Credit Suisse - India Financials Sector (Jun-2017)

6 June 2017
Asia Pacific/India
Equity Research
Diversified Financials
India Financials Sector

Research Analysts
INITIATION
Sunil Tirumalai
91 22 6777 3714
sunil.tirumalai@credit-suisse.com Rise of mini financial conglomerates
Ashish Gupta
91 22 6777 3895 Figure 1: Lenders from diverse backgrounds gaining scale and
ashish.gupta@credit-suisse.com
eyeing growth
Viral Shah
91 22 6777 3827 6,000 Loan books (Rs mn)
viral.shah@credit-suisse.com Diversified NBFCs Traditional NBFCs Pvt. banks
5,000 FY17
Kush Shah Rs18.5
91 22 6777 3862 4,000 FY17 bn
FY17 Rs7.7bn
kush.shah@credit-suisse.com
Rs2.2bn
3,000 FY15 FY15
Rs5.6 Rs13.4
FY15 bn
2,000 Rs1.2bn bn
1,000
-
ABNL - NBFC…
LICHF
MMFS
Motilal
Indiabulls
L&T Finance
IndusInd Bk
Edelweiss
Axis
Kotak Mahindra
IIFL
JM Financial
Yes Bk
Rcap
Piramal
STFC
Bajaj Finance
HDFC
Chola
ICICI Bk
Federal
SCUF
HDFC Bk
Source: Company data, Credit Suisse estimates
■ Non-traditional players growing their lending books. The Indian lending

market is seeing the 'coming of age' of a group of companies with non-
traditional backgrounds (capital markets/banking/industrial conglomerates,
etc.). Having built loan books of ~Rs200 bn+, these companies are using
lower funding costs available, due to deeper bond markets and their own
improved credit ratings, to scale up in the mainstream lending segments
(including retail).
■ More to this story than just lending. These companies continue to retain
their traditional non-lending business strengths—with 30% plus of revenues
from non-interest/fee streams. Spread across diverse, underpenetrated
segments such as capital markets, wealth management, mutual funds,
insurance etc., these offer unique growth drivers absent in traditional non-
banking finance companies (NBFCs). They should be beneficiaries of an
increasing shift to financial assets/equities in savings.
■ Initiate with OUTPERFORM on IIFL/Edelweiss. Both come from a capital
market background, but have built new businesses of scale already. We
see a path to improving profitability/ROE for both. IIFL is among the few
younger lenders who has already built a retail book and is market leader in
the wealth management business (30% of PBT). We see continued growth
leading to a 36% EPS CAGR. We initiate with a Rs650 target price.
Edelweiss's efforts on building a retail platform in the past few years should
start delivering good growth. The company is the dominant leader in
distressed asset finance and is investing in an insurance venture with
Tokio. We expect a 34% EPS CAGR. We initiate with a Rs220 target price
Key risks include interest rates (housing finance being an area of focus)
and pricing in wealth management and broking.
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
6 June 2017
Focus charts
Figure 2: Diversified players started with focus on wholesale lending—with heavy dependence on builder
finance and structured credit. This is possibly due to high funding costs
Diversified NBFCs Traditional NBFCs Banks
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Kotak Mahindra
IndusInd Bk
Piramal
IoB
BoB
LICHF
MMFS
Axis
L&T Finance
IIFL
Edelweiss
Motilal
Yes Bk
BoI
JM Financial
SBI Bk
UBI
PNB
Rcap
Bajaj Finance
HDFC
Chola
STFC
ABNL - NBFC business
SCUF
ICICI Bk
Federal
HDFC Bk
Retail Whole sale
Figure 3: Deepening bond markets and upgrades to

credit ratings in some cases allow for a focus on Figure 4: We expect IIFL/Edelweiss to continue to
mainstream loan segments deliver faster-than-industry growth
12.00% Funding costs % 40%
Edelweiss
Securities
3Y loan book CAGR %
upgraded to
AA/Stable from AA-
11.00% /Positive in FY17 30%
10.00% 20%
10%
9.00% AB Finance upgraded
to AA+ from AA in
FY15 0%
8.00%
Indiabulls
MMFS
LICHF
IIFL
Edelweiss
BHAFIN
Chola
SCUF
FY12 FY13 FY14 FY15 FY16 FY17

IIFL Rcap ABNL - NBFC business L&T Finance Edelweiss
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 5: Fee revenue streams in underpenetrated

sectors could drive non-linear growth for diversified Figure 6: Expect strong PBT growth with ROE
NBFCs expansion for IIFL and Edelweiss
100% Non interest income as % of total income 40,000
Diversified 35,000
80% Traditional
NBFCs NBFCs 30,000
60% 25,000
40% 20,000
15,000
20%
10,000
0% 5,000
MMFS
L&T Finance
LICHF
Edelweiss
Indiabulls
Motilal
IIFL
Rcap
JM Financial
Bajaj Finance
Chola
STFC
SCUF
-
FY14 FY15 FY16 FY17 FY18E FY19E FY20E
IIFL Consol PBT (LHS) Edelweiss Consol PBT (LHS)
India Financials Sector 2

6 June 2017
Rise of mini financial conglomerates

Diversified companies growing lending business
Lower interest rates, In this report, we study some recent entrants into the lending space—who come from
deepening bond various backgrounds such as capital markets, advisory, healthcare, real estate, and other
markets, rating financial services. We see these companies now becoming meaningful players in lending
upgrades enabling market across the wholesale and retail segments. Lower interest rates, deepening bond
entry into mainstream markets and credit rating upgrades for some of these companies are helping them move
retail segments from risky high-yielding wholesale assets to more mainstream retail segments.
Small scale and diversified presence across multiple segments should allow for continued
strong growth for these companies: we have IIFL and Edelweiss (initiation in this report)
among the faster growing NBFCs in our coverage at 26-28% CAGR.
Stronger fee revenue streams a differentiating factor

Strong non-lending A key differentiator between these diversified NBFCs and traditional companies is the
businesses like capital strong presence in non-lending businesses. Both as a legacy (capital markets, investment
markets, IB, wealth and banking, among others.) and as recent entry (wealth management, mutual funds,
asset management, insurance, distressed assets, and the like), these companies get 30%+ of their revenues
ARC, insurance from non-credit businesses. These revenue streams not only allow for non-linear profit
growth and ROE expansion, but also help with the stability and cross-sell opportunities
that come from such diversified models. In particular, we explore the wealth management,
broking and ARC businesses in greater detail.
Some of these companies have on-boarded strategic/PE investors in key subsidiaries.
Multiple levers for growth and ROE

Initiate on Edelweiss We initiate coverage on IIFL and Edelweiss with Outperform ratings and 20-22% target
and IIFL with continued price upsides. While smaller scale in relation to sector opportunities allow for healthy 26-
visibility of strong PBT 28% loan growth to continue, we expect the non-lending businesses to continue to grow
growth as well. In particular, the ongoing shift to financial assets in savings in general, and
equities in particular, should help. Overall, we have 34-36% EPS CAGR for the two
companies over next three years. This should allow for gradual ROE expansion from the
current 15-17% levels to 21-23%. At these growth and profitability levels, we believe the
valuations are reasonable compared to peers.
Our 12-month forward target price of Rs650 for IIFL is based on 15x P/E multiple on 24-
month forward EPS. Our 12-month forward target price of Rs220 for Edelweiss is based
on 13x P/E multiple on 24-month forward EPS (ex-insurance). We give zero value to the
insurance business in investment phase.
Figure 7: FY19 P/B vs ROE Figure 8: FY19 P/E vs EPS growth

35 50 SCUF
IBHFL
30
Edelweiss
LICH BHAFIN
25 40 IIFL
EPS growth FY19
SCUF IIFL BoB

