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Three States

A financial drive through Southern India

Dipen Sheth, Head – Institutional Research
+91-22-6171 7339

Darpin Shah
+91-22-6171 7328

Vishal Rampuria
+91-22-6171 7325

Pranav Gupta
+91-22-6171 7337
Three States: A financial drive through Southern India

Three states
We drove through nine cities in southern India Commercial Vehicles (CV)
(across the states of Kerala, TN and Karnataka) to  CIFC and SUF are highly respected by all players for
their diligence and prudent practices
gauge ground realities in retail/SME credit  Select financiers are resorting to rescheduling and
segments such as Vehicle finance, unsecured cash payouts to hide borrower stress
Retail/Business loans, Housing finance, LAP (loan
Passenger Vehicles (PV)
against property) and Micro-finance. Higher  Many players operate primarily in identified niches
financial penetration in southern India (relative to (eg. premium cars for Kotak Prime)
the rest of the country) is in keeping with the fact  Customers’ preference tilts toward PSBs (particularly
that income (and literacy) levels across the states SBI), esp. amongst salaried folks
we visited are significantly higher (~21% over FY12- Two Wheelers (2W)
16) than national averages.  Pressure on sales vols in TN owing to regulatory
issues (no sale without driving licence)
We were pleasantly surprised to see that despite  Credit substitution via gold loans, as rates are lower
various difficulties and disruptions (such as political
Unsecured Loans
turmoil, drought, demonetisation, GST rollout,
 Delinquencies are lower than national average,
industrial stagnation and allegedly weak business reflecting evolved credit behaviour
confidence), credit demand remains healthy.  Rates and policies vary starkly across financiers,
However, competition is stiff. In addition to banks exposing them to differential risk
and NBFCs, a large number of unorganised players Housing Loans (HL)
cater to Tier 3/4 borrowers. Asset quality is mostly  Growth challenges visible in the face of weak
holding up as per formal (and anecdotal) evidence demand, pricing pressures and high balance transfers
we gathered. Borrowers’ financial discipline (and  Large HFCs will benefit due to competitive CoF
awareness) limited the adverse fallouts of recent LAP/BL
shocks like demonetisation and farm loan waivers,  Competitive market with rates as low as 8.5%
in contrast with the rest of India.  Some players are providing aggressive loans even on
unapproved structures
Our interactions confirm our positive stance on CUB
(City Union Bank), while we continue to like CIFC
 Normalisation across the sector, barring a few
(Chola Inv & Fin) in the NBFC space. We also retain locations
confidence on our constructive thesis on DHFL  Use of technology can provide oplev hereon
(Dewan Housing) and Ujjivan.  Strong focus on individual loans

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Three States: A financial drive through Southern India

Per Capita Net Domestic Product

Rs Kerala Tamil Nadu Karnataka Avg All India Variance (%)
FY12 97,912 92,984 90,263 93,720 63,462 47.7
FY13 110,314 105,031 102,319 105,888 70,983 49.2
FY14 123,388 116,329 118,829 119,515 79,118 51.1
FY15 135,537 128,385 129,823 131,248 86,454 51.8
FY16 147,190 137,837 142,906 142,644 94,130 51.5
Source: HDFC sec Inst Research

