FUNDAMENTAL INSIGHT India | Banks | 20-May-2013
IndusInd Bank Unique business with hidden strengths Indusind has a unique business model that combines the strengths of a bank and a NBFC to target a niche customer segment for its consumer finance business, namely the small road transport operators (SRTOs), single truck owners (STOs) and vehicles for retail consumers. Together with its associate, Indusind Marketing and Financial Services, the combined franchise has a formidable sales force (c.8,000+) and more than 1,300 customer touch points (branches and marketing outlets). While valuations have clearly run up over the last few months, we believe the franchise strength and fundamentals will support these valuations. We reiterate our BUY rating and revise our fair value to Rs593 (from Rs313).
Targeting niche customer segment with a unique business model IndusInd Bank is in a unique position among the smaller aspirant private banks to target a lucrative customer segment – namely the SRTO/STO segment and retail consumers who are relatively under banked and offer higher risk-return ratios. Unique franchise with hidden strengths: IndusInd Bank along with its associate Indusind Marketing and Financial Services has an enviable franchise with a strong distribution network. With more than 1,300 customer touch points (branches + marketing outlets of associates) and a strong sales force of more than 8,000 personnel (more than 18,000 total employees), Indusind‖s franchise packs a punch compared with most aspirant private banks and vehicle finance NBFCs. – Detailed analysis in pages 10-12
Resilience of the SRTO/STO model suggests stable asset quality Our analysis of IndusInd‖s asset quality suggests that its main customer segment, SRTO/STO, is in a better position to handle the economic slowdown because of flexible P&Ls and balance sheets. Our analysis suggests that as long as the lenders collect 47% of the EMI they can be assured that the borrower is unlikely to default. Hence, the bank should in our view sail through the current economic downturn without any significant asset quality deterioration – Scenario analysis in pages 4-9
Investing in new product segments and offerings
Accounting & corporate governance
GREEN
Franchise Strength
GREEN
Earnings Momentum
GREEN
BUY
16% upside
Fair Value
Rs592.58
Bloomberg ticker Share Price Market Capitalisation Free Float
IIB IN Rs511.25 Rs239,640.62m 85%
INR m Y/E 31-Mar
2012A
2013A
2014E
2015E
Total Income Pre provision profit
27,130 13,701
35,958 18,395
45,249 22,811
57,218 28,551
Provisions
1,804
2,631
2,523
3,214
PBT
11,897
15,764
20,288
25,337
PAT
8,028
10,612
13,657
17,057
EPS (Rs)
17.2
20.3
26.2
32.7
DPS (Rs) ABVPS (Rs)
2.2 95.1
3.0 140.0
4.0 161.0
5.0 187.5
Y/E 31-Mar
2012A
2013A
2014E
2015E
29.8
25.1
19.5
15.6
5.4
3.7
3.2
2.7
18.8%
17.5%
17.1%
18.4%
1.53% 0.43%
1.61% 0.59%
1.70% 0.78%
1.72% 0.98%
P/E (x) P/ABV (x) ROE (%) ROA (%) Dividend Yield (%)
Share Price Performance 180 160 140 120 100 80 Jun Jul 2012 2012
Aug 2012
Sep Oct 2012 2012
IIB IN
Nov 2012
Dec 2012
Jan 2013
Feb Mar 2013 2013
Apr 2013
May 2013
vs BSE500 Index
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Over the past few years IndusInd has used both the organic (used CV, LAP, retail FX & investment banking) and inorganic (Deutsche Bank credit card division) routes to build new products for its target customers. This we believe will allow IndusInd to sustain its growth rates without compromising on margins or asset quality. – Analysis in pages 14 - 15
Stable branch expansion strategy will drive liabilities IndusInd‖s branch expansion strategy in our view has been more stable and diversified compared with Kotak and Yes Bank. Further, our analysis of the geographic spread of its deposits‖ mobilization suggests branch expansion will yield results, as the newly added branches stabilize and efficiencies improve (as of FY10, its branch network in North, East and South India - 67% of total branches - are currently operating 37% below their peak efficiency). Further, the bank has strategically increased its savings account rate and has been a beneficiary of the deregulation of savings deposits. Analysis in pages 16 - 19
Valuation – expensive but fundamentals support We forecast IndusInd Bank to deliver a RoE of c.17.1% in FY14E and expect RoE to increase steadily further to c.18.4% in FY15E. We value the bank at 3.7x FY14E P/B, c.10% discount to our target multiple on HDFC Bank (4.1x FY14E P/B). We increase our fair value by 89% to Rs 593, 16% upside.
Analysts Saikiran Pulavarthi +91 22 4315 6824
[email protected] Espirito Santo Securities India Private Limited Sri Karthik Velamakanni +91 22 4315 6826
[email protected] Espirito Santo Securities India Private Limited
FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)
Commercial vehicle (CV) asset quality – will the bubble burst? Concern 1: Warning signs from ratings agencies “A portfolio analysis of the leading NBFCs that lend to the CV segment reveals that delinquency in near-term buckets is rising. The 90+ days pastdue levels has increased by about 100bps over the three months ended Dec ’12.” - Pawan Agrawal, Senior Director, CRISIL Ratings Several rating agencies such as CRISIL & IndRa (India Rating formerly FITCH) have expressed concerns over the asset quality of CV portfolios securitized by NBFCs as collection levels have declined to below 95% for the first time since 2009. They have clearly warned about the higher likelihood of NPAs increasing over the next several quarters. “This decline in collection efficiency indicates that borrowers are increasingly delaying repayments; there is, therefore, a likelihood of increase in NPAs over the next few quarters.” - Pawan Agrawal, Senior Director, CRISIL Ratings The lower collection efficiency was attributed to reduced freight demand and declining truck rentals. “The sub-par collection levels may continue over the next few quarters, reflecting the adverse impact of reduced freight demand on CV owners and their inability to pass on increases in fuel and labour costs.” - Pawan Agrawal, Senior Director, CRISIL Ratings Detailed ABS pool performance as of Dec ’12 provided in Appendix A
Concern 2: Drop in truck rentals as reported by the Indian Foundation of Transport Research and Training (IFTRT) Along with the credit rating agencies, several independent research organizations such as Indian Foundation of Transport Research and Training (IFTRT) have reported a drop in truck rentals on several key truck routes. As can be seen from the table below, the average monthly truck rentals for FY'13 witnessed a drop of 3.0%-6.9% over FY12. Table 1
IFTRT has been highlighting a drop in truck rentals during FY13 for several months now
Round Trip/ 9 ton pay load – monthly averages Delhi - Mumbai-Delhi
51,158
55,900
YoY Change 9%
52,900
YoY Change -5%
Delhi - Nagpur-Delhi
49,058
54,100
10%
51,000
-6%
Delhi - Kolkata-Delhi
50,359
57,100
13%
54,500
-5%
56,300
58,000
Delhi - Guwahati-Delhi
90,541
100,800
11%
95,500
-5%
96,400
99,300
3%
Delhi - Hyderabad-Delhi
66,975
75,800
13%
73,500
-3%
74,700
78,000
4%
FY11
FY12
FY13
54,800
56,500
QoQ Change 3%
51,000
53,000
4% 3%
Apr'13
May'13
Delhi - Chennai-Delhi
79,858
88,100
10%
82,000
-7%
84,000
86,500
3%
Delhi - Bangalore-Delhi
77,950
86,200
11%
82,000
-5%
83,300
86,000
3%
Delhi - Ranchi-Delhi
49,933
55,500
11%
53,000
-5%
54,000
56,200
4%
Delhi – Raipur-Delhi
48,759
53,600
10%
51,000
-5%
51,000
53,000
4%
Delhi - Kandla-Delhi
35,400
41,300
17%
39,500
-4%
41,900
43,600
4%
Delhi - Bilaspur-Delhi
47,433
53,300
12%
50,300
-6%
51,300
53,400
4%
Source: Espirito Santo Investment Bank Research, IFTRT
IFTRT‖s report on truck rentals for the month of Mar ‖13 further highlighted that: Banks and NBFCs are saddled with more than 35,000 CVs they repossessed during the last 6 months period, implying high stress levels in CV financing.
Banks and NBFCs are saddled with more than 35,000 CVs they repossessed during the last 6 months period, implying high stress levels in CV financing
According to the same report, the resale market of old trucks witnessed a drop of 25%-30% in market price.
Page 2 of 29
Concern 3: Commentary from competitors also suggests stress on asset quality The management of banks (such as HDFC, IndusInd) and NBFCs (Shriram) have highlighted stress in their CV portfolios during the last couple of analyst calls. The table below summarizes the most recent commentary on CV asset quality by the managements of the top private banks with meaningful retail exposure. Table 2
Management commentary on CV asset quality suggests an uptick in NPL formation
Bank
Comment Of the absolute increase in GNPLs (Rs2,980m), about 80% of that has come from the retail portfolio.
HDFC Bank – Q3 FY13 analyst call
While there has been an increase, I think one should appreciate that in taking this into perspective in terms of the actual increase, it's still not anything meaningful. However, of the total increase in retail NPLs, approximately 50% of that is from the CV/CE portfolio. 1.
HDFC Bank – Q4 FY13 analyst call
2.
3.
IndusInd Bank– Q3 FY13 analyst call
4.
IndusInd Bank– Q4 FY13 analyst call
The CV portfolio still remains under stress, but has actually seen a stabilization and a very, very marginal improvement on a sequential basis. So, has it suddenly bounced back to where it used to be, the answer is no. But it is – it has improved on a sequential basis to some extent. “From the Jan to March quarter, we see certain improvements in the CV picking up. And also the quality of book should also become slightly better than whatever it is now.” “I would not say that there would be a very great improvement in credit cost. But I wouldn't say that there won't be deterioration.” – Mr S. V. Parthasarathy, Head of Consumer Finance.
5. 6.
GNPA% seems to have gone up by 11bps on commercial vehicles. But if you add back what was sold to ARCs on the commercial vehicle side, actually gross NPAs are flat at 1%.
7.
"February and March 2013 overall consumption demand has come down. And therefore the freight rate and freight movement were little less active. So there was some pressure for the customer and that should be okay by this time because April, May has been good and we are seeing a better price rate, especially the North India” - Mr. Umesh Revankar, MD Shriram Transport, on CV asset quality.
L&T Finance – Q4 FY13 analyst call
8.
"Rural demand remains robust. However, we have seen some signs of stress at the end of FY13 due to drought and low level of farming" Mr. N Sivaraman, Chairman L&T Financial Holdings.
Chola Finance – Q4 FY13 analyst call
9.
