hdfc bank 874.00 1,106.00 upside: 959.50 likely early...

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■ What's new We believe HDFC Bank will be among the early beneficiaries of the capacity utilisation pick-up we are seeing currently in India’s corporate sector, which (as in past years) we expect to precede the start of an investment cycle upturn. Further, the bank stands to benefit from its historically greater focus vs. its large private bank peers on working-capital loans, which should be the first loan type to improve upon a capacity utilisation revival. Also, HDFC Bank’s cost of deposits is among the lowest in the industry; hence, it can afford to grant more working-capital loans, which are lower-yielding but also low-risk, and maintain its NIM, in our view. ■ What's the impact Along with improving economic indicators, positive industry

commercial vehicle (CV) sales growth in November should drive the bank’s CV and construction equipment (CE) loan book (which had been consolidating post a slowdown since late-FY13). We raise our forecast for the bank’s loan growth to 24% YoY for FY16E, from 20% in FY15E. We believe its YoY net profit growth rate per quarter has almost bottomed out (20% YoY for 2Q15). Our 2-3% net profit cuts for FY15-17E reflect higher operating expenses. But we forecast the YoY net profit growth to pick up from 21% for FY15E to 24% for FY16E, driven by higher NII, a pick-up in fee-based income and lower cost ratios. The bank plans capital-raising of INR100bn, which should be almost EPS-neutral by end-FY16E and lift its Tier I capital ratio by then to about 14.8%, the highest among its peers. ■ What we recommend We raise our Gordon Growth model- derived 6-month target price to INR1,106 (from INR874), now based on FY16E PBR of 4.3x (previously 4x for FY15E). We upgrade HDFC Bank to Buy (1), from Outperform (2) as we now expect a faster turnaround in loan growth. A further slowdown in loan growth and fee-based income are the key risks to our call.

■ How we differ While investors still seem concerned that HDFC Bank’s slowing loan book YTD in FY15 may persist, we forecast a pick-up in FY16E.

Financials / IndiaHDFCB IN

24 December 2014

HDFC Bank

Likely early beneficiary of economic recovery

• Should be among first to benefit from loan growth pick-up on higher capacity utilisation by corporates in an economic upturn

• Should also start to benefit from a pick-up in auto sector loans, which should drive higher retail loan growth

• Raising target price to INR1,106, upgrading to Buy (1)

Source: Daiwa forecasts

Source: FactSet, Daiwa forecasts

Financials / India

HDFC BankHDFCB IN

Target (INR): 874.00 1,106.00Upside: 15.3%23 Dec price (INR): 959.50

Buy (from Outperform)

OutperformHoldUnderperformSell

1

2

3

4

5

Forecast revisions (%)Year to 31 Mar 15E 16E 17EPPOP change (1.8) (2.0) (2.1)Net profit change (2.1) (2.3) (2.4)Core EPS (FD) change (2.4) (2.9) (3.0)

96

101

106

110

115

600

700

800

900

1,000

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Share price performance

HDFC Bank (LHS)Relative to SENSEX Index (RHS)

(INR) (%)

12-month range 626.35-963.25Market cap (USDbn) 36.603m avg daily turnover (USDm) 29.80Shares outstanding (m) 2,414Major shareholder HDFC group (22.5%)

Financial summary (INR)Year to 31 Mar 15E 16E 17ETotal operating income (m) 311,391 373,289 450,529Pre-provision operating profit(m) 172,070 212,581 265,147Net profit (m) 102,959 127,706 159,571Core EPS (fully-diluted) 42.780 52.896 66.094EPS change (%) 20.6 23.6 25.0Daiwa vs Cons. EPS (%) (0.2) (0.5) 0.7PER (x) 22.4 18.1 14.5Dividend yield (%) 0.9 1.1 1.4DPS 8.600 10.700 13.300PBR (x) 4.5 3.7 3.1ROE (%) 21.6 22.5 23.4

Punit Srivastava(91) 22 6622 [email protected]

Vikesh Mehta(91) 22 6622 [email protected]

How do we justify our view?How do we justify our view?

Financials / India HDFCB IN

24 December 2014

- 2 -

Growth outlook HDFC Bank: loan growth, net profit growth and ROE

Driven by a 24% loan CAGR that we continue to forecast for HDFC Bank over FY15-17E and a strong NIM for this period, we remain comfortable that it should also see robust NII growth at a 22.3% CAGR over the period. The benefits of operating leverage should continue to materialise over FY15-17E, driving a 24.1% CAGR in its PPOP for the period, on our forecasts. The improvement that we expect in the bank’s asset quality should drive lower provisions and lower cost ratios, underpinning our forecast for its net profit to rise at a CAGR of 24.5% for FY15-17E. As such, we forecast its ROE should continue to rise to 23.4% in FY17 without the impact of dilution in equity.

Source: Company, Daiwa forecasts

Valuation HDFC Bank: 1-year forward PBR bands (x)

The HDFC Bank stock is trading currently at a PBR of 3.7x (based on our FY16E BVPS forecast), which is at about a 6% premium to its past-5-year mean PBR. As we expect investors’ concerns over the bank’s retail loan growth and asset quality to subside in the coming months, we believe the stock will rerate close to 1SD above its past-5-year PBR. We now value HDFC Bank at a FY16E PBR of 4.3x derived from our Gordon Growth Model, assuming a 10.5% COE (previously 10.8%), 22% normalised ROE and 7% terminal growth rate (both unchanged), and derive a new target price of INR1,106.