Chola
ROE FY19
MMFS
20 SHTF HDFC HDFC bk Bajaj Fin
Yes PNB Chola
Edelweiss IndusInd 30 IBHFL
15 Axis UBI SBI Axis IndusInd
BoB
J&K SBI ICICI SHTF Yes
10 UBI Kotak LICH HDFC bk
20 IDFC Bk Kotak
IDFC Bk Bajaj Fin
BoI PNB ICICI
5 BHAFIN
IOB HDFC
0 10
0.0 1.0 2.0 3.0 4.0 5.0 6.0 0 5 10 15 20 25 30 35
P/B FY19 P/E FY19

6 June 2017
Sector valuation summary

Figure 9: Sector valuation summary
Company Current Rating Target +/ - Mkt Cap P/ BVPS (x ) ROE PE (x ) EPS Growth (yoy %) ROA
Price (In $ bn)
4-Jun-17 Rs Rs (%) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E
Coverage Universe
LIC Housing Finance 739 OUTPERFORM 780 6% 5.8 2.8 2.3 1.9 22.4 22.9 23.2 13.5 11.1 9.1 41.7 22.4 22.1 1.8 1.8 1.8
Shriram Transport 1,023 OUTPERFORM 1,220 19% 3.6 1.8 1.5 1.3 17.7 19.3 21.3 10.8 8.6 6.7 69.6 26.1 28.7 2.7 3.0 3.3
Indiabull Finance 1,169 OUTPERFORM 1,185 1% 7.7 3.5 3.0 2.5 28.0 30.3 32.7 13.4 10.6 8.3 39.1 26.5 28.0 3.4 3.6 3.8
M&M Finance 373 OUTPERFORM 410 10% 3.3 2.7 2.2 1.9 15.0 21.5 22.3 19.7 11.8 9.1 110.3 67.2 29.6 1.9 2.7 2.9
IIFL Holdings 549 OUTPERFORM 650 18% 2.7 3.4 2.8 2.0 19.4 22.6 23.0 19.0 13.6 10.1 34.5 39.3 35.0 2.8 3.1 3.1
Cholamandalam 1,050 OUTPERFORM 1,230 17% 2.5 3.2 2.6 2.2 20.3 22.0 23.6 17.1 13.1 10.0 33.7 29.7 30.9 2.6 2.8 3.0
SCUF 2,311 OUTPERFORM 2,600 12% 2.4 2.5 2.1 1.8 17.8 22.1 23.0 15.3 10.5 8.4 72.6 45.6 24.6 3.4 4.1 4.2
Edelw eiss 179 OUTPERFORM 220 23% 2.3 2.9 2.3 1.9 17.7 20.5 20.7 17.9 12.7 10.2 37.2 40.7 24.6 1.7 2.0 2.0
Bharat Financial (SKS) 746 OUTPERFORM 800 7% 1.6 3.3 2.6 2.1 24.3 22.3 24.0 15.2 13.1 9.6 124.3 16.2 36.1 5.9 4.9 5.0
HDFC Core OUTPERFORM 3.1 2.5 2.2 20.4 19.7 19.3 16.1 14.0 12.0 19.1 14.5 16.8
Bajaj Finance 1,359 UNDERPERFORM 670 -51% 11.6 6.1 5.0 na 20.3 19.0 na 34.6 29.2 na 12.0 18.5 na 3.5 3.4 na
Not covered companies (IBES consensus)
Magma Fincorp 132 0.5 1.3 1.2 8.9 11.8 15.6 10.7 883% 45% 1.4 1.7
Repco 779 0.8 3.7 3.1 2.7 17.6 18.4 17.3 23.1 18.7 17.1 13% 23% 10% 2.1 2.2 2.0
PFC 126 5.2 0.8 0.7 0.7 16.3 15.9 15.7 5.0 4.7 4.3 213% 5% 10% 2.4 2.3 2.3
REC 189 5.8 1.0 0.9 0.8 17.6 17.2 15.6 5.9 5.5 5.4 1% 8% 1% 2.8 2.7 2.3
Reliance Cap 557 2.2 0.8 0.8 8.9 3.9 9.9 8.3 31% 19% 2.1 2.4
L&T Finance 132 3.7 2.5 2.2 1.9 14.9 17.1 17.8 18.5 14.0 11.7 39% 32% 20% 1.6 1.9 1.9
JM Financial 125 1.6 2.3 2.2 18.2 19.7 17.8 15.3 19% 16%
Motilal 1,130 2.5 7.6 6.1 20.1 20.0 20.4 34.3 26.5 17.8 33% 29% 49% 14.9 2.0 2.5
Piramal 2,807 7.5 3.6 2.8 6.6 5.3 2.6 24.9 18.4 54% 35% 6.7 3.8 3.4
ABNL 1,717 3.5 2.1 54.8 94%
Muthoot Finance 434 400 2.7 2.3 2.0 1.7 18.9 18.8 18.2 13.2 11.5 10.3 12% 15% 11% 4.2 4.3 3.8
Note: Priced as of 5 June 2017.

Source: Company data, IBES estimates for not covered companies, Credit Suisse estimates for covered companies

6 June 2017
Diversified companies growing lending

business
Companies with established brand/ franchise other
than lending…
Recent entrants In this report, we study some recent entrants into the lending space which come from
coming from various various backgrounds like capital markets, advisory, healthcare, real estate, and other
backgrounds have their financial services. We believe these companies come with strengths from their traditional
own set of strengths businesses: Retail touchpoints, brand recognition and association with financial services,
corporate and SME relationships, etc.
Figure 10: Companies from diverse backgrounds now focusing on retail lending
Wholesale lender
L&T
Finance
Capital Markets Conglomerates
EDELWEISS
Piramal
RETAIL
IIFL
Motilal
Oswal
LENDING
Aditya Birla
JM Nuovo
FINANCIAL
Reliance
Capital
Financial services
Source: Company data

6 June 2017
…now growing their lending businesses

Meaningful players in We now see these companies growing their lending businesses aggressively—with the
lending result that they are already meaningful players in some segments.
Figure 11: Loan book breakdown of diversified lenders (as at 31 Mar-2017)
Corporate CV/ vehicle Corporate
loans Home 10% loans Infra fin
3% Loans/ LAP 4% 7%
Corporate Home
12% loans
MFI Loans/ LAP Constructio Home
26% Capital
5% 31% n fin Loans/ LAP
Market/
SME & LAS 13% 41%
Others 12%
Infra fin 4% Structured SME &
49% Constructio credit SME & Others
n fin 27% Others 26%
7% 3%
Structured Constructio CV/ vehicle
credit n fin 9%
LTHF AUM (Rs666bn) 10% ABNL AUM (Rs331bn) 1% Reliance Capital AUM (Rs273bn)
Home Structured Constructio

Loans/ LAP credit SME & n fin
ARC cap 13% Capital 11% Others 14%
employed Market/
5%
17% LAS
8% MFI Home
SME &
Others 1% Loans/ LAP
Structured 49%
8% Capital CV/ vehicle
credit
Constructio Market/ 13%
25% Constructio Agri/ rural
n fin LAS
n fin fin Gold
89% 5%
26% 3% 13%
Edelweiss AUM (Rs250bn) Piramal AUM (Rs227bn) IIFL AUM (Rs223bn)
ARC cap Capital Capital

employed Market/ Market/
5% LAS LAS
14% 6%
Retail book
Structured
credit
13% Wholesale book
Constructio
n fin Home
68% Loans/ LAP
94%
JM Financial AUM (Rs119bn) Motilal AUM (Rs43bn)