“On LCVs we definitely don't see freight rates going down. As a matter of fact, if anything they are trending upwards and so when we look at the overall market, actually the answer is not going to be the same for various segments” – Mr Vellayan Subbiah, MD, Cholamandalam Finance.
Shriram Transport – Q4 FY13 analyst call
Source: Espirito Santo Investment Bank Research, Company Data
Asset quality data for the likes of Indusind (IIB) & Shriram Transport Finance (SHTF IN, Rs 786, NEUTRAL, FV: Rs 773) shows a slight uptick in the GNPA% during the year which is also a cause of concern for Indusind. Figure 1
Asset quality reading for auto financiers has been mixed with Indusind and Shriram showing slight stress in their portfolio
Q1FY13
Q2FY13
Q3FY13
Q4FY13
4.50%
4.00% 3.80%3.90%
4.00% 3.20% 3.00%2.89%2.89%
3.50% 3.00%
3.00%
2.50% 2.00% 1.50%
1.07% 1.10% 1.11% 1.16%
1.00% 0.50% 0.00% IIB - Consumer
SHTF
M&MFS
Source: Espirito Santo Investment Bank Research, Company Data
Page 3 of 29
Mitigating asset quality concerns In the following section we give six reasons why we think IndusInd will thrive in what appears to be a very challenging sector.
Reason 1: Resilience of the SRTO/STO model suggests stable asset quality One clear takeaway from our discussions with the industry participants, transporters and managements of unlisted competitors along with commentary from private banks and NBFC managements during the recent analyst calls, is the fact that the asset quality of small road transport operators (SRTOs) and the single truck owners (STOs) has been much more resilient compared to large fleet owners. Our analysis of the operating model shows that the P&Ls and balance sheets of SRTOs and STOs are much more resilient to economic downturns than that of large fleet owners. In tables below, we show the typical P&L of a one truck SRTO and a large fleet owner. Based on our modelling and scenario analysis we conclude that even in the worst-case scenario SRTOs are still in a position to service up to 37% of their monthly EMI while the equivalent number for a fleet owner is only around 24%. Table 3
Scenario analysis of P&L for SRTO/STO
STRO / First Time User Truck Cost (Rs mn) LTV Loan Amount (Rs mn) No of days Km / day Tonnes Price per ton per km (Rs) Fuel Cost per ton per km (Rs) Revenues Driver & helper Salary (Rs) Fuel Cost (Rs) Repairs & Insurance (Rs) FCFO (Rs) Debt payment – EMI (Rs) EMI Coverage Ratio (x) FCFE (Rs) Diesel Price (Rs) Mileage
Bear
Base
Table 4 Bull
12
12
12
80%
80%
80%
10
10
10
15
20
25
250
270
300
9
9
9
2.00
2.30
2.50
1.11
1.11
1.11
67,500
111,780
168,750
(15,000)
(15,000)
(15,000)
(37,500)
(54,000)
(75,000)
(5,000)
(5,000)
(5,000)
10,000
37,780
73,750
(27,207)
(27,207)
(27,207)
37%
139%
271%
(17,207)
10,573
46,543
55.0 5.5
Source: Espirito Santo Investment Bank Research
55.0 5.5
55.0 5.5
Scenario analysis of P&L for Fleet owners
Fleet Owners Truck Cost (Rs mn) LTV Loan Amount (Rs mn) No of days
Bear
Base
Bull
25
25
25
80%
80%
80%
20
20
20
12
20
24
Km / day
220
250
280
16
16
16
1.70
1.90
2.10
Tonnes Price per ton per km (Rs) Fuel Cost per ton per km (Rs) Revenues (Rs) Driver & helper Salary (Rs) Fuel Cost (Rs) Repairs & Insurance (Rs) FCFO (Rs) Debt payment – EMI (Rs) EMI Coverage Ratio (x) FCFE (Rs) Diesel Price (Rs) Mileage
0.82
0.82
0.82
71,808
152,000
225,792
(18,000)
(18,000)
(18,000)
(34,571)
(65,476)
(88,000)
(5,000)
(5,000)
(5,000)
14,237
63,524
114,792
(56,681)
(56,681)
(56,681)
24%
112%
203%
(42,444)
6,843
58,111
55.0
55.0
55.0
4.2
4.2
4.2
Source: Espirito Santo Investment Bank Research
Another important aspect in the financing of SRTOs and STOs is the part payment facilities allowed by banks and NBFCs when there is a short fall in cash flows due to lower economic activity. So how do part payments work? 1.
Part payments are used to service complete interest due and the principal payment is delayed.
2.
Because of this the loan outstanding declines at a lower rate than the rate at which the truck depreciates.
3.
As this prolongs, the loan principal outstanding becomes higher than the depreciated value of the truck, leading to negative equity. This might motivate the borrower to default on the loan.
4.
Also, the loan will continue to remain standard as long as the borrower services at least the interest part of the monthly instalment.
Page 4 of 29
Evidence from rating agencies suggests that securitized pools during the 2012 vintage or one year old loans are facing the most stress. This can also be seen from the securitization pool performance data in Appendix A. In the following sections we analyse the asset quality behaviour of loans disbursed a year ago and we use the following assumptions in our modelling: 1.
The loan has completed one year of normal servicing and is currently facing lower cash flow issues
2.
After the first year the lender will start accepting part payments due to lower cash flows
3.
The part payments will be first used to service the interest cost and remaining amount will be used to service the principal amount
4.
If the part payment is lower than the interest costs the loan will automatically become overdue
5.
Also, the borrower has no incentive for servicing the loan if the equity (truck value – loan outstanding) becomes negative
6.
The truck depreciates by 20% immediately after purchase and 10% per year subsequently.
Scenario 1 - Full payment of EMI for by a fleet owner or SRTO 1.
The loan is serviced normally with no part payment at all.
2.
As can be seen from the graph below the equity of the truck owner accrues every month as the outstanding principal declines faster than decline in the value of the truck
Figure 2
20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Scenario analysis when the borrower pays full EMI
Instalment
Principal Repay
Equity of Truck owner
Source: Espirito Santo Investment Bank Research, Company Data
Scenario 2 - Part payment of 24% of EMI – the bear case scenario of the fleet owner 1.
After first year of normal service we assume that the borrower has only enough cash flows to make 24% part payment of the EMI, which is the worst case scenario for the fleet owners
2.
As can be seen from Figure 3, in this scenario the borrower will not be able to even service the interest expense and hence there is a very high likely hood of the lender classifying this as an NPA
3.
Further the equity of the borrower becomes negative within 6 months of commencing the part payments
We believe this negative equity dynamic for the truck in a larger fleet along with its lower flexibility in terms of P&L and balance sheet is causing higher stress among fleet owners.
Page 5 of 29
Figure 3
Scenario analysis when the borrower pays 24% of EMI
10,000 8,000
Instalment
Principal Repay
Equity of Truck owner
6,000 4,000
2,000 0 (2,000)
(4,000) (6,000) (8,000)
Source: Espirito Santo Investment Bank Research, Company Data
Scenario 3 - Part payment of 33% of EMI – only enough for servicing interest 1.
After first year of normal service we assume that the borrower has only enough cash flows to make 33% part payment of the EMI, which is only enough to service the interest expenses
2.
The bank can continue to classify the loan as standard as the borrower continues to meet the minimum liability requirement of servicing the interest
3.
However, there is a risk that the borrower has lower incentive to continue to service the loan as the equity becomes negative after 9 months of commencing the part payment
Figure 4
Scenario analysis when the borrower pays 33% of EMI
10,000 8,000
Instalment
Instalment
Equity of Truck owner
6,000 4,000 2,000
0 (2,000) (4,000) (6,000)
Source: Espirito Santo Investment Bank Research, Company Data
Scenario 4 - Part payment of 37% of EMI – the bear case scenario of SRTO/STO 1.
After first year of normal service we assume that the borrower has only enough cash flows to make 37% part payment of the EMI, which is the worst case scenario for the SRTO/STO
2.
The bank can continue to classify the loan as standard as the borrower continues to meet the minimum liability requirement of servicing the interest
Page 6 of 29
3.
However, there is a risk that the borrower has lower incentive to continue to service the loan as the equity becomes negative after 10 months of commencing the part payment
Figure 5
Scenario analysis when the borrower pays 37% of EMI
10,000 Instalment
Principal Repay
Equity of Truck owner
8,000 6,000
4,000 2,000 0 (2,000) (4,000)
Source: Espirito Santo Investment Bank Research, Company Data
Scenario 5 - Part payment of 47% of EMI – minimum part payment requirement to avoid default 1.
After first year of normal service we assume that the borrower has only enough cash flows to make 47% part payment of the EMI
2.
The bank can continue to classify the loan as standard as the borrower continues to meet the minimum liability requirement of servicing the interest
3.
Further, there is no risk of the borrower defaulting on the loan as the as the equity remains in the positive territory for the entire period
Figure 6
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Scenario analysis when the borrower pays 47% of EMI
Instalment
Principal Repay
Equity of Truck owner
Source: Espirito Santo Investment Bank Research, Company Data
Hence, as can be seen from above and based on the assumptions in table 3, as long as the lenders collect 47% of the EMI they can be assured of the fact that the borrower is unlikely to default.
Page 7 of 29
Reason 2: Strong credit risk monitoring and underwriting What can be observed from the above scenario analysis is the fact that in Scenarios 3 & 4, as long as the borrower continues to service the interest the lender is unlikely to classify the loan as a NPA, but there is a chance that the borrower could turn wilful defaulter as his equity becomes negative during the period. This is where the underwriting capabilities of the lender and lender‖s relation with the borrower become very critical.
Figure 7 IndusInd Banks’s proportion of consumer finance portfolio and NIMs % of Consumer Portfolio
120%
100%
Below 100%
5%
80% 41%
100%
3.00%
4%
3%
4%
5%
5%
5%
31%
31%
34%
33%
28%
23%
25%
60%
40% 54%
64%
65%
62%
63%
68%
72%
69%
2.50%
40.0%
2.00%
1.50%
35.0%
1.00% 30.0%
0.50%
25.0%
0.00%
Source: Espirito Santo Investment Bank Research, Company Data
Figure 9 Indusind's internally rated portfolio across various rating grades in proportion to total rated advances - H2 FY13
More than 100%
5%
3.50%
45.0%
Also, as can be seen from Table 9, only 5.27% of the portfolio (both fund based and non-fund based) is below investment grade which gives us further confidence in the underwriting capabilities of the bank.
Credit risk classified in terms of RWA's for Indusind Bank
4.00%
50.0%
In figure 8 we show the distribution of credit risk weights (RWA) of the portfolio below 100% (low risk and priority), equal to 100% (medium risk) and above 100% (high risk). Management has managed to maintain the high risk category of the portfolio below 5% while changing the portfolio composition toward higher yielding segments, as can be seen from the shift towards consumer finance. Further, the NIMs during the period have also improved while reducing the credit risk within the portfolio.
