8 34.0 FY06 7.6 7.9 7.2 2.8 4.5 4.8 7.9 2.8 58.7 36.2 FY07 8.3 7.6 7.5 2.9 4.7 4.7 9.7 3.6 54.2 40.4 FY08E 9.3 7.3 7.9 2.8 5.3 5.4 8.1 3.9 52.5 35.0 FY09E 9.4 7.3 8.1 2.8 5.6 5.6 8.5 3.8 50.3 35.0 79

Profile of participating companies

Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed assets Other assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters to Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings* Price/ BV* Price/ ABV* Dividend yield (%)
* Adj. for subs.

(INR mn) FY05 FY06 FY07 FY08E FY09E

5,263 235,458 240,721 34,648 3,670,475 191,843 461,140 4,598,829 2,023,745 1,756,730 214,249 393,221 26,977 183,907 4,598,829 24.1 15.2 13.3 45.5 58.8 41.3 5.9 2.6 57.1 12.5 8.0

5,263 271,178 276,441 49,858 3,800,461 306,414 505,524 4,938,698 2,616,415 1,388,266 237,077 445,600 27,529 223,810 4,938,698 26.0 3.5 6.8 33.8 72.1 47.6 3.9 1.9 52.7 11.9 9.4

5,263 307,723 312,986 144,307 4,355,211 397,033 456,116 5,665,652 3,373,365 1,216,135 275,350 519,687 28,189 252,927 5,665,652 27.3 14.6 14.9 25.6 80.0 48.5 2.9 1.6 47.4 12.3 8.0

6,316 526,688 533,004 164,307 5,164,437 568,947 378,933 6,809,627 4,216,706 1,466,776 325,009 562,386 28,621 210,128 6,809,627 25.0 18.6 22.0 25.0 84.3 44.0 2.0 1.3 37.5 15.8 10.5

6,316 586,512 592,827 184,307 6,043,971 647,108 442,229 7,910,442 5,060,047 1,538,923 380,255 657,474 28,516 245,226 7,910,442 20.0 17.0 16.2 22.5 86.3 44.1 1.6 1.1 31.6 15.4 10.2

FY05 3.4 1.3 0.4 5.1 (2.4) (1.1) (0.5) (4.1) 1.0 5.4 19.4

FY06 2.8 1.5 0.1 4.4 (2.6) (0.3) (0.6) (3.4) 1.0 5.7 17.0

FY07 2.9 1.4 0.1 4.3 (2.3) (0.5) (0.6) (3.4) 0.9 5.9 15.4

FY08E 2.8 1.3 0.2 4.2 (2.2) (0.4) (0.6) (3.1) 1.0 7.1 14.7

FY09E 2.8 1.2 0.1 4.0 (2.0) (0.4) (0.6) (2.9) 1.0 7.9 13.1

FY05 81.8 17.0 457.4 386.2 17.2 3.0 3.0 0.7

FY06 83.7 2.4 525.3 460.0 17.0 2.6 2.6 0.8

FY07 86.3 3.0 594.7 524.8 14.9 2.2 2.3 0.8

FY08E 98.8 14.5 843.9 784.4 13.6 1.7 1.8 0.9

FY09E 117.0 18.4 938.7 875.8 11.7 1.5 1.6 1.1

80

India Equity Research | Banking and Financial Services

UNION BANK OF INDIA


Steady player
Building a SME focused loan book to protect margins

INR 170

November 29, 2007

Having grown its loan book by ~20% CAGR from FY04-07, Union Bank of India (UBI) was one the first PSU banks to limit loan book expansion (FY07 growth was lower than the system at 15% ) in Q3FY07, to maintain margins. This was evident when it had called back INR 62 bn in Q3FY07lent to low-yield corporate advances. In H1FY08, the loan book grew by 11% Y-o-Y at INR 685 bn. Significantly, nearly 52% of the incremental INR 52 bn credit growth for Q2FY08 is from the SME segment (forms 16% of the banks total loan book), wherein yields are typically in the 11.5-12.5% range. We expect advances to grow 25% in FY08E. Operating efficiency despite large distribution network UBIs operating costs at 1.7% of average assets is only 10bps higher than OBC and Karnataka Bank. However, given the scale of its distribution network as well as its operations, the bank stands as a benchmark in the industry. One of the primary reasons for such high degree of efficiency is its low growth of staff strength which has remained flat at ~26,000 employees in the past five years, while its branch network has increased by 10% and business growth has been in excess of 130% in this period. With technology implementation completed in most of its business branches, we believe that UBI will be able to maintain its staff strength at current levels while other operating expenditure will grow inline with balance sheet growth.
Reuters : : UNBK.BO UNBK IN