With plenty of runway Overall, these companies have a fairly small scale currently that allows for a longer growth
for growth runway.
Figure 12: Diversified NBFCs among the fastest growing lenders—off a small base
6,000 Loan books (Rs bn)
Diversified NBFCs Traditional NBFCs Pvt. banks
5,000 FY17
Rs18.5
4,000 FY17 bn
FY17 Rs7.7bn
Rs2.2bn
3,000 FY15 FY15
Rs5.6 Rs13.4
FY15 bn
2,000 Rs1.2bn bn
1,000
-
ABNL - NBFC…
LICHF
MMFS
Motilal
Indiabulls
IndusInd Bk
L&T Finance
Edelweiss
Axis
Kotak Mahindra
IIFL
JM Financial
Yes Bk
Rcap
Piramal
STFC
Bajaj Finance
HDFC
Chola
ICICI Bk
Federal
SCUF
HDFC Bk
Note: Figures in bubbles indicate loan book


6 June 2017
Initial focus heavily towards wholesale credit—IIFL stands out for large
retail credit operations
Initial focus on In general, the initial focus of these players has been on wholesale/corporate credit
wholesale credit (except for IIFL, which has already transitioned to a majority retail portfolio). Motilal has
started with the retail home loan segment—though the loan book is still of a smaller scale.
Figure 13: Diversified players started with a focus on wholesale lending
Diversified NBFCs Traditional NBFCs Banks
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Kotak Mahindra
IndusInd Bk
Piramal
BoB
LICHF
MMFS
IoB
Axis
L&T Finance
IIFL
Edelweiss
Motilal
Yes Bk
BoI
UBI
SBI Bk
PNB
JM Financial
Rcap
Bajaj Finance
Chola
HDFC
STFC
ICICI Bk
Federal
ABNL - NBFC business
SCUF
HDFC Bk
Retail Whole sale
Initial wholesale tilt due to high funding costs and poor distribution
infrastructure?
Driven by higher cost We believe that the choice of segments for these diversified players is influenced by a
of funds and lack of couple of factors:
retail distribution
■ Higher funding costs in initial years before they get respectable ratings. This makes
them uncompetitive in lower yielding segments.
■ Building a retail distribution/origination channel takes time—while wholesale loans are

easier to build with low operational investments.
As a combination of these two factors, we currently see a heavy tilt towards wholesale,
high-yielding segments such as builder loans, structured credit and capital markets among
these players.
■ Some players, such as Piramal and JM Financial, have grown builder finance books
comparable in size to traditional players, such as Indiabulls.
■ Others, such as Edelweiss and LTFH, are in structured credit to mid-corporate

segments.
■ Companies with a capital market/broking business background are also leading in

loans against securities.
■ Some of the companies are trying to capitalise on the efforts to clean up non-
performing assets (NPA) on bank balance sheets by growing Asset Reconstruction
Company (ARC) businesses. In particular Edelweiss has seen strong asset
acquisitions in recent years making it the largest ARC in India.

6 June 2017
Figure 14: Developer lending books Figure 15: Structured credit portfolios
600 80
Real estate developer funding book (Rs bn) Structured credit book (Rs bn)
500 70
60
400
50
300
40
200 30
100 20
10
-
JM Financial
Finance
LICHF
Indiabulls
Edelweiss
HDFC
IIFL
Piramal
Rcap
ABNL -
-
NBFC
L&T
Financial
Edelweis
Finance
Finance
Piramal
Bajaj
L&T
JM
s
Figure 16: Loans against securities’ portfolios Figure 17: Distressed asset loan books
45 Loans against securities (Rs bn) 450 ARC AUM (Rs bn)
40 400
35 350
300
30
250
25
200
20
150
15
100
10 50
5 -
- Edelweiss JM Financial Arcil* Phoenix Reliance
ABNL Bajaj Edelweiss JM HDFC IIFL Motilal Capital
Finance Financial Bank
Note: Capital market portfolio assumed as LAS for ABNL, JM Financial, IIFL * As of Mar-2016
Better credit ratings and access to bond markets could help open up
lower yielding segments
Better credit ratings Going forward, however, as companies have started getting better ratings, lower funding
and well developed options open up—allowing entry into lower yielding segments. In particular, the deepening
bond markets bond markets have helped access funding stream that is often cheaper than bank loans.

6 June 2017
Figure 18: Over the last couple of years, funding costs have been coming down
12.00% Funding costs % Edelweiss Securities
upgraded to AA/Stable
11.50% from AA-/Positive in
FY17
11.00%
10.50%
10.00%
9.50%
9.00%
AB Finance
8.50% upgraded to AA+
from AA in FY15
8.00%
FY12 FY13 FY14 FY15 FY16 FY17
IIFL Rcap ABNL - NBFC business L&T Finance Edelweiss
Source: Company data, Credit Suisse research
Retail credit now in focus for most players

While IIFL has been early to steer towards retail loans, we now see a growing trend of
retail focus from the others as well. Housing finance is a common area of focus. Other
segments of interest include: SME lending, rural markets, gold, consumer durables,
among others.
Figure 19: Stated areas of focus in retail lending

Company Recent management commentary on focus areas
IIFL Home loans, CV, SME, gold
Edelweiss Home loans, agri, SME
JM Financial Home loans, SME loans
Motilal Home loans
Rcap Home loans
ABNL - Financial services business SME financing, personal loans, home loans, infra financing
L&T Finance Rural, home loans, infra financing
Source: Company data, Credit Suisse research]
The common focus on housing finance seems to do with the vastness of the opportunity,
and the ability to build a loan book of scale on this segment (large ticket size and long
tenures). While this is not a segment where we would be particularly worried about asset
quality (secured loans with regulated LTVs), profitability is a risk to be aware of. Some
players, such as Motilal, are in higher yielding segments (12% plus yields) and are still
making decent profitability (15% plus reported ROE). However, there is always the risk of
yield compression by better-funded lenders.

6 June 2017
Figure 20: Having low funding costs is important in housing finance;

established players are placed better
9.0% Incremental cost of funds
Diversified NBFC
8.5%
Specialist mortgage co.
8.0%
7.5%
7.0%
Edelweiss RCAP IIFL PNB HF Indiabulls LIC HF
(HFC) HF
In our estimates for Edelweiss and IIFL, we have flat/falling NIMs because of this concern.
Non-credit retail presence could help
Retail touch points in For some of the players with retail touch points on other businesses, these could shorten
non-credit businesses the time to market to build a retail NBFC franchise.
could help
Figure 21: Diversified NBFCs already have retail distribution franchises in place
Diversified NBFCs Established retail NBFCs for comparison
- 1,112 NBFC branches
- 1,200 plus service locations for capital market business
IIFL STFC 918 branches
- 33 offices including in seven major global financial centres in
Wealth business
- 71 offices in 61 cities for Life Insurance business
Edelweiss - Retail lending presence in 52 cities & 3,100 villages SCUF 976 branches
- 80 plus offices for wealth management business; 249 own offices
- Wealth management presence in 6 cities
JM Financial Bajaj Finance 304 consumer branches; 519 rural locations
- 17 branches & 81 service centres for asset management business
Motilal 120 branches in 9 states for HFC business LICHF 245 marketing offices
Piramal - Funding 259 plus projects of 79 plus developers in top 6 cities Indiabulls HF 220 branches
- AMC business: 160 branches
- Commercial finance: presence in 44 cities
Reliance Capital - Home finance: presence in 90 cities MMFS 1182 branches
- Life insurance business: 750 offices
- Broking and distribution business: 80 branches
- Overall 1,350 branches and touch points for its financial services
businesses
ABNL - NBFC business HDFC 427 outlets
- Life insurance division: 489 branches
- AMC business: 109 branches
- Overall financial services have 700 plus points of presence across
24 out of 29 states in India
L&T Finance Cholamandalam 703 branches
- Lending business: 200 plus branches
- Mutual fund: branch network covering 55 cities