Source: Bloomberg, Daiwa forecasts

Earnings revisions HDFC Bank: revisions to consensus FY15-16E EPS forecasts (INR)

The Bloomberg consensus FY15-16E EPS forecasts for HDFC Bank have declined slightly over the past 6 months, on concerns over its loan growth outlook. Our FY15-17 EPS forecasts are largely in line with those of the consensus.


How do we justify our view?

Growth outlook

Valuation

Earnings revisions

22.2

22.7

26.4

20.0

24.0

24.0

31.6

30.2

26.0

21.4

24.0

25.0

18.720.3 21.3

21.6 22.5 23.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY12 FY13 FY14 FY15E FY16E FY17E

Loan growth (YoY, %) Net profit growth (YoY, %) ROE (%)

1.5

2.5

3.5

4.5

5.5

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

PBR (x) Mean +2.0 sd+1.0 sd -1.0 sd -2.0 sd

42.0

44.0

46.0

48.0

50.0

52.0

54.0

56.0


FY15E FY16E

Buy (from Outperform)

OutperformHoldUnderperformSell

1

2

3

4

5


24 December 2014

- 3 -

Key assumptions

Profit and loss (INRm)

Change (YoY %)


Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ELoan growth (YoY%) 27.3 27.1 22.2 22.7 26.4 20.0 24.0 24.0Deposit growth (YoY%) 17.2 24.6 18.3 20.1 24.0 20.0 22.0 25.0Average yield on advances (%) 10.8 10.9 11.9 12.3 11.7 11.3 11.2 11.3Average cost of deposits (%) 4.5 4.3 5.6 6.0 5.7 5.3 5.3 5.5

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ENet-interest income 83,866 109,957 128,846 158,111 184,826 222,397 270,500 332,486Net fees & commission 28,393 42,067 43,121 51,669 57,349 65,378 75,185 87,215Trading and other income 9,683 7,384 14,715 16,857 21,847 23,616 27,604 30,828Net insurance income 0 0 0 0 0 0 0 0Total operating income 121,942 159,409 186,682 226,637 264,023 311,391 373,289 450,529Personnel expenses (22,892) (28,360) (33,999) (39,654) (41,790) (48,894) (56,717) (65,792)Other expenses (34,753) (49,440) (58,777) (72,707) (78,632) (90,427) (103,991) (119,590)Total expenses (57,645) (77,800) (92,776) (112,361) (120,422) (139,321) (160,708) (185,381)Pre-provision operating profit 64,297 81,608 93,906 114,276 143,601 172,070 212,581 265,147Total provision (21,406) (23,422) (18,769) (16,764) (15,873) (20,661) (24,778) (30,484)Operating profit after prov. 42,891 58,186 75,137 97,512 127,728 151,410 187,803 234,663Non-operating income 0 0 0 0 0 0 0 0Profit before tax 42,891 58,186 75,137 97,512 127,728 151,410 187,803 234,663Tax (13,404) (18,923) (23,466) (30,249) (42,944) (48,451) (60,097) (75,092)Min. int./pref. div./other items 0 0 0 0 0 0 0 0Net profit 29,487 39,263 51,671 67,263 84,784 102,959 127,706 159,571Adjusted net profit 29,487 39,263 51,671 67,263 84,784 102,959 127,706 159,571EPS (INR) 13.356 17.017 22.115 28.464 35.486 42.780 52.896 66.094EPS (adjusted) (INR) 13.356 17.017 22.115 28.464 35.486 42.780 52.896 66.094EPS (adjusted fully-diluted) (INR) 13.356 17.017 22.115 28.464 35.486 42.780 52.896 66.094DPS (INR) 2.400 3.300 4.300 5.500 6.900 8.600 10.700 13.300

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ENet-interest income 13.0 31.1 17.2 22.7 16.9 20.3 21.6 22.9Non-interest income 16.1 29.9 17.0 18.5 15.6 12.4 15.5 14.8Total operating income 13.9 30.7 17.1 21.4 16.5 17.9 19.9 20.7Total expenses 4.2 35.0 19.2 21.1 7.2 15.7 15.4 15.4Pre-provision operating profit 24.4 26.9 15.1 21.7 25.7 19.8 23.5 24.7Total provisions 13.9 9.4 (19.9) (10.7) (5.3) 30.2 19.9 23.0Operating profit after provisions 30.4 35.7 29.1 29.8 31.0 18.5 24.0 25.0Profit before tax 30.4 35.7 29.1 29.8 31.0 18.5 24.0 25.0Net profit (adjusted) 31.9 33.2 31.6 30.2 26.0 21.4 24.0 25.0EPS (adjusted, FD) 16.5 27.4 30.0 28.7 24.7 20.6 23.6 25.0Gross loans 26.9 26.8 22.1 22.6 26.3 20.0 24.0 24.0Deposits 17.2 24.6 18.3 20.1 24.0 20.0 22.0 25.0Total assets 21.4 24.7 21.8 18.5 22.8 19.3 20.9 23.5Total liabilities 19.4 25.4 22.2 18.2 23.1 19.3 21.1 23.8Shareholders' equity 43.0 17.9 17.9 21.0 20.1 19.0 19.8 20.6Avg interest-earning assets 28.7 21.9 20.9 20.5 21.6 20.6 20.6 22.4Avg risk-weighted assets 20.1 22.7 24.9 25.5 18.9 18.9 24.0 24.0

Financial summary


24 December 2014

- 4 -

Balance sheet (INRm)

Key ratios (%)


Company profile

HDFC Bank is India's second-largest private bank by assets, with total assets of INR5.1tn as at end-September 2014. The bank had 3,600 branches and 11,515 ATMs as at the same date.