Peer Valuations
Mcap CMP TP ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)
(Rs bn) (Rs) (Rs) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E
ICICIBC # 2,031 317 BUY 364 114 134 151 15.5 13.2 11.7 2.09 1.66 1.48 10.5 10.8 9.5 1.20 1.19 1.18
KMB # 1,978 1,040 BUY 1,179 181 205 235 37.9 31.4 24.8 4.83 4.16 3.52 13.9 13.3 14.5 1.89 1.89 1.94
AXSB 1,341 560 NEU 504 199 234 271 35.9 18.5 13.4 2.82 2.40 2.07 6.5 11.7 14.5 0.58 0.99 1.16
IIB 990 1,663 BUY 1,809 382 444 521 28.1 22.9 18.3 4.36 3.75 3.19 16.2 17.3 18.5 1.79 1.80 1.81
FB 218 112 BUY 137 59 65 72 20.6 16.1 12.9 1.92 1.73 1.55 9.9 10.5 11.9 0.84 0.91 0.97
CUB 106 161 BUY 196 56 66 78 17.9 15.5 13.0 2.88 2.45 2.07 15.5 15.4 15.8 1.58 1.57 1.57
DCBB 59 191 BUY 214 78 88 99 22.5 17.8 14.7 2.44 2.18 1.94 10.9 11.1 12.2 0.97 1.02 1.02
SBIN # 2,907 337 BUY 373 119 157 190 23.4 15.0 8.6 2.04 1.54 1.26 4.5 6.1 10.0 0.29 0.38 0.60
BOB 405 175 BUY 202 97 136 175 26.5 13.9 8.0 1.81 1.29 1.00 4.1 7.4 11.8 0.22 0.39 0.62
AU 189 665 NEU 550 76 89 105 62.4 48.1 35.7 8.81 7.49 6.32 14.2 16.0 18.4 1.78 1.71 1.85
Equitas 49 146 NEU 160 64 67 73 90.3 36.7 21.0 2.28 2.19 2.00 2.4 5.7 9.3 0.54 1.11 1.24
Ujjivan 49 409 BUY 435 146 163 185 371.4 24.2 19.0 2.80 2.51 2.21 0.7 10.9 12.4 0.15 1.90 1.96
LICHF 301 597 BUY 675 242 283 328 14.6 12.5 10.7 2.46 2.11 1.82 17.3 17.6 17.8 1.27 1.30 1.31
SHTF 287 1,265 BUY 1,346 435 501 576 19.8 15.5 12.4 2.91 2.52 2.20 12.2 14.1 15.7 1.83 2.03 2.16
CIFC 198 1,268 BUY 1,427 267 339 422 22.0 17.1 14.1 4.75 3.74 3.01 19.2 20.7 21.1 2.65 2.81 2.84
DHFL 193 616 BUY 685 262 288 320 17.9 14.1 12.1 2.35 2.13 1.93 12.9 15.0 15.8 1.33 1.40 1.39
REPCO 39 625 BUY 770 198 241 278 19.1 16.1 13.4 3.16 2.59 2.25 16.6 16.9 17.4 2.11 2.17 2.20
Source: Company, HDFC sec Inst Research, # Adjusted for subsidiaries value

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Three States: A financial drive through Southern India

Disparity in cash collections

Vehicle finance  As witnessed in our travel through UP earlier this
year, MMFS’ collection efficiency has improved ~300-
With widespread presence of large (and small) 500bps, with more employees focusing on collections
private banks, foreign banks, NBFCs and PSBs, than sales. Creation of departments within the
vehicle financing is a very competitive business collection team (hard and soft buckets) further
across Southern India. Aggression is rising, boosted efficiency. Since Apr-17, CIFC has also
especially in PVs. Unorganised financiers are also witnessed a sharp reduction in NPAs, with improved
thriving. Kerala tilts towards the LCV and SCV
segments, while TN is more broad-based, with HCV  Its commendable to see each CIFC employee talking
hubs like Salem, Namakkal and Coimbatore. In about pre-tax RoAA (similar trends witnessed in our
2Ws, Kerala is dominated by Scooters, whilst Tamil previous yatras to UP and Pune)
Nadu has a more motorcycles in the sales mix.  Sundaram Finance and CIFC are highly regarded for
Regulatory issues (in TN, where 2W sales are fair practices by almost all their significant
restricted to license holders) have affected sales. competitors (HDFCB, HDB, MMFS) and even
CV finance
 Private Banks like YES (though a smaller player) and
 Our branch visits indicated disbursal growth rates of IIB were repeatedly spoken about for their ‘wrong’
10-15% YoY (for listed NBFCs) to as high as 25-30% practices (rescheduling, lower rates, cash collections
CIFC customer paying cash (albeit on a smaller base) for unlisted players and payouts to executives, and relatively higher
 In Kerala, NBFCs believe there is some sanity in yields payouts). Amongst NBFCs, SHTF was repeatedly
and LTVs. The situation is different in TN, where mentioned for rescheduling of loans, and providing
competition is affecting both yields and LTVs - captive loans not only for vehicles, but also for tyres,
financiers offer 100% LTV insurance and maintenance

