INDIA DAILY October 5, 2018 India 4-Oct 1-day 1-mo 3-mo

Transcription

1 Contents Daily Alerts Change in Reco IndusInd Bank: In a more comfortable zone; upgrade to BUY Valuations lot more comfortable today as compared to a few months back Few key headwinds to business to remain Management change is around the corner and likely to occur in FY2020 Company alerts ICICI Bank: Another chapter comes to a close INDIA DAILY October 5, 2018 India 4-Oct 1-day 1-mo 3-mo Sensex 35,169 (2.2) (7.5) (1.1) Nifty 10,599 (2.4) (7.6) (1.4) Global/Regional indices Dow Jones 26,627 (0.7) Nasdaq Composite 7,880 (1.8) (1.4) 3.9 FTSE 7,418 (1.2) 0.5 (2.4) Nikkei 23,864 (0.5) Hang Seng 26,624 (1.7) (2.3) (5.5) KOSPI 2,271 (0.2) (0.9) 0.6 Value traded India Cash (NSE+BSE) Derivatives (NSE) 20,263 10,174 8,721 Deri. open interest 3,698 3,839 3,423 Chanda Kochhar receives board approval for early retirement with immediate effect Forex/money market Change, basis points New CEO has a lower baggage to carry and to start focusing on improving return ratios Maintain BUY with unchanged TP Sector alerts Energy: This time, it's no different! Intervention in fuel prices through cut in excise duty, marketing margins and a few states' VAT Expect further interventions with OMCs requiring a hike of ~Rs3-4/liter at MTM crude and Rupee Earnings uncertainty for oil PSUs, as the government prioritizes fuel prices and fiscal receipts 9-15% cut in estimates for now; cut TPs to Rs275 for BPCL, Rs185 for HPCL and Rs120 for IOCL Economy alerts Economy: Fuel excise duty cut: Marginal impact on fiscal and inflation #1 Fiscal impact: Central excise revenue to be lower by Rs105 bn in FY Oct 1-day 1-mo 3-mo Rs/US$ yr govt bond, % Net investment (US$ mn) 3-Oct MTD CYTD FIIs (209) (430) (2,436) MFs ,966 Top movers Change, % Best performers 4-Oct 1-day 1-mo 3-mo WPRO IN Equity 326 (0.6) ARBP IN Equity 757 (1.9) JSTL IN Equity 378 (1.5) (5.2) 21.6 DIVI IN Equity 1,284 (1.9) IDBI IN Equity (4.0) 18.4 Worst performers JPA IN Equity 7 (4.2) (40.9) (56.0) YES IN Equity (37.5) (38.3) IDEA IN Equity 34 (7.9) (29.4) (38.0) UT IN Equity (26.0) (35.7) RCAPT IN Equity 270 (2.5) (40.7) (26.5) #2 Inflation impact: Direct impact of around 14 bps For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL.

2 IndusInd Bank (IIB) Banks In a more comfortable zone; upgrade to BUY. We upgrade IIB to BUY from REDUCE with an unchanged TP to factor the recent correction in stock price. Our concern on a few headwinds to business remains as the business is not at its sweetest spot in the interest rate/loan growth cycle but we derive greater comfort in the valuation, underlying growth opportunity given the bank s relatively small share in business and the impressive execution of their business plan. BUY OCTOBER 05, 2018 CHANGE IN RECO. Coverage view: Attractive Price (`): 1,590 Target price (`): 1,900 BSE-30: 35,169 C ompany data and valuation summary IndusInd Bank Stock data Forecasts/Valuations 2019E 2020E 2021E 52-week range (Rs) (high,low) 2,038-1,551 EPS (Rs) Market Cap. (Rs bn) EPS growth (%) Shareholding pattern (%) P/E (X) Promoters 15.0 NII (Rs bn) FIIs 57.7 Net profits (Rs bn) MFs 8.8 BVPS Price performance (%) 1M 3M 12M P/B (X) Absolute (14.3) (19.1) (5.9) ROE (%) Rel. to BSE-30 (7.0) (18.0) (15.2) Div. Yield (%) Valuations lot more comfortable today as compared to a few months back We move our rating on IIB back to BUY from REDUCE with an unchanged TP (higher cost of equity) but roll forward our estimates to September The bank would trade at 3.3X book and 20X September 2020E EPS for RoEs in the range of 16-17% and earnings growth of 30% for FY led by solid balance sheet growth and merger with BHAFIN. We do believe that the recent correction of ~20% in the past three months and a relatively high degree of underperformance addresses some of the concerns that we have had on valuations. Few key headwinds to business to remain IIB has a few short to medium term challenges that are likely to keep valuation in check: (1) NIM pressure is likely to remain in the short term given the sharp rise in the cost of funds while the loan book is unlikely to see a similar offset given the higher share of fixed interest rate retail loan book. (2) Impact of overloading ban is an event to watch out for, though it is still not visible in headline volume sales of new commercial vehicles. Adverse mix change is further NIM dilutive. Also, fee income could slowdown primarily in investment banking and retail fees. (3) Asset quality is stable in the retail portfolio, especially CVs despite the recent increase in fuel costs as fleet utilization seems to be comfortable. We are not able to ascertain if the bank has a sizeable exposure to any specific corporate, especially of the likes of IL&FS. (4) BHAFIN acquisition is always likely to show unexpected surprises given the nature of its business. As discussed previously, we believe that it would be incorrect to look at BHAFIN acquisition as a RoE accretive business considering the high volatility in return ratios, especially when the sector has a crisis. Management change is around the corner and likely to occur in FY2020 Management change will happen considering that Mr Sobti s term would end on March 23, 2020 and he would reach the upper limit of ~70 years. While the management has indicated that succession planning is in place, the details are not in the public domain. As we have seen in other banks and companies from other sectors, it is important to understand the senior management exits that are likely to happen when a change is implemented at the leadership level. It would not be too surprising if we see a few key members of the bank looking to step down around the time that Mr Sobti retires. The management has a strong senior team that can take this bank forward, in our view. M B Mahesh CFA Nischint Chawathe Dipanjan Ghosh For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