As at 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ECash & equivalent 299,424 296,688 209,377 272,802 395,836 435,836 475,836 515,836Investment securities 586,076 709,294 974,829 1,116,136 1,209,511 1,451,413 1,741,695 2,159,702Net loans and advances 1,258,306 1,599,827 1,954,200 2,397,206 3,030,003 3,636,003 4,508,644 5,590,719Fixed assets 21,228 21,707 23,472 27,031 29,399 32,399 35,399 38,399Goodwill 0 0 0 0 0 0 0 0Other assets 59,552 146,011 217,216 190,144 251,246 309,459 331,854 458,961Total assets 2,224,586 2,773,525 3,379,095 4,003,319 4,915,995 5,865,111 7,093,429 8,763,618Customers deposits 1,674,044 2,085,864 2,467,065 2,962,470 3,673,375 4,408,050 5,377,821 6,722,276Borrowing 129,157 70,010 127,409 164,198 227,960 268,992 317,411 387,241Debentures 63,531 73,931 111,057 165,868 166,431 174,752 183,490 192,664Other liabilities 142,629 289,929 374,319 348,642 413,444 496,133 595,359 714,431Total liabilities 2,009,361 2,519,733 3,079,848 3,641,178 4,481,209 5,347,927 6,474,080 8,016,612Share capital 4,577 4,652 4,693 4,759 4,798 4,829 4,829 4,829Reserves & others 210,648 249,140 294,553 357,383 429,988 512,355 614,520 742,177Shareholders' equity 215,225 253,793 299,247 362,141 434,787 517,184 619,349 747,006Minority interests 0 0 0 0 0 0 0 0Total equity & liabilities 2,224,586 2,773,525 3,379,095 4,003,319 4,915,995 5,865,111 7,093,429 8,763,618Avg interest-earning assets 1,947,939 2,374,807 2,872,108 3,462,275 4,210,747 5,079,301 6,124,714 7,496,217Avg risk-weighted assets 1,421,828 1,744,715 2,179,282 2,734,482 3,250,000 3,864,000 4,791,360 5,941,286BVPS (INR) 94.046 109.104 127.518 152.197 181.233 214.217 256.533 309.409

Year to 31 Mar 2010 2011 2012 2013 2014 2015E 2016E 2017ELoan/deposit 76.0 77.4 79.9 81.5 83.1 83.1 84.5 83.8Tier-1 CAR 13.3 12.2 11.6 11.1 11.8 11.3 11.1 10.8Total CAR 17.4 16.2 16.5 16.8 16.1 15.3 14.6 14.3NPLs/gross loans 1.4 1.0 1.0 1.0 1.0 1.0 1.1 1.1Total loan-loss prov./NPLs 78.4 82.5 82.4 79.9 72.6 71.6 70.2 70.2ROAA 1.5 1.6 1.7 1.8 1.9 1.9 2.0 2.0ROAE 16.1 16.7 18.7 20.3 21.3 21.6 22.5 23.4Net-interest margin 4.3 4.6 4.5 4.6 4.4 4.4 4.4 4.4Gross yield 8.3 8.6 9.7 10.1 9.8 9.5 9.5 9.6Cost of funds 4.6 4.6 6.1 6.4 6.2 5.8 5.8 5.9Net-interest spread 3.7 4.0 3.6 3.7 3.6 3.7 3.7 3.7Total cost/total income 47.3 48.8 49.7 49.6 45.6 44.7 43.1 41.1Effective tax 31.3 32.5 31.2 31.0 33.6 32.0 32.0 32.0Dividend-payout 18.0 19.4 19.4 19.3 19.4 20.1 20.2 20.1

Financial summary continued …


24 December 2014

- 5 -

Likely the key beneficiary of an improvement in capacity utilisation

We believe HDFC Bank’s net profit growth rate should trough in FY15E and see it as an early beneficiary of a pick-up in capacity utilisation from FY16

Demand for working-capital loans should drive higher corporate loan growth vs. peers

After reporting average 30% YoY growth in its net profit over the past decade, HDFC Bank has seen its YoY rate of net profit growth slow over the past 5 quarters, from 30% for 1Q FY14 to 20% for 2Q FY15. This has been due to: 1) a weak domestic macro backdrop, 2) a moderation in the bank’s NII growth rate, and 3) a slowdown in its non-interest income stream. HDFC Bank: net profit growth for 1Q FY12-2Q FY15 (YoY)

Source: Company

However, we believe HDFC Bank’s per-quarter rate of YoY net profit growth has almost bottomed out and should witness an uptrend from the current levels starting in 1Q FY16. While we believe it could take 6-12 months for the greenfield capex cycle to pick up, we expect a strong rebound in demand by companies for

working-capital loans – a key area of focus for HDFC Bank – and that this should take place from now as a domestic macro recovery is under way. A look at the correlation between HDFC Bank’s growth in its working-capital loans and nominal GDP growth over FY09-14 shows that, while there has not always been an exact match between them, HDFC Bank’s working-capital loan sensitivity to nominal GDP growth still appears high compared to that of its large private bank peers, as shown in the following chart. Large private banks: comparison of working-capital loan growth vs. domestic nominal GDP growth (x)