Figure 8
NIM (%)
55.0%
IB1 IB2+
Fund Based Unsecure Secured d 9.96% 0.00%
Non-Fund Based Unsecur Secured ed 24.54% 0.90% 2.50%
0.73%
Total 35.40%
0.68%
0.00%
3.91%
IB2
1.17%
0.00%
1.10%
0.61%
2.88%
IB2-
2.96%
1.29%
4.23%
0.57%
9.05%
IB3+
3.53%
1.07%
2.89%
2.03%
9.51%
IB3
2.59%
0.35%
1.45%
0.13%
4.52%
IB3-
5.78%
0.53%
3.11%
0.59%
10.01%
IB4+
3.07%
1.22%
1.65%
0.13%
6.06%
IB4
4.96%
0.26%
1.58%
0.05%
6.85%
IB4-
5.06%
0.06%
1.35%
0.07%
6.54%
20%
0%
NonInvestment Total Source: Espirito Santo Investment Bank Research, Company Data
3.93%
0.15%
1.02%
0.15%
5.27%
43.69%
4.93%
45.42%
5.96%
100.00%
Source: Espirito Santo Investment Bank Research, Company Data
Reason 3: Persistence pays in managing asset quality in a CV cycle Another important aspect of maintaining asset quality in a CV cycle is by not withdrawing from the market at times when the cycle turns bad. Usually, when the cycle turns south most of the “non-serious” or “opportunistic” players tend to withdraw from the market. This in our view gives the more permanent players additional advantage to cherry pick loans as per their risk appetite while at the same time remaining in touch with the borrowers. How do the portfolios behave when growth slows and asset quality stress increases? 1.
Asset quality stress implies the borrower would be paying only part payments
2.
Hence the prepayment rate reduces as the part payments will only be enough to pay a part of the principal due
3.
Hence even with lower disbursements the lender can maintain the overall portfolio growth rates.
Page 8 of 29
In the example below, during FY08 when retail asset quality of the entire banking system took a hit, the portfolio repayment rate declined from 62% in FY07 to 55% in FY08 for Indusind. But despite the lower disbursements during FY08, IndusInd managed to grow during FY08. Currently, the repayment rate has declined from 61% in FY12 to 56% as of FY13, indicating some asset quality stress. However, by continuing to disburse during FY13 IndusInd has once again demonstrated its willingness to remain in the market during difficult times. Table 5
Indusind's consumer portfolio movement - Annual basis
Consumer Banking
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Advances Opening
3,964
6,640
7,349
7,180
8,301
11,619
17,099
68%
11%
-2%
16%
40%
47%
5,141
4,358
4,269
5,927
8,935
12,599
14,800
130%
66%
58%
83%
108%
108%
87%
-15%
-2%
39%
51%
41%
17%
2,465
3,649
4,438
4,806
5,617
7,119
9,598
62%
55%
60%
67%
68%
61%
56%
6,640
7,349
7,180
8,301
11,619
17,099
22,301
68%
11%
-2%
16%
40%
47%
30%
YoY Growth (%) Disbursements As a % of opening advance (%) YoY Growth of disbursements (%) Repayments As a % of opening advance (%) Advances Closing YoY Growth (%) Source: Espirito Santo Investment Bank Research, Company Data
Reason 4: Product diversification coming to fore The other important aspect of IndusInd‖s portfolio is the high level of diversification within its vehicle loan and corporate portfolio. As can be seen from the Figures 10 and 11, IndusInd has a highly diversified portfolio even within its Vehicle portfolio further segmented into CV, Commercial Equipment (CE), 3 Wheelers (3W), 2 Wheelers (2W), Car and Utility Vehicles (UV). Figure 11 Indusind's vehicle loan portfolio by sub-segment (% proportion)
Figure 10 Indusind's vehicle loan portfolio (Rs bn)
CV
3W
CE
2W
Car
UV
2500
2000
1500
CV 100%
3W
CE
2W
Car
UV
90%
7% 7%
80%
10%
9%
70%
13%
13%
12%
12%
10%
50%
50%
48%
60%
8% 8%
50% 1000
40%
500
20%
30%
9% 10% 9% 13%
10% 0
Source: Espirito Santo Investment Bank Research, Company Data
0%
Source: Espirito Santo Investment Bank Research, Company Data
Reason 5: Portfolio diversified across geography & sector As can be seen from the figures below, the vehicle loan portfolio is further diversified across states, with the single largest contribution coming from the Rajasthan (12.8% of its total vehicle portfolio). Also, states such as Orissa, Goa and Karnataka, which are hit with bans on mining, contribute only 7.3% of its total vehicle loan portfolio. Even on the corporate side the portfolio is very well diversified as can be seen from the Figure 13 in the following page.
Page 9 of 29
Figure 12 Indusind's vehicle loan diversification across geography
Figure 13 Indusind's corporate portfolio diversification by segment
0.9% Rajasthan 2.3% 2.3%
4.0%
3%
12.8%
3%
2% 2% 1%
Andhra Pradesh
2.6%
Kerala
2.7%
9.6%
Power Gems and Jewellery Constn related to infra.- EPC Pharma
Uttar Pradesh Haryana
3.1%
1%
1%
Maharashtra
2.9%
NBFCs (other than HFCs) Lease Rental
2% 2%
Tamil Nadu
Karnataka Punjab
4.1%
Steel
Delhi Assam
8.9%
4.4%
Real Estate 31%
Jharkhand
Petroleum
Chhattisgarh 7.0%
Odisha 8.1%
Other Industries Consumer Finance
Goa
7.2%
Others Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Reason 6: Indusind Marketing differentiated business model
&
Financial
Services
provides
a
Most of the origination for the consumer banking division is handled through its associate — IndusInd Marketing and Financial Services (IMFS) — which has more than 729 outlets as of H2 FY13. In comparison, most of the larger NBFCs, including Kotak Mahindra (KMB IN, Rs 778, Not Rated), which are involved in vehicle financing, have a lower presence than IndusInd. This is clearly reflected in terms of the market leadership of IndusInd in a number of sub-segments. Figure 14 Indusind's bank's marketing outlets managed by its associate Indusind Marketing and Financial Services
729 660
700
578
600 499 500
1400
Marketing outlets
800
410
Figure 15 Number of branches and marketing outlets by banks and NBFCs involved in vehicle financing - FY13
1229 1200 1000 729
800
410
400
600
300
400
200
657 542
539
507 275
200
100 0
0
Source: Espirito Santo Investment Bank Research, Company Data
Indusind - Indusind - M&M Fin Sundaram Marketing Marketing outlets + outlets Branches
SHTF
Kotak Prime + Bank
Magma
Source: Espirito Santo Investment Bank Research, Company Data
Commenting on market share Mr Sobti said - “we don't want to come back and say we are number two in any vehicle category. And I think we have the ability to do that, that's without sacrificing either quality or pricing.”
Page 10 of 29
The associate (IMFS) has around 5,200 employees as of FY12, who do most of the origination for IndusInd Bank. The associate is compensated on a commission basis which is reflected in the form of higher ―other expenses‖ for IndusInd. Along with other retail focused banks like HDFC Bank (HDFCB IN, Rs 723, BUY, 721, Rs 721) and Kotak Mahindra bank, IndusInd has higher nonemployee expenses. Figure 16 Average "Non-Employee Expenses" to asset ratio for Indusind
1.64%
1.54%
1.60% 1.40%
2.00%
Indusind
1.80% 1.40%
Figure 17 Non-employee expense to asset is higher for retail banks
1.66%
1.41%
1.79%
1.80%
1.66% 1.55%
1.60%
1.26%
1.40%
1.20%
1.20%
1.01%
1.00% 1.00%
0.80%
0.81%
0.80%
0.60%
0.60%
0.40%
0.40%
0.20%
0.20%
0.00%
0.00% HDFC Bank Source: Espirito Santo Investment Bank Research, Company Data
Indusind
Kotak
ICICI Bank
Yes Bank
Source: Espirito Santo Investment Bank Research, Company Data
The fast growth in the “other miscellaneous” expenses is in line with the fast growth of its consumer finance portfolios during the FY08-FY12 period. Figure 18 Misc expenses growth for IIB (with non-employee costs)...
Misc Expenses
70.0%
Consumer loan growth
50.0%
62.5%
47.2% 40.0%
60.0% 50.1% 50.0%
40.0% 30.0%
36.3%
40.0%
20.0%
28.5%
30.0%
15.6% 10.7%
10.0%
20.0% 10.0%
Figure 19 ...Is highly correlated to the consumer portfolio growth of IIB
7.6%
0.0% (2.3%)
0.0%
(10.0%)
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Summing up – minimal asset quality impact for Indusind Against this backdrop we believe that the bank is well placed to manage its credit costs below the management guidance of 50-65bps and we expect slippages to normalize to 1.10% of average advances, as FY13 slippages were high due to the slippage of one large account. Figure 20 Credit costs estimates for Indusind Bank
Figure 21 Slippage ratio estimtes for Indusind Bank
Credit Costs 1.00% 0.90% 0.80% 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00%
Slippages / Avg Loans (%) 1.60%
0.89%
1.40%
0.69%
1.34% 1.22%
1.16%
1.20% 0.54% 0.47%
Source: Espirito Santo Investment Bank Research, Company Data
0.48%
0.48%
1.00%
1.10%
1.10%
0.82%
0.80% 0.60%
0.40% 0.20% 0.00%
Source: Espirito Santo Investment Bank Research, Company Data
Page 11 of 29
Questioning the scalability of the bank Concern 1: IndusInd has the highest exposure among private banks to vehicle loans Among private banks IndusInd is the most dependent on vehicle loans for growth. As a % of advances, 46% of its total advances and 92% of its consumer portfolio is vehicle loans, which is the highest among private sector banks. Figure 22 Vehicle portfolio of private bank as of FY13
Figure 23 Vehicle loan portfolio as a % of total advances - FY13
Vehicle Loan portfolio (Rs Bn)
Vehicle loans as a % of Total Advances
600 501 500 400 300
260 206
206
200 76
100 0
Source: Espirito Santo Investment Bank Research, Company Data
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
46%
31% 21% 9% 4%
Source: Espirito Santo Investment Bank Research, Company Data
Even in terms of the absolute size of its portfolio, IndusInd has a very large CV/CE book compared to those of HDFC Bank and ICICI Bank. The other major component of its vehicle loan portfolio is retail consumer, with subsegments of Cars & Utility vehicles, 2 Wheelers and 3 Wheelers which together form a portfolio of around Rs 79bn. Figure 24 Vehicle loan portfolio split into sub-segments - FY13
CV/CE
600 500
Car/UV/3W
2W
30
400
300
309 110
200
19 60
100
161
149
127
0
128 78
76
Source: Espirito Santo Investment Bank Research, Company Data
Concern 2: IndusInd’s retail advances growth has come off its previous highs As can be seen from Figure 25, IndusInd‖s advances growth over the last several years was dependent on the higher growth of its consumer banking portfolio, which at the peak during Q3‖12 grew at a rate of 48% and has now tapered off to close to 30% YoY growth as of Q4 FY13.