3 IndusInd Bank Banks Exhibit 1: Loan mix broadly remains similar qoq Break-up of loans, March fiscal year-ends, QFY19 (%) QFY19 Retail advances Vehicle financing Commercial vehicles Utility vehicles Cars Two and three wheelers Equipment Home loans Personal loans Corporate advances Large corporate advances SME/commercial banking Other loans Source: Company, Kotak Institutional Equities Exhibit 2: Break-up of the corporate segment; power generation exposure has dropped 40 bps qoq top 3.7% March fiscal year-ends, QFY19 (%) QFY19 Gems and Jewellery Power generation NA Microfinance Real Estate Developers Services Lease Rental Constn related to infra.- EPC Steel Petroleum and products Food beverages and processing 1.6 NA NA Telecom NA 1.2 Roads/other infra 1.1 Power distribution NA NA 0.7 NBFCs (other than HFCs/HFIs) NA NA Pharma NA 0.9 NA NA NA Paper 0.9 NA NA NA NA NA Food credit NA NA 1.0 NA Plastic & Plastic Products 1.2 NA NA Auto ancilliaries NA NA Hospital and medical services NA NA Contract construction-civil NA Media, entertainment and adv. 1.2 NA NA Power transmission 0.9 NA Engineering and machinery 0.8 NA Other Industry Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

4 Banks IndusInd Bank Exhibit 3: Real estate exposure has dropped to 5% of from ~11% in FY2017 Break-up of exposure in the real estate sector, March fiscal year-ends, (Rs mn) Real estate Developers 1,310 4,360 1,360 5,160 16,429 33,675 42,424 25,017 48,837 Lease rental discounting 2,110 3,100 8,280 13,400 23,409 26,935 41,045 57,486 43,618 Lease rental discounting - others 7,150 10,762 11,806 10,042 8,664 7,748 Housing finance companies 3,610 3,710 1,500 1, ,083 12,831 14,908 1,901 Loans against property 940 2,532 37,409 56,917 73,386 3,741 Total real estate 7,030 12,110 11,140 26,920 53, , , , ,845 Trading Wholesale 11,500 16,140 19,916 27,525 40,854 55,332 60,974 Retail 14,130 19,650 18,233 23,478 26,912 33,080 42,622 Total exposure to trading 25,630 35,790 38,149 51,003 67,766 88, ,596 Total exposure 335, , , , , ,887 1,232,022 1,652,866 1,993,382 Consumer finance division 82, , , , , , , , ,972 Others 253, , , , , , ,675 1,310,269 1,491,410 Real estate to total exposure (%) Real estate to exposure ex consumer (%) Trading to total exposure (%) Real estate to exposure ex consumer (%) Loans and debentures -reported in balance sheet Loans 207, , , , , , ,859 1,151,070 1,480,348 Consumer finance division 83, , , , , , , , ,400 Debenture and bonds 18,266 33,880 23,773 47,335 47,394 33,181 69,333 25,655 49,424 Total 225, , , , , , ,192 1,176,725 1,529,771 Loans and debentures to total exposure (%) Loans and debentures to exposure, ex consumer Source: Company, Kotak Institutional Equities Exhibit 4: IIB is trading at 3.1X one-year forward book March fiscal year-ends, Oct (X) Exhibit 5: IndusInd banks trading at premium to peers IndusInd Bank premium to peers, Oct 2010 Oct 2018 (X) 5.0 Rolling PBR (X) (LHS) Rolling PER (X) (RHS) Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates 4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

5 IndusInd Bank Banks Exhibit 6: IndusInd Bank - key growth rates and financial ratios March fiscal year-ends, E (%) E 2020E 2021E Growth rates (%) Net loan Customer assets Investments excl. CPs and debentures Net fixed and leased assets Cash and bank balance (6.2) 84.2 (29.1) Total assets Deposits Current Savings Fixed Net interest income Loan loss provisions (0.5) Total other income Net fee income Net exchange gains Operating expenses Employee expenses Key ratios (%) Yield on average earning assets Yield on average loans Yield on average investments Average cost of funds Interest on deposits Difference Net interest income/earning assets New provisions/average net loans Total provisions/gross loans Fee income to total income Net trading income to PBT Exchange income to PBT Operating expenses/total income Operating expenses/assets Tax rate Dividend payout ratio Share of deposits (%) Current Fixed Savings Loans-to-deposit ratio Equity/assets (EoY) Asset quality trends (%) Gross NPL Net NPL Slippages Provision coverage Dupont analysis (%) Net interest income Loan loss provisions Net other income Operating expenses Invt. depreciation (1- tax rate) RoA Average assets/average equity RoE Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