Source: Companies, Bloomberg

Note: AXSB = Axis Bank, ICICIBC = ICICI Bank

On the back of the macro recovery that we expect to gather pace over the next 6-12 months, we expect HDFC Bank to see a loan growth pick-up, driven by working-capital loans, which should lead to a pick-up in its revenue momentum and aid its profitability. As such, HDFC Bank should be one of the first banks to ride on the economic recovery cycle, in our view, given that (as of FY14) it has the highest proportion of working-capital loans to total loans among the large private banks (depicted in the following chart) and has built a niche position in this segment over the years. Large private banks: proportion of working-capital loans to total loans

Source: Companies

34%

31% 31%30% 31% 30% 30% 30% 30%

27%25%

23%21%

20%

15%

20%

25%

30%

35%

1Q F

Y12

2Q F

Y12

3Q F

Y12

4Q F

Y12

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

4.1

2.6

3.0

1.8

3.1

2.5

2.2

1.5

1.7

2.1

1.4

2.1

-0.1

-1.7

0.9

0.7

2.8

1.8

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

FY09 FY10 FY11 FY12 FY13 FY14

HDFCB AXSB ICICIBC

19.1

%

20.7

%

33.5

%

35.1

%

39.5

%

40.7

%

26.2

%

24.9

%

24.6

%

27.6

%

27.7

%

29.9

%

15.8

%

14.1

%

14.0

%

13.2

%

15.5

%

16.3

%

0%

10%

20%

30%

40%

50%

FY09 FY10 FY11 FY12 FY13 FY14

HDFCB AXSB ICICIBC


24 December 2014

- 6 -

A look at HDFC Bank’s quarterly loan composition over 1Q FY12-2Q FY15 shows that it has maintained a well-balanced mix between retail and wholesale loans (the latter include its working-capital loans), as the following chart shows. HDFC Bank: loan breakdown (quarter-end)

Source: Company

HDFC Bank still grows at a higher pace than the average industry credit growth, as it has done in the past. In the past 2-3 years, its wholesale loan growth has been driven largely by financing working-capital loans, which form a large part of its wholesale loan segment. Further, as HDFC Bank’s cost of funds remains lower than its peers, it has been able to focus more vs. its peers on working-capital loans without sacrificing its NIM. On the back of the improvement we expect in companies’ capacity utilisation rates from now on, demand for working-capital loans should pick up further, thereby benefiting HDFC Bank by driving higher loan growth for it vs. its large private bank peers over the next 6-12 months. HDFC Bank: growth in wholesale loans (YoY)

Source: Company

Underlying retail loan growth looks intact

The market has lately become concerned about HDFC Bank’s retail loan growth, which has been the main driver of its loan growth over the past couple of years. The bank’s YoY rate of retail loan growth slowed from about 30% for FY13 to less than 10% for 2Q FY15, due in particular to 2 segments: 1) the business banking segment, where the loan book declined by about 15% YoY in 2Q FY15, after growing by more than 30% YoY in FY13, and 2) the commercial vehicle and construction equipment segment (CV/CE), which saw its loan book decline to an 18.3% for 2Q FY15 (from growth of 25-30% YoY in FY13). Excluding these 2 segments, however, the bank’s retail loan growth was still a healthy 20.7% YoY for 2Q FY15, as the next chart shows. HDFC Bank: retail loan growth (YoY)

Source: Company

Within HDFC Bank’s retail loan composition, the bank’s business banking segment has for several years remained one of the key drivers of its retail loan growth. Over 1Q FY15 and 2Q FY15, this segment has seen a decline in its loan book, leading to a decline in its share of the bank’s total retail loans to 13.9% in 2Q FY15, from a healthy 17-18% per quarter. HDFC Bank: business banking loans’ share of retail loans

Source: Company

48%

49%

52% 55%

52%

53%

54% 57%

54%

54%

50%

49%

48%

48%

52%

51%

48%

45%

48%

47%

46%

43%

46%

46%

50%

51%

52%

52%

0%

20%

40%

60%

80%

100%

1Q F

Y12

2Q F

Y12

3Q F

Y12

4Q F

Y12

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

Retail Wholesale

11%13%

19% 17% 16% 15%

34%

48%

37% 36%

0%

10%

20%

30%

40%

50%

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

33% 33%30%

27%26%

17%14%

10%7%

10%

31% 32%29%

27% 28%

19%15% 15% 15%

21%

5.0%

15.0%

25.0%

35.0%

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

Retail loan growthRetail credit growth (ex-CV/CE, business banking)

17% 17%18% 18%

17%

18% 18%

17%

15%

14%

13.0%

15.0%

17.0%

19.0%

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15


24 December 2014

- 7 -

In the post-1Q FY15 results analyst call, management clarified that loan growth in its business banking segment remains strong, but that in 1Q FY15 it reclassified some of its business banking loans. Consequently, a large portion of its business banking loans were reclassified as wholesale loans, leading to a decline in the business banking segment’s share of the banks’ total retail loans. As for HDFC Bank’s CV/CE loan segment, loan growth over the past few years has been adversely impacted directly by the previously weak macro backdrop, which drove down industry CV sales, and thereby exerting more stress on the bank’s loan book. In order to mitigate the risk, the bank took corrective measures from late-FY13 onwards. These entailed reducing its level of loans made to this segment which, together with a normal decline in the size of its CV/CE loan portfolio due to customers’ loan repayments, led to a substantial YoY declines in the bank’s CV/CE loan book per quarter over 4Q FY14-2Q FY15 (as the next chart shows). HDFC Bank: growth in CV/CE loans (YoY)

Source: Company

As a result of the contraction in HDFC Bank’s CV/CE loan book, the latter’s share of the bank’s total retail loan book has come down to about 9% in 2Q FY15, from 12-13% in FY12-13. We believe this reduction is largely over. We expect the CV/CE loan book’s share of the bank’s retail loan book to rise gradually given that industry CV sales have picked up sharply since India’s new government took office (May 2014). Following 22 consecutive months of YoY CV sales declines, sales rebounded by about 9% YoY in September 2014 and increased by 10% YoY for November 2014, which we see as encouraging given it should underpin a CV/CE segmental loan growth pick-up for HDFC Bank going forward.