Page 12 of 29
Figure 25 Composition of advances and growth rates - FY13 Advances
SME 8%
Consumer Banking
Corporate Banking
60% 48%
50%
Mid Corporate 15%
40% 40%
Vehicle 46%
42%
44%
47%
47%
44% 38%
35%
30%
29% 30%
22%
26% 23%
20%
Large Corporate 27%
10%
Other Retail 4%
0%
Source: Espirito Santo Investment Bank Research, Company Data
Mitigating growth concerns Reason 1: Despite falling auto sales Indusind has managed to maintain growth in vehicle loans
Please refer to the section “Persistence Pays” in page 8
on
We have correlated the industry quarterly sales growth number and advances growth of IndusInd and we have noticed that across product segments IndusInd has managed to grow at a faster pace than the Industry auto sales growth rates during FY11-FY13. Since FY11, when the industry sales growth and IndusInd‖s advances growth were broadly in line, the bank has managed to widen this gap significantly over the last 3 years which is a testament to its ability to tide through low growth phases. Figure 26 IIB Vehicle portfolio and industry auto sales - YoY Growth
60%
Indusind - Vehicle
Industry Vehicle Sales
Figure 27 IIB CV portfolio and industry CV sales - YoY Growth
60%
Indusind - CV
Industry CV Sales
50%
50%
40%
40% 30%
30%
30%
21%
20%
20%
10%
10%
0%
0% (3%)
(10%)
(9%)
(20%)
(10%)
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Also, the higher growth is an indicator of the banks‖ ability and willingness to gain market share which is the management‖s stated intention. Figure 28 IIB Car portfolio and industry Car sales - YoY Growth
80%
Indusind - Cars
Figure 29 IIB UV portfolio and industry UV sales - YoY Growth
Industry Car Sales
70%
Indusind - UV
Industry UV Sales
60%
60% 47% 40%
50% 44% 40%
20%
36%
30%
0% (20%) (40%)
Source: Espirito Santo Investment Bank Research, Company Data
20%
(20%)
10% 0%
Source: Espirito Santo Investment Bank Research, Company Data
Page 13 of 29
Figure 30 IIB 3W portfolio and industry 3W sales - YoY Growth Indusind - 3W
60%
Figure 31 IIB 2W portfolio and industry 2W sales - YoY Growth
Industry 3W Sales
Indusind - 2W
50%
50%
Industry 2W Sales
40%
40% 30%
30%
20%
29%
20% 11% 5%
10% 0%
10% (1%)
0%
(10%) (20%)
(10%)
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data, SIAM
Reason 2: Several levers still available to drive advances growth in vehicle loans As we have mentioned previously, IndusInd drives its consumer finance business through its associate IndusInd Marketing and Financial Services (IMFS), which is the main originator of the bank‖s consumer finance advances. We believe that the distribution network of IndusInd together with IMFS make it a formidable competitor when compared to NBFCs like Sundaram (SUF IN, Rs 533, BUY, FV: Rs 660), Shriram (SHTF IN, Rs 786, NEUTRAL, FV: Rs 773), M&M finance (MMFS IN, Rs 248, BUY, FV: Rs 246), Magma (MGMA IN, Rs 97, Not rated) and Kotak (KMB IN, Rs 778, Not rated).
Market leadership helps in maintaining growth without sacrificing margins or quailty
When one compares IndusInd with other competitors on a number of parameters, including advances per marketing office and number of field offices and total employees size, we can see that IndusInd still has significant headroom for capacity addition and we believe the bank can continue to grow its consumer finance business on a sustainable basis. Figure 32 Average advances per marketing office for banks and NBFCs FY13
Advances per marketing office
Bank
700 583
600
Total Employees including associates
o/w Field officers
18,000 16,000
500
363
400 300
200
Figure 33 Number of employees in bank, NBFC including associates and field officers - FY13
181
366
14,000
368
12,000
10,000
205
8,000
100
6,000
0
4,000 Indusind Sundaram Kotak M&M Fin Bank (incl Prime + Bank Bank Branches) branches
Magma
SHTF
Source: Espirito Santo Investment Bank Research, Company Data
2,000
0 Indusind
SHTF
M&M Fin
Magma
Source: Espirito Santo Investment Bank Research, Company Data, Data for Indusind is our estimates
Reason 3: Developing newer asset class for a rainy day Over the last couple of years management has been quite prudent in diversifying its consumer finance book away from the vehicle loan portfolio by investing in other segments such as loan against property (LAP), mortgages, credit cards and used vehicle loans. Sell down of portfolio: During Q4FY13, IndusInd sold down close to Rs30bn of loans or 1% of its portfolio because of which the advances growth has declined to 26% for FY13. Adding this back to the portfolio takes the advances growth to the 35% level for FY13.
Retaining sell down portfolio on balance sheet can help Indusind to sustain growth
LAP – Increasing exposure: As can be seen from the rapid expansion in Figures 34 and 34, the LAP portfolio has been growing at a significant rate from Rs4bn as of FY12 to Rs14bn as of FY13. Further, the fact that the proportion of LAP within its consumer banking portfolio has increased from
Page 14 of 29
2.4% in FY12 to 6.3% as of FY13 shows that LAP has been driving growth for IndusInd. Figure 34 Indusind's LAP portfolio (Rs mn)
Figure 35 Indusind's LAP portfolio as a % of total advances
16,000
14,010
14,000
6.3%
6.0%
12,000
10,690
3.9%
4.0%
7,830
8,000
5.0%
5.0%
10,000
6,000
7.0%
3.0% 3.0%
5,560 4,080
2.4%
2.0%
4,000 2,000
1.0%
0
0.0%
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Unsecured – acquisition of Deutsche Bank India credit cards: IndusInd chose the inorganic route to get a foothold in the unsecured lending business by acquiring Deutsche Bank‖s credit card business. This has given the bank another additional product that can drive growth going forwards. Figure 36 Indusind's Credit Card / PL portfolio (Rs mn)
Figure 37 Indusind's Credit Card / PL portfolio as a % of advances
4,000
1.6% 3,330
3,500 3,000
2,500
3,420
3,030
2,810
1.5%
1.5% 1.5%
1.5%
2,470
1.5%
1.5%
1.5% 1.5%
2,000
1.5%
1,500
1.4%
1.4%
1,000
1.4%
500
1.4%
0
1.4%
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Used Vehicle loans – leveraging existing customer relations: Another product segment where IndusInd has been increasingly focusing on is the used vehicle loan segment, which is currently offered to its existing customers. As a % of the portfolio, the used vehicles segment accounts for around 10%, while it accounts for around 15% of the incremental disbursements for IndusInd, which clearly illustrates that IndusInd is relying on used vehicle loans for maintaining its growth. Figure 38 Indusind banks vehicle portfolio composition - FY13
Figure 39 Indusind banks vehicle disbursements composition - FY13
Disbursements
Portfoio 10%
15%
85%
90%
New Vehicles
Used Vehicles
Source: Espirito Santo Investment Bank Research, Company Data
New Vehicles
Used Vehicles
Source: Espirito Santo Investment Bank Research, Company Data
Page 15 of 29
Liabilities & Fee Income – can they keep pace? Well distributed branch network Compared with the other aspirant new generation banks, IndusInd has a much more diversified branch distribution network. As can be seen from the figures below, both Kotak Mahindra Bank (KMB IN, Not rated) and Yes Bank (YES IN, BUY, FV: Rs 386) have a high Northern and Western Indian focus and lower presence in the Southern region. IndusInd on the other hand has a much more equally distributed presence across the country. Figure 40 Branch distribution - FY13
Figure 41 Branch distribution - FY13
IndusInd Bank
3%
Figure 42 Branch distribution - FY13
Kotak Mahindra 1%
Yes Bank
5% 13% 24%
5%
5%
North
26%
West
22%
13%
West
North
South
South
10%
4%
North
15%
43%
Central
Central
East
East
N-E
N-E
West South
9%
Central East N-E
28%
27% 38% Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
IndusInd has expanded its presence into the North, East and Central India regions, which are relatively under banked, compared with the Western and Southern regions. This has helped the bank mobilize higher deposits from these regions as can be seen from the increasing proportion of deposits from the central and northern regions.
Figure 43 Branch distribution evolution for Indusind Bank
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
West
Figure 44 Deposits composition by geography for Indusind Bank
10%
11%
11%
11%
12%
13%
15%
16%
32%
28%
29%
27%
20%
24%
23%
25%
21%
21%
North
South
20%
East
Central
20%
North-East
Source: Espirito Santo Investment Bank Research, Company Data
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
14%
4% 10% 10%
5% 10% 10%
9% 7% 10%
28%
30%
25%
27%
43%
46%
49%
47%
5% 9%
West
North
South
East
Central
North-East
Source: Espirito Santo Investment Bank Research, Company Data
Stable branch addition strategy compared with peers Over the last 8 quarters, IndusInd has demonstrated a steadier branch expansion strategy compared with the other aspiring banks, which we think will play out well as the branches mature at a steady rate. As can be seen from Figure 46 below, IndusInd has a steady run-rate of branch additions of around 20-25 per quarter, which is much more stable compared with the branch addition style of Kotak or Yes Bank.