6 June 2017
Diversified book and small scale should allow strong

growth in the coming years
We expect a healthy We expect IIFL and Edelweiss, two companies coming under coverage in this report, to
growth rate for deliver among the fastest loan growth over the next few years.
Edelweiss and IIFL
Figure 22: We expect Edelweiss and IIFL will grow Figure 23: IIFL and Edelweiss have healthy tier 1
at a CAGR of 26-28% until FY20 compared to peers
40% 25.0%
3Y loan book CAGR % 22.2% Tier I %
35% 20.0% 18.1%
30% 15.2% 14.6%
15.0% 14.0% 14.0% 13.7% 13.6%
13.2%
11.8%
25%
10.0%
20%
15% 5.0%
10% 0.0%
LICHF
MMFS
IIFL
Edelweiss
Bajaj Finance
Chola
STFC
HDFC
SCUF
AB Finance
5%
0%
BHAFIN IIFL Edelweiss SCUF Indiabulls MMFS Chola LICHF
Source: Company data, Credit Suisse estimates Note: As of FY17. Source: Company data, Credit Suisse research

6 June 2017
Stronger fee revenue streams are a

differentiating factor
Non-credit fee/advisory revenues are high vs
traditional NBFCs
Non-credit businesses Diversified NBFCs have strong non-credit income streams. This is partly because they
already have a are: (1) fairly recent entrants in the lending business; or (2) their non-credit businesses are
meaningful quite strong.
contribution to profits
Figure 24: These diversified NBFCs have a significant portion of business/profits from non-lending
businesses
Asset mgmt Information
and others mgmt
3% Others 7%
Wealth Lending
14%
mgmt + business
Capital mrkt 22%
20% Pharma
Asset & 24%
wealth
Lending Lending
mgmt Capital mrkt
business business
34% 30%
77% 69%
JM Financial FY17 PAT breakdown Motilal FY17 PAT breakdown Piramal FY17 PBT breakdown
Insurance Others Solar power Asset mgmt Others

4% 4% 1% 4% 2%
Textile,
insulators
Asset mgmt Other fin
and Urea
29% services
32%
including
Lending lending
business Life 56%
Lending
63% insurance
business
11%
94%
Reliance Cap FY17 PBT breakdown ABNL FY17 EBIT breakdown L&T Finance FY17 PAT breakdown
BMU, Corp
and others Capital
11% mrkt/others
18%
Lending business
Wealth
mgmt + Lending Others
capital mrkt business
27% Lending Wealth 52%
business mgmt
62% 30%
Edelweiss Ex-Insurance FY17 PAT

breakdown IIFL FY17 PAT breakdown
Note: (1) JM Financial: PAT breakdown from 4Q17 presentation.
(2) Motilal: Consolidated PAT breakdown from 4Q17 presentation. Others comprises PAT from fund-based businesses
(3) Piramal: Segment results from 4Q17 exchange filings. Lending business PBT calculated by subtracting entire finance costs of Rs4,365 mn from Lending business segment results
(4) Reliance Capital: Segment results from 4Q17 exchange filings. Lending business PBT calculated as summation of segment PBT for commercial finance, home finance and Finance &
Investments segment. Insurance includes life insurance and general insurance PBT
(5) ABNL: Consol. EBIT breakdown from 4Q17 presentation. Lending business EBIT calculated after deducting interest costs since it is an operating expense for that division. Lending business
includes NBFC, Housing Finance, Health Insurance, Private Equity, Broking, Wealth Management, Online Personal Finance Management , General Insurance Broking businesses
(6) L&T Finance: PAT breakdown 4Q17 presentation. Lending business includes loss from de-focussed products. Asset management refers to Investment management segment; Others
includes PAT from Wealth management, Private Equity , L&T Vrindavan, L&T Access and LTFH Standalone
(7) Edelweiss ex. insurance: Ex. insurance PAT breakdown from 4Q17 presentation. Insurance contributes -18% of consolidated PAT. Lending business refers to credit business
(8) IIFL: PAT (pre-minority) breakdown from 4Q17 presentation.
.

6 June 2017
Figure 25: Diversified NBFCs earn a high share of revenues from non-credit
businesses: i.e. fee income is high
90% Fee income as % of total income
80%
Diversified NBFCs Traditional NBFCs
70%
60%
50%
40%
30%
20%
10%
0%
Indiabulls
MMFS
LICHF
IIFL
L&T Finance
Motilal
Edelweiss
JM Financial
Rcap
Bajaj Finance
Chola
STFC
SCUF
Wealth management: Untapped market

Plenty of opportunity in We believe that wealth management/private banking is an untapped market in India, with
wealth management in ~180,000 high net-worth individual (HNI) families (HNI defined as those having financial
India assets of >US$1 mn), as per the CS Global Wealth Report. Not only is the current market
underpenetrated, the market could also grow with economic growth and rising income
levels.
Figure 26: Wealth of millionaires as a % of GDP Figure 27: India has 180,000 millionaires
350% 16,000
311%
Wealth of millionaires % of GDP 13,554 Absolute number of millionaires ('000)
Thousands
300% 14,000
12,000
250% 227% 223%
10,000
200% 182%
150% 8,000
150% 6,000
100% 4,000 2,225
51% 1,637
47% 46% 44% 2,000
50% 178 172 150 115 63 35
-
0%
Singapore
Malaysia
Germany
India
Brazil
USA
UAE
UK
Hong Kong
Brazil
Germany
USA
UAE
Singapore
India
UK
Malaysia
Hong Kong
Source: Credit Suisse Wealth Report 2016, IMF, Credit Suisse estimates Source: Credit Suisse Wealth Report 2016, Credit Suisse estimates
In particular, we believe that the opportunity outside the top metros is only now opening
up.

6 June 2017
Figure 28: HNI population concentrated in Mumbai/ Figure 29: …however, rising prosperity in smaller
Delhi ... cities should open up opportunities elsewhere
50,000 Rest of India
City-wise split of HNIs 5%
40,000
30,000 Next 10 cities

23%
20,000
Top 4 cities
55%
10,000 Next 6 cities
17%
-
Mumbai Delhi Hyderabad Bengaluru Pune
Source: Company data, Credit Suisse estimates Note: Top 4 cities: Mumbai, Delhi, Chennai, Kolkata; Next 6 cities: Bengaluru, Ahmedabad,
Pune, Hyderabad, Nagpur, Ludhiana; Next 10 cities: Chandigarh, Surat, Jaipur, Lucknow,
Kanpur, Jamshedpur, Amritsar, Raipur, Indore, Aurangabad
Source: Top of the Pyramid 2016, Kotak Wealth Report
A 2016 study by Asian Private Banker indicated that the top 10 wealth managers
accounted for ~US$56.9 bn in assets under advice (AUA). Of these, four were home
grown.
Figure 30: Wealth management space in India dominated by IIFL followed

closely by Kotak
10.0 250
9.0
8.0 200
7.0
6.0 150
5.0
4.0 100
3.0
2.0 50
1.0
- -
IIFL Kotak Barclays Julius Baer BNP Standard Deutsche Sanctum Centrum
Paribas Chartered
AUM ($bn) (LHS) # RMs (RHS)
Source: Asian Private banker 2016, Credit Suisse estimates
Exit by MNCs should The trend of home-grown private banks growing faster should continue with many MNCs
help home grown announcing exits in recent years.
wealth managers grow
Figure 31: Many of the global banks have exited the wealth management space
Date Bank
May-2013 Morgan Stanley sold off its wealth management business in India to Standard Charted
Jun-2013 UBS started winding down its wealth-management and commercial banking businesses in India
Sep-2015 RBS sold off its wealth management operations in India to Sanctum Wealth
Nov-2015 HSBC shut down its private banking services through which it provided asset management services in India
Indeed, some of the Indian wealth managers have grown rapidly after even this recent
survey. For instance, IIFL now has US$18.5 bn in AUA, while Edelweiss estimates the
WM market at ~US$120 bn (6% of GDP). In established markets, advised wealth as % of
GDP is much higher at 60-75%%, as seen below. Assuming, India can get to 30% advised
wealth as % of GDP in ten years, we could expect industry growth of 22-23% CAGR.