Industry CV sales volume growth (YoY)

Source: CIME

Operating costs should pick up, but operating leverage still a deciding swing factor

HDFC Bank’s YoY growth in total revenue (NII plus non-interest income) moderated to about 15-16% in FY14 and 1H FY15, from 21% in FY13, due to a slowdown in loan growth and fee income growth. Still, the bank managed the slowdown well as it implemented cost reduction measures such as: 1) near-zero growth its headcount in FY14, and 2) over the past couple of years most of its new branch openings have been in the semi-urban areas which have few bank branches, where the cost of setting up branches is relatively lower than in urban areas. These measures cushioned the dip in the bank’s net profit growth rate in FY14 and 1H FY15. HDFCB Bank: contributors to ROA improvement over FY12-14

Source: Company

As a result, HDFC Bank’s cost-to-income (C/I) ratio declined by about 380bps between FY13 and 1H FY15, to 45.7%. We consider this as commendable but not sustainable, as we expect the bank’ operating cost growth to accelerate going forward, especially if domestic economic growth accelerates, which would likely make some of the bank’s cost-cutting measures

59%

45%

30%23%

17%

3% 2%

-10%

-21% -18%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Nov-12 May-13 Nov-13 May-14 Nov-14

1.68%1.90%

-0.04% -0.10%

-0.20%

0.17%0.15%

0.25%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

ROAFY12

NII otherincome

employeeexpenses

otherexpenses

provisions Tax ROAFY14


24 December 2014

- 8 -

done over the past 2 years difficult to replicate. We believe our stance on costs is justified given that operating costs rose sharply by 19.2% YoY in 2Q FY15, as during that quarter the bank added nearly 4,900 employees and a large number of its 112 branches opened were high-cost ones as they were opened in urban and metropolitan areas. HDFC Bank: revenue and opex growth

Source: Company

While we believe the improving trend in HDFC Bank’s C/I ratio is largely over, the bank could still see some positive operating leverage that has yet to materialise. This is because, over the past 3 years, the bank has expanded its branch network by about 40%, and given its branches take about 3 years to break even, and it does still have some room to improve its C/I ratio slightly over the next 2 years. As such, we still see modest scope for its C/I ratio to improve further over our forecast period, given the potential for branch productivity to rise further, hence continuing to be a factor aiding earnings. HDFC Bank: C/I ratio and opex growth


Outlook for asset quality still benign

Given that HDFC Bank has limited exposure to the traditionally stressed sectors, its asset quality has fared far better than that for other private banks, despite the economic downturn. HDFC Bank: asset quality


The asset quality of the bank’s corporate portfolio has held up well over the past couple of years, despite the economic slowdown, as it is skewed towards working capital loans, but its retail loan portfolio has seen some rise in NPLs. A look at the individual segment-wise asset quality shows that apart from the CV/CE segment, the asset quality of all of HDFC Bank’s other retail loans has largely remained stable for many years. There were some upticks in fresh slippages from the CV/CE and SME segments in 1Q FY15, which drove HDFC Bank’s gross NPL ratio to rise to 1.1%, from 0.98% in 4Q FY14. But this was a mere aberration and the trend should not be extrapolated to future quarters, in our view, as gross NPLs settled down to 1% in 2Q FY15. HDFC Bank: segment-wise gross NPLs Segment FY11 FY12 FY13 FY14Wholesale loans 1.4% 1.1% 0.8% 0.8%Retail loans 1.1% 0.8% 0.8% 1.0%

-Auto loans 0.4% 0.3% 0.3% 0.5%-Personal loans/Credit card 0.8% 0.5% 0.5% 0.6%-Retail business banking 2.5% 1.8% 1.4% 1.4%-CV/CE 0.5% 0.7% 1.3% 2.2%-Housing loans 0.4% 0.3% 0.2% 0.1%-Other retail 2.6% 1.4% 0.9% 0.8%

Source: Company

34%29% 30%

18%20% 18%

15% 14%11%

20%

36%32%

29%

18%16%

9% 4% 1% 5%

19%

0%

10%

20%

30%

40%

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

Income growth Opex growth

49.7

%

49.6

%

45.6

%

44.7

%

43.1

%

41.1

%

19.2%

21.1%

7.2%

15.7%15.4%

15.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

20%

30%

40%

50%


C/I ratio (LHS) Opex growth (RHS)

1.0% 1.0% 1.0% 1.0% 1.0%0.9%

1.0% 1.0%1.0% 1.1%

1.0% 1.0%1.1%

1.0%

0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1Q F

Y12

2Q F

Y12

3Q F

Y12

4Q F

Y12

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15

Gross NPLs Net NPLs


24 December 2014

- 9 -

HDFC Bank: proportion of gross NPLs to total gross NPLs Segment FY11 FY12 FY13 FY14Wholesale loans 46.0% 40.6% 31.0% 29.5%Retail loans 54.0% 59.4% 69.0% 70.5%

-Auto loans 4.8% 5.0% 5.9% 6.2%-Personal loans/Credit card 6.3% 5.7% 7.3% 6.7%-Retail business banking 24.8% 26.3% 27.4% 23.9%-CV/CE 3.5% 8.3% 17.3% 20.9%-Housing loans 2.2% 2.1% 1.3% 0.7%-Other retail 12.4% 11.9% 9.8% 12.1%