6 Banks IndusInd Bank Exhibit 7: IndusInd Bank income statement and balance sheet March fiscal year-ends, E (` mn) E 2020E 2021E Income statement Total interest income 115, , , , , ,615 Loans 92, , , , , ,475 Investments 17,806 24,669 30,744 41,486 55,169 67,850 Cash and deposits 5,555 4,597 5,065 4,571 5,781 7,290 Total interest expense 70,641 83,431 97, , , ,740 Deposits from customers 57,088 69,313 80, , , ,988 Net interest income 45,166 60,626 74, , , ,875 Loan loss provisions 6,141 10,600 10,546 13,608 18,683 24,662 Net interest income (after prov.) 39,025 50,026 64,429 87, , ,213 Other income 32,969 41,715 47,501 60,868 68,100 80,668 Net fee income 22,315 28,953 34,119 40,943 48,313 57,009 Net capital gains 1,453 2,769 3,638 4,500 4,500 4,500 Net exchange gains 8,370 9,195 9,210 10,684 12,393 14,376 Operating expenses 36,721 47,831 55,914 72,098 90, ,108 Employee expenses 12,361 15,210 17,807 22,161 25,394 28,651 Depreciation on investments , Other provisions Pretax income 34,693 43,597 54,807 74,229 91, ,273 Tax provisions 11,828 14,918 18,747 24,124 29,818 34,864 Net profit 22,864 28,679 36,060 50,104 61,930 72,409 Growth (%) PBT - Treasury + Provisions 39,962 51,741 62,923 85, , ,935 Growth (%) Balance sheet Cash and bank balance 101, , , , , ,530 Cash 7,395 11,355 10,692 11,227 11,788 12,377 Balance with RBI 37,815 66,132 98, , , ,905 Balance with banks 55,908 26,578 9,287 13,248 13,248 13,248 Net value of investments 340, , , , ,920 1,098,920 Government and other securities 252, , , , ,318 1,013,944 Shares 413 1,612 2,919 2,919 2,919 2,919 Debentures and bonds 18,129 25,246 44,764 40,288 36,259 32,633 Net loans and advances 884,193 1,130,805 1,449,537 1,952,514 2,443,598 3,036,756 Fixed assets 12,553 13,352 13,388 13,579 13,783 14,782 Net owned assets 12,553 13,352 13,388 13,579 13,783 14,782 Other assets 90,561 89, , , , ,131 Total assets 1,428,982 1,786,499 2,216,262 2,995,247 3,723,239 4,596,119 Deposits 930,003 1,265,722 1,516,392 2,147,319 2,845,693 3,631,183 Borrowings and bills payable 255, , , , , ,501 Other liabilities 66,848 83,760 71,886 71,886 71,886 71,886 Total liabilities 1,252,010 1,580,023 1,977,845 2,650,253 3,324,975 4,135,570 Paid-up capital 5,950 5,981 6,002 7,096 7,096 7,096 Reserves and surplus 171, , , , , ,453 Total shareholders' equity 176, , , , , ,549 Source: Company, Kotak Institutional Equities estimates 6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

7 ICICI Bank (ICICIBC) Banks Another chapter comes to a close. The ICICI Bank board of directors (BoD) has approved Chanda Kochhar s request for an early retirement. The ongoing inquiry to examine a complaint by a whistleblower will maintain progress and certain benefits will be subject to the outcome of the inquiry. Sandeep Bakhshi has been elevated as the MD and CEO for a period of five years until October 3, 2023, subject to regulatory and other approvals. Directionally positive and we maintain BUY rating. TP unchanged. BUY OCTOBER 05, 2018 UPDATE Coverage view: Attractive Price (`): 317 Target price (`): 400 BSE-30: 35,169 C ompany data and valuation summary ICICI Bank Stock data Forecasts/Valuations 2019E 2020E 2021E 52-week range (Rs) (high,low) EPS (Rs) Market Cap. (Rs bn) 2,036.7 EPS growth (%) (17.6) Shareholding pattern (%) P/E (X) Promoters 0.0 NII (Rs bn) FIIs 60.1 Net profits (Rs bn) MFs 17.5 BVPS Price performance (%) 1M 3M 12M P/B (X) Absolute (3.7) ROE (%) Rel. to BSE Div. Yield (%) Chanda Kochhar receives board approval for early retirement with immediate effect As per the latest press release, the BoD of ICICI Bank has accepted the request of Chanda Kochhar for early retirement with immediate effect. She will also relinquish office from the BoD of the bank s subsidiaries. Her tenure as MD and CEO of ICICI Bank was until March 31, The board has appointed Sandeep Bakshi as the new CEO and MD of the bank for a period of five years up to October 3, 2023, subject to regulatory and other approvals. The other terms and conditions of his appointment, such as remuneration, would remain unchanged. Mr Bakhshi (58) started his career in 1986 and has experience in corporate and retail businesses. He was the MD and CEO of ICICI Lombard General Insurance between 2002 and He later moved back to the bank as deputy MD overlooking the wholesale and SME business. He became the MD of ICICI Prudential Life Insurance on August 1, New CEO has a lower baggage to carry and to start focusing on improving return ratios Similar to the appointment of a new CEO at Axis Bank, we believe that Mr Bakhshi has a relatively lower headwind to start off. Any residual risk is likely to be negligible and mostly within the watch-list that the bank has shared in the past. The bank would look to improve its coverage ratio on bad loans at the earliest to put this episode of corporate cycle behind and focus on getting the organization back on track. Unlike Axis Bank, the new CEO is within the group and it is quite likely that the exits, if any, at the senior leadership level are likely to be far fewer. The approach taken by the CEO is more driven by identifying a framework to operate the business with the belief that it would take the firm on the path to better long-term value creation. Rather than taking a very disruptive approach towards changes, the CEO has taken a softer approach of backing a majority of his existing team and showing his confidence to achieve the desired outcomes. Maintain BUY with unchanged TP We have long argued that the asset quality concerns are getting addressed and the Street has underestimated the strength of the liability franchise. The steps taken by the firm seem to be commonsensical at this point. We maintain our BUY rating on the bank (TP unchanged at `400) our top pick in the sector. M B Mahesh CFA Nischint Chawathe Dipanjan Ghosh Shrey Singh For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