6 June 2017
Figure 32: Significant room for wealth management AUA to grow in India
Professionally managed wealth as % of GDP

80%
70%
60%
50%
40%
30%
20%
10%
0%
North America Latin America China India
Source: McKinsey global wealth management survey; IMF, Credit Suisse research
Wealth management profitability in India at global standards

Indian wealth managers Leading Indian wealth managers like IIFL already report revenue yields and profitability
starting to provide on-par with global leaders. While some pressure on yields can be expected due to
higher value competition, we also highlight that the Indian wealth management industry is graduating
products—to help away from plain vanilla 'custody' products to higher value products (discretionary products
protect yields and use of balance sheet). This could help protect revenue yields for the industry.
Figure 34: Climbing up the value chain—higher

Figure 33: Yields for India comparable to global yielding products should help offset any
levels competitive pressures on yields for Indian WM
120 Yield comparison (bps) IIFL - changing mix towards higher yielding products
99 100%
100 91 Segment - revenue yield (bps)
90%
83 81 80% NBFC Assets-300bps
80
70%
60% Investment Manager-150bps
60
50%
40% Distribution Assets-100bps
40
30%
Advisory Assets-75bps
20 20%
10%
Custody Assets-5bps
- 0%
India (IIFL) Julius Baer Asia (Ex-Japan) North America FY14 FY15 FY16 FY17
Source: McKinsey Global Wealth Management Survey, Julius Baer, company data, Source: Company data, Credit Suisse estimates
It is also notable that operating leverage with scale should be more meaningful for Indian
companies—given the low employee costs (the primary variable cost).

6 June 2017
Figure 35: Cost-to-income ratio in India superior to global benchmarks
Cost/Income ratio %
100%
78% 76%
80% 70%
60%
60%
40%
20%
0%
North America Asia (Ex-Japan) India (IIFL) Julius Baer
Source: McKinsey Global Wealth Management Survey, Julius Baer, company data
Figure 36: India wealth management costs (IIFL)— Figure 37: Employee costs (primary variable costs
scope for operating leverage with scale in WM) lower in India vs global benchmarks
Employee costs as % of total costs
70%
Employee cost
66%
(Variable), 33%
65%
PBT, 40%
60%
56%
55%
Admin
50%
expenses
IIFL Julius Baer
(Fixed), 26%
Note: As of FY17. Source: Company data, Credit Suisse research Source: Company data, Credit Suisse estimates
Traditional capital markets: Opportunity still large

Rising equity The contribution of capital market businesses to the profits of these diversified companies
penetration in India has come down over the years—due to growth in other business lines.
should help
Figure 38: Share of broking revenue as a % of net total revenue is declining
70.0% Broking / capital market revenues as % of net total revenue

60.0%
FY13
50.0%
FY14
40.0% FY15
FY16
30.0% FY17
20.0%
10.0%
0.0%
Motilal IIFL Rcap
Note: IIFL: revenues from capital market activity; Motilal: brokerage and operating income; RCAP: brokerage and distribution income

6 June 2017
However, this does not take away the fact that the capital markets business has strong
growth potential. The penetration of equities in India is quite low, and the recent event of
demonetisation could be a catalyst for stronger retail inflows into the markets.
Figure 39: Share of financial assets in household Figure 40: …but there is still plenty of potential to
savings has been increasing in recent years… grow when compared with other countries
100% 100%
80% 80% 40%

59% 59% 55%
69% 67% 62% 63%
60% 60%
40% 40%
60%
20% 41% 45%
20% 33% 38% 37% 41%
31%
0%
0%
India Emerging economies Developed economies
FY2012 FY2013 FY2014 FY2015 FY2016
Financial assets Non- Financial assets
Financial assets Non- Financial assets
Source: RBI, Credit Suisse estimates Source: NSE DRHP, Credit Suisse estimates
Figure 41: Within financial assets, the share of equities is abysmal in India—
Indians park more money in cash and deposits
60% Share of equities in financial assets
48%
50% 44%
40% 37%
30%
20%
20% 15%
10%
10% 6%
0%
Hong Kong US Singapore Korea Japan UK India
Source: RBI, NSE DRHP, Credit Suisse estimates
Post demonetisation, Indian equity markets have benefited from the surge in retail money
flowing into domestic institutional investors and direct retail participation.
Figure 42: A steady improvement in daily volumes on Indian exchanges

300,000 10,000
9,000
250,000
8,000
200,000
7,000
150,000 6,000
5,000
100,000
4,000
50,000
3,000
0 2,000
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
ADTV (Rs mn) (LHS) NIFTY 50 (RHS)
Note: Equity ADTV for BSE and NSE; Nifty 50 Index as of each FY end
Source: Bloomberg, company data

6 June 2017
Buoyant markets have also allowed for good growth in equity issuances.
Figure 43: Capital-raising activity picking up Figure 44: Key domestic broker franchises
1,000 140 3.0% Total ADV market share %
120
800 2.5%
2.2% 2.2%
100 2.1%
600 2.0%
80 1.6%
60 1.5%
400
40
1.0%
200 0.7% 0.7%
20
0.5%
- -
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
0.0%
Capital raised* (Rs bn) Nos of primary issuances Kotak IIFL Motilal Edelweiss* JM Financial Rcap
Securities
* Includes capital raised through rights issuance Note: Cash + FAO ADV market share for FY17; * ADV based on 9M FY17 for Edelweiss
IPO funding: At the confluence of multiple business lines

IPO funding has become a meaningful (albeit lumpy) contributor to profits of some of the
diversified NBFCs—especially with several large successful IPOs in recent months. The
opportunity comes about due to the high demand for IPOs in bull markets in the HNI
segment (usually restricted to less than 10-15% of total issue size). The wealth
management businesses allow HNI customers to leverage significantly (sometimes 20x) to
subscribe to the HNI segment of the IPO. The loans are extended for a duration of ~7
days, with yields in the 7-8% range.
As long as the issue remains oversubscribed higher than this level in the HNI segment
(i.e., more than the leverage implied in the loan), the whole transaction should be
reasonably risk-free for the lender. It helps if the wealth manager has an NBFC within the
group (for the lending), and the group is also a broker in the IPO (knowledge of the level of
demand building up for the IPO).
In our estimate, the total HNI IPO funding opportunity in the recent D'Mart IPO would have
been ~Rs330 mn net of NBFC funding costs—that's ~1.75% of the total IPO size itself!
This is over and above the normal banking fees that the bankers would have earned from
the deal. The HNIs that participated may have seen ~8% return over seven days on their
invested amounts (or ~430% annualised return).
In a bull market, this business model feeds on itself (a kind of virtuous cycle—where
leveraged participation by HNIs drives up demand in the HNI segment—in turn, forcing
HNIs to lever up more in order to get a meaningful chunk of the oversubscribed IPO.
While this seems like an attractive business to be in, it should be treated like a bull market
phenomenon that is non-recurring, in our view. When markets cool and investors stop
seeing good listing gains, they may shy away from taking such leveraged bets. We do not
treat these revenues as recurring business in our valuation model. However, this does
show the benefit of diversified businesses with broking, investment banking, NBFC and
wealth management businesses under one roof.