 TAT has seen some improvement with the

 Most of HDB’s hires are from CIFC, similar to what we
saw in UP!
introduction of distributed IT systems by some
players, notably CIFC. Post demonetisation, cash PV segment
collection did witness a decline. MMFS reported 30-
45% decline vs. 15-30% for peers  Market size varies across regions, with Trivandrum
having a greater share in Kerala, and Salem (and the
 In contrast with what we saw across UP, loan waiver surrounding areas) being a major contributor in the
announcements did not affect asset quality as most TN region
borrowers (80-90%) were well versed with its  Post demonetisation, the proportion of financed
applicability. vehicles has gone up to ~70% vs. 60% earlier
 NPA levels are largely in line with the national  Maruti is the market leader, followed by Hyundai and
average for lenders like MMFS and CIFC. Honda

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Three States: A financial drive through Southern India

 Mid-sized vehicles (in the range of Rs 0.5mn to Rs  As witnessed in PVs, competition in 2Ws is restricted
CIFC old vehicle scheme 2mn) form a major proportion of sales, with SBIN to dealer payouts, with IIB, YES and CAFL (in some
being one of the largest players in the region regions) offering 3.5-4%. LTV trends remain largely
similar across players
 SBIN remains competitive across segments, while
KMP caters mainly to Premium cars  Lending rates in the 2W space range from ~18% to
~30%, with SCUF at the higher end and private banks
 In the rural markets (predominantly used cars), both
at the lower end
captive financers and NBFCs are relatively more
aggressive  While demonetisation led to an overall slowdown in
sales, we sensed no major worries on asset quality
 Surprisingly, most players believe that there is sanity
in yields and LTVs; but payouts vary across peers,  Even post demonetisation, cash collection for SCUF
with IIB paying ~3.5-4% (in all regions) continues to be north of 40%
 Lower TAT is a deciding factor for most dealers. Most Extreme competition in the region
PSBs lose here, while digitisation has helped private
players bring down TAT.
 Better asset quality performance, given a higher
proportion of salaried borrowers (especially in Kerala)
 Repossession remains a big challenge in Kerala, owing
SCUF schemes for 2W’s to higher political intervention. With this, SCUF has
stopped PV financing, while SUF is re-entering some
2W segment
 The market size of Kerala and Tamil Nadu put
together is at 0.17 to 0.2mn units/ month, which is
relatively smaller when compared to other states
Extreme competition in the region
 The govt. order in TN prohibiting sales of 2Ws to
people not holding a driving license has adversely
affected sales
 The overall proportion of financing is gradually
reducing, as borrowers prefer taking gold loans that
are available at significantly lower rates to finance
their vehicles
 With Kerala predominantly being a Scooter market,
HMSI has the highest share here. Even in TN, HMSI is
the market leader, followed by Bajaj and Hero

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Three States: A financial drive through Southern India