8 Banks ICICI Bank Profile of Sandeep Bakshi Sandeep Bakshi, aged 58, was the interim whole-time director and COO of ICICI Bank while Chanda Kochhar was sent on leave until the completion of an inquiry set up by the board under Justice BN Srikrishna. Mr Bakshi is a mechanical engineering graduate from Punjab Engineering College and has completed his MBA from XLRI Jamshedpur. He has been associated with the ICICI group for over 32 years. He started in 1986 as an operations officer in Delhi and has held a variety of roles at ICICI. Prior to 2002, he looked after corporate lending operations of ICICI Bank in the Northern and Eastern divisions. He joined ICICI Lombard General insurance in 2002 and has been instrumental in building the business from the scratch. He was appointed as the CEO of ICICI Lombard General Insurance in 2007 and later in 2010 appointed as the CEO of ICICI Prudential Life Insurance. Exhibit 1: Stock of bad loans continues to drop Break-up of stressed loans across categories, March fiscal year-ends, 1QFY17-1QFY19 (Rs bn) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Outstanding stock of bad loans Gross NPL Sub investment grade Security receipts Other dispensation Restructured loans : SDR S4A Stock of bad loans (% of loans) Non-GNPL stress (% of loans) GNPL/total stress (%) BB and below outstanding 246 Source: Company, Kotak Institutional Equities Exhibit 2: 3.1% of potential stress loans March fiscal year-ends, 3QFY18-1QFY19 (Rs bn) 3QFY18 4QFY18 1QFY19 Gross restructured loans Non-fund o/s to restructured loans Non-fund o/s to non-performing loans Drilldown list Other loans under RBI schemes not included above NA Non-fund o/s to borrowers where S4A has been implemented NA Security receipts Total (% of loans) Source: Company, Kotak Institutional Equities 8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

9 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 ICICI Bank Banks Exhibit 3: Contribution from retail loans has increased over the past few years Composition of loans, March fiscal year-ends, QFY19 (%) QFY19 Retail Housing Auto Commercial vehicles Personal loans Credit card Others Domestic corporate/others Agriculture SME International Aggregate loans (Rs bn) 1,812 2,164 2,537 2,902 3,387 3,875 4,353 4,642 5,124 5,163 Source: Company, Kotak Institutional Equities Exhibit 4: Share of A- and above rated loans in the overall portfolio has increased Rating-wise total loan portfolio, March fiscal year-ends, QFY19 (%) QFY19 AA- and above A+,AA A- and above BBB+, BBB, BBB BB and below Unrated Source: Company, Kotak Institutional Equities Exhibit 5: Retail loan growth to remain ahead of overall loan growth in the medium term Retail and overall loan growth, March fiscal year-ends, 1QFY14-1QFY19 (%) 30 Retail loan growth (LHS) Overall loan growth (LHS) Retail to overall loans (RHS) Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

10 Banks ICICI Bank Exhibit 6: ICICI Bank trading at 2X one-year forward P/B Rolling PBR, March fiscal year-ends, Oct Oct 2018 (X) Exhibit 7: ICICI Bank has lagged peers ICICI Bank trading premium to private banks, Oct Oct 2018 (X) 3.2 Rolling PBR (X) (LHS) Rolling PER (X) (RHS) Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Source: Company, Bloomberg, Kotak Institutional Equities estimates Source: Company, Bloomberg, Kotak Institutional Equities estimates Exhibit 8: Growth slowed down in FY2019E Revenue and earnings growth, March fiscal year-ends, E (%) Exhibit 9: Scope for RoEs improvement low in the medium term RoE (core), March fiscal year-ends, E (%) Earnings (LHS) Revenue (RHS) (75) E 2020E 2021E (7) E 2020E 2021E Source: Company, Kotak Institutional Equities estimates Source: Company, Kotak Institutional Equities estimates 10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

11 ICICI Bank Banks Exhibit 10: Marginal NIM expansion in medium term Net interest margin, March fiscal year-ends, E (%) Exhibit 11: NII growth at 9% yoy in 1QFY19 NII growth, March fiscal year-ends, 1QFY15-1QFY19 (%) 3.6 NIM (LHS) NII growth (RHS) E 2020E 2021E (10) (5) 1QFY15 3QFY15 1QFY16 3QFY16 1QFY17 3QFY17 1QFY18 3QFY18 1QFY19 Source: Company, Kotak Institutional Equities Source: Company, Kotak Institutional Equities Exhibit 12: ICICI Bank SoTP (FY2020) valuation ICICI share FY2020 (%) (Rs) Valuation methodology Value of ICICI standalone Based on residual growth model Subsidiaries ICICI Financial Services 94 ICICI Prudential Life X Embedded Value and 18X EVOP General insurance X FY2020 PBR Mutual funds % of AUMs Other subsidiaries/associates ICICI Securities X FY2020 PER ICICI Securities Primary Dealer X FY2020 PBR ICICI Homes X FY2020 PBR ICICI Bank UK XFY2020 PBR ICICI Bank Canada XFY2020 PBR Venture capital/mf % of AUM of US$2 bn Value of subsidiaries 118 Value of company 399 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