Page 16 of 29
Figure 45 Number of branches for Indusind, Kotak and Yes
Q4'11
Q1'12
Q2'12
Q3'12
Q1'13
Q2'13
Q3'13
Q4'13
Figure 46 Number of branch additions during the quarter
Q1'12
Q4'12
Q2'12
Q3'12
Q4'12
Q1'13
Q2'13
Q3'13
Q4'13
60 50
600
50
500 500
437
400
430
321
300
35 2624
30
300
214
20
200
41
39
40
30 25 23 18
212020
15
262525 19
100
10
0
0
18 12
11 7 2 0
Source: Espirito Santo Investment Bank Research, Company Data
Source: Espirito Santo Investment Bank Research, Company Data
Retail deposits primarily to fund consumer business The management‖s stated object for its Asset Liability Management (ALM) is to fund its consumer finance business through the retail liabilities. The definition of retail liabilities according to the management will include CASA and retail term deposits. Given that the consumer finance business is about 50% of its business, this implies that the bank has to match this by having around 50% of its liabilities funded through retail deposits. As can be seen from Figure 47, CASA + retail term deposits already constitute around 50% of IndusInd‖s funding profile. While the CASA momentum has been strong thanks to the strong savings deposits growth driven by savings deposit rate deregulation, the bank has seen the proportion of its retail term deposits decline during this period. However, we believe this is likely to improve going forwards primarily as the distribution expansion will start to pay-off in terms of improved efficiencies as the branches mature. Figure 47 Deposit composition for Indusind
CASA 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Retail TD + CASA
Figure 48 Deposits per branch for Indusind (Rs mn) FY10
Bulk
FY11
FY12
H2FY13
3,000 2,576 2,585 2,500
51%
49%
50%
50%
50%
2,000
1,500
24%
24%
22%
22%
21%
1,805
1,169
1,010 541
500
25%
27%
28%
Source: Espirito Santo Investment Bank Research, Company Data
28%
874
1,000 420
484
594 89
29%
137
0
Source: Espirito Santo Investment Bank Research, Company Data
During FY10-FY13 period, IndusInd has added 290 branches and hence the deposit per branch metric has declined in most of the regions like North, South and East India during this period. As the newly established branches improve their efficiencies back to the FY10 levels as they mature, we believe the bank has significant scope to drive retail liabilities from these newly established branches.
Page 17 of 29
CASA momentum driven through higher savings interest rate IndusInd Bank, along with Kotak and Yes Bank, is one of the three listed banks to have increased the savings deposits rate post the deregulation of SA. This has helped the bank improve its SA ratio which has sort of stabilized around the 11% level. IndusInd‖s savings deposit mobilization run rate has improved to around the Rs8.5bn levels over the last couple of quarters and this has helped the bank improve the SA ratio by more than 200bps in two quarters. Figure 50 Incremental savings deposits mobiliztion per quarter for Indusind (Rs mn)
Figure 49 Savings deposits (Rs bn) and SA ratio (%) for Indusind Bank
SA
Increamental SA mobilization
SA ratio
80.0 11.1% 11.4% 11.1%
70.0
60.0
8.9% 9.2% 8.6%
12.1%
13.0% 14.0% 12.0%
9.8%
10.0%
50.0
8.0%
40.0 6.0%
30.0
4.0%
20.0 10.0
2.0%
0.0
0.0%
Source: Espirito Santo Investment Bank Research, Company Data
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
8,500 8,710 6,830
7,171
4,449
1,730
1,702 650
Source: Espirito Santo Investment Bank Research, Company Data
Also, IndusInd has managed to keep pace with the other two aspirant banks — Kotak and Yes — in terms of its savings accounts mobilization, which give us enough confidence about the bank‖s ability to sustain this momentum despite high level of competition from its immediate peers. Figure 51 Incremental savings deposits mobiliztion per quarter for Indusind, Kotak and Yes Bank (Rs mn)
Indusind
Kotak
Yes
13.0
14.0 12.0
8.8
8.6
8.0
7.2
6.8
6.0 3.7
4.0 2.0
11.2
10.3
10.0
6.9
6.2 4.5 4.9 5.0
2.6
1.7 0.0
0.6
8.7
8.5
6.5
3.9
1.7 0.1
0.0 -2.0
-0.2
Source: Espirito Santo Investment Bank Research, Company Data
Initiatives on improving fee income streams have yielded results The management took several initiatives in FY11 to improve and diversify its fee income streams such as: 1.
Distribution agreement with HDFC Limited: In May‖11 IndusInd signed an agreement with HDFC Limited to distribute the latter‖s home loan product. This helped it to complete the product offering to its retail liabilities customers while earning fee income leveraging its distribution network.
2.
Acquisition of Deutsche Bank India credit cards: Along with providing an additional product for its liabilities customers, the acquisition of Deutsche Bank‖s Indian credit card business has helped IndusInd to boost its third party distribution and general banking fees income.
Page 18 of 29
3.
Boost from bancassurance, especially life insurance: IndusInd has a tie up with Aviva life insurance to distribute the latter‖s products. Over the last several quarters, Aviva has reduced its agency channel and relied instead on bancassurance. Hence, despite the lower volumes growth in the life insurance industry, IndusInd has managed to improve its bancassurance fees by increasing its share of Aviva‖s sales.
4.
Rollout of branch-centric retail FX product: During FY11, IndusInd has invested in developing a branch-centric retail FX product. This has helped the bank to improve its forex income stream as can be seen from both the annual growth rates (Table 6) and the quarterly run-rate (Fig 52).
5.
Building the investment banking fee steam: Another focus area of the bank has been the development of its investment banking team which has also provided the bank with strong fee income growth.
Table 6
Management has reiterated their focused approach for their investment banking division – “We've selected three or four verticals on which we will do more specialization” – CEO Mr Ramesh Sobti
Fee income growth for Indusind
FY09
FY10
FY11
FY12
FY13
Trade & Remittances
28%
39%
55%
32%
42%
TPP Distribution Income
62%
60%
49%
52%
11%
General Banking Fees
33%
-2%
-8%
29%
26%
Loan Processing fees
8%
103%
30%
30%
45%
-
-
179%
31%
82%
Forex Income
149%
-11%
71%
83%
42%
Total
48%
36%
43%
45%
36%
Investment Banking
Source: Espirito Santo Investment Bank Research, Company Data
Figure 52 Indusind Forex fee income
Figure 53 Indusind Investment banking fees
Forex Income fees
900
600
350
400
317 327
300
200 117
312
283
300
460
423
398
400
523
500
200
634658
601
444
450
732
700
Investment Banking fees
500
829
800
250 150
166 156 186
100
100
50
0
0
Source: Espirito Santo Investment Bank Research, Company Data
52
113 100
93
70
2
355
213
185
200
266
328
80
24
Source: Espirito Santo Investment Bank Research, Company Data
Changes to estimates and fair value We have marginally increased our revenue and PAT estimates by 5% and 3%; however, our BVPS estimate for FY14E increases by 41% primarily as the bank raised equity capital of Rs20bn at a 266% premium to trailing (Q2‖13) book value during FY13. This along with higher target multiple, which increased to 3.7x along with the roll over effect from FY12 to FY14E, increases the fair value from Rs313 to Rs593 (89% above our last published valuation). Table 7
Espirito Santo vs. Consensus New
Old
% Change
Rs mn FY14E Total Income PAT BVPS (Rs)
FY15E
FY14E
FY15E
FY14E
FY15E
45,249
57,218
43,127
NA
5%
NA
13,657
17,057
13,292
NA
3%
NA
164
192
116
NA
41%
NA
Source: Espirito Santo Investment Bank Research, Company Data
Page 19 of 29
Valuations – expensive but fundamentals support We forecast IndusInd Bank to deliver a RoE of c.17.1% in FY14E and expect RoE to increase steadily further to c.18.4% in FY15E. We value the bank at 3.7x FY14E P/B, which is c.10% discount to our target multiple on HDFC Bank (4.1x FY14E P/B). 1.
Unique customer segment: IndusInd Bank is in a unique position among the smaller aspirant private banks to target a lucrative customer segment – namely the SRTO/STO segment and retail consumers who are relatively under banked and offer higher risk-return ratios.
2.
Strong franchise with hidden strengths: IndusInd Bank, along with its associate Indusind Marketing and Financial Services, has an enviable franchise with strong distribution network. With more than 1,300 customer touch points (branches + marketing outlets of associates) and a strong sales force of more than 8,000 (more than 18,000 total employees) Indusind‖s franchise packs a punch compared with most aspirant private banks and vehicle finance NBFCs.
3.
Resilience of the SRTO/STO model suggests stable asset quality: Our analysis of IndusInd‖s asset quality suggests that its main customer segment, SRTO/STO, is in a better position to handle the economic slowdown because of flexible P&Ls and balance sheets. Hence, the bank should in our view sail through the current economic downturn without any significant asset quality deterioration – Detailed analysis in pages 4-9
4.
Investing in new product segments and offering: Over the past few years IndusInd has used both the organic (used CV, LAP, retail FX & investment banking) and inorganic (Deutsche Bank credit card division) route to build new products for its target customers. This we believe will allow IndusInd to sustain its growth rates without compromising on margins or asset quality.
5.
Stable branch expansion will drive liabilities: IndusInd‖s branch expansion strategy in our view has been more stable and diversified compared with Kotak and Yes Bank. Further, our analysis of the geographic spread of its deposits mobilization suggests branch expansion will yield results as the newly added branches stabilize and efficiencies improve (as of FY10, its branch network in North, East and South India - 67% of total branches are currently operating 37% below their peak efficiency). Further, the bank has strategically increased its savings account rate and has been a beneficiary of the savings deposits deregulation.
Table 8
Two stage Gordon growth model used for valuation for Indusind Bank
Two Stage Gordon Growth CoE Risk free rate Our Beta Assumption Risk premium G - Growth phase g - final Sustainable RoE Initial Payout ratio (P) Perpetual Payout ratio (Pn) Implied P/B FY14E ABVPS Investment in Subs Target price Current Price Upside / Downside Our Stance
Indusind 12.7% 7.25% 0.90 6.0% 29.0% 6.0% 17.5% 15.0% 35.0% 3.70 160 0 593 511 16% BUY
Source: Espirito Santo Investment Bank Research, Company Data
Page 20 of 29
Historical valuations – justifiably trading at a premium IndusInd‖s valuations have run up significantly over the past several months driven by a rerating of the entire private banking space. However, we believe that over the longer term the premium valuation of IndusInd is sustainable as it is driven by improvement of its fundamentals as can be seen from the improved RoE and RoA profiles of the bank. Figure 54 Rerating for IndusInd driven by RoE improvement...
