India Daily, January 25, 2017

INDIA DAILY January 25, 2017 India 24-Jan 1-day 1-mo 3-mo Sensex 27,376 1.0 5.1 (2.5) Nifty 8,476 1.0 6.1 (2.5) Contents Global/Regional indices Dow Jones 19,913 0.6 (0.1) 9.6 Daily Alerts Nasdaq Composite 5,601 0.9 2.5 6.0 Results FTSE 7,150 (0.0) 1.2 1.9 HDFC Bank: Minor bruises Nikkei 19,054 1.4 (1.9) 9.7 Hang Seng 23,066 0.5 6.9 (2.1) Bharti Airtel: The pain is evident KOSPI 2,067 0.1 1.5 1.5 HCL Technologies: Big bets Value traded – India Cash (NSE+BSE) 233 168 58 Asian Paints: Wait for the right entry price continues Derivatives (NSE) 5,652 3,508 3,765 Zee Entertainment Enterprises: Margin disbelief misplaced Deri. open interest 3,157 2,789 3,068 TVS Motor: Decent results; but expectations of margin expansion could be tested Forex/money market Mahindra & Mahindra Financial: Betting heavily on a recovery Change, basis points 24-Jan 1-day 1-mo 3-mo Adani Power: Weak generation, rising cost Rs/US$ 68.2 3 39 136 Ashoka Buildcon: Stage well set 10yr govt bond, % 6.8 (1) (6) (20) Net investment (US$ mn) Results, Change in Reco 23-Jan MTD CYTD (1,702 FIIs (38) 2,903 Bharti Infratel: A tough call; downgrade to REDUCE ) MFs 9 1,078 6,951 Change in Reco Top movers Change, % L&T: Domestic hand for real Best performers 24-Jan 1-day 1-mo 3-mo HNDL IN Equity 187.2 3.0 17.5 24.4 VEDL IN Equity 252.5 2.9 16.5 23.8 SAIL IN Equity 61.9 0.8 25.3 22.2 NMDC IN Equity 147.0 1.1 19.4 19.7 CAIR IN Equity 275.4 1.8 12.9 19.4 Worst performers DIVI IN Equity 683.1 (0.6) (20.7) (46.5) RCOM IN Equity 31.2 0.8 (10.2) (33.6) UT IN Equity 4.5 0.0 11.1 (26.2) MMFS IN Equity 277.7 1.2 8.5 (22.0) HDIL IN Equity 62.6 2.4 7.8 (21.9) Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. ADD HDFC Bank (HDFCB) Banks JANUARY 25, 2017 RESULT Coverage view: Attractive Minor bruises. HDFC Bank reported 15% yoy earnings growth, which is lower than Price (`): 1,268 20% growth trends reported in recent past as demonetization took effect. Loan growth Target price (`): 1,350 slowed to 13% yoy and revenue growth was at 15% yoy. CASA growth has been fairly BSE-30: 27,376 strong but loan growth is getting a higher share from unsecured loans. High market share in select products and low growth for the industry resulting in high competition in retail remains the key risk. Maintain ADD with TP at `1,350 (`1,300 earlier). Company data and valuation summary HDFC Bank Stock data Forecasts/Valuations 2017E 2018E 2019E 52-week range (Rs) (high,low) 1,318-928 EPS (Rs) 57.3 66.7 76.9 Market Cap. (Rs bn) 3,236.1 EPS growth (%) 17.8 16.3 15.3 QUICK NUMBERS Shareholding pattern (%) P/E (X) 22.1 19.0 16.5 Promoters 21.3 NII (Rs bn) 326.1 361.4 403.8 NII grew 18% yoy; FIIs 50.6 Net profits (Rs bn) 144.9 168.5 194.4 MFs 9.3 BVPS 328.6 380.3 438.5 earnings grew 15% Price performance (%) 1M 3M 12M P/B (X) 3.9 3.3 2.9 yoy Absolute 6.9 0.3 23.0 ROE (%) 18.5 18.7 18.6 Rel. to BSE-30 1.6 3.3 9.8 Div. Yield (%) 0.9 1.0 1.2 CASA grew 38% yoy; Gross NPLs at Business slows but impact is lower than expected 1.1% HDFC Bank reported earnings growth of 15% yoy, one of the lowest in recent history as Maintain ADD with revenue growth slowed to 15% yoy. NII grew 18% yoy, which is ahead of loan growth of 13% TP at `1,350 (`1,300 yoy while non-interest income grew 9% yoy. Fee income was sluggish at 10% yoy. CASA earlier) growth was strong at 38% yoy with a similar growth trends on savings and current deposits. NIM declined 10 bps qoq to 4.1%. The repatriation of FCNR deposits and lending against these deposits has had an additional impact in the current quarter with deposit growth on adjusted basis higher at 25% (21% yoy reported) and loan growth at ~16% yoy (13% yoy