12 Banks ICICI Bank Exhibit 13: ICICI Bank forecasts and valuation March fiscal year-ends, E PAT (Rs bn) EPS (Rs) P/E (X) BVPS (Rs) P/B (X) Core RoE (%) P/E (standalone) (X) ABVPS (standalone) (Rs) P/B (standalone) (X) E E E RoE (%) Source: Company, Kotak Institutional Equities estimates 12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

13 ICICI Bank Banks Exhibit 14: ICICI Bank income statement and balance sheet March fiscal year-ends, E (Rs mn) Growth rates (%) E 2020E 2021E Net loan growth Customer assets growth Corporate loans 3.9 (0.9) (0.8) Total retail loans Deposits growth Borrowings growth (2.6) (26.5) (23.9) 13.5 (3.0) 1.5 Net interest income Loan loss provisions (71.9) 5.8 Non-interest income (10.7) (13.0) Net fee income Net capital gains (26.9) (73.0) 17.6 Total income (1.9) Operating expenses Employee expenses DMA Asset management measures (%) Yield on average earning assets Interest on advances Interest on investments Average cost of funds Interest on deposits Other interest Difference Net interest income/earning assets New provisions/average net loans Loans-to-deposit ratio Share of deposits Current Fixed Savings Tax rate Dividend payout ratio Asset quality metrics (%) Gross NPL Net NPL Slippages Provision coverage (ex write-off) RoA composition - % of average assets Net interest income Loan loss provisions Net other income Operating expenses (1- tax rate) RoA Average assets/average equity RoE Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 13

14 Banks ICICI Bank Exhibit 15: ICICI Bank, growth rates, key ratios and Du Pont analysis March fiscal year-ends, E (%) E 2020E 2021E Total interest income 527, , , , , ,667 Interest on advances 389, , , , , ,736 Interest on investments 106, , , , , ,046 Total interest expense 315, , , , , ,464 Deposits from customers 215, , , , , ,673 Net interest income 212, , , , , ,203 Loan loss provisions 111, , , ,595 45,758 48,403 Net interest income (after prov.) 101,114 73,903 85,042 92, , ,800 Other income 153, , , , , ,738 Net fee income 74,617 80,349 87, , , ,596 Net capital gains 37,954 86,232 63,059 17,000 20,000 20,000 Miscellaneous income 2, ,042 1,302 1,628 Operating expenses 126, , , , , ,978 Employee expense 50,023 57,337 59,140 64,904 71,656 78,645 DMA 9,340 11,078 13,036 14,872 17,795 21,295 Pre-tax income 121, ,787 74,346 71, , ,560 Tax provisions 24,694 14,775 6,570 20,748 67,843 80,492 Net profit 97,264 98,012 67,776 50, , ,067 % growth (13.9) 0.8 (30.8) (25.0) PBT+provision-treasury gains 200, , , , , ,962 % growth 10.4 (14.0) (4.0) Balance sheet (Rs mn) Cash and bank balance 530, , , , , ,837 Cash 65,797 71,939 80,448 91, , ,879 Balance with RBI 205, , , , , ,118 Balance with banks 2,446 3,801 4,849 5,334 5,867 6,454 Outside India 256, , , , , ,386 Net value of investments 1,604,118 1,615,065 2,029,942 2,266,147 2,443,214 2,723,024 Investments in India 1,522,607 1,541,700 1,962,100 2,198,912 2,376,704 2,657,223 Govt. and other securities 1,106,493 1,104,084 1,391,853 1,618,966 1,774,306 2,030,670 Shares 19,874 27,419 23,781 23,781 23,781 23,781 Subsidiaries 64,218 62,405 61,489 61,489 61,489 61,489 Debentures and bonds 92, , , , , ,930 Net loans and advances 4,352,639 4,642,321 5,123,953 5,715,719 6,486,483 7,342,879 Corporate loans 2,221,939 2,201,941 2,184,003 2,374,498 2,643,159 2,955,039 Total retail loans 2,130,700 2,440,380 2,939,950 3,341,221 3,843,324 4,387,840 Fixed assets 75,770 78,052 79,035 72,540 66,288 59,125 Net leased assets 2,415 2,415 2,415 1, Net owned assets 73,355 75,637 76,620 71,505 65,407 58,377 Other assets 575, ,345 Total assets 7,138,531 7,429,784 7,857,965 8,774,467 9,804,292 11,032,864 Deposits 4,214,257 4,900,391 5,609,752 6,345,572 7,328,947 8,429,051 Borrowings and bills payable 1,726,711 1,269, ,385 1,096,642 1,064,208 1,080,399 Preference capital 3,500 3,500 3,500 3,500 3,500 3,500 Other liabilities 300, , , , , ,721 Total liabilities 6,241,175 6,430,274 6,806,376 7,683,965 8,586,556 9,664,170 Paid-up capital 11,699 11,651 12,858 12,858 12,858 12,858 Reserves & surplus 885, ,860 1,038,731 1,077,644 1,204,878 1,355,836 Total shareholders' equity 897, ,511 1,051,589 1,090,502 1,217,736 1,368,694 Source: Company, Kotak Institutional Equities estimates 14 KOTAK INSTITUTIONAL EQUITIES RESEARCH

