5 March 2020 Today’s top research idea Market snapshot Equities - India Close Chg .% CYTD.% Bandhan Bank - Braving the challenges! Sensex 38,409 -0.6 -6.9 Return ratios strong; asset diversification to drive sustainable growth Nifty-50 11,251 -0.5 -7.5 Bandhan Bank (BANDHAN) has strengthened its positioning as one of the key Nifty-M 100 16,746 -1.5 -2.1 financial institutions in east/north-east India. It has maintained a healthy Equities-Global Close Chg .% CYTD.% market share of ~19% in MFI loans with a CAGR of 35% since FY15. S&P 500 3,130 4.2 -3.1 The merger with Gruh Finance will help improve asset diversification and Nasdaq 9,018 3.8 0.5 provide opportunities to cross-sell varied asset products. Moreover, a leaner FTSE 100 6,816 1.4 -9.6 cost structure will ensure sustained cost leadership of the merged entity. DAX 12,128 1.2 -8.5 BANDHAN has built a strong deposit franchise (53% CAGR over FY16-19) with Hang Seng 10,522 0.3 -5.8 a focus on granularity, with retail deposits forming ~76% of total deposits and Nikkei 225 21,100 0.1 -10.8 CASA at 34.3%. Commodities Close Chg .% CYTD.% With its share of volatility, the stock offers a great long-term opportunity as it Brent (US$/Bbl) 52 -0.1 -22.3 has corrected significantly owing to concerns about promoter shareholding Gold ($/OZ) 1,637 -0.2 7.9 and recent state-level issues. Cu (US$/MT) 5,664 0.3 -7.9 We nevertheless expect the bank to deliver industry leading RoA/RoE of Almn (US$/MT) 1,716 0.5 -3.7 3.7%/23.4% for FY22. Valuations appear reasonable and reflect near-term Currency Close Chg .% CYTD.% risks emanating from Assam. Initiate with a Buy rating and a TP of INR500 USD/INR 73.2 -0.1 2.6 (3.8x Sep'21E BV). USD/EUR 1.1 -0.3 -0.7 USD/JPY 107.5 0.4 -1.0 Research covered YIELD (%) Close 1MChg CYTDchg 10 Yrs G-Sec 6.2 -1.83 -0.3 Cos/Sector Key Highlights 10 Yrs AAA Corp 7.2 -1.34 -0.4 Bandhan Bank Braving the challenges! Return ratios strong; asset diversification Flows (USD b) 4-Mar MTD CYTD (Initiating Coverage) to drive sustainable growth FIIs -0.12 -0.48 1.43 V-Mart Value retailer with a well-run business; Long runway for growth DIIs 0.10 0.69 3.25 Volumes (INRb) 4-Mar MTD* CYTD* Piping hot news Cash 496 480 405 Domestic air passenger traffic rose by 2.5 per cent in January: IATA F&O 19,406 15,187 16,938 Revenue passenger kilometres growth in the India domestic market was broadly Note: *Average unchanged in January compared to December, at 2.5 per cent year-on-year, said a statement issued by the International Air Transport Association (IATA). Chart of the Day: Bandhan Bank - Initiating Coverage (Braving the challenges!) Highest RoA bank amongst coverage universe… …while RoE is second highest due to high capitalization levels Research Team ([email protected]) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. In the news today Kindly click on textbox for the detailed news link 1 2 Government asks Airtel, Supreme Court lifts curbs on cryptos but risks remain an issue Vodafone Idea, others to pay In April 2018, the Reserve Bank of India (RBI) had barred regulated balance AGR dues without entities such as banks from dealing in bitcoins and other virtual delays: Sources currencies. The Supreme Court has now lifted the restriction. Mint The telecom department wrote analyses the financial risks associated with cryptocurrencies… to all the telcos asking them to pay balance dues "without delay" and also submit detailed bifurcation of payments (explanation of self assessed amounts)… 3 4 Govt okays proposal permitting NRIs to own 100% Debt-laden IVRCL gets Rs stake in Air India 1,655-crore bid from Gabs The govt, which aims to divest its Megacorp entire stake in AI, invited offers Hyderabad-based debt-laden from potential investors last infrastructure firm IVRCL has month. Air India failed to attract a received a bid under the e- single bid last year when the auction process from Gabs 5 government decided to sell a Megacorp for Rs 1,654.77 crore Merger of 10 banks into 4 to portion of its stake… under the Insolvency and Bankruptcy Code (IBC)… come into effect from Apr 1, says Sitharaman The government on Wednesday approved a scheme for the amalgamation of 10 state-owned banks into four, putting to rest any