reported). Impairment ratios were stable qoq with gross NPLs at 1.1% and net NPL at 0.3%. Cost-income ratio declined marginally to 42% from 44% in the previous quarter. The performance for the quarter has been marginally higher than expected, especially on fee income. A few one-off on growth; growth and high share of unsecured loans remains the big concern The performance on loan growth, adjusted for one-off, continues to impress in an environment where there was a challenge on disbursements. However, two key concerns remain—the weak loan growth at the sector level, which can impact HDFC Bank as gaining market share would be a challenge in this environment. On the other hand, the bank has increased the share of unsecured loans as it is closer to peak levels of ~15% that we saw in FY2008 and yet, margins have already moved towards the lower end at 4-4.4% and we are seeing an increase in loan- loss provisions. There is a concern that this pressure could extend for a few more quarters and M B Mahesh CFA spreads in the lending business could decline further from current levels. [email protected] Mumbai: +91-22-4336-0886 Maintain ADD: revise TP to `1,350 (from `1,300 earlier) Nischint Chawathe [email protected] We maintain our ADD rating post changes to earnings. We value the bank at ₹1,350 (from Mumbai: +91-22-4336-0887 ₹1,300 earlier), which implies 3.3X book and 19X September FY2018E EPS. We expect the Abhijeet Sakhare bank to deliver 16% CAGR in earnings for FY2017-19E and RoEs in the range of 18%. Our [email protected] broad thesis remains intact as we continue to see the bank compounding led by healthy Mumbai: +91-22-4336-0889 balance sheet growth. We see HDFC Bank as a frontrunner in capturing the fast-growing retail opportunity. Even as other banks are getting more active in retail, HDFC Bank’s strong execution track-record of building a strong retail network underpinned by stable liability profile provides comfort on growth and profitability. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. HDFC Bank Banks Exhibit 1: HDFC Bank – quarterly performance March fiscal year-ends, 3QFY16-3QFY17 (` mn) (% chg.) 3QFY17 3QFY17E 3QFY16 2QFY17 3QFY17E 3QFY16 2QFY17 9MFY17 9MFY16 (% chg.) 2017E Interest income 176,056 175,401 154,111 170,699 0.4 14.2 3.1 511,916 442,247 15.8 690,207 Interest on advances 131,756 130,406 114,835 129,014 1.0 14.7 2.1 385,478 328,790 17.2 517,698 Interest on investments 40,493 41,315 36,514 38,181 (2.0) 10.9 6.1 116,767 103,304 13.0 159,097 Other interest 3,806 3,680 2,762 3,505 3.4 37.8 8.6 9,671 10,153 (4.7) 13,412 Interest expense 92,965 94,047 83,426 90,764 (1.2) 11.4 2.4 271,074 240,865 12.5 364,166 Net interest income 83,091 81,353 70,685 79,936 2.1 17.6 3.9 240,841 201,382 19.6 326,042 Non interest income 31,427 29,855 28,722 29,010 5.3 9.4 8.3 88,502 78,859 12.2 118,451 - fee income 22,068 20,649 20,048 21,039 6.9 10.1 4.9 62,886 55,867 12.6 85,168 - exchange income 2,972 3,051 2,774 2,950 (2.6) 7.1 0.7 9,067 9,450 (4.1) 12,277 - sale of invts. 3,986 3,750 3,279 2,835 6.3 21.6 40.6 9,590 6,162 55.6 12,000 Non treasury income 27,441 26,105 25,443 26,175 5.1 7.9 4.8 78,912 72,697 8.6 106,451 Total income 114,518 111,209 99,407 108,945 3.0 15.2 5.1 329,344 280,240 17.5 444,493 Op. expenses 48,425 48,749 42,048 48,700 (0.7) 15.2 (0.6) 144,814 123,954 16.8 194,298 Employee cost 16,886 16,738 14,313 16,572 0.9 18.0 1.9 49,310 42,043 17.3 66,537 Other cost 31,539 32,011 27,736 32,128 (1.5) 13.7 (1.8) 95,504 81,912 16.6 127,761 Operating profit 66,093 62,460 57,359 60,246 5.8 15.2 9.7 184,530 156,286 18.1 250,195 Provisions and cont.

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