Source: Company

HDFC Bank utilised the benefit of a favourable retail asset quality period from FY11-13 to build floating provisions. As at end-2Q FY15 the bank had a floating provision of INR17.3bn, which was one of the highest among the Indian banks. However, in FY14 as the asset quality of the CV/CE segment saw some deterioration, HDFC Bank did not materially add to these provisions. HDFC Bank: incremental floating provisions (INRbn)

Source: Company

The chart below shows that HDFC Bank’s provision coverage ratio (calculated) fell from about 82% in FY12 to 73% in 2Q FY15. But if we look at the coverage ratio after including the floating provisions, the overall coverage still stood at a healthy 137% as at end-2Q FY15. This overall coverage level, we believe, should cushion the impact of any deterioration in asset quality on earnings going forward. HDFC Bank: provision coverage ratio

Source: Company, Daiwa

Timely capital issuance

As HDFC Bank will likely be classified as a systemically important bank by the RBI, probably sometime soon, its core tier- 1 capital requirement stands to rise to 10.5% by 2019 (as explained in the table ahead). Regulatory Tier 1 capital requirement by 2019 as per Basel III norms Regulatory Capital As % to RWAsCET-1 5.50%Additional Tier 1 capital 1.50%Minimum Tier 1 7.00%Capital conservation buffer 2.50%Total Tier 1 capital 9.50%Additional CET-1 for systemically important banks 1.00%Total Tier 1 capital 10.50%

Source: RBI

HDFC Bank’s CET-1 was 11.8% in 2Q FY15, and its additional tier-1 capital (mostly in the form of hybrid capital, such as subordinated bonds) is currently 0%. Hence, the bank does have the flexibility to raise 1.5% of RWA as additional Tier 1 capital (the new Basel-III norm maximum amount is 1.5%), through various subordinated debt instruments. As such, HDFC Bank still has some buffer to raise its total tier-I capital by a further 1.5% without any equity dilution. However, the bank also needs to have a suitable cushion available to position itself for an economic recovery. In our view, the credit growth of the bank, which is around 20% currently, could stretch to 27-28% should an economic upturn take hold in the next couple of years, and at some point, the bank may be in need of further capital in order to have a sufficient cushion or buffer. The bank has received shareholder approval to raise INR100bn of capital. At its latest share price, the dilution from this equity raising will be around 5%. There will be some negative impact on EPS in the short term, but in our view the issuance could well be EPS neutral by the end of FY16E. However, even post dilution, the ROE is unlikely to fall below 19-20%, based on our estimates.

0.1 0.0 0.10.5

6.7 7.0

4.0

0.0

-1.1-2.0

0.0

2.0

4.0

6.0

8.0

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 1H FY15

81.3%80.3%

82.4%81.0%

81.9%

79.6% 79.9%

74.7%73.9% 73.6%

72.6%

70.0%

72.7%

68%

70%

72%

74%

76%

78%

80%

82%

84%

2Q F

Y12

3Q F

Y12

4Q F

Y12

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15


24 December 2014

- 10 -

HDFC Bank: ROE pre and post dilution


Impact of dilution

Particulars Pre-dilution Post-dilution

FY15E FY16E FY17E FY15E FY16E FY17E No. of shares 2414.3 2414.3 2414.3 2,520.7 2,520.7 2,520.7ROE 21.6% 22.5% 23.4% 19.6% 19.9% 21.4%PBR (x) 4.5 3.7 3.1 3.9 3.4 2.8BVPS (INR) 214.2 256.5 309.4 244.8 287.2 340.9EPS (INR) 42.8 52.9 66.1 40.8 53.0 67.1

Source: Daiwa estimates

The capital raising initiative will not only add about 250-300bps to its tier-1 capital, but will also place HDFC Bank ahead of its peers in terms of capital adequacy. HDFC Bank and peers: tier-1 ratio as of 2Q FY15


Note: * is post raising capital

Note: IIB = Indusind Bank, Yes = Yes Bank, SBIN = State Bank of India, BOB = Bank of Baroda, PNB = Punjab National Bank

NIM should remain strong

In our opinion, HDFC Bank’s asset-liability management is superior to that of its domestic peers, which has been a key reason behind its ability to sustain its NIM in a narrow range of 4.2-4.6%. It has been running balanced books (ie, assets vs. liabilities) thereby shielding its margin from extreme interest-rate volatility.

HDFC Bank: NIM (%)

Source: Company

Also, the bank’s mature loan mix has supported its NIM for more than 10 years, while its balanced mix between corporate and retail loans should support margins at elevated levels in the medium term, in our opinion. HDFC Bank: movement in yield and cost Particulars FY09 FY10 FY11 FY12 FY13 FY14Avg. yield on loans 11.8% 10.7% 10.2% 11.3% N.A. N.A.

-On retail 12.7% 12.9% 12.2% 12.8% 12.6% 12.4%-On wholesale 10.5% 7.9% 8.0% 9.2% 9.9% 9.8%

Avg. cost of deposits 5.6% 4.7% 4.3% 5.7% 6.1% 5.9%Avg. cost of funds 5.1% 4.3% 4.1% 5.6% 5.9% 5.7%

Source: Company

Apart from these factors, the NIM should continue to remain strong, as we believe current account and savings account (CASA) deposits will improve when interest rates start to fall, likely in the next 6-12 months; and especially with a pick-up in corporate activity over the next 6-12 months on higher current account balances. However, we have not built in the impact of equity capital issuance and a fall in the cost of funds, because we do not yet know the timing of equity raising, which could provide a further upside to our flat NIM forecasts of 4.4% for FY15 and FY16.