Figure 55 ...as well as RoA improvement
Indusind Bank 4.0
PB
Indusind Bank 30%
RoE
3.5
25%
3.0
PB
2.50%
RoA
3.5
1.75%
3.0 20%
2.5 18%
2.0 1.5
15% 10%
1.0 0.5
4.0
2.5
1.50%
2.0 1.00%
1.5 1.0
5% 5%
0.0
0%
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
2.00%
0.50%
0.5 0.0
0.27%
0.00%
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
As can be seen from the tables below, both IndusInd and HDFC Bank have been able to sustain their valuations, thanks to improving fundamentals. Given that we do not see any asset quality risks or growth risks in the next couple of years for IndusInd, we think that the premium valuation is likely to be sustained for IndusInd. Table 9
Rolling average P/B, RoE and RoA of Indusind
Rolling basis FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 - YTD
Average P/B 2.0 2.4 1.7 2.3 1.3 1.6 2.6 2.3 2.4 2.8
Average RoE 15.4% 5.8% 7.0% 9.0% 14.6% 17.9% 18.3% 18.2% 17.7% 17.9%
Table 10
Average RoA 0.78% 0.29% 0.34% 0.46% 0.84% 1.26% 1.47% 1.57% 1.69% 1.75%
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Rolling average P/B, RoE and RoA of HDFC Bank
Rolling basis FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 - YTD
Average P/B 2.7 3.5 3.5 3.9 2.7 3.0 3.6 3.4 3.6 3.7
Average RoE 18.1% 18.6% 18.6% 17.0% 16.3% 16.6% 17.7% 19.3% 20.9% 21.7%
Average RoA 1.49% 1.43% 1.30% 1.18% 1.26% 1.47% 1.65% 1.74% 1.83% 1.88%
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Valuation for IndusInd is expensive in the short term as it is trading +2 STD above its average valuation multiple. We believe that from a fundamental point of view the valuation will be sustained due the strength of the franchise. Figure 56 P/B band chart for IndusInd since FY04 4.0
Figure 57 P/B band chart for IndusInd since FY10
PB
Std Dev(-2)
Std Dev(-1)
Mean
Std Dev(+1)
Std Dev(+2)
3.5
3.0 2.5 2.0 1.5
1.0 0.5 0.0
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
3.5 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5
PB
Std Dev(-2)
Std Dev(-1)
Mean
Std Dev(+1)
Std Dev(+2)
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Page 21 of 29
Relative valuation IndusInd is currently trading at a FY14E P/Adj P/B of 3.2x, which is c.10% discount to HDFC Bank. It is trading at a premium to other private banks such as ICICI Bank, Axis Bank and Yes Bank. Table 11
Relative valuation table - Espirtio Santo Estimates
Espirito Santo Estimates
(Rs)
Fair Value Rs
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
1,229
1,229
1.58%
1.58%
13.7%
14.6%
14.8
12.7
1.98
1.79
31,092
719
773
1.87%
1.91%
21.5%
22.5%
20.4
16.3
4.09
3.40
NEUTRAL
13,041
1,533
1,548
1.53%
1.53%
16.5%
17.1%
12.6
10.6
1.99
1.74
BUY
4,858
511
593
1.70%
1.72%
17.1%
18.4%
19.5
15.6
3.19
2.75
VYSB IN
BUY
1,749
621
711
1.30%
1.33%
16.0%
17.4%
12.3
9.8
1.85
1.59
DEVB IN
BUY
216
47
63
1.15%
1.31%
12.4%
15.3%
8.9
6.3
1.14
0.98
Mkt Cap
Ticker
Ratings
$mn
ICICI Bank
ICICIBC IN
BUY
25,770
HDFC Bank
HDFCB IN
BUY
AXSB IN IIB IN
ING Vysya DCB
Axis Indusind
CMP
RoA (%)
ROE (%)
P/E
P/B FY15E
Source: Espirito Santo Investment Bank, Company Filings
In figure 58 below we show the discount of IndusInd over HDFC Bank and in figure 59 we show the premium of HDFC Bank over IndusInd. Both these suggest that the bank has re-rated over the past several years even on a relative basis when we compare it with HDFC Bank. The current discount is one of the lowest levels seen since FY11. Figure 58 P/B band chart for Indusind since FY04
20% 10% 0% -10% -20% -30% -40% -50% -60% -70% -80%
Discount of Indusind over HDFC Bank
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Figure 59 P/B band chart for Indusind since FY10
250%
Premium of HDFC Bank over Indusind
200% 150% 100% 50% 0% -50%
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Page 22 of 29
Company snapshot Promoted by the Hinduja Group in 1994 (15.3% promoter holding as of Mar ‖13), IndusInd Bank is a new generation aspirant private sector bank targeting to emulate the success of its larger peers HDFC Bank, ICICI Bank and Yes Bank. It is one of the consumer lending focused banks along with HDFC Bank and Kotak Mahindra Bank with vehicle loans constituting 46% of its advances portfolio. The bank has transformed itself post the management change in Feb 08 when Mr.Ramesh Sobti and team joined the bank from ABN Amro. Since then, the bank has improved its asset quality, RoA and RoE and has significantly outperformed the BANKEX (more than 383% outperformance since Feb‖08). Figure 60 Branch distribution of IndusInd 3%
Figure 61 Advances mix as of Q4 FY13
IndusInd Bank
SME 8%
13%
Mid Corporate 15%
North
24%
West
Vehicle 46%
South
10%
Central East
Large Corporate 27%
N-E
22% 28%
Promoted by the Hinduja Group in 1994, IndusInd is a consumer lending focused bank, with vehicle loans constituting 46% of its advances portfolio.
Figure 62 RoE, RoA profile
18.8% 17.5% 17.1% 18.4% 20% 18.1% 17.7% 18% 16% 14% 12% 10% 8% 6% 4% 1.10% 1.41% 1.53% 1.61%1.70%1.72% 2% 0%
Other Retail 4%
Source: Espirito Santo Investment Bank Research, Company Data
RoA
Source: Espirito Santo Investment Bank Research, Company Data
RoE
Source: Espirito Santo Investment Bank Research, Company Data
Key risks and sensitivities Bear case: Our low case valuation is based on lower multiple which we arrive using historical valuation band charts. From this we value it +1STD above its historical multiple, which is 2.7x. Base case: We value new generation private sector banks using Two stage Gordon growth model based on which we arrive at a target P/B multiple of 3.7x.
Table 12 Key catalyst/events Event
Impact
Date
Q1 FY14 Results
Medium
July‖13
Q2 FY14 Results
Medium
July‖13
Source: Espirito Santo Investment Bank Research
Bull case: In the bull case we value IndusInd in line with HDFC Bank and hence give it a target multiple of 4.1x. Table 13
Key sensitivities
Low Case
Base Case
High Case
432
593
657
-15%
16%
29%
164 2.7x +1STD above historical mean
164 3.7x – Based on our two stage Gordon growth model
164 4.1x – Our target multiple for HDFC Bank
Fair Value Upside/downside: FY 14E BVPS P/B
Source: Espirito Santo Investment Bank Research, Company Data
ESIB vs. consensus: expect consensus to upgrade We are broadly in line with consensus in terms of our estimates. Table 14
Espirito Santo vs. Consensus Espirito Santo
Consensus
% Gap
Rs mn FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
Total Income
45,249
57,218
46,525
58,423
-3%
-2%
PAT
13,657
17,057
13,842
17,470
-1%
-2%
164
192
165
194
-1%
-1%
BVPS (Rs)
Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg
Page 23 of 29
Indusind Bank Recommendation: Fair Value:
BUY Rs 593
Share Price: Upside / Downside
Rs 511 16%
3 Month ADV ($m) Free Float 52 Week High / Low
$13.6mn 85% Rs 527 / Rs 279
Bloomberg: Model Published On:
IIB IN Equity 20 May 2013
Shares In Issue (mm) Market Cap (Rs bn) Market Cap ($mn) Promoter Holding
523 240 4,858 15%
Forthcoming Catalysts Q1 FY14 Results Q2 FY13 Results
Jul 13 Oct 13
Espirito Santo Securities Analysts Saikiran Pulavarthi
[email protected] Sri Karthik Velamakanni
[email protected]
Shareholding Pattern (Mar'13)
Promoter 15%
Others 36%
FII 40% DII 9%
Loan Book (FY13) Auto / Car /2 Wheelers 9%
Three Wheeler / Utility 9%
C&I Banking 27%
Commerci al Banking 15%
CV / CE 28%
SME 8%
RoA and RoE Trends Chart 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
#REF!