Driving change from the top  MMFS has discontinued 2W and 3W businesses in  In the PV and 2W segments, the cash purchase
Kerala (owing to higher losses) proportion is gradually increasing, as agri and Gold
loans are available at lower rates.
 Avg. yields are 14.5-15%; TAT of 1-2 days; payouts at
~1.5-2.5%  Demonetisation, GST and BS IV impacted sales of new
vehicles, which has led to a rise in the proportion of
 Market share at 30-40% at MM dealership; 12-15% at refinance
Maruti dealership
 Avg. yields at ~15.5-16%%. Segment-wise yields at
 ~50% of the customers operate on earn and Pay 2W 20-22%, LCV ~13%, Cars at 10-14%, SCV 15%;
model Used/Refinance at 18%, HCV 11%. LTVs of 85-90%
and TAT of ~2 days in most sub-segments
 Cash collections at 30-45% dipped vs. pre-
demonetisation levels, albeit remain elevated  Payouts at ~1-2.5% (2W 3%, LCV 1-1.5%, Cars 2%, SCV
1.5% and HCV ~1%)
 Most employees are focused on collection vs. sales
earlier  Avg. tenure of ~4 years; incremental tenures are
increasing, given higher vehicle prices
MMFS collection board  NPAs in the range of 9-10%; MM vehicle contribution
is lower as it has stopped 3W financing  Focus on higher cross-selling – HDFC Life and Motor
 More focus on collections of current dues (CD, i.e.
30DPD) vs. overdues (OD, +120DPD). Further, the co  Cash collections vary in the range of ~5-30%
now focuses on 12M+ overdue accounts, which were
hardly addressed. Now, the legal team works on
 Sharp drop in NPAs (since April-17), with a focus on
recoveries (collecting more than one EMI)
these cases. and is witnessing recoveries
 Stock of repossessed vehicles has fallen sharply
 Collection efficiency: Improvement of 300bps YoY
 No major worries on loan waiver, as a majority (70-
MMFS encouraging digital  Stock of repossessed vehicles has significantly 90%+) of borrowers are aware about the details of
payments reduced over the last 6-12 months loan waivers
 Loan waiver and freebies are of no major concern, as  TAB initiative is not successful as of now; having
most NBFCs regularly educate borrowers about the issues in uploading pictures
same. ~60-80% of the borrowers are educated about
loan waivers and the free freebies  Lenders preferred by dealers based on (1) Payouts,
incl. cash payout to executives, (2) Customer profile:
 Target: Disbursals growth of ~15% and lower NPAs by A-B category HDFCB/SBIN/ICICIBC, B-C category IIB
200-300bps and CIFC. Others to captive financiers

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Three States: A financial drive through Southern India

AXSB offers lower rates to gain Unsecured products (PL/BL)

market share
The market for unsecured loans is very fragmented.  AXSB is offering PL at lower rates, in a bid to poach
A further challenge is that customer behaviour (and customers. It does not charge any pre-closure or
hence, risk) differs across the south. Players in the balance transfer fees which entices customers, while
PL space are largely focused on cross selling to their some private banks charge ~4% for pre-closure (incl.
existing customer base, in a bid to curb risk. For BT)
banks, the focus customer segments are salaried  Some regional PSBs are also trying to capture share
people. NBFCs like BAFL/SCUF focus on un-banked by offering lower rates in bigger proposals (loans for
customers. employees of CAT A/B companies)
For most lenders, asset quality is relatively better
than the national average in the segment, despite  Delinquencies in Kerala and Tamil Nadu are lower
higher yields and the inherent risks of unsecured than the national average
lending. Although competition in this segment is  No major collection problems were faced post
relatively benign, we gathered that AXSB is offering demonetisation. However, disbursement growth was
lower rates (similar to the feedback we received in hit, and has only seen some traction in the past few
HDB Customer some regions of UP in our Jun-17Yatra). This has, months
understandably, influenced pricing.
 Growth in Kerala is challenging, as a large portion of
customers are paid their salaries in cash (esp HDB product offerings
government employees). Hence, lack of
documentation is a hindrance in the appraisal
 In the salaried segment, PL yields vary from 10.5-
17.5%, depending on the slab for most players. In
contrast, loans are given in a narrow (and higher)
range of 15-18% for non-salaried borrowers, with
NBFCs pricing loans at the higher end of the band
 Different players operate in identified niche
segments, and are doing well in their chosen areas.
For instance, BAFL is focused on business loans, while
players like ICICIBC, AXSB, YES and IIB are mostly
active in PLs
 Most borrowers cite home renovation, marriage,
education and medical needs as the end use

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Three States: A financial drive through Southern India

