Equitas Holdings. Rating: Target price: ABV: Target CMP. Rating. Rs Rs. 226 BUY

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1 : price: ABV: How does our one year outlook change? Remains a idea in the SFB space owing to a well-diversified product profile, prudence in approaching the MFI space marked by the lowest ticket size amongst peers, visibility on growth, margins and a well laid out bank transition plan in terms of branch expansion/ resultant opex in the medium term. Maintain with a TP of Rs.226 valuing the entity at 3.0x FY18E ABV. Expect the SFB to post a ~43% growth in advances in FY17 led by growth in MFI and MSE segments. Used CV and housing to grow at ~30% each. Estimate the company to open 412 liability branches by March 2017 with ~8-10 employees per branch resulting in the cost to income rising to ~54% from 53% in FY16; expect the full impact of transition costs to come through in FY18 with a peak CIR of 60%. Expect other income profile to be driven largely by processing fees, resulting in an other income to assets ratio of 1.8% for FY17, largely led by the high churn MFI book. Factor in GNPAs at 2.1% by end FY17, with PCR at ~48%. Estimate used CV GNPA at 4.5%, MSME at 1%, MFI at 0.3% and housing at 3.5%. Factor in deposit accretion from 2QFY17, with deposits accounting for ~60% of liabilities, resulting in a 150bps yoy CoF reduction. Estimate sticky YoA for FY17 at 22% given the inherent pricing power. Estimate NIM at 12.9%, RoA AT 2.8% and RoE at 13.3% for FY17. How does our 3 year Outlook change? Expect ~85% of liabilities to be deposit driven by end FY18, with the majority being wholesale funded in this phase. Given the over banked geography the SFB operates in, factor in ~14% CASA over FY17-FY19. Estimate new branch addition at ~60 per year in this phase, resulting in a peak CIR of 60% in FY18; CIR to trend down to 53% by FY20. With sticky yields in a price setter s market, estimate healthy NIM >10% even by FY20. Regulatory action on MFI spreads for banks to be keenly monitored. On the asset side expect the MFI book to decline to 35%, with SME at 30%, used CV at 25% and housing, gold loans, agri and personal loans forming the remnant. With steady state GNPA at 2.7%, estimate RoA at 2.5% by FY20. Financial summary Year 1QFY17 Update Promoters - Institutions 89.7 Public 10.3 % 1m 3m 12m EQUITAS 11% 40% - Sensex 6% 8% 0% Bankex 8% 11% 1% Key estimate revision NII (Rs. mn) PAT (Rs. mn) FY17E Bloomberg Shares o/s Market Cap FY18E Old New Change Old New Change NII 9,028 8,948-1% 12,926 12,042-7% NIM% 12.9% 12.9% 4 bps 11.40% 11.1% -33 bps PAT 1,844 2,417 31% 2,611 2,979 14% ROA% 2.1% 2.8% 73 bps 2.0% 2.3% 25 bps ABV % % EPS % % All figures in Rs. mn, except ABV and EPS, which is in Rs. 27 Jul, 2016 EQUITAS IN 335mn Rs. 65bn 52-wk High-Low Rs m Avg. Daily Vol Index Rs. 712mn BSE IPO ROE (%) ROA (%) ABV (Rs.) P/ABV (x) FY16 5,777 1, FY17E 8,948 2, FY18E 12,042 2, FY19E 16,536 4, FY20E 21,212 6, Abhinesh Vijayaraj abhinesh@sparkcapital.in Nishant Rungta nishant@sparkcapital.in Navin Babu E S navin@sparkcapital.in Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1

2 Quarterly Financial Statements Standalone financial results Rs. mn\period 1QFY17 1QFY16 yoy Growth 4QFY16 qoq Growth FY16 FY17E yoy Growth Interest Earned 3,119 2, % 2, % 10,137 14, % Interest Expended 1, % 1, % 4,360 5, % Net Interest Income 1,903 1, % 1, % 5,777 8, % Other Income % % 1,012 1, % Fee Income % % 735 1, % Trading Gains Total Income 2,273 1, % 1, % 6,789 10, % Operating Expenses 1, % 1, % 3,597 5, % Pre-Provision Profit 1, % % 3,192 4, % Provisions % % % PBT % % 2,601 3, % PAT % % 1,671 2, % EPS (Rs.) % 2 5.1% % NIM% 14.1% 12.8% 127 bps 12.5% 154 bps 13.2% 12.9% 31 bps CASA% % - ROA% 3.7% 3.3% 41 bps 3.0% 66 bps 3.0% 2.8% 22 bps Gross NPA % 1.6% 1.4% 59.0% 1.3% 34.7% 1.3% 2.1% 141.4% Net NPA % 1.1% 1.1% - 0.9% 54.4% 0.9% 1.1% 114.6% Advances 57,103 40, % 50, % 50,702 72, % Deposits ,410 - Page 2

