WEEKENDER REPORT. Macro / political commentary

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1 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 WEEKENDER REPORT Macro / political commentary Driven by good performance of manufacturing and capital goods sectors, industrial production rose by 4.2% in July against 0.9% growth a year ago, but may not dampen the case for rate cut by RBI as it is still lower than growth recorded in the previous month. Index of Industrial Production (IIP) in July was a shade lower than the revised estimate of 4.36% in June. The IIP was at 3.5% in April-July period against 3.6% in the year-ago period, the Central Statistics Office (CSO) said in a release. The main contributors to the growth were manufacturing and capital goods sector. More than a third of the 69 small and marginal oil and gas fields that the government plans to auction to private firms are in Mumbai Offshore and the biggest of them holds about 15 million tons of oil reserves. Of the 69 idle oil and gas fields of state-owned ONGC and Oil India Ltd which are to be auctioned, 27 are in Mumbai Offshore while another 15 are in the prolific Krishna Godavari (KG) basin, official sources said. Merchandise exports plunged 20.7% to $21.3 billion in August from $26.8 billion in the year-ago period, the ninth consecutive monthly decline and the steepest in the first five months of this financial year. The fall resulted from a massive demand slowdown in global markets and an uncertain global economic environment, owing to a crisis in China. The value of exports in August was the lowest in about five years. Exports from Korea declined 14.7% in August, the most in six years, while those from China contracted 5.5%. For April-August, exports from India stood at $111.1 billion, down 16.2% compared with $132.5 billion in the year-ago period, according to data released by the commerce and industry ministry on Tuesday. In a major relief to investors as well as the common man on the street, battling high prices, consumer price index (CPI) for the month of August came in at 3.66%, marginally lower than the July CPI which stood at 3.78%. The range for the CPI was between 3.3% and 3.6%. Despite the marginal fall in CPI, this will still come as music to the Reserve Bank's ears which had said it expects retail inflation to fall to about 4% by August CPI (% YoY) Reserve Bank of India on Wednesday granted in-principle approval to 10 entities to start small finance banks. Such banks will primarily undertake basic banking activities, of acceptance of deposits and lending, to un-served and underserved sections, including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. At least 75% of credit has to be lent to the sectors eligible for classification as priority sector lending & at least 50% constitute loans and advances of up to Rs.25 lakh. Page 1 / 8

2 Small bank license awardees Company Disha Microfin Janalakshmi Financial Services Ujjivan Financial Services Equitas Holdings ESAF Microfinance & Investments RGVN (North East) Microfinance Au Financiers (India) Capital Local Area Bank Suryoday Micro Finance Utkarsh Micro Finance City Ahmedabad Bengaluru Bengaluru Chennai Chennai Guwahati Jaipur Jalandhar Navi Mumbai Varanasi Equity market performance Positive momentum continued this past week as well. And all but auto & cap goods sectors closed the week in positive territory. Sensex was up 2.4%, while mid & small cap indices underperformed increasing by 1.2% & 1% respectively. Bankex was the top performer with 5% increase on the back of news of no hike in interest rate by US Fed Reserve. Amongst the stock names, Yes Bank was the best performer while Axis Bank also moved by 7.5%. Auto names like Tata Motors & Bajaj Auto were under pressure correcting by 4.2% & 1.2% respectively. Index Value Weekly % Bankex 19, Power 1, Healthcare 17, Sensex 26, IT 11, Oil & Gas 8, Metals 7, Mid Cap Index 10, FMCG 7, Small Cap Index 10, Auto 17,572 (0.4) Cap Goods 15,567 (2.4) Stock INR Weekly % Gainers Yes Bank Tata Power Axis Bank Power Grid Sun Pharma Losers Bajaj Auto 2,298 (1.2) Cairn India 144 (1.5) Tata Steel 228 (2.1) L&T 1,541 (3.9) Tata Motors 330 (4.2) Currency, commodity & interest rates INR appreciated against USD by 0.7% as USD was weaker post the US Fed Reserve meeting where it did not hike interest rate. INR depreciated marginally against Euro, British Pound & Japanese Yen. Silver appreciated the most amongst the key commodities by 2.9%. Gold inched by 1.4%. Other key commodities were largely stable. Government of India 10-year bond yield fell by 1%. Currency Value Weekly % $ / INR / INR 75.1 (0.3) / INR (0.2) / INR 55.0 (0.0) Commodity INR Weekly % Crude (1 barrel) 3, Gold (10 gm) 26, Silver (1 kg) 35, Copper (1 kg) Aluminium (1 kg) 107 (0.0) GoI Bond Rate Weekly % 10-year 7.7 (1.0) 5-year 7.8 (0.8) 1-year 7.5 (0.1) Page 2 / 8