Home loans
Housing demand in TN and Karnataka continues to incentives provided by the Central govt. and strong
be sluggish. The impact of demonetisation, along demand. However, the supply of affordable housing
with sticky and unaffordable property prices, from the state govt. remains on the lower side
continues to pose demand challenges. However,  LTVs remain stable at 70-80%
demand for affordable homes is good, with the
segment growing at 20-25%. The registration issue  An aggressive pricing war and takeover of loans is
in TN and sand mining restrictions (along with visible, with interest rates starting at 8.35%
political instability) pose housing supply  Some players like SBI, DHFL are offering takeover
bottlenecks. and top-ups at the same interest rates
Given the overall weak demand, competition is  Contribution of takeover of loans within
very high, with large HFCs as well as banks offering disbursements has increased; it contributes 15-20%
very competitive rates. The home loan rate war and 40-50% for small and large lenders respectively
commenced in Jan-17, with PSU banks offering very  While large HFCs and banks are gaining from balance
attractive interest rates starting at 8.35%. With no transfer, smaller players are net losers, owing to
prepayment penalty under RBI/NHB rules, the competitive interest rates offered by the biggies,
balance transfer/takeover of loans has substantially including banks
increased subsequently, leading to industry-wide
compression in lending rates. While this holds true
 Prepayment rates have increased for many lenders to
for high-ticket loans, we discovered that even low-
ticket sized loans (under Rs 2.5mn) are being taken  Success of the PMAY subsidy scheme is not high (5-
over. Large HFCs and banks are very active in the 10% of eligible borrowers). Reasons attributed for
balance transfer space across all ticket sizes. Asset this are complying with the criteria and conditions of
quality, however, remains stable. Implementation the subsidy like area, size of the house, etc
of the PMAY subsidy scheme remains muted in this  Post demonetisation, almost all lenders are insisting
region. on ECS payment
 Most South Indian branches of HFCs are reporting  Delinquency and stress levels are different across
YoY disbursement growth of 15-20% (for the large regions. While places like Madurai and Trichi have
players) and 5-20% (for the smaller players). Demand good asset quality, cities like Coimbatore have high
for high-value houses (above Rs 4-5mn) is sluggish; NPAs. It seems that the higher domination of
property prices continue to be unaffordable, with a industrial activity in Coimbatore vs. Madurai and
huge supply of stock Trichy (which are dominated more by Agri-related
activity) has led to a cyclical income downturn
 Demand for affordable housing (Rs 1 to 2mn) remains
in a sweet spot. Many private players are jumping  RERA implementation is creating short-term hiccups,
into the fray to build affordable houses, given as many projects are yet to be registered

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Three States: A financial drive through Southern India


DHFL is part of the Wadhawan Group, with a pan-

India presence. It has a market cap of Rs 193bn, and
an AUM of Rs 941bn. During FY17, the AUM loan
book grew 20%, and ROA improved 1.57%, owing to
a drop in the cost of funds. During 1HFY18, its
disbursement grew 42% leading to 25% growth in
AUM. We have a buy Rating on the stock which
trades at 2.1x FY19E BV.
 DHFL is one of the fastest-growing large HFCs in the
 Despite a sluggish external environment, REPCO HOMES
disbursement growth is at 50-80%. Realignment of
Repco Homes is a south-focused mid-sized HFC,
the sales area and strengthening of channel partners
with an AUM of Rs 90bn. The company largely
are helping to generate large leads. An upgradation in
processes is helping improve the turnaround time focuses on the self-employed, who have no access
to formal credit. Over the past year, it faced
 Home loans and LAP split is 90% and 10%; Home challenges in disbursement growth owing to
loans is a key focus area unregistered land woes and asset quality stress,
especially in the LAP book. During 2QFY18, the loan
 Blended yield on Home loans is 9.6%
book growth rate was muted at 10% but NIMs were
 Self-construction, along with plot purchase steady. We have a BUY rating on the stock which
constitutes 50-60% of the demand trades at 2.6x FY19E BV.
 20-25% of the disbursement is the takeover of loans  The proportion of the self-employed and salaried
classes is 60:40, in-line with the company’s overall
 Loans under the assessed income category have 1-
2% higher rates
 The average ticket size is Rs 1.4mn for Home loans
 The proportion of the self-employed and salaried
class (including govt employees) is 40:60  Home loan interest rates for the salaried class are
between 8.75 and 9.75%, and for the self-employed
 With the average ticket size at Rs 1.2-1.5mn, strong
between 10.25 to 11.25%. LAP is between 12-15%,
growth is witnessed in the Rs 1 to 3mn range of
and the average yield is 10.3%
 With stress levels prevalent in high ticket-sized loans,
 80% of loans are sourced through DHFL’s employees
the focus is on lower ticket-sized loans (below Rs
 PAR>30 is 1.5-2%, NPA is 0.8% 7.5mn)