6 June 2017
Distressed assets: Pace of asset acquisition could

slow but a growing business nonetheless
New regulation to The sale of stressed assets to ARCs started with good momentum only from FY14. So far,
reduce pace of asset our estimate is that ~12% of total stressed assets of the banking system have been sold to
acquisition by ARCs the ARC industry. The pace was higher in initial years when ARCs could buy out by paying
only 5% of the value in cash (the '5:95' scheme). The pace of buyouts slowed post the
Reserve Bank of India (RBI) circular of August 2014 which increased the share of cash to
15%. For a given IRR expectation, ARCs will be willing to ascribe a lower value to an
asset with higher cash commitments—and hence the sale to ARCs becomes a less
attractive option for the banks.
Figure 46: Only 12% of total stressed assets have

Figure 45: Assets sold to ARCs over time been sold to ARCs to date
600 60%
512 508 49% Sold to
500 45% 450 50% ARCs, 2,200
40% , (12%)
40%
400 360 40%
300 30%
19% 21% 227 220 Total
19% 17% 206
200 20% stressed
142
93 105 101 assets,
100 70 10% 16,180 ,
18 20 12 21 (88%)
- 0%
2010 2011 2012 2013 2014 2015 2016 2017
Dues acquired (Rs bn) Acquisition price (Rs bn) Acquisition price % of dues
Source: JM Financial ARC Note: Stressed assets include SME, restructured, special mentioned, watchlist and written-off
problem loans of Rs2 tn
Growth to be limited by capital appetite of ARCs
With new RBI rules mandating higher provisioning against assets which banks sell to
ARCs for less than 50% cash from FY18, there could a further slowdown in ARC asset
purchases. Our analysis shows that if an ARC was willing to pay close to 100% of book
value under the 5:95 structure, they may be comfortable paying up to 60 cents to the dollar
under 15:85. This further could fall to ~40-45 cents to the dollar under 50:50 and could
dampen asset sales to ARCs by banks.
Figure 47: ARCs may insist on deeper discounts for Figure 48: While capital deployment by ARCs such
assets while buying from banks—as their as Edelweiss may stay high, the size of loans
commitment could rise to 50% plus purchased could fall due to the 50:50 shift
50.0%
ARC IRR scenarios
45.0%
40.0%
35.0%
30.0% 5:95
25.0% 15:85
20.0% 50:50
15.0% 18% IRR
10.0%
5.0% Cents to the dollar
0.0%
20 30 40 50 60 70 80 90 100

6 June 2017
However, we still believe that ARCs add value in the process of resolving stressed asset
problems in the banking industry, as:
■ They usually bring specialised skills and industry-specific turnaround expertise to the
table which some banks (especially PSUs) may find it difficult to grow on their own.
■ With the right of first refusal accorded to any ARC that has already acquired the
highest and more than 25% share of the asset, ARCs have the opportunity to quickly
consolidate debt holdings—which could help quicken decision making in the resolution
process.
Overall, while we expect Edelweiss ARC to continue investing a similar amount of capital
into the ARC business as in recent years, the pace of build-up of the ARC book should
slow.
Strategic investors in important subsidiaries

Investors in Some of these diversified companies have acquired strategic/private equity investors in
subsidiaries provide key subsidiaries. While these give comfort to availability of capital and expertise in
capital and expertise respective businesses, they may lead to some holding company discount.
Figure 49: Diversified NBFCs have strategic/PE investors in key subsidiaries

Company Strategic/PE investor Business invested in
CDC NBFC
IIFL
General Atlantic Wealth Management
CDPQ ARC
Edelweiss
Tokio Marine Life insurance
JM Financial Vikram Pandit and Associates Real estate lending
APG Infrastructure financing
Piramal CPPIB; Ivanhoe Cambridge Real estate financing
Bain capital Distressed asset investing
Rcap Nippon Life Life insurance
Fintech: More an opportunity than a threat

Private banks and The entry of disruptive technology is a reality that all traditional financial services providers
NBFCs ahead of PSU need to deal with. In general, we believe that private sector banks and NBFCs are ahead
banks in adoption of of incumbent PSU banks in adopting new technology. Some of the recent entrants into
new technology lending are using their lack of legacy to their advantage and starting with higher tech
adoption in their processes. Many are coming out of multiple years of technology
investments into building platforms, feet-on-street devices and the like.
Edelweiss and IIFL Indeed, we also find some companies, such as IIFL and Edelweiss, partnering with these
partnering with start- non-traditional start-up lenders to grow their business. Overall, we believe disruptive
ups which could be an technology could eventually play to the advantage of these companies (rather than being a
advantage threat to their business models).

6 June 2017
Figure 50: Diversified NBFCs' digital initiatives

Company Digital initiatives
 Fully digitised retail loan origination process
IIFL  Non-cash push even in traditional cash-heavy segments such as gold loans
 Tie-ups with new-age loan originators such as Indifi, Lendingkart
 Working with IBM to build technology platform for wealth management and insurance
Edelweiss  Engaging with start-ups to identify and implement new technologies (ex. Indifi)
 Cognitive email response engine using AI for retail finance
 Digitisation of KYC, customer acquisition, etc. Competitive turnaround time in many segments
L&T Finance
 Investments into analytics and early warning signals
Motilal  New apps for sales, credit, clients and vendors. A collections app will soon be launched

6 June 2017
Multiple levers for growth and ROE

Healthy loan growth should continue
Coming from a small The diversified NBFCs that have entered the lending business are among the fastest
base, IIFL and growing lenders currently—growing off a small base compared to traditional established
Edelweiss should lenders.
continue to grow
faster… We expect the companies coming under coverage—IIFL and Edelweiss—to continue
expanding their loan books at a 26-28 % CAGR over the next three years.
Figure 51: Expecting Edelweiss and IIFL to expand at a 26-28% CAGR over the
next three years
40% 3Y loan book CAGR %
35%
30%
25%
20%
15%
10%
5%
0%
BHAFIN IIFL Edelweiss SCUF Indiabulls MMFS Chola LICHF
PBT growth relying not just on loan growth

…with strong non- Strong non-interest revenue lines for these companies imply PBT growth not restricted by
credit businesses fund-based interest income growth. Indeed, as seen in the earlier section, some of the
driving even faster PBT non-lending businesses such as wealth management and capital markets themselves
growth have high growth potential. Thus, the scope for PAT growth surpassing loan growth is
high.
Figure 52: We expect PBT to experience a 41%

CAGR over the next three years for IIFL… Figure 53: …and a 34% CAGR for Edelweiss
40,000 IIFL Consol 80% 25,000 Edelweiss Consol 60%
35,000 70%
20,000 50%
30,000 60%
25,000 50% 40%
15,000
20,000 40% 30%
15,000 30% 10,000
20%
10,000 20%
5,000 10%
5,000 10%
- 0% - 0%
FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY14 FY15 FY16 FY17 FY18E FY19E FY20E
PBT (LHS) % yoy growth (RHS)
PBT (LHS) % yoy growth (RHS)

6 June 2017
ROE should improve with growing balance sheet

For the companies coming under coverage, we expect ROE expansion due to scale in
lending business (opex leverage) as well as growth in non-lending businesses. The delta
is higher for Edelweiss where we expect slower increases in insurance losses.
Figure 54: Edelweiss’ ROE tree

Consolidated DuPont on balance sheet assets FY15A FY16A FY17A FY18E FY19E FY20E
Credit business - Interest income/ assets 7.7% 8.4% 9.3% 10.2% 10.8% 10.8%
Finance costs/ assets 7.5% 7.8% 6.9% 7.0% 7.2% 7.2%
NIM 0.2% 0.6% 2.4% 3.3% 3.6% 3.6%
Non-interest income/assets (includes all revenues excluding credit business) 8.4% 7.3% 6.9% 7.0% 7.0% 6.8%
Opex/ assets 5.8% 5.7% 6.2% 6.6% 6.7% 6.5%
PPoP/ assets 2.7% 2.3% 3.1% 3.7% 3.9% 3.9%
Credit costs/ assets 0.6% 0.5% 0.8% 1.0% 0.8% 0.8%
Tax/ assets 0.8% 0.7% 1.0% 1.1% 1.2% 1.2%
Minority interests/ assets 0.0% -0.1% -0.1% -0.1% -0.1% -0.1%
ROA 1.4% 1.2% 1.5% 1.7% 2.0% 2.0%
ROE 10.9% 12.1% 15.2% 17.7% 20.5% 20.7%
Figure 55: IIFL’s ROE tree