15 Energy India ATTRACTIVE OCTOBER 05, 2018 UPDATE BSE-30: 35,169 This time, it s no different! The government s decision to curtail marketing margins on auto fuels by `1/liter brings to fore the earnings uncertainty for oil PSUs, associated with an environment of higher crude prices amid the government s socio-economic compulsions. We reiterate our negative stance on OMCs, while seeing a possibility of further curtailment of profitability given the rising ask-rate of fuel prices hikes amid higher crude and a weaker Rupee. We also see negative implications for upstream PSUs, but retain ADD on ONGC with the stock discounting lowest crude price realized over the past decade. A sharp crude moderation may help, but seems unlikely in the near term. Intervention in fuel prices through cut in excise duty, marketing margins and a few states VAT The government announced a reduction in retail prices of diesel and gasoline by (1) undertaking a cut in excise duty by `1.5/liter, (2) asking OMCs to absorb `1/liter implying a reduction in their marketing margins and (3) urging states to cut VAT by a similar amount of ~`2.5/liter, to which states that are being ruled by the same government as the center, have obliged. The reduction in excise duty will reduce the government receipts by ~`105 bn and curtailment of marketing margins will impact OMCs profits by ~`50 bn, for the remainder of FY2019. Expect further interventions with OMCs requiring a hike of ~`3-4/liter at MTM crude and Rupee Our calculations suggest that OMCs are already required to increase the price of auto fuels by ~`3-4/liter, post this cut, in order to earn even the curtailed marketing margins at current levels of Dated Brent crude price at ~US$85/bbl and exchange rate at `73.6/US$. It remains uncertain, if the OMCs will be able to undertake price hikes to that extent in the coming fortnight post the current reduction. Even if the OMCs manage to realign prices gradually, (1) expected crude spike in the short run amid a tightening global oil market due to the impact of US sanctions on Iran s crude exports and/or (2) persisting weakening of Rupee, will increase the ask-rate and may compel the government to intervene yet again. Earnings uncertainty for oil PSUs, as the government prioritizes fuel prices and fiscal receipts We see negative implications for the earnings of oil PSUs and more important, uncertainty around that in the near term, as the government attempts to prioritize between (1) lower fuel prices for end-consumers before state/central elections, (2) management of fiscal receipts amid continuing shortfall in GST collections and (3) profitability of oil PSUs. The government s ad-hoc interventions in fuel prices and subsidy sharing historically suppressed earnings and return ratios for these companies, while limiting visibility on profits until the end of every year during that time. 9-15% cut in estimates for now; cut TPs to `275 for BPCL, `185 for HPCL and `120 for IOCL We cut our FY EPS estimates for OMCs by 9-15% for now, factoring in (1) lower marketing margins on auto fuels for FY2019, (2) our assumptions of higher crude prices and a weaker Rupee, (3) lower underlying refining margins and (4) other minor changes. In our view, the earnings estimates for OMCs lose significance now given the material sensitivity to modest changes in marketing margins, which becomes tough to predict in the current environment. A further `0.5/liter reduction in marketing margins on auto fuels, will impact FY EPS of BPCL by 18%, HPCL by 24-25% and IOCL by 14%. We cut our TPs to `275 for BPCL, `185 for HPCL and `120 for IOCL from `375, `285 and `150 respectively valuing the stocks at 5X EV/EBITDA multiples instead of 5.5X earlier. Our fair valuation corresponds to X forward book value for these companies, which is perhaps more reliable than earnings estimates. A sharp moderation in crude price can ease out concerns for OMCs and is a key risk to our negative stance, but it seems unlikely in the near term. Tarun Lakhotia Akshay Bhor For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

16 India Energy Exhibit 1: OMCs need to raise auto fuel prices by ~5% to earn curtailed margins at spot crude price and exchange rate Calculation of marketing margins on auto fuels (Rs/liter) Diesel Petrol Based on fortnightly average prices Dated Brent crude price - fortnightly average (US$/bbl) C&F price - fortnightly average (US$/bbl) Exchange rate - fortnightly average (Rs/US$) Refinery transfer price of BS-IV equivalent Specific excise duty Dealer commission VAT/cess in Delhi Retail selling price in Delhi Price charged to dealer (excluding duties) Gross marketing margins Based on current global prices Dated Brent crude price - current (US$/bbl) C&F price - current (US$/bbl) Exchange rate - current (Rs/US$) Refinery transfer price of BS-IV equivalent Price charged to dealer (excluding duties) Gross marketing margins (1.2) (1.6) Normative calculation Curtailed gross marketing margins Required increase in retail price Required increase in retail price (%) Source: Kotak Institutional Equities estimates Exhibit 2: We cut our FY EPS estimates for OMCs by 9-15% and TPs by 20-35% Standalone EPS estimates and target price for OMCs, March fiscal year-ends, E (Rs) New estimates Old estimates Change (%) Company 2019 EPS 2020 EPS TP 2019 EPS 2020 EPS TP 2019 EPS 2020 EPS TP BPCL (13) (14) (27) HPCL (13) (9) (35) IOCL (15) (12) (20) Source: Kotak Institutional Equities estimates Exhibit 3: Earnings of OMCs have high sensitivity to changes in refining and marketing margins Change in earnings estimates (standalone), March fiscal year-end, E (Rs) FY2019E FY2020E BPCL HPCL IOCL BPCL HPCL IOCL Sensitivity to refining margin Refining margins (US$/bbl) Current EPS estimates Refining margin lower by US$1/bbl Change (%) (15.7) (14.3) (16.2) (16.1) (14.5) (17.1) Refining margin higher by US$1/bbl Change (%) Sensitivity to marketing margin Marketing margin on auto fuels (Rs/liter) Current EPS estimates Marketing margin lower by Rs0.5/liter Change (%) (18.1) (24.0) (13.5) (18.4) (24.7) (14.4) Marketing margin higher by Rs0.5/liter Change (%) Source: Kotak Institutional Equities estimates 16 KOTAK INSTITUTIONAL EQUITIES RESEARCH