3 Key economic events next week India s inflation data came in benign as expected. US Federal Reserve refrained from hiking its short term interest rate leaving it unchanged at 0.25%. There is not much activity on the economic news front in the forthcoming week. Major economic news is going to flow through US, which will report its home sales data. We do not expect this to have any major impact on Indian market. Date Event Forecast Previous US 21-Sep Existing home sales (Aug) 5.51M 5.59M 24-Sep New home sales (Aug) 515, ,000 Trading Holiday Sep. 25, 2015, Friday will be a trading holiday on account of Bakri Id Sector / company specific news The Government has shunted out Bank of Baroda (BOB) executive director KV Rama Moorthy, as an investigation by Reserve Bank continues into granting 70 million dirham loan to the troubled Atlas Jewellery Group, when he was heading its Dubai branch. In an unprecedented move, Moorthy has been shifted to a smaller state-run lender United Bank of India. RBI had recently initiated a probe into the operations of BoB s Dubai branch and had reportedly told the government that his continuance may lead to a conflict of interest. Representatives of the domestic aluminium industry met Finance Minister Arun Jaitley seeking government intervention and protection from cheaper imports. The meeting comes days after the Directorate-General of Safeguards recommended a safeguard duty on flat steel product imports which would bring a relief to the domestic industry. We met the Finance Minister to represent the case of the aluminium industry and the difficulties we are facing. He gave us a patient hearing and now we will have to hope for the best, said D Satish Pai, Deputy Managing Director, Hindalco. Healthcare services platform provider Practo has acquired Insta Health, a provider of software technologies to hospitals, for $12 million. The deal will help Practo get access to hospitals, clinics and diagnostic labs in India, West Asia, South-East Asia and Africa, to whom Insta Health offers its Hospital Information Management Solutions (HIMS). Post the deal, Insta s 100-member team will become part of Practo. State owned oil refiner and marketing company Indian Oil Corporation will invest Rs 1,75,000 crore over the next seven years to scale up its output to around 100 million tonne from 65 million ton now, Chairman and Managing Director B Ashok said Tuesday. "We had planned a capital expenditure of Rs 56,200 crore in the 12 th 5-Year Plan and by the end of the current financial year we would achieve that target a year in advance. So we will definitely exceed the target." Ashok said. Japanese car maker Nissan will ramp up its dealerships by March, as part of its three-pronged strategy of more products, more customers and more customer touch-points. "We will have 230 to 240 dealerships by the end of the current fiscal year and 300 by March We have launched 19 dealerships this year so far, with the latest being in Mumbai the other day," Nissan India managing Page 3 / 8

4 director Arun Malhotra said. Nissan is present across 124 cities with 200 dealerships since it entered the country five years ago. Power and automation technology firm ABB India has won orders worth around Rs 119 crore to provide electrification, automation and substation solutions for solar power plants in the country. Spread across Karnataka, Tamil Nadu and Andhra Pradesh, these projects will connect more than 850 megawatts (MW) of solar energy to the grid and will be amongst the biggest solar projects worldwide. Outlook for forthcoming week As the US Fed Reserve meeting is now behind us, market gets more clarity on how things should pan out for next few months at least. Its decision not to hike short term rates has buoyed the markets and we expect foreign investors to stop selling and probably start buying emerging market equities which can help Indian market to do well. Sensex Chart 30,000 29,250 28,500 27,750 27,000 26,250 25,500 24,750 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Page 4 / 8