doubts about a possible delay 6 7 in the process… RBI follows Fed's example, Zomato buys UberEats India for steps in to calm financial $206 million markets over coronavirus Ride-hailing major Uber sold its The Reserve Bank on Tuesday food delivery business in India to said it is closely monitoring food-tech giant Zomato for $206 global as well as domestic million according to the firm’s situation regarding the impact of recent regulatory filings. Zomato deadly coronavirus and ready to had acquired UberEats India in take necessary action to ensure January in an all-stock transaction orderly functioning of financial with UberEats selling the business markets… for a 9.99 per cent stake in the online food delivery business… 5 March 2020 2 Initiating Coverage | Sector: Financials Bandhan Bank BSE Sensex S&P CNX 38,409 11,251 CMP: INR400 TP: INR500 (+25%) BUY Braving the challenges! Return ratios strong; asset diversification to drive sustainable growth Stock Info Bandhan Bank (BANDHAN) has strengthened its positioning as one of the key Bloomberg BANDHAN IN financial institutions in east/north-east India. It has maintained a healthy market Equity Shares (m) 1,193.1 M.Cap.(INRb)/(USDb) 644.7 / 8.8 share of ~19% in MFI loans with a CAGR of 35% since FY15. 52-Week Range (INR) 650 / 371 The merger with Gruh Finance (GRUH) will help improve asset diversification and 1, 6, 12 Rel. Per (%) -3/-16/-23 provide ample opportunities to cross-sell varied asset products. Moreover, a 12M Avg Val (INR M) 1040 leaner cost structure will ensure sustained cost leadership of the merged entity. Free float (%) 39.0 BANDHAN has built a strong deposit franchise (53% CAGR over FY16-19) with a focus on granularity, with retail deposits forming ~76% of total deposits and CASA Financial Snapshot (INR b) at 34.3%. Y/E March FY19 FY20E FY21E FY22E With its share of volatility, the stock offers a great long-term opportunity as it has NII 45.0 62.0 79.6 98.3 corrected significantly owing to concerns about promoter shareholding and recent OP 37.5 52.3 65.4 79.7 NP 19.5 32.3 40.3 49.3 state-level issues. NIM (%) 9.6 8.8 8.2 7.9 We nevertheless expect the bank to deliver industry leading RoA/RoE of 3.7%/23.4% EPS (INR) 16.4 23.0 25.0 30.6 for FY22. Valuations appear reasonable and reflect near-term risks emanating from EPS Gr. (%) 39.1 40.8 8.5 22.5 Assam. Initiate with a Buy rating and a TP of INR500 (3.8x Sep’21E BV). BV/Sh. (INR) 94 98 119 143 ABV/Sh. (INR) 93 96 116 140 MFI leader with high customer vintage; funding cost advantage aids Ratios RoE (%) 19.0 23.9 23.1 23.4 lowest lending rate RoA (%) 3.9 4.4 3.9 3.7 BANDHAN is a leader in MFI with a market share of ~19% by loans and ~18% by Payout (%) 22.1 13.3 18.8 19.2 number of micro borrowers. It has delivered 35% loan CAGR since FY15 and Valuations enjoys a strong brand recall with 50%+ market share in east and north-east P/E(X) 24.5 17.4 16.0 13.1 P/BV (X) 4.3 4.1 3.4 2.8 regions. Most of its competitors are secondary lenders and provide top-up P/ABV (X) 4.3 4.2 3.5 2.9 loans. Around 54% of the bank’s borrowers have vintage of >4 cycles (~6% for Div. Yield (%) 0.9 0.8 1.2 1.5 the industry), which allow it to operate on higher ticket size compared to peers. Shareholding pattern (%) It has the lowest lending rate of ~18% in MFI owing to its strong funding As On Dec-19 Sep-19 Dec-18 franchise. Promoter 61.0 82.3 82.3 DII 8.2 8.8 10.5 Merger with GURH to ensure sustained cost leadership FII 13.9 6.9 5.1 The merger with GRUH has helped improve product diversification, reduce Others 17.0 2.0 2.1 concentration risk and increase cross-sell opportunities (~68% of GRUH’s book FII Includes depository receipts has a ticket size of less than INR1m). BANDHAN has best cost-ratios among Bandhan Bank peers, which, along with synergies from the merger with another cost leader Braving the challenges! (GRUH), will ensure sustained cost leadership and robust return ratios. We estimate a stable C/I ratio of ~33% over FY20-22. Asset quality witnessing cyclical volatility; Assam – the key monitorable BANDHAN has a long track record of successfully handling events like demonetization and GST, wherein it reverted back to the normal delinquency rate within a few months.