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Three States: A financial drive through Southern India

 Loan melas, held twice a quarter, are significant DHFL VYSYA HOUSING
contributors to demand/leads DHFL Vysya, an unlisted HFC, is part of the
 Registration issues for unregistered plots and political Wadhawan Group. The company has a focus on
inaction in TN have created supply hurdles, impacting housing, with customers largely in the low and
demand middle-income segment. As on 1QFY18, it has an
AUM of Rs 19.2bn.
 Disbursement growth in TN continues to face
headwinds, and is between -5% and 20%. Balance  Home loan and LAP is 90:10
transfer has increased in the last 4-5 months.
Customers have been given lower interest rates, and
 Yield on HL is 11.75% and LAP is 13.5%; average yield
at 12%
are being poached by large players; 15-20% balance
transfer rate  Average ticket size is Rs 1-1.2mn
 Delinquencies and NPAs remain divergent  75% is the salaried class, 25% non-salaried
 Branches in Coimbatore continue to face stress,  Disbursement growth rate is 40-50%
with PAR and NPAs exceeding 9% and 4-5%
respectively. This is owing to large exposure in 4  PAR>30 days is 3%, GNPA 1.4%
to 5 construction, paper mills and money lending
accounts  Beneficiaries of the PMAY subsidy are few, owing to
urban areas not being included in the PMAY-Urban
 However, the branch in Madurai has good asset Scheme. Also, many properties are not qualifying,
quality, PAR>0 of 7% and NPA at 0% owing to larger sizes

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Three States: A financial drive through Southern India

Secured products (LAP/BL)  Some NBFCs offer products according

quantity/quality of information available

The LAP market is very aggressive. The presence of  Most players are focused on smaller ticket-sized
a spectrum of players like private banks, HFCs and loans
NBFCs has led to highly competitive interest rates.
 PNBHF is offering sub-10% interest rates, and
Weak credit demand is countered with balance executes maximum BT cases
transfers and offers of higher LTV and lower
interest rates.
 Many players are inflating property valuations,
leading to effective LTVs in excess of 100% (Tata and
Some players are reportedly considering Bajaj Fin in Kerala). In some regions of TN, Hero
unapproved structures for sanctioning of loans. Fincorp and L&T Fin are following similar practices.
Though overall stress levels are stable, they are CAPF provides additional PLs to existing LAP
high in pockets like Coimbatore, with a high customers (thus having overall LTVs in excess of
proportion of the self-employed and small-scale 100%)
industries. GST has created a higher level of formal  Most large proposals come through the DSA channel,
credit demand. Formal credit and GST are leading and are traditionally more prone to asset quality
to higher disclosed revenues. Given the lack of LAP issues and higher payouts
products in many PSU banks, most NBFCs poach
customers from them. CIFC
 Area covered is within a distance of 20-40kms/
 LAP/BL is highly competitive, with rates as low as branch
8.5%, and a tenure of up to 15 years for high ticket-
size loans  Sourcing is a mix of DSA and the internal sales force,
varying from region to region
 Balance transfer is high, at ~25-30% of
disbursements. Lenders will avoid sanctioning of  Customers are mostly retailers and traders
loans in an individual’s name, which allows them to  Avg fee is at ~2%; below Rs 5mn – Rs 2,950 + 1.5%;
levy pre-payment charges and retain borrowers between Rs 510mn – Rs 5,900 + 1.5%, and above Rs
 Demand is increasing owing to GST, owing to the 10mn – 1.75%
need for money that is accounted for  LTV ranges from 50-60%, depending on the type of
 Client feedback has prompted lenders to believe that property (SORP or commercial). LTVs were higher
retailers have adjusted to GST, though the wholesale before demonet
channel continues to be impacted  Payouts are in the range of 0.5-1%, lower as
 LTV is in the range of 50-60%. However, the provision compared to peers
of loans against unauthorised structures has led to
 Avg yields differ from customer to customer, and
above-100% LTV loans
depend on documents available. CIFC lends at rates
 Stress levels are lower for loans under Rs 10mn, as as low as 11.5%, and can go up to ~14%. Average
compared to those above this slab tenure is 8-10 years
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Three States: A financial drive through Southern India