5 Weekender Stock Idea Yes Bank Ltd. (Rating: Buy; Price: Rs ; Target: Rs.1,184; Upside: 53%) Shareholding Stock performance Key data Category Stake Perf. 1M YTD 1Y Particulars FY14 FY15 FY16e FY17e Promoter 22% Company -1.8% -0.1% 29.7% P/B (x) FII 44% Sensex -5.8% -4.7% -3.3% EPS growth 23% 7% 25% 34% DII 21% Bankex -7.4% -7.0% 7.9% ROE 23% 17% 18% 20% Others / public 12% Dividend yield 1.0% 1.2% 1.3% 1.4% Background Yes Bank (market cap. Rs. 27,830 crs.) is a new generation private sector bank promoted by late Mr. Ashok Kapur and Mr. Rana Kapoor (current CEO). It s a full service commercial bank and has made steady improvement in business parameters over the years. Investment Argument Improvement in liability franchise Liability franchise of a bank is evidence of sustainability of its business. This is because in essence, deposits are the raw material for lending entity. They take deposits and lend the same and earn a spread in the intermediation activity. Over the years, Yes Bank has improved its liability franchise considerably. Low-cost CASA deposit ratio has improved for Yes Bank from 10.3% in FY11 to 23.4% in 1QFY16, post the saving deposit interest rate deregulation. Chart 1: Current & Savings deposit ratio (%) FY11 FY12 FY13 FY14 FY15 1QFY16 Strong credit growth Being a small player (<2% market share) in terms of loans to entire system, Yes Bank has been able to grow its loan book much faster than the system. Even in 1QFY16 it grew loan book by 35% whereas system credit growth has been anaemic at ~8-9%. With the recent capital infusion and improving economic scenario we expect Yes Bank to growth its loan book by ~30% for next few years. Chart 2: Loan growth 55% 36% 35% 24% 18% 11% FY11 FY12 FY13 FY14 FY15 1QFY16 Page 5 / 8

6 Healthy operating margins Despite lot of volatility in short term interest rates, Yes Bank has managed to maintain its spread / net interest margin in a tight band of 2.8-3%. A fact which at times is ignored is that not only its liability orientation of shorter term, but also its asset side of balance sheet has shorter maturity profile. This enables Yes Bank to pass on interest rate hikes and cuts faster to both liability as well as loan customers. Chart 3: Net interest margin (%) FY11 FY12 FY13 FY14 FY15 1QFY16 Improving productivity of distribution network Yes Bank has 662 branches. It employs a hub and spoke model for its distribution and branch expansion whereby a central/ head branch in a region takes care of the major business volume, while nodal branches simply act as customer interaction centres. The bank is now looking to improve productivity of its individual branches. This is facilitated by two factors (1) a technology platform and (2) urban target audience of HNIs and young salaried people. Both these factors make retail penetration easier and economical. Chart 4: Cost / income ratio 36% 38% 38% 40% 41% 43% FY11 FY12 FY13 FY14 FY15 1QFY16 Well managed asset quality Yes Bank has lower % of NPA and restructured assets, both combined together are ~1% of the loan book. This primarily implies good credit process employed by the bank. Provision coverage after considering provision for standard assets is well above 3 times of the NPA level. So even with a low base, if the NPAs triple, the bank has sufficient buffer to absorb them. Future scope towards lending growth especially retail growth 31% of revenue was from treasury and balance from lending activities. Retail banking was just 5% of the revenue. Non-interest income was around 40% of total income. Loans to deposits and loans to assets were 75% and 50% respectively. Generally established banks have higher loan book weightage on their balance Page 6 / 8