3 Financial Summary Abridged Financial Statements Key Metrics Rs.mn FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Profit & Loss Growth ratios Net Interest Income 5,777 8,948 12,042 16,536 21,212 ABV per share 13% 37% 12% 16% 19% Other Income 1,012 1,531 1,985 2,498 3,180 Advances 46% 43% 41% 38% 34% Fee Income 735 1,513 1,618 2,027 2,564 Deposits % 46% 45% Treasury Income NII 47% 55% 35% 37% 28% Total Income 6,789 10,480 14,027 19,034 24,393 PAT 56% 45% 23% 49% 40% Operating Expenses 3,597 5,685 8,177 10,413 12,944 EPS 56% 16% 23% 49% 40% Pre-Provision Profit 3,192 4,795 5,850 8,621 11,449 Asset Quality Provisions ,403 1,996 2,202 Gross NPA (Rs.mn) 681 1,555 2,446 3,453 5,055 PBT 2,601 3,806 4,447 6,626 9,246 Gross NPA 1.3% 2.1% 2.4% 2.5% 2.7% PAT 1,671 2,417 2,979 4,439 6,195 Net NPA 0.9% 1.1% 1.2% 1.4% 1.5% Balance Sheet Slippage 2.6% 2.4% 2.4% 2.9% 2.4% Networth 13,414 22,825 25,804 30,243 36,439 Coverage 29.8% 48.7% 50.0% 45.2% 46.2% Deposits - 49, , , ,475 Growth in Gross NPA 82.1% 128.1% 57.4% 41.2% 46.4% CASA - 3,843 14,782 20,851 30,904 Asset-Liability Profile Borrowings & Current Liabilities 51,652 33,455 27,964 31,540 30,853 Leverage (x) Total Liabilities & Networth 65, , , , ,766 CD ratio % 97.0% 91.1% 84.4% Cash with RBI & other banks 9,470 11,315 18,685 26,820 40,028 CASA - 7.8% 14.1% 13.6% 13.9% Advances 50,702 72, , , ,688 Tier I CAR 22.9% 25.4% 20.3% 18.0% 16.1% Investments ,621 26,205 35,451 46,297 Profitability and Efficiency Fixed & Current Assets 4,773 8,286 12,023 13,174 15,753 Net Interest Margin 13.2% 12.9% 11.1% 10.7% 10.2% Total Assets 65, , , , ,766 ROA 3.0% 2.8% 2.3% 2.4% 2.5% Other Information ROE 13.3% 13.3% 12.3% 15.8% 18.6% Shares outstanding (mn) Valuation Current market price (Rs.) Book Value per share (Rs.) Market capitalisation (Rs. mn) 65,218 65,218 65,218 65,218 65,218 Adj Book Value per share (Rs.) Earnings per share (Rs.) P/ABV (x) Dividend per share (Rs.) P/E (x) Page 3

4 Crystal Ball Gazing Over FY17-20, Equitas is expected to clock a 40% CAGR in advances book translating into a loan book size of Rs.188bn with MFI JLG loans constituting ~40% of the overall AUM (current onbook advances of Rs.50.7bn as of FY16). With business undergoing a transformation to build as a liability franchise, the focus will be on replacing borrowings with deposits (predominantly wholesale funded). We expect significant cost escalations and business transformation over the next three years. Change in asset mix profile and significant branch and employee expansion Shift in focus to build a deposit franchise to lead to a slow yet steady increase in leverage Consistent growth in business and stabilization of operations may lead to Will lead to increase in cost income ratios and margins tapering off in the medium term Estimate ROEs to remain low in the medium term due to opex escalation A probable rerating in the business FY15 FY16 FY17E FY18E FY19E FY20E NIM 13.6% 13.2% 12.9% 11.1% 10.7% 10.2% Cost Income 53.6% 53.0% 54.2% 58.3% 54.7% 53.1% Provisions 3.0% 2.8% 2.8% 2.2% 2.2% 2.1% Credit Costs 1.8% 1.4% 1.6% 1.6% 1.6% 1.3% ROA 3.0% 3.0% 2.8% 2.3% 2.4% 2.5% FY15 FY16 FY17E FY18E FY19E FY20E ROE 11.2% 13.3% 13.3% 12.3% 15.8% 18.6% Leverage T1 CAR 26.2% 22.9% 25.4% 20.3% 18.0% 16.1% ABV (Rs.) P/ABV Multiple FY20E ABV Price Entry = 2.6x FY18E ABV Cumulative Dividends of nil ABV CAGR of 21%, exit multiple of 3.0x TOTAL RETURN OF 1.6x Page 4

5 Spark Disclaimer Rs. 3 Year Price and History Report Date Price Reco /Jun/ Buy Apr-16 May-16 Jun-16 Jul-16 Price Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation Stock expected to provide positive returns of >15% over a 1-year horizon ADD Stock expected to provide positive returns of >5% <15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% -10% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 5

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