17 Energy India Exhibit 4: OMCs have traded at lower P/B multiples in times of uncertainty 12-month forward P/B for OMCs (X) (X) BPCL HPCL IOCL Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Notes: (a) BPCL's P/B is adjusted for valuation for E&P segment. Source: Bloomberg, Companies, Kotak Institutional Equities estimates Exhibit 5: We compute fair value of Rs275 for BPCL Fair valuation of BPCL (Rs/share) P/B based valuation EV/EBITDA based valuation Refining and marketing business (Rs bn) Refining and marketing business (Rs bn) March 2019E book value 375 March 2020E standalone EBITDA 112 Less: investments valued separately 112 EV/EBITDA (X) 5.0 March 2019E adjusted book value 262 EV of refining and marketing business (Rs bn) 561 March 2019E adjusted BVPS (Rs) 133 EV of refining and marketing business (Rs) (A) 285 P/B multiple (X) 1.3 Investments (Rs bn) Value of refining and marketing business (Rs) (A) 173 Numaligarh Refinery 66 Investments (Rs bn) Petronet LNG 42 Numaligarh Refinery 66 Indraprastha Gas 30 Petronet LNG 42 Oil India Ltd 3 Indraprastha Gas 30 Others 58 Oil India Ltd 3 Value of investments (Rs bn) 198 Others 58 Value of investments (Rs) (B) 101 Value of investments (Rs bn) 198 Net debt (Rs bn) 216 Value of investments (Rs) (B) 101 Net debt (Rs) (C) 110 Total equity value (A) + (B) 274 Total equity value (A) + (B) - (C) 276 Source: Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 17

18 India Energy Exhibit 6: We compute fair value of Rs185 for HPCL Fair valuation of HPCL (Rs/share) P/B based valuation EV/EBITDA based valuation Refining and marketing business (Rs bn) Refining and marketing business (Rs bn) March 2019E book value 261 March 2020E standalone EBITDA 88 Less: investments valued separately 61 EV/EBITDA (X) 5.0 March 2019E adjusted book value 200 EV of refining and marketing business (Rs bn) 442 March 2019E adjusted BVPS (Rs) 131 EV of refining and marketing business (Rs) (A) 290 P/B multiple (X) 0.9 Investments (Rs bn) Value of refining and marketing business (Rs) (A) 118 HMEL BV) 79 Investments (Rs bn) MRPL 21 HMEL 79 Oil India 3 MRPL 21 Value of investments (Rs bn) 102 Oil India 3 Value of investments (Rs) (B) 67 Value of investments (Rs bn) 102 Net debt (Rs bn) 261 Value of investments (Rs) (B) 67 Net debt (Rs) (C) 171 Total equity value (A) + (B) 185 Total equity value (A) + (B) - (C) 186 Source: Kotak Institutional Equities estimates Exhibit 7: We compute fair value of Rs120 for IOCL Fair valuation of IOCL (Rs/share) P/B based valuation EV/EBITDA based valuation Downstream business (Rs bn) Downstream business (Rs bn) March 2019E book value 1,178 March 2020E standalone EBITDA 300 Less: investments valued separately 366 EV/EBITDA (X) 5.0 March 2019E adjusted book value 813 EV of refining and marketing business (Rs bn) 1,500 March 2019E adjusted BVPS (Rs) 86 EV of refining and marketing business (Rs) (A) 158 P/B multiple (X) 1.1 Investments (Rs bn) Value of downstream business (Rs) (A) 94 ONGC 158 Investments (Rs bn) Petronet LNG 42 ONGC 158 CPCL 22 Petronet LNG 42 GAIL India 14 CPCL 22 Oil India 6 GAIL India 14 Value of investments (Rs bn) 242 Oil India 6 Value of investments (Rs) (B) 25 Value of investments (Rs bn) 242 Net debt, including tax liabilities (Rs bn) 607 Value of investments (Rs) (B) 25 Net debt, including tax liabilities (Rs) (C) 64 Total equity value (A) + (B) 120 Total equity value (A) + (B) - (C) 120 Source: Kotak Institutional Equities estimates 18 KOTAK INSTITUTIONAL EQUITIES RESEARCH