 Though the focus is on lower ticket-sized loans (Rs  Competition is fierce. Many players are offering lower
3.5-4mn), CIFC is also dealing in large-ticket loans, rates, higher LTVs (by inflating valuations or including
albeit to a lesser extent unapproved constructions), and longer tenures CIFC
is continuously losing deals to PNBHF, owing to
 Apart from a couple of regions (particularly Salem), undercutting in terms of yields and LTVs
asset quality is largely below company averages. The
negative effects of demonetisation and GST are still
visible in certain regions

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Three States: A financial drive through Southern India

Microfinance FULLERTON
Fullerton is owned 100% by Temasek. It has a pan-
The demonetisation impact is now negligible on
India presence, with a network of 437 branches as
MFIs. Collection efficiency has recovered, and is on March 31, 2015. FICCL’s loan portfolio was Rs
~96-97% in most pockets. However, a few affected
86bn as on FY15, comprising Personal loans
districts continue to report high PAR (15-17%). The
(37.9%), Mortgage loans (23.6%), Rural Financing
number of non-paying customers has also reduced
(18.7%), SME Financing (14.5%), Vehicle loans i.e.
notably. Most MFIs are focusing on disbursing
2W, Car loans and CV loans (5.2%).
Individual loans to customers who have a good
credit history, or secured loans.  Offers Microfinance, 2W loans, Growing Enterprise
loans, Equipment loans and Mortgage loans
 Our interactions reveal that collection efficiency has
improved to 90-98%. However, urban centres in
 70% MF and 30% non-MF loans
Bangalore continue to report weak collections. The  Collection efficiency has returned to normal levels of
farm loan waiver has had no impact, with the 99%+
borrower understanding the difference. Many players  PAR is 1%, while GNPA (120 days) is 0.5%
resorted to top-up loans to help customers clear past  Cashless disbursement since April 2016
dues  One credit officer covers 30-40 groups. He interacts
 Players like Bandhan and Janalakshmi are aggressive with every customer. There is a 3-day education
in providing very high-ticket-sized loans, even to programme, followed by a group recognition test
delinquent customers. Many players are now  Fake IDs are minuscule
focussing on disbursing individual loans to good
 Possession of an Aadhar card is compulsory for new
loans, which is expected to remove duplicate and
fake customers from the system over a period of
time. The overall write-off from current delinquencies
is expected to range between 4-5%
 We believe MFIs play an important role in financial
inclusion of the bottom-of-the-pyramid by providing
capital for income-generating purposes. Many players
have moved or are moving to superior usage of
technology via E-EYC and Instant Pay. This is expected
to strengthen the business model, and also lead to
lower opex costs. Many players are now focussing on
individual loans outside the JLG for customers with a
good credit record, or those who can provide security

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Three States: A financial drive through Southern India