Attractive RoE given strong leverage Given the high leverage which is at ~5%, UBI has been utlised its capital well to post RoEs of ~19% for FY06-07. As of Q2FY08, Tier 1 capital was at ~7.4%. We have seen in the past that the bank effectively utilizes its Tier II capital to generate higher RoEs. Given the current expectation of credit growth, we do not expect the bank to raise further capital for the next two years and hence, we believe the bank will be able to post RoEs in excess of 20% for FY08-09E. Valuations Driven by the focus on building higher SME book and backed by its operating efficiency we expect UBI to post RoA of 1% for FY08-09E, while its strong leverage to will help in delivering RoEs in excess of 20%. We have factored credit growth of 21% CAGR for FY08-09E and deposit growth of 17%. We expect EPS to grow by 23% CAGR for FY07-09E and the stock is currently trading at 1.6x FY08E book and 1.3x FY09E book.
Financials Year to March Revenues (INR mn) Rev growth (%) Net interesrt income(INR mn) Net profit (INR mn) Shares outstanding (mn) EPS (INR) EPS growth (%) P/E (x) Price to book (x) Price to PPOP (x) ROE (%) FY06 28,703 1.4 23,743 6,759 505.1 13.4 (14.4) 12.7 2.4 5.7 18.7 FY07 34,766 21.1 27,902 8,453 505.1 16.7 25.1 10.1 2.0 4.2 19.2 FY08E 39,202 12.8 31,242 10,567 505.1 20.9 25.0 8.1 1.6 3.8 20.5 FY09E 45,264 15.5 37,266 6,292 2,356 (650) 20.3 6.7 1.3 1.4 21.0

Bloomberg

Market Data 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : : 200 / 84 505.1

: 85.7 / 2,156.5 2,002.9

Avg. Daily Vol. BSE/NSE (000) :

Share Holding Pattern (%) Promoters MFs, FIs & Banks FIIs Others : : : : 55.4 11.5 19.6 13.5

240

2,000

180
(INR)

1,500
('000)

120

1,000

60

500

0 Dec-06

May-07

0 Nov-07

Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Profile of participating companies

Company description Incorporated in 1919, UBI is one of the oldest banks in India. Its network of 2,200 branches and balance sheet size of INR 1,022 bn as in March 2007 are the sixth largest and fifth largest, respectively, in the country. The bank has the most widespread branch network in India (after SBI), with branches distributed evenly across all regions. Around 979 of the banks branches are networked under core banking solution (CBS). The government of India (GoI) has 55.4% equity holding in the bank as in March 2007, followed by foreign institutional investors (FIIs) with 19.9% stake. Key risks Liability management will be a key factor to grow loan book at faster-than-expected rate. Margins may come under pressure, as the bank has a low SLR cushion.

82

Union Bank

Financial Statements
statement Income statement Year to March Interest income Interest expenses Net Interest income Non interest income - Fee & forex income - Misc. income - Investment profits Net revenues Operating expense FY05 49,698 29,052 20,646 7,655 3,429 1,629 2,597 28,300 12,575 8,064 4,511 15,726 9,611 2,422 5,676 1,513 6,114 -1,075 7,189 7,189 15.6 3.5 22.4 FY06 58,637 34,894 23,743 4,960 3,685 1,612 -337 28,703 14,023 8,668 5,355 14,680 5,730 2,570 3,030 130 8,950 2,191 6,759 6,759 13.4 3.5 26.2 FY07 73,822 45,920 27,902 6,864 4,717 2,616 -469 34,766 14,756 8,737 6,019 20,010 6,207 4,660 1,164 384 13,803 5,350 8,453 8,453 16.7 3.5 20.9 FY08E 94,485 63,244 31,242 7,960 5,424 2,686 -150 39,202 17,054 10,048 7,006 22,148 6,185 5,785 750 -350 15,963 5,395 10,567 10,567 20.9 4.0 19.1 (INR mn) FY09E 112,011 74,745 37,266 7,998 6,292 2,356 -650 45,264 18,819 10,993 7,826 26,445 7,238 7,138 100 0 19,207 6,492 12,715 12,715 25.2 5.0 19.9

- Employee exp - Other opex Preprovision profit Provisions - Loan loss provisions - Investment depreciation - Other provisions PBT Taxes PAT Reported PAT EPS DPS Payout ratio (%)

Growth ratios (%) Year to March NII growth Fees growth Opex growth PPOP growth PPP growth Provisions growth PAT growth FY05 18.9 25.1 15.9 25.2 6.0 45.0 1.0 FY06 15.0 7.5 11.5 14.4 (6.6) (40.4) (6.0) FY07 17.5 28.0 5.2 36.4 36.3 8.3 25.1 FY08E 12.0 15.0 15.6 8.9 10.7 (0.4) 25.0 FY09E 19.3 16.0 10.3 21.5 19.4 17.0 20.3