Consol DuPont on balance sheet assets FY15A FY16A FY17A FY18E FY19E FY20E
Interest income/ assets 15.3% 13.7% 11.9% 10.9% 11.2% 10.7%
NIM 5.8% 4.8% 3.6% 2.9% 3.2% 2.9%
Non-interest income/ assets (includes all revenues excluding credit business) 8.2% 7.2% 7.6% 8.5% 9.2% 9.6%
Opex/ assets 8.6% 7.1% 5.7% 5.5% 5.5% 5.2%
PPoP/ assets 5.4% 5.0% 5.5% 6.0% 6.9% 7.2%
Tax/ assets 1.6% 1.5% 1.6% 1.9% 2.1% 2.2%
Minority/assets 0.2% 0.2% 0.5% 0.7% 0.8% 0.9%
ROA 2.9% 2.7% 2.7% 2.8% 3.1% 3.1%
ROE 19.0% 17.3% 17.7% 19.4% 22.6% 23.0%
Initiating coverage on Edelweiss and IIFL

At ~13x/2.3-2.7x FY19 P/E/P/B, respectively, we find that IIFL and Edelweiss stocks are
reasonably valued compared to peers with similar growth and ROE profiles.
Figure 56: FY19 P/E vs EPS growth Figure 57: FY19 P/B vs ROE
50 35
SCUF IBHFL
30
Edelweiss LICH BHAFIN
40 IIFL 25 SCUF IIFL
EPS growth FY19
BoB
Chola
ROE FY19
MMFS
20 SHTF HDFC HDFC bk Bajaj Fin
PNB Yes
Chola Edelweiss IndusInd
30 IBHFL 15
BoB Axis
UBI SBI Axis IndusInd J&K SBI ICICI
SHTF Yes 10 UBI Kotak
LICH IDFC Bk HDFC bk Kotak IDFC Bk
20 BoI PNB
Bajaj Fin 5
BHAFIN ICICI
IOB
0
10 HDFC 0.0 1.0 2.0 3.0 4.0 5.0 6.0
0 5 10 15 20 25 30 35 P/B FY19
P/E FY19

6 June 2017
IIFL: Outperform with a Rs650 target price

Initiate on IIFL with Our 12-month forward target price of Rs650 for IIFL is based on a 15x P/E multiple on 24-
Outperform rating and month forward EPS. We believe that this is a fair multiple given the established diversified
Rs650 TP… retail lending franchise and good visibility on non-interest income growth (primarily wealth
management), leading to strong earnings growth visibility.
Edelweiss: Outperform with a Rs220 target price
…and Edelweiss with Our 12-month forward target price of Rs220 for Edelweiss is based on a 13x P/E multiple
Outperform rating and on 24-month forward EPS (ex. insurance). We give zero value to the insurance business
Rs220 TP which is in an investment phase—this is a long-term option value on this stock.
We believe the above multiple is justified given the trading multiples of similar placed
peers, and Edelweiss' stronger growth visibility on loan book and earnings.
Risks to our target/ratings

IIFL
Risks include: (1) Risks to our Rs650 target price and OUTPERFORM rating recommendation, include:
tighter interest rates
leading to spread ■ One of the key areas of focus for IIFL is the home loan segment. We see the company
pressure, (2) slow having a relatively weak footing on funding costs here. Management believes that it
growth in new areas of can manage spreads by selling down assets to banks. There is a risk that the expected
focus and yield level of demand for their loans does not fructify, in which case the company may see a
compression in wealth sharper-than-expected squeeze on net interest margins.
management
■ Two of the new growth areas for the company, commercial vehicle and SME lending,
have established incumbents. While IIFL is banking on the opportunity being large in a
growing market, there is a risk that growth rates may disappoint if the company fails to
gain market share.
■ We model yields in wealth management to stay flat for IIFL. This is an intensely
competitive space and regulations have in the past hurt revenue yields (such as direct
code mutual fund purchases). Adverse competitive or regulatory events could lead to
lower revenue yields than expected.
Edelweiss
Risks include: (1) lower Risks to our Rs220 target price and OUTPERFORM rating on Edelweiss are:
NIM or higher credit
costs in new growth ■ The chosen areas for growth in lending are either intensely competitive (affordable
areas in lending, (2) housing) or are untested by other players (agri commodities). We factor in stable NIMs
regulatory changes in and credit costs for Edelweiss in its lending business, and there is a risk that in these
ARC driving down businesses growth may not be as profitable.
growth, (3) higher-than-
expected losses in ■ Edelweiss retail lending business is concentrated in 4-5 states only (primarily South
insurance business India)—this exposes the company to geographic concentration risks.
■ We assume that Edelweiss ARC gets an opportunity to deploy Rs60 bn in capital over
the next three years, in buying bad assets from banks. The rules on ARC asset
purchases are changing and becoming less attractive for banks. While our model
factors these changes by assuming the lower value of assets acquired (i.e., a lower
bang for the buck), it is possible that the banks stay away from future asset sales. This
would lead to lower growth in earnings.
We have accounted for ~Rs6.6 bn in equity infusion into the insurance business over
the next three years—with decelerating growth in losses. If momentum slows there is a
chance that losses will continue to rise faster than expectation.

6 June 2017
Brief company profiles

Figure 58: Profile of diversified companies outside of lending business
Company background Businesses Strengths in traditional businesses
IIFL Capital markets 1. Broking/capital markets 1.Broking
2. Credit business - market share of 2.2%
3. Wealth management - 4 mn plus customers serviced from 1,200+ locations
2. Wealth management
- AUAs: Rs1.2 tn
- 22 offices across 7 countries and major Indian cities
Edelweiss Capital markets/Investment 1. Credit business 1. Broking
advisory 2. Wealth management - Market share of 1.6%
3. Broking, investment banking - 270 offices across India
4. Life insurance 2. Wealth management
- AuAs: Rs0.6 tn
- 0.41 mn clients (HNIs+UHNIs+mass affluent)
3. Asset management
- AUMs: Rs182 bn
4. Asset Reconstruction Company
- Partnership with CDPQ
- AUMs: Rs395 bn
5. Life Insurance
- 21,400 personal financial advisors
- Holds 51%
JM Financial Capital markets/Investment 1. Broking 1. Broking
advisory 2. Credit business - Market share of 3.1%
3. Asset management and alternative asset 2. Wealth management
management - AUAs: Rs236.6 bn
- Team of 67 wealth advisors
- Presence in 7 top cities in India
3. Asset reconstruction company
- AUM: Rs118.7 bn
4. Asset management
- AUMs: Rs136.7 bn
Motilal Capital markets 1. Broking 1. Broking
2. Asset and management - Market share: 2.1%
3. Housing finance - 0.78 mn retail broking clients
- Distribution reach of 2,000 plus business locations across 511 cities
2. Asset/wealth management
- Wealth AUA: Rs101 bn
- AMC AUM: Rs203 bn
Piramal Healthcare, IT 1. Real estate financing 1. Real estate financing
2. Alternative asset management - Lending book for construction finance
- AUM: Rs244 bn
2. Alternative asset management
- Fund structure with Piramal sponsor commitment
- AUM: Rs71.6 bn