Equitas Holdings, headquartered in Tamil Nadu, is a Ujjivan Small Finance Bank is an NBFC-MFI-turned
lender to underserved segments in urban, semi- SFB. It commenced banking operations in February
urban and rural India. With an AUM of Rs 72bn, it 2017, and has a pan India presence. Its market cap
Equitas-Centre meeting provides Microfinance, Used CV loans, MSE and is Rs ~40bn and has an AUM of Rs. ~64bn.During
Housing Finance loans. Its ROA dropped from FY17, the AUM loan book grew by 18%. 95% of the
3.05%in FY16 to 2% in FY17, owing to its conversion loan book comprises Microfinance loans (JLG+
to a SFB from a NBFC-MFI. Currently, we have a Individual). We have a BUY rating on the stock,
Neutral rating on the stock which trades at 2.2x which trades at 2.5x FY19E BV.
 PAR >0 is in the range of 15-17%; pre-demonetisation
Non-vehicle branch in Madurai it was lower than 1%
 The branch is 10 years old, and the current AUM is  During demonetisation, collection efficiency was
split into MF/M-LAP/other loans down to 60%. It has now recovered to 90%+
Ujjivan-Centre meeting  Non-paying customers have reduced considerably,
 Collection efficiency is 99.5%, with PAR>0 of 1% and now stand at 6-7%. However, there is little hope
 It is targetting 20-25% growth rate in the loan book of recovery from non-paying customers. Women
cannot be forced to repay, and there is interference
 It operates in the radius of 30 kms, focussing on non- from local politicians/workers too
MF loans like M-LAP, Business loans, Housing loans  Offers JLG loan at 21.25% and non-JLG at 23.25%.
etc Ujjivan continues to maintain its lending rate, which
Vehicle branch in Trichy is helping it overcome burgeoning opex witnessed
during SFB conversion
 Loan book grew 30% last year, and continues to  No fresh loans are issued without an Aadhar card. Old
expand at the same rate loans were issued against ration cards, driving
 PAR>0 in the used CV segment is 20%, GNPA is at 4.5- licenses, voter ID cards etc
5%, and has remained stable  Top-up loans were given to customers who started
repaying loans
 LTV stands at 65%  Disbursement is completely cashless
 Lending rate is 20-24%  Credit bureau checks are strong, with no loans given
to delinquent customers. There were complaints
 Provides top-up loans, if 30% of the principal has about a few NBFCs not reporting to the credit bureau
been repaid
 Focusing on Individual loans, based on credit history
in the JLG format
 Plans to start the secured lending book
 The bank branch is six months old, and has
CASA/RD/TD of Rs 3.3/5.3/6.5mn respectively
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Three States: A financial drive through Southern India

FEDERAL BANK Federal bank offerings

In its stronghold region, FB is performing well.
Despite chunky exposure in the Corp segment
(largely the Kerala govt), asset quality remains
stable. (Though below the overall banks’ level).
Though FB faces stiff competition in some Retail
loans (HL, PV and LAP, owing to higher payouts by
other banks), the bank continues to hold on to its
share without diluting risk. While the Kerala
business is highly skewed towards deposits, TN is
heavily tilted towards advances. Maintain BUY with
a TP of Rs 137 (2x Sept-18 ABV of Rs 68).
 FB has made some operating changes, which have
helped optimise performance
 Setting up credit hubs for credit appraisal and
better underwriting
 Bringing in the RM structure across products, and
offering tailor-made solutions to large
enterprises, and strengthening relationships
 Exclusive tie-ups with the Kerala government for
remittances. Presence in all payment gateways will
also aid fee income
 Advances growth in Tamil Nadu has been mainly
owing to the SME portfolio being driven by higher
ticket-sized loans. Though growth in the SME slice has
shot up, credit underwriting is being given special
 Retail growth was hit owing to certain bottlenecks
(namely ambiguity in business licenses). Mgt believes
that these should ease off hereon
 Major competition includes AXSB and SBIN (only in
HL), and regional banks like KVB and LVB

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Three States: A financial drive through Southern India

CUB Customers CITY UNION BANK CUB’s gold loan offering

CUB’s focus on building strong relationships with its
customers has enabled the bank to grow at a
steady rate and also maintain asset quality. CUB’s
offerings are largely in line with other private
banks, so customers are comfortable with higher
perceived rates Iron, steel and textiles are the main
contributors of NPAs. Maintain BUY with a TP of
196 (2.75x Sept-19E ABV of ~Rs 72).
 Focus on customer retention, steady growth and
maintaining asset quality
 CUB also offers a variety of personalised services
 The contribution of transactions via alternate
channels has been increasing in all branches
 CUB is poaching customers not only from PSBs, but
Motivational meets by Dr Kamakodi
also from large private banks. Customers of e-SBH are
unhappy with SBIN’s service, and are being poached
by the bank
 CUB largely focuses on granular loans. However,
exposures to the Iron & Steel segment has impacted
NPA levels
 Top mgt is committed to giving the greatest
satisfaction to both customers and employees.
Digitally advanced (Monetary: salary, ESOPs and performance bonuses)

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Three States: A financial drive through Southern India

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Three States: A financial drive through Southern India

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