Operating ratios (%) Year to March Yield on advances Yield on investments Yield on assets Net interest margins Cost of funds Cost of deposits Cost of borrowings Spread Cost-income Tax rate FY05 8.3 8.3 8.4 3.5 4.7 4.8 6.0 3.5 44.4 (17.6) FY06 8.0 8.0 7.9 3.2 4.6 4.6 6.2 3.4 48.9 24.5 FY07 8.8 7.8 8.3 3.1 5.0 5.1 7.7 3.7 42.4 38.8 FY08E 10.1 7.5 9.0 3.0 5.9 6.0 9.0 4.1 43.5 33.8 FY09E 10.2 7.5 9.1 3.0 6.0 6.0 9.1 4.1 41.6 33.8 83

Profile of participating companies

Balance sheet As an 31st March Liabilities Liabilities Equity capital Reserves Net worth Sub bonds/pref cap Deposits Borrowings Other liabilities Total Assets Loans Investments Gilts Others Cash & equi Fixed Assets Other Assets Total Balance sheet ratios Credit growth Deposit growth EA growth SLR ratio C-D ratio Low-cost deposits Gross NPA ratio Net NPA ratio Provision coverage Capital adequacy - Tier 1 ROA decomposition (%) Year to March Net interest income/Assets Fees/Assets Investment profits/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROE Valuation parameters Year to March EPS EPS growth (%) Book value per share Adjusted book value/share Price/Earnings Price/ BV Price/ ABV Dividend yield (%) FY05 15.6 1.0 68.2 52.1 10.8 2.5 3.2 2.1 FY06 13.4 (14.4) 81.0 69.5 12.7 2.1 2.4 2.1 FY07 16.7 25.1 93.7 85.4 10.1 1.8 2.0 2.1 FY08E 20.9 25.0 110.2 103.4 8.1 1.5 1.6 2.4 FY05 3.5 0.9 0.4 4.8 (2.1) (1.6) 0.2 (3.6) 1.2 4.8 25.0 FY06 3.2 0.7 (0.0) 3.9 (1.9) (0.8) (0.3) (3.0) 0.9 4.9 18.7 FY07 3.1 0.8 (0.1) 3.9 (1.7) (0.7) (0.6) (3.0) 0.9 5.0 19.2 FY08E 3.0 0.8 (0.0) 3.7 (1.6) (0.6) (0.5) (2.7) 1.0 4.9 20.5 FY05 FY06 FY07 FY08E

(INR mn) FY09E

4,601 26,793 31,394 19,700 618,306 20,210 29,773 719,382 401,051 164,111 63,817 65,720 3,488 21,196 719,382 38.7 22.3 24.7 25.7 73.6 32.7 4.9 2.6 66.8 12.1 6.1

5,051 35,874 40,925 27,700 740,943 39,744 37,292 886,604 533,800 202,817 56,357 63,905 3,447 26,277 886,604 33.1 19.8 23.3 26.0 78.1 32.4 3.9 1.6 59.7 11.4 7.3

5,051 42,274 47,325 34,200 851,802 42,155 46,723 1,022,205 623,864 229,054 50,760 84,264 3,680 30,582 1,022,205 16.9 15.0 15.3 25.6 77.7 34.5 2.9 1.0 67.9 12.8 7.8

5,051 50,615 55,666 42,700 1,020,607 46,155 43,839 1,208,967 773,592 260,115 55,917 86,882 3,767 28,695 1,208,967 24.0 19.8 19.1 25.0 79.9 33.5 2.4 0.6 74.4 12.4 7.4

5,051 60,547 65,598 46,200 1,173,461 50,155 50,404 1,385,818 920,574 263,125 65,439 99,894 3,794 32,992 1,385,818 19.0 15.0 14.7 22.0 82.7 33.7 2.4 0.6 75.0 11.9 7.2

FY09E 3.0 0.7 (0.1) 3.7 (1.5) (0.6) (0.5) (2.6) 1.0 4.9 21.0

FY09E 25.2 20.3 129.9 122.2 6.7 1.3 1.4 3.0

84

Notes

NOTES

85

Profile of participating companies

NOTES

86

Notes

NOTES

87

Limited, Edelweiss Securities Limited


Naresh Kothari Vikas Khemani Shriram Iyer

14th Floor, Express Towers, Nariman Point, Mumbai 400 021, Board: +91 22 2286 4400, Email: research@edelcap.com

Co-Head Institutional Equities Co-Head Institutional Equities Head Research

naresh.kothari@edelcap.com vikas.khemani@edelcap.com shriram.iyer@edelcap.com

2286 4246 2286 4206 2286 4256

Distribution of Ratings / Market Cap


Edelweiss Research Coverage Universe Buy Accumulate
Rating Distribution 103 47

Rating Interpretation
Rating Expected to
appreciate more than 20% over a 12-month period appreciate up to 20% over a 12-month period depreciate up to 10% over a 12-month period depreciate more than 10% over a 12-month period

Reduce
22

Sell
3

Total
190

Buy Accumulate

* 13 Stocks under review / 2 rating withheld

> 50bn
Market Cap (INR) 96

Between 10bn and 50 bn < 10bn


65 29

Reduce Sell

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