7 sheets and much of their income originates from lending operations, i.e. interest spread. There is a lot of scope for Yes to tilt its operations towards lending, particularly retail lending. Valuation & view We value Yes Bank on the basis of strong profitability track record, improving business profile with increasing contribution from retail segment, benign asset quality estimates and high credit growth. At the current market price Yes Bank is trading at 2x FY17e book value per share. Our target price of Rs. 1,184 implies an upside of 53% from the current level. Income statement & balance sheet data & ratios INR crs FY14 FY15 FY16e FY17e Ratios FY14 FY15 FY16e FY17e Net interest income 2,717 3,489 4,477 5,806 Net interest margin 2.8% 2.9% 3.0% 3.1% Operating profit 2,320 2,902 3,731 4,775 Cost / Income 40% 41% 40% 40% Net profit 1,611 1,997 2,500 3,343 Loan / Deposit 75% 83% 86% 88% Advances 55,633 75,550 98, ,715 GNPA 0.3% 0.4% 0.5% 0.6% Investments 40,933 46,570 53,556 61,589 NNPA 0.1% 0.1% 0.2% 0.2% Deposits 74,186 91, , ,436 Provision coverage 84% 71% 68% 65% Gross NPA RoA 1.5% 1.5% 1.5% 1.6% Net NPA Tier I Capital 9.8% 11.5% 11.1% 10.5% Provision coverage Leverage Company price chart Page 7 / 8

8 Disclosures: (a) The research analyst or research entity or his/their associates or his/their relatives do not have actual/beneficial ownership of one per cent or more securities of the subject company or any financial interest in the subject company (b) The research analyst or research entity or his/their associates or his/their relatives do not have any other material conflict of interest at the time of publication of the research report or at the time of public appearance (c) The research analyst or research entity or its associates have not received any compensation for investment banking or merchant banking or brokerage services nor received any compensation for products or services from the subject company in the past twelve months (d) The research analyst or research entity or its associates have not received any other benefits from the subject company or third party in connection with the research report (e) The subject company is not or was not a client during twelve months preceding the date of distribution of the research report and the types of services provided by the research analyst or research entity or his/their associates or his/their relatives (f) The research analyst has not served as an officer, director or employee of the subject company (g) The research analyst or research entity has not been engaged in market making activity for the subject company Happy investing and have a good weekend! THANK YOU Disclaimer: This report has been prepared by Securities Pvt Ltd. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Securities Pvt Ltd. may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. Securities Pvt Ltd., its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Neither Securities Pvt Ltd. nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. Registered Office: 124 Viraj, S,V.Road, Khar (W), Mumbai Tel. (022) , Fax (022) research@lmspl.com, LMSPL Network : Fort, Mahalaxmi, Parel, Bandra, Santacruz, Vile Parle, Andheri, Malad, Kandivili, Borivali, Bhayender, Ghatkopar, Mulund, Chunabhatti, Jacob Circle, Masjid Bunder, Cotton Green, Thane, Bhiwandi, Panvel, Pune, Sholapur, Nasik, Malegoan, Ahmednagar, Aurangabad, Akola, Mahekar, Nagpur, Surat, Karjan(Baroda), Khambat, Ahmedabad, Rajkot, Surendranagar, Porbandar, Amreli, Bharuch, Anand, Chennai, Vishakhapatnam, Vizianagaram, Palasa, Kakinada, Karnal, Kolkatta, Bhubhaneshwar, Hyderabad, Bangalore, Jafrabad, Chital, Kodinar, Keshod, Gondal, Haryana, Srikakulam, Mehkar (Buldhana), Jamnagar, Bangalore, Jodhpur, Jalgaon, Malkangiri (Orissa), Karimnagar Dist. (Andhra Pradesh). Registered Office: 124 Viraj, S.V Road, Khar (W), Mumbai Follow Us On: Page 8 / 8