Net profit growth should pick up from FY16 onwards

In FY15, we forecast slower YoY net profit growth for HDFC Bank at 21%, but expect it to accelerate to around 24% in FY16, on the back of: 1) a strong NII performance with a pick-up in loan demand, 2) growth in non-interest income owing to an improvement in fee income, 3) an expected improvement in HDFC Bank’s C/I ratio as operating leverage plays out, and 4) a decline in provisioning requirement as asset quality improves further.

18.7%

20.3%

21.3%21.6%

22.5%

23.4%

19.6%19.9%

21.4%

18.0%

20.0%

22.0%

24.0%


ROE (pre-dilution) ROE (post-dilution)

14.8%

12.0% 12.0% 11.6% 11.4%

9.6% 9.3% 8.7%

0.0%

4.0%

8.0%

12.0%

16.0%

HDFCB* IIB ICICIBC AXSB YES SBIN BOB PNB

4.1 4.1 4.4 4.6 4.4 4.3 4.5 4.6

4.3 4.2 4.4 4.4 4.5

0.0

1.0

2.0

3.0

4.0

5.0

2Q F

Y12

3Q F

Y12

4Q F

Y12

1Q F

Y13

2Q F

Y13

3Q F

Y13

4Q F

Y13

1Q F

Y14

2Q F

Y14

3Q F

Y14

4Q F

Y14

1Q F

Y15

2Q F

Y15


24 December 2014

- 11 -

We forecast a 22.3% CAGR in NII over FY15-17E, driven by a 24.0% loan CAGR and strong NIM. Also, fee income growth should pick up from FY16E onwards, albeit from a low base in FY15, which was impacted by a number of regulatory hurdles. The improvement in the C/I ratio should also add to the profitability of the bank.

Technical overhangs removed; stronger fundamentals should lead to a rerating

HDFC Bank has underperformed the Bank Nifty Index by 21% over the past year owing to both technical as well as fundamental concerns. Indian banks: share price performance relative to Bank Nifty over the past 12 months

Source: Bloomberg

Note: KMB = Kotak Mahindra Bank

HDFC Bank: share price performance relative to its peers

Source: Bloomberg

The technical barriers included: 1) a delay in foreign investment promotion board (FIPB) approval to hike the bank’s foreign institutional investor (FII) limit owing to a lack of clarity in identifying HDFC Ltd’s stake in HDFC Bank as foreign or domestic, 2) the RBI banning FIIs from increasing their stake in the bank in December 2013, driven by a breach in the limit, 3) which led to a reduction in HDFC Bank’s weight in the

MSCI EM Index (from 5.78% in FY13 to about 2% in June 2014) followed by an exclusion from the index in its semi-annual index review in November 2014. On the other hand, fundamental issues surrounding the stock included: 1) slowing retail loan growth, 2) a marginal rise in asset quality stress, and 3) slowing net profit growth due to lower net interest income and non-interest income growth. In our view, most of the technical overhangs on the stock have now been removed as: 1) recently the FIPB, after months of uncertainty, approved the bank’s proposal to hike foreign holdings in the bank from 49% to 74%, and 2) HDFC Bank was excluded from the MSCI EM Index in November 2014, hence the stock is no longer subject to selling pressure. HDFC Bank may still continue to remain under the FII limit as its parent, HDFC, is still considered a foreign entity because of its high FII holding. Any decision in this regard by the government to not consider HDFC as a foreign company could provide a further trigger for the stock, though we have not built that upside trigger into our 6-month target price, as there is no clarity on this front yet. As far as the fundamental issues are concerned, we believe the underlying drivers for loan growth and asset quality are still intact, and should lead to the stock to be rerated over the next 6-12 months, as these drivers are only set to improve from here on with the macro recovery now under way in India. We raise our 6-month target price to INR1,106 (from INR874), as we now value HDFC Bank at a PBR of 4.3x on our FY16E BVPS (previously 4x on our FY15E BVPS), derived from our revised Gordon Growth Model. We assume an ROE of 22%, a terminal growth rate of 7% (both unchanged) and a COE of 10.5% (previously 10.8%). HDFC Bank vs. peers: PBR and ROE for FY16E

Source: Daiwa forecasts

Note: Bloomberg consensus forecasts for IIB

-21.0%

-0.9%

5.6%

17.1%

29.0%34.1%

-4.1%

9.7%

21.8%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

HDFCB ICICIBC KMB IIB AXSB YES BOB SBIN PNB

PSU banks

80

100

120

140

160

180

200

220


HDFCB AXSB ICICIBC

ICICIBC

HDFCB

AXSB YES

IIB

2.0

2.5

3.0

3.5

4.0

16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0

PBR (x)

ROE (%)


24 December 2014

- 12 -

HDFC Bank: 1-year-forward PBR


HDFC Bank: 1-year-forward PER


Risks

The risks to our positive investment thesis for HDFC Bank are as follows: Loan growth – a key risk to our positive call on the stock is that we anticipate a revival in retail loan growth for HDFC Bank. If the economic environment deteriorates to the point where the bank in turn deliberately slows down its retail credit growth, HDFC Bank stock could take longer than we expect to reach our target price. A further slowdown in loan growth and fee-based income would be the key risks to our call. Asset quality risks – our expectation for an improvement in the bank’s asset quality is based on the assumption that the CV cycle is on the verge of a recovery. If the recovery takes longer than expected to take hold, the slippages from the segment could increase and have a domino effect on loan growth in this segment.