18.1%
17.7%
1.10%
1.41%
FY10A
FY11A RoA
18.8%
17.5%
17.1%
1.53%
1.61%
1.70%
FY12A
FY13A
FY14E
RoE
Valuation Metrics
FY11A
FY12A
FY13A
FY14E
FY15E
P/E (x) P/ABV (x) ROE (%) ROA (%) Dividend Yield (%)
41.2 6.3 17.7% 1.41% 0.4%
29.8 5.4 18.8% 1.53% 0.4%
25.1 3.7 17.5% 1.61% 0.6%
19.5 3.2 17.1% 1.70% 0.8%
15.6 2.7 18.4% 1.72% 1.0%
BVPS (Rs) ABVPS (Rs) EPS (Rs) DPS (Rs) Dividend Payout Ratio
82 81 12.4 2.0 16%
97 95 17.2 2.2 13%
142 140 20.3 3.0 15%
164 161 26.2 4.0 15%
192 188 32.7 5.0 15%
P&L Summary Net Interest Income Non Interest Income Total Income % change Wage costs Other costs Operating Expenses % change Pre provision profit % change Provisions PBT % change Income Tax Expense Net Income % change
FY11A 13,765 7,108 20,873 29% (3,826) (6,258) (10,085) 37% 10,788 54% (2,019) 8,769 65% (3,025) 5,782 65%
FY12A 17,042 10,088 27,130 42% (4,855) (8,575) (13,430) 33% 13,701 27% (1,804) 11,897 36% (3,900) 8,028 39%
FY13A 22,329 13,630 35,958 35% (6,615) (10,949) (17,564) 31% 18,395 34% (2,631) 15,764 33% (5,152) 10,612 32%
FY14E 28,139 17,110 45,249 26% (8,533) (13,905) (22,438) 28% 22,811 24% (2,523) 20,288 29% (6,630) 13,657 29%
FY15E 34,918 22,300 57,218 30% (11,007) (17,660) (28,667) 28% 28,551 25% (3,214) 25,337 25% (8,281) 17,057 25%
Balance Sheet Summary Equity Networth Deposits Borrowings Other Liabilities & Provisions Total Liabilities
FY11A 4,660 40,422 343,654 55,254 16,948 456,358
FY12A 4,677 47,308 423,615 86,820 18,108 575,961
FY13A 5,229 76,195 541,167 94,703 21,000 733,065
FY14E 5,229 87,765 691,339 77,027 21,600 877,732
FY15E 5,229 102,212 883,183 97,036 22,200 1,104,631
Cash with RBI ,Call Money and others Investments Advances Fixed Assets Other Assets Total Assets
40,246 135,508 261,656 5,721 12,983 456,358
55,396 145,719 350,640 6,141 17,638 575,961
68,487 196,542 443,206 7,561 17,269 733,065
87,492 210,160 554,008 7,939 18,132 877,732
111,771 250,815 714,670 8,336 19,039 1,104,631
Key ratios Advances Yield Cost of Funds NIM CASA Credit / Deposit Investment / Deposit
FY11A 9.5% 6.4% 3.7% 27.2% 76% 39%
FY12A 11.0% 8.1% 3.5% 27.3% 83% 34%
FY13A 11.3% 8.5% 3.6% 29.3% 82% 36%
FY14E 11.0% 8.2% 3.6% 32.3% 80% 30%
FY15E 11.1% 8.3% 3.6% 35.3% 81% 28%
Gorss NPAs Net NPAs Provision Coverage Ratio
1.0% 0.28% 73%
1.0% 0.27% 73%
1.0% 0.31% 70%
1.1% 0.40% 63%
1.1% 0.43% 61%
Efficiency Ratios Operating Cost/Income Wage costs/Total operating costs
48.3% 37.9%
49.5% 36.1%
48.8% 37.7%
49.6% 38.0%
50.1% 38.4%
Capital Ratios Tier-1 capital Tier-2 capital Capital adequacy ratio
12.3% 3.6% 15.9%
11.4% 2.5% 13.9%
13.8% -12.2% 1.6%
14.3% 1.5% 15.8%
13.2% 1.2% 14.5%
Dupont (as % of Avg assets) NII Other Income o/w Treasury Employee exp Non- Employee exp Operating Profit Provisions PBT (1-tax rate) Return on Assets RoA excl Treasury Avg. total assets/average equity (x) Return on Equity
FY11A 3.4% 1.7% 0.1% (0.9%) (1.5%) 2.6% (0.5%) 2.2% 34.5% 1.4% 1.35% 12.6 17.7%
FY12A 3.3% 1.9% 0.1% (0.9%) (1.6%) 2.6% (0.3%) 2.3% 32.8% 1.5% 1.45% 12.3 18.8%
FY13A 3.4% 2.1% 0.0% (1.0%) (1.7%) 2.8% (0.4%) 2.4% 32.7% 1.6% 1.61% 10.9 17.5%
FY14E 3.5% 2.1% 0.0% (1.1%) (1.7%) 2.8% (0.3%) 2.5% 32.7% 1.7% 1.70% 10.1 17.1%
FY15E 3.5% 2.2% 0.0% (1.1%) (1.8%) 2.9% (0.3%) 2.6% 32.7% 1.7% 1.72% 10.7 18.4%
Source: Espirito Santo Investment Bank Research, Reuters, Company Data
Page 24 of 29
Appendix A Table 15
NBFC Securitized pool performance as of Dec'12 - Crisil Research Delinquencies 3Month Avg MCR
CRISIL
90+
Overdues 180+
Chola
Asset Class
Q3'13
Q4'13
Q3'13
Q4'13
Q3'13
Q4'13
Nov'11
CV
98.9%
97.8%
0.20%
0.60%
0.00%
Feb'12
CV & Tractor
98.2%
97.2%
0.30%
0.60%
0.00%
Mar'12
CV, MUV & Tractor
97.8%
96.1%
0.10%
0.50%
Nov'09
CV
104.8%
99.2%
1.80%
Jan'10
CV
99.5%
97.7%
99.4%
1-90
90+
180+
Q3'13
Q4'13
Q3'13
Q4'13
Q3'13
Q4'13
0.20%
0.50%
0.70%
0.10%
0.20%
0.00%
0.10%
0.20%
0.80%
1.00%
0.10%
0.10%
0.00%
0.10%
0.00%
0.10%
0.50%
0.90%
0.00%
0.10%
0.00%
0.00%
1.60%
0.60%
0.60%
0.30%
0.50%
0.60%
0.60%
0.60%
0.30%
1.60%
1.50%
0.60%
0.60%
0.30%
0.20%
0.60%
0.60%
0.30%
0.30%
94.3%
2.20%
2.20%
0.60%
0.60%
0.20%
0.30%
0.50%
0.60%
0.30%
0.30%
96.5%
92.9%
2.50%
2.40%
0.80%
0.70%
0.30%
0.50%
0.70%
0.70%
0.50%
0.30%
107.3%
94.7%
2.50%
2.40%
0.50%
0.50%
0.20%
0.80%
0.60%
0.60%
0.90%
0.20%
96.1%
95.6%
2.40%
2.10%
0.70%
0.70%
0.30%
0.70%
0.60%
0.60%
0.70%
0.30%
97.3%
95.7%
2.80%
2.70%
0.60%
0.70%
0.20%
1.20%
0.70%
0.80%
1.30%
0.30%
96.1%
94.9%
2.20%
2.20%
0.40%
0.50%
0.40%
0.40%
0.60%
0.60%
0.20%
0.20%
Shriram
Mar'10 - I Mar'10 - II
CV, Car, MUV, CE & Others CV, Car, MUV, CE & Others
Sept'10 - I
CV & Others
Sept'10 - III
CV & Tractors
Sept'10 IV
CV, MUV & Others CV, MUV, Car & Tractor
Sept'10 - V Nov'10 - I Dec'10 - I Dec'10 - II
CV & Others CV, MUV & Others CV, MUV & Others
96.0%
94.5%
2.90%
2.80%
0.40%
0.50%
0.40%
0.40%
0.60%
0.70%
0.10%
0.20%
107.8%
94.9%
3.80%
3.80%
0.60%
0.70%
0.80%
0.70%
0.80%
0.90%
0.20%
0.30%
100.0 %
95.3%
3.40%
3.30%
0.50%
0.50%
0.40%
0.30%
0.70%
0.70%
0.20%
0.20%
94.8%
3.10%
3.00%
0.50%
0.50%
1.00%
1.00%
0.60%
0.60%
0.20%
0.20%
Jan'11 - II
CV & Others
95.7%
Feb'11 - II
CV & Others
106.5%
93.9%
3.40%
3.40%
0.50%
0.70%
0.40%
0.40%
0.70%
0.70%
0.20%
0.20%
Sept'11 - II
CV, PV & Others
96.2%
94.5%
2.50%
2.90%
0.40%
0.50%
0.30%
0.30%
0.40%
0.50%
0.10%
0.10%
Nov'11 - II
CV, PV & Others
93.7%
91.8%
3.40%
3.90%
0.60%
0.70%
0.90%
0.90%
0.80%
1.10%
0.20%
0.30%
Dec'11
CV & Others
98.5%
92.8%
2.70%
3.30%
0.10%
0.10%
0.00%
0.40%
0.40%
0.50%
0.00%
0.00%
Dec'11 V
CV, Tractors & Others
94.0%
92.8%
2.70%
3.20%
0.20%
0.30%
0.50%
0.60%
0.40%
0.60%
0.00%
0.10%
Dec'11 VI
CV & Others
96.7%
93.0%
1.90%
2.50%
0.10%
0.20%
0.30%
0.40%
0.30%
0.40%
0.00%
0.00%
Dec'11 I
CV & Others
98.8%
94.1%
3.60%
4.00%
0.40%
0.30%
0.70%
0.70%
0.50%
0.60%
0.10%
0.10%
CV & PV
96.3%
91.5%
3.00%
4.90%
0.30%
0.30%
1.40%
1.40%
0.70%
1.30%
0.10%
0.10%
CV & Others
98.5%
91.7%
0.80%
1.70%
0.00%
0.00%
1.20%
1.20%
0.10%
0.30%
0.00%
0.00%
Mar'12 III
CV & Others
93.2%
92.2%
1.40%
2.90%
0.00%
0.10%
1.10%
1.30%
0.20%
0.50%
0.00%
0.00%
Sept'12 – I
CV & PV
-
88.0%
-
0.00%
-
0.00%
-
0.80%
-
0.00%
-
0.00%
Sept'12 – II
CV & PV
-
87.4%
-
0.20%
-
0.00%
-
0.50%
-
0.00%
-
0.00%
CV & MUV
102.2%
96.1%
0.70%
0.70%
0.10%
0.10%
0.50%
0.60%
0.30%
0.30%
0.10%
0.10%
Mar'10
CV & MUV
102.0 %
95.9%
1.40%
1.80%
0.80%
0.70%
0.50%
0.50%
0.90%
1.00%
0.70%
0.60%
May'10 - I
Car
99.2%
98.7%
1.10%
1.20%
0.70%
0.70%
0.40%
0.30%
0.70%
0.80%
0.50%
0.60%
1.70%
1.80%
1.00%
0.90%
0.40%
0.40%
0.80%
1.00%
0.70%
0.70%
2.50%
0.60%
0.80%
0.80%
1.00%
0.80%
1.10%
0.40%
0.60%
SRTO Trust 2012 Sansar Trust 2012
Magma Nov'09
May'10 - II
Car
99.2%
100.6 %
Dec'10 - II
CV, CE & Car
96.9%
93.5%
2.10%
Dec'10 - I
CV, CE & Car
97.4%
96.4%
2.30%
2.70%
0.80%
0.80%
0.80%
0.80%
0.70%
0.90%
0.30%
0.50%
Mar'11 - I
CV
97.3%
95.0%
1.80%
2.30%
0.30%
0.30%
0.70%
1.00%
0.50%
0.70%
0.20%
0.20%
Mar'11 - II
CV, Tractor & MUV
98.1%
97.5%
2.10%
2.10%
0.40%
1.20%
0.80%
0.90%
0.60%
0.80%
0.30%
0.60%
Mar'11 - III
CV & Tractor
98.6%
95.8%
1.70%
2.10%
0.50%
0.60%
0.60%
0.80%
0.50%
0.60%
0.30%
0.40%
98.2%
95.5%
2.10%
2.60%
0.80%
0.90%
0.70%
0.80%
0.90%
1.10%
0.60%
0.70%
Mar'11 - IV Sept'11 - I Dec'11 - I
CV, CE, Tractor & Car CV, CE, Tractor & Car CV & MUV
97.5%
95.8%
1.00%
2.10%
0.30%
0.40%
0.60%
0.80%
0.20%
0.40%
0.10%
0.20%
97.1%
94.0%
0.90%
1.90%
0.10%
0.40%
0.60%
0.90%
0.10%
0.30%
0.00%
0.10%
Page 25 of 29
Table 15
NBFC Securitized pool performance as of Dec'12 - Crisil Research
Feb'12 - I
CV, MUV, CE, Tractor & Car CV, MUV, CE, Tractor & Car
93.4%
97.3%
1.00%
2.80%
0.10%
0.30%
0.80%
1.00%
0.20%
0.50%
0.00%
0.10%
97.8%
96.6%
1.00%
1.90%
0.10%
0.30%
0.50%
0.80%
0.20%
0.40%
0.10%
0.20%
CV, MUV, CE, Tractor & Car
97.6%
96.30 %
0.70%
1.70%
0.10%
0.30%
0.60%
0.90%
0.10%
0.30%
0.00%
0.10%
Jun'09 - A
Car & Pick Up
96.3%
105.2%
3.30%
3.00%
2.80%
2.70%
0.60%
0.30%
2.90%
2.90%
2.96%
2.60%
Jun'09 - C
Car & Pick Up
94.9%
94.6%
3.60%
3.50%
2.40%
2.90%
0.90%
0.70%
2.70%
3.20%
2.10%
2.70%
Sept'09 A
Car & Pick Up
93.8%
95.1%
3.90%
3.70%
3.00%
2.90%
1.00%
0.80%
3.00%
3.20%
2.50%
2.70%
Nov'09 B
MUV, Car & CV
98.8%
94.9%
3.10%
2.90%
2.20%
2.20%
0.50%
0.40%
1.90%
2.00%
1.50%
1.70%
Dec'09 A
MUV, Car & CV
97.0%
95.0%
2.70%
2.50%
1.90%
1.90%
0.30%
0.30%
1.70%
1.80%
1.40%
1.60%
Dec'09 B
MUV, Car & CV
96.7%
99.2%
2.80%
2.60%
1.90%
1.90%
0.40%
0.30%
1.70%
1.80%
1.40%
1.50%
Dec'09 C
Car & Pick Up
99.3%
92.9%
3.10%
3.10%
2.20%
2.30%
0.80%
0.70%
2.20%
2.40%
1.80%
2.00%
Mar'10 A
Car & Pick Up
94.2%
92.6%
2.30%
2.40%
1.30%
1.50%
1.00%
0.90%
1.30%
1.60%
0.90%
1.10%
Mar'10 B
Car & Pick Up
96.1%
94.8%
3.20%
3.20%
2.00%
2.20%
0.90%
0.80%
2.00%
2.20%
1.50%
1.70%
Mar'10 C
Car & Pick Up
94.8%
93.3%
2.90%
3.00%
1.70%
1.90%
1.00%
1.00%
1.60%
1.90%
1.20%
1.40%
May'10 A
MUV, Car & CV
96.6%
95.9%
2.60%
2.60%
1.50%
1.60%
0.50%
0.50%
1.20%
1.40%
0.90%
1.10%
Jul'10 A
Car & Pick Up
96.2%
94.4%
0.60%
0.80%
0.20%
0.30%
0.40%
0.50%
0.20%
0.30%
0.10%
0.20%
Aug'10 A
Car & Pick Up
97.1%
94.1%
2.00%
2.30%
1.10%
1.30%
0.80%
0.90%
1.00%
1.20%
0.60%
0.80%
Aug'10 B
Car & Pick Up
96.1%
93.1%
2.70%
2.90%
1.40%
1.60%
0.80%
0.90%
1.20%
1.50%
0.90%
1.10%
Sept'10 B
CV
94.0%
91.3%
3.60%
4.60%
1.50%
2.00%
1.30%