19 Energy India Exhibit 8: Profit model, balance sheet, cash model of BPCL, March fiscal year-ends, E (Rs mn) E 2020E 2021E Profit model (Rs mn) Net sales 2,600,605 2,380,869 1,884,046 2,022,106 2,363,131 3,438,971 3,324,567 3,269,188 EBITDA 80,862 76, , , , , , ,693 Other income 14,687 22,000 17,762 26,007 30,109 27,670 28,020 28,370 Interest (13,591) (5,831) (5,652) (4,959) (8,333) (10,595) (10,663) (10,098) Depreciation (22,468) (25,160) (18,446) (18,913) (26,485) (29,448) (32,377) (34,302) Pretax profits 59,490 67, , , ,980 94,702 97, ,662 Extraordinary items 6,579 (4,900) Current tax (21,829) (19,836) (26,987) (20,988) (18,468) (22,621) (24,674) (28,141) Deferred tax 2,948 (3,474) (6,360) (9,047) (14,318) (8,069) (6,858) (5,933) Adjusted net profits 40,609 46,334 70,564 83,960 79,194 64,013 65,650 70,587 Adjusted EPS (Rs) Balance sheet (Rs mn) Total equity 194, , , , , , , ,364 Deferred taxation liability 13,609 17,083 35,118 36,182 50,924 58,993 65,851 71,784 Total borrowings 203, , , , , , , ,507 Currrent liabilities 312, , , , , , , ,506 Total liabilities and equity 724, , , ,896 1,002,225 1,142,126 1,174,134 1,210,161 Cash 2,038 13,602 20, ,431 1,112 1,158 Current assets 382, , , , , , , ,568 Total fixed assets 221, , , , , , , ,226 Investments 118, , , , , , , ,208 Total assets 724, , , ,896 1,002,225 1,142,126 1,174,134 1,210,161 Free cash flow (Rs mn) Operating cash flow, excl. working capital 62,232 58,016 86,450 79,658 92,074 73,102 75,813 81,111 Working capital changes 7, ,160 7,522 (8,441) (10,640) (16,115) 10,803 7,261 Capital expenditure (47,439) (80,349) (93,246) (89,824) (69,154) (73,289) (74,849) (75,212) Investments (6,527) (9,092) 26 (29,314) (59) (2,000) (2,000) (2,000) Other income 11,107 10,351 13,338 17,836 21,718 27,670 28,020 28,370 Free cash flow 26,459 96,085 14,090 (30,086) 33,938 9,368 37,787 39,529 Ratios (%) Debt/equity Net debt/equity RoAE RoACE Key assumptions Crude throughput (mn tons) Effective tariff protection (%) Net refining margin (US$/bbl) Sales volume (mn tons) Marketing margin on auto fuels (Rs/liter) Subsidy under-recoveries (Rs mn) (5,115) (4,874) Adventitious gain/(loss) (Rs mn) 15,770 (31,420) (23,710) 19,872 1,210 14,040 Source: Company, Kotak Institutional Equities estimates KOTAK INSTITUTIONAL EQUITIES RESEARCH 19

20 India Energy Exhibit 9: Profit model, balance sheet, cash model of HPCL, March fiscal year-ends, E (Rs mn) E 2020E 2021E Profit model (Rs mn) Net sales 2,232,448 2,055,868 1,777,006 1,870,237 2,193,326 3,123,945 3,013,088 2,962,781 EBITDA 52,377 56,666 79, , ,719 84,926 88,343 94,361 Other income 9,745 11,684 11,442 15,147 18,495 16,127 16,417 16,689 Interest (13,364) (7,066) (6,536) (5,357) (5,667) (7,060) (8,006) (7,746) Depreciation (22,019) (19,788) (26,532) (25,353) (27,528) (28,786) (30,429) (32,575) Pretax profits 26,739 41,497 57,766 95,428 92,019 65,207 66,325 70,730 Extraordinary items (5,219) Current tax (7,640) (12,257) (14,336) (22,362) (25,710) (15,980) (17,357) (19,870) Deferred tax (1,178) (1,952) (7,373) (6,283) (2,739) (6,184) (5,187) (4,171) Prior-period adjustment (584) 45 1, Adjusted net profits 17,338 27,333 37,262 65,650 63,571 43,043 43,781 46,689 Earnings per share (Rs) Balance sheet (Rs mn) Total equity 150, , , , , , , ,496 Deferred tax liability 39,084 41,036 49,194 58,956 65,692 71,876 77,063 81,234 Total borrowings 321, , , , , , , ,909 Currrent liabilities 264, , , , , , , ,984 Total liabilities and equity 775, , , , ,072 1,023,399 1,072,618 1,128,623 Cash ,941 1, Current assets 361, , , , , , , ,546 Total fixed assets 304, , , , , , , ,276 Investments 108, , , , , , , ,301 Total assets 775, , , , ,072 1,023,399 1,072,618 1,128,623 Free cash flow (Rs mn) Operating cash flow, excl. working capital 39,134 46,279 75,478 88,488 95,781 58,822 58,261 60,186 Working capital changes 21, ,486 (14,397) 6,120 9,817 (74,337) 2,644 (349) Capital expenditure (41,358) (41,762) (47,100) (58,890) (66,901) (85,176) (97,801) (98,175) Investments (1,581) 3,063 1,484 1,368 (14,170) 3,250 3,250 3,250 Other income 4,906 4,688 4,715 4,473 7,159 16,127 16,417 16,689 Free cash flow 22, ,753 20,180 41,560 31,686 (81,315) (17,230) (18,398) Ratios (%) Debt/equity Net debt/equity RoAE RoACE Key assumptions Crude throughput (mn tons) Effective tariff protection (%) Net refining margin (US$/bbl) Sales volume (mn tons) Marketing margin on auto fuels (Rs/liter) Subsidy under-recoveries (Rs mn) (4,818) (4,958) (78) Adventitious gain/(loss) (Rs mn) 7,770 (20,090) (12,300) 23,000 2,720 11,350 Source: Company, Kotak Institutional Equities estimates 20 KOTAK INSTITUTIONAL EQUITIES RESEARCH