1.5

2.5

3.5

4.5

5.5

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14


24 December 2014

- 13 -

Daiwa’s Asia Pacific Research Directory

HONG KONG

Hiroaki KATO (852) 2532 4121 [email protected] Regional Research Head

Kosuke MIZUNO (852) 2848 4949 / (852) 2773 8273

[email protected]

Regional Research Co-head

John HETHERINGTON (852) 2773 8787 [email protected] Regional Deputy Head of Asia Pacific Research

Rohan DALZIELL (852) 2848 4938 [email protected] Regional Head of Product Management

Kevin LAI (852) 2848 4926 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional)

Christie CHIEN (852) 2848 4482 [email protected] Macro Economics (Regional)

Junjie TANG (852) 2773 8736 [email protected] Macro Economics (China)

Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property

Leon QI (852) 2532 4381 [email protected] Banking (Hong Kong, China); Broker (China); Insurance (China)

Anson CHAN (852) 2532 4350 [email protected] Consumer (Hong Kong/China)

Jamie SOO (852) 2773 8529 [email protected] Gaming and Leisure (Hong Kong/China)

Lynn CHENG (852) 2773 8822 [email protected] IT/Electronics (Semiconductor) (Greater China)

Dennis IP (852) 2848 4068 [email protected] Power; Utilities; Renewables and Environment (Hong Kong/China)

John CHOI (852) 2773 8730 [email protected] Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap

Joey CHEN (852) 2848 4483 [email protected] Steel (China)

Kelvin LAU (852) 2848 4467 [email protected] Head of Transportation (Hong Kong/China); Transportation (Regional)

Brian LAM (852) 2532 4341 [email protected] Transportation – Aviation (Hong Kong/China); Railway; Construction and Engineering (China)

Carrie YEUNG (852) 2773 8243 [email protected] Transportation – Transportation Infrastructure (Hong Kong/China)

Jibo MA (852) 2848 4489 [email protected] Head of Custom Products Group

Thomas HO (852) 2773 8716 [email protected] Custom Products Group

PHILIPPINES

Bianca SOLEMA (63) 2 737 3023 [email protected] Utilities and Energy

SOUTH KOREA

Sung Yop CHUNG (82) 2 787 9157 [email protected] Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Shipbuilding; Steel

Mike OH (82) 2 787 9179 [email protected] Capital Goods (Construction and Machinery)

Jun Yong BANG (82) 2 787 9168 [email protected] Oil; Chemicals; Tyres

Thomas Y KWON (82) 2 787 9181 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game

TAIWAN

Rick HSU (886) 2 8758 6261 [email protected] Head of Regional IT/Electronics; Semiconductor/IC Design (Regional)

Steven TSENG (886) 2 8758 6252 [email protected] IT/Technology Hardware (PC Hardware)

Christine WANG (886) 2 8758 6249 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer

Kylie HUANG (886) 2 8758 6248 [email protected] IT/Technology Hardware (Handsets and Components)

INDIA

Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Head of India Research; Strategy; Banking/Finance

Saurabh MEHTA (91) 22 6622 1009 [email protected] Capital Goods; Utilities

SINGAPORE

Ramakrishna MARUVADA (65) 6499 6543 [email protected] Telecommunications (China/ASEAN/India)

Royston TAN (65) 6321 3086 [email protected] Oil and Gas; Capital Goods

David LUM (65) 6329 2102 [email protected] Property and REITs

Evon TAN (65) 6499 6546 [email protected] Property and REITs

Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)


24 December 2014

- 14 -

Daiwa’s Offices

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24 December 2014

- 15 -

Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship

Within the preceding 12 months, The subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); China Everbright Bank Company Limited (6818 HK); econtext Asia Ltd (1390 HK); Lotte Shopping Co (023530 KS); Rexlot Holdings Ltd (555 HK); Neo Solar Power Corp (3576_TT); Accordia Golf Trust (AGT SP); Hua Hong Semiconductor Ltd (1347 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd. Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research.

Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analyst’s personal views about the securities and issuers that are subject of the Report, and that no part of the analyst’s compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non – US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research. Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Philippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities. For relevant securities and trading rules please visit SEC and PSE Link at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively. Thailand

This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).

This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. While the information is from sources believed to be reliable, neither the information nor the forecasts shall be taken as a representation or warranty for which Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees incur any responsibility. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any


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direct or consequential loss arising from any use of this research or its contents.

The information and opinions contained herein have been compiled or arrived at from sources believed reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.

Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research. United Kingdom This research report is produced by Daiwa Capital Markets Europe Limited and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and/or its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and/or its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory . Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Bahrain

This research material is distributed by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

This material is provided as a reference for making investment decisions and is not intended to be a solicitation for investment. Investment decisions should be made at your own discretion and risk. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document, Content herein is based on information available at the time the research material was prepared and may be amended or otherwise changed in the future without notice. All information is intended for the private use of the person to whom it is provided without any liability whatsoever on the part of Daiwa Capital Markets Europe Limited, Bahrain Branch, any associated company or the employees thereof. If you are in doubt about the suitability of the product or the research material itself, please consult your own financial adviser. Daiwa Capital Markets Europe Limited, Bahrain Branch retains all rights related to the content of this material, which may not be redistributed or otherwise transmitted without prior consent. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in

the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.


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• For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.

• There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.

• There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants.

*The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

hdfc bank 874.00 1,106.00 upside: 959.50 likely early...

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