1.40%
1.30%
1.90%
0.70%
1.10%
Dec'10 B
Car & Pick Up
93.1%
95.4%
2.40%
2.90%
1.00%
1.30%
1.00%
1.10%
0.90%
1.20%
0.50%
0.70%
Dec'10 A
Car
97.2%
95.8%
2.30%
2.60%
1.10%
1.40%
0.50%
0.50%
0.80%
1.00%
0.50%
0.70%
Feb'11 A
Car & Pick Up
6.8%
93.8%
2.40%
3.00%
1.10%
1.50%
1.10%
1.10%
0.90%
1.30%
0.50%
0.80%
Feb'12 - II
Feb'12 - III Tata Motor Finance
Source: Crisil Research
Page 26 of 29
Valuation Methodology Please refer page 20
Risks to Fair Value 1.
Key man risk: One of the key risks for IndusInd Bank is the retirement of current CEO Mr. Ramesh Sobti (current age 62 years). Our channel checks suggest that he is most likely to get an extension for another two years. However, there is downside risk to our fair value when the superannuation date for Mr. Sobti approaches.
2.
Concentration of top management: Most of the top management of IndusInd Bank came from the erstwhile ABN Amro. There is downward risk to our fair value if there is high attrition at the top level.
3.
Asset quality risks: While we believe that IndusInd‖s customers are more resilient to a slowdown in the economic activity, a prolonged slowdown will have some implications on the asset quality of the bank which will lead to down side risks for our fair value
4.
Large scale default: During FY13, IndusInd suffered due to a large scale corporate default which has increased its credit costs and slippage ratio during FY13 over FY12. We are currently not factoring in any such default in to our estimates as it was due to a one-off fraud case which impacted the entire banking system including IndusInd. A repeat of such a large scale slippage could lead to downside risks to our fair value.
5.
Lower growth: While we have built in lower advances growth for FY14E and FY15E of 25% and 29%, respectively, a sharp slowdown in the banking system credit growth due to further decline in systemic credit growth could lead to downside risks to our fair value.
IndusInd Bank
IIB IN Buy
550
Trading Buy
Neutral
Trading Sell
Sell
Restricted
Dropped Coverage
500
450
400
350
300
B
B
B
250
200
150 May-10
Aug-10
Report date 2011
Nov-10
Feb-11
May-11
Aug-11
Nov-11
Recommendation
Feb-12
May-12
Aug-12
Fair value
Nov-12
Feb-13 May-13
Share price
August 10
Buy
Rs313.00
Rs256.00
April 8
Buy
Rs330.00
Rs274.00
2010 September 16
Buy
Rs258.00
Rs246.80
Source: Bloomberg, Espirito Santo Investment Bank Research
Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.
Page 27 of 29
IMPORTANT DISCLOSURES 160513 This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Espírito Santo Financial Group S.A. (“Banco Espírito Santo Group”). Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter. Ratings Distribution Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of end of March 2013. Explanation of Rating System 12-MONTH RATING BUY
Ratings Distribution DEFINITION
Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months
As at end March 2013 Recommendation
Total ESIB Research Count % of Total
Total Investment Banking Clients (IBC) Count
% of IBC % of Total
12 Month Rating: NEUTRAL
SELL
Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months
TRADING RATING TRADING BUY
DEFINITION
Analyst expects a positive short-term movement in the share price (max duration 2 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period
TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 2 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period
Buy
229
44.4%
28
60.9%
5.4%
Neutral
181
35.1%
14
30.4%
2.7%
Sell
99
19.2%
0
0.0%
0.0%
Restricted
5
1.0%
4
8.7%
0.8%
Under Review
1
0.2%
0
0.0%
0.0%
Trading Buy
1
0.2%
0
0.0%
0.0%
Trading Sell
0
0.0%
0
0.0%
0.0%
516
100%
46
100%
8.9%
Trading Rating:
Total recommendations
For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com. Share Prices Share prices are as at the close of business on the day preceding publication, unless otherwise specified. Coverage Policy Espírito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Espírito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released. Representation to Investors Espírito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor‖s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Espírito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information. Espírito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents. Ownership and Material Conflicts of Interest Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Espírito Santo Investment Bank Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion. Banco Espírito Santo Group has a qualified shareholding (1% or more) in EDP, Portugal Telecom, Providência and ZON Multimédia. Portugal Telecom has either a direct or indirect qualified shareholding (2% or more) in Banco Espírito Santo, S.A. and Lloyds Banking Group has a shareholding of 3.3% in Espírito Santo Investment Holdings Limited. Bradesco has an indirect qualified shareholding (4.8%) in Banco Espírito Santo, S.A. and has a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM. BES Securities do Brasil S.A. CCVM does not hold a direct or indirect stake in the capital of the company (companies) that are subject of analysis(es)/recommendation(s) in this report, but the Banco Espírito Santo Group within which it is inserted, holds, directly and in some cases indirectly, 1% or more of the equity securities of Bradesco. With the exception of the company mentioned before, BES Securities do Brasil S.A. CCVM does not hold direct or indirect stakes in the capital of the other companies that are subject of analysis(es)/recommendations in this report, and it was not involved in the acquisition, alienation and intermediation of securities issued by these companies in the market. Pursuant to Polish Ministry of Finance regulations, we inform that Banco Espírito Santo Group companies and/or Banco Espírito Santo de Investimento, S.A. Branch in Poland do not have a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital. Mr. Ricardo Espírito Santo Silva Salgado, the CEO of Banco Espírito Santo, S.A. and Chairman of Banco Espírito Santo de Investimento, S.A., is a board member of Bradesco since June 2003. The Chief Executive Officer of Banco Espírito Santo de Investimento, S.A., Mr. José Maria Ricciardi, is a member of EDP‖s General and Supervisory Board. Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis. Mr. Ricardo Abecassis Espírito Santo Silva, a member of the board of Banco Espírito Santo de Investimento, S.A., is a board member of Brazil Hospitality Group. Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers for Altri. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in share offerings of Equatorial, Fibria Celulose, IQE plc, Marfrig, Minerva, Santander, Suzano Papel e Celulose and ZE PAK in the last 12 months.
Page 28 of 29
Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated as a syndicate member in the bond issues of the following companies: EDP, Galp Energia, Jerónimo Martins, Mota-Engil, Portugal Telecom, REN and ZON Multimédia in the last 12 months. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided investment banking services to the following companies: 4imprint, ACM Shipping, AGA Rangemaster Group, Air Partner, Altri, Assura, Burford Capital, Casino Guichard, Cemig, Copel, EDP, Ence, Equatorial, Fibria Celulose, Flybe Group Plc, Galp Energia, Godrej Consumer Products, ImmuPharma, Impax Asset Management Group, Inditex, IQE, Jerónimo Martins, Kcom Group, Kredyt Inkaso, Kruk, Laird, Marfrig, Minerva, Mota-Engil, Novae Group Plc, Portugal Telecom, REN, Rovi, Santander, Semapa, Shaftesbury Plc, Sonae, Sports Direct, Suzano Papel e Celulose, SVG Capital, Ted Baker, The Local Shopping REIT Plc, Tim, Vertu Motors, Workspace Group Plc, Xchanging, ZE PAK and ZON Multimédia in the last 12 months. Banco Espírito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Espírito Santo Group, through ES Concessões, S.G.P.S., S.A., have created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi. Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist. Market Making UK Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com. Confidentiality This report cannot be reproduced, in whole or in part, in any form or by any means, without Espírito Santo Investment Bank Research‖s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A. Regulatory Authorities For information on the identity of the Regulatory Authorities that supervise the entities included within Espírito Santo Investment Bank Research please see http://www.espiritosantoibresearch.com. IMPORTANT DISCLOSURES FOR U.S. PERSONS This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarter in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, and Execution Noble Limited, in the United Kingdom, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Espírito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended. This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors. E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc. Contact Information Garreth Hodgson
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Page 29 of 29