6 June 2017
Rcap Diversified financial services: 1. Broking 1. Broking

operations spanning capital 2. Asset/wealth management - Market share of 0.7%
markets, credit businesses, 3. Life insurance - 80 branches
asset and wealth management; 4. General insurance -0.88 mn broking accounts
life and general insurance 5. Credit business 2. Life/ general insurance
- 750 offices
- AUM: Rs172.5 bn
3. Wealth management
- AUA: Rs41.3 bn
4. Asset management
- AUM: Rs3.6 tn
ABNL Business conglomerate with 1. Broking 1. Asset management
interests across sectors. 2. Asset management - AUM: Rs2.1 tn
Financial services soon to be 3. Credit business - 3.3 mn unique customer folios
demerged into standalone 4. Insurance 2. Insurance
business - AUM: Rs350 bn
- 1.5 mn policy holders
L&T Finance Part of infrastructure major, 1. Credit business 1. Wholesale lending
L&T 2. Asset management - AUM Rs414 bn
3. Wealth management 2. Asset management
- AUM: Rs393 bn

6 June 2017
Asia Pacific/India
Diversified Financial Services
IIFL Holdings Limited (IIFL.BO)

Rating OUTPERFORM
Price (05-Jun-17, Rs) 549.35 INITIATION
Target price (Rs) 650.00
Upside/downside (%)
Mkt cap (Rs/US$ mn)
18.3
174,661/ 2,715
Retail lender of scale; leader in wealth management
Number of shares (mn) 317.94
Free float (%) 35.3 ■ We initiate coverage on IIFL Holdings Limited with an OUTPERFORM
52-wk price range 549.35-207.55 rating and a target price of Rs650. We believe IIFL has demonstrated a
ADTO-6M (US$ mn) 2.7
Target price is for 12 months.
scalable retail lending platform with its Rs223 bn loan book built over the last
ten years. The company has made a niche for itself in the retail broking
Research Analysts space. The traditional capital markets business now contributes less than
Sunil Tirumalai 20% to profits, as IIFL has built scalable businesses elsewhere.
91 22 6777 3714
sunil.tirumalai@credit-suisse.com ■ Established retail lending business with a US$3 bn loan book. IIFL has
Viral Shah been amongst the most successful of recent entrants into the NBFC space to
91 22 6777 3827
viral.shah@credit-suisse.com
build a scalable retail lending book. As the efforts of the last 3-4 years of
setting up a base for home loans, gold and CV financing bear fruit, we expect
the company to experience a 28% CAGR over the next three years. While the
rising focus on home loans (high competition) could lead to margin
compression, we expect opex gains as it achieves scale. Overall, we expect
gradual ROA improvement in lending.
■ Leading wealth management franchise. IIFL has emerged as the dominant
private banker for high networth individuals (HNIs) in India, with US$18.5 bn
in assets under advice. We see this as an underpenetrated market with a
long runway of growth. IIFL's full portfolio of services (across broking, lending
and wealth management) should help it capitalise on this industry's growth.
The company is already at par with global leaders here on profitability, and
we expect stable yields with improving opex ratios going forward.
■ Valuations. At 13.6x/2.8x FY19E P/E/P/B, we find the stock reasonably
valued for visibility on earnings growth and ROE expansion. Our 12-month
forward target price of Rs650 is based on 15x 24-month forward EPS. Please
see page 24 for key risks.
Share price performance Financial and valuation metrics

Year 3/17A 3/18E 3/19E 3/20E
Pre-provision op profit (Rs mn) 13,874.0 20,018.5 29,048.9 40,320.9
Pre-tax profit (Rs mn) 12,240.0 17,885.0 25,328.3 34,646.2
Net attributable profit (Rs mn) 6,862.0 9,230.8 12,859.1 17,363.0
EPS (CS adj.) (Rs) 21.51 28.92 40.29 54.40
Change from previous EPS (%) n.a. - - -
Consensus EPS (Rs) n.a. 25.99 31.40 35.40
EPS growth (%) 31.7 34.5 39.3 35.0
P/E (x) 25.5 19.0 13.6 10.1
The price relative chart measures performance against the Dividend yield (%) 0.8 0.8 0.8 0.8
S&P BSE SENSEX IDX which closed at 31,309.49 on BVPS (CS adj.) (Rs) 137.83 162.01 197.24 279.80
05/06/17. On 05/06/17 the spot exchange rate was P/B (x) 3.99 3.39 2.79 1.96
Rs64.33/US$1 ROE (%) 17.7 19.4 22.6 23.0
Performance 1M 3M 12M ROA (%) 2.7 2.8 3.1 3.1
Absolute (%) 11.8 50.3 144.6 Tier 1 ratio (%) 18.1 15.8 13.9 15.2
Relative (%) 7.0 42.3 128.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

6 June 2017
IIFL Holdings Limited (IIFL.BO )

Price (05 Jun 2017): Rs549.35; Rating: OUTPERFORM; Target Price: Rs650.00; Analyst: Sunil Tirumalai
Earnings Drivers 03/17A 03/18E 03/19E 03/20E Company Background
NBFC loan growth 14.18 27.00 30.00 28.00 IIFL is one of India’s diversified non-banking financial services
Wealth management AUA growth 51.24 37.22 36.62 34.88 company operating diverse businesses across credit business,
Credit business NIM 5.83 5.89 5.81 5.66 Wealth and Asset management, Financial advisory, Broking and
Wealth management Yield 1.05 0.94 0.92 0.91 other advisory services.
Wealth management Cost to 59.50 59.29 52.91 50.53
income Statement (Rs mn)
Income 03/17A 03/18E 03/19E 03/20E Blue/Grey Sky Scenario
Interest income 49,123 65,138 85,607 113,134
Interest expense 20,921 26,795 33,697 43,752
Net interest income 28,202 38,342 51,910 69,382
Total income 28,202 38,342 51,910 69,382
Personal expense 0 0 0 0
Other expenses 14,328 18,324 22,861 29,061
Total expenses 14,328 18,324 22,861 29,061
Pre-provision profit 13,874 20,019 29,049 40,321
Loan loss provisions 1,759 2,265 3,858 5,819
Operating profit 12,115 17,754 25,190 34,502
Associates/JV 0 0 0 0
Other non-operating inc./(exp.) 125 131 138 145
Pre-tax profit 12,240 17,885 25,328 34,646
Taxes 4,018 6,412 9,015 12,267
Net profit before minorities 8,222 11,473 16,314 22,379
Minority interests 1,360 2,242 3,454 5,016
Reported net profit 6,862 9,231 12,859 17,363
Analyst adjustments 0 0 0 0
Net profit (Credit Suisse) 6,862 9,231 12,859 17,363
Balance Sheet (Rs mn) 03/17A 03/18E 03/19E 03/20E
Assets
Gross customer loans 228,962 301,724 417,712 581,205 Our Blue Sky Scenario (Rs) 780.00
Risk provisions 2,400 3,031 3,941 5,044 Our blue sky scenario assumes faster-than-expected growth in the
Net customer loans 226,557 297,636 412,397 574,402 NBFC segment, better yield on wealth management AUA and a
Investment & securities 0 0 0 0 higher multiple.
Cash & cash equivalents 30,114 39,684 41,771 40,684
Fixed assets 0 0 0 0
Our Grey Sky Scenario (Rs) 455.00
Intangibles 0 0 0 0
Our grey sky scenario assumes lower-than-expected growth in the
Other assets 42,944 26,910 10,853 21,365
NBFC segment, higher-than-expected asset quality stress and a
Total assets 299,615 364,229 465,021 636,451
Liabilities lower multiple.
Interbank deposits 0 0 0 0
Customer deposits 0 0 0 0 Share price performance
Total deposits 0 0 0 0
Other liabilities 243,246 298,078 384,246 524,486
Total liabilities 243,246 298,078 384,246 524,486
Shareholders' equity 43,816 51,357 62,527 88,700
Minority interests 12,552 14,794 18,249 23,265
Preferred stock 0 0 0 0
Total liabilities & equity 299,614 364,229 465,021 636,451
Asset quality & Capital 03/17A 03/18E 03/19E 03/20E
Asset Quality (%)
NPL/ gross loans 1.5 1.7 1.6 1.5
B/S loan loss coverage 68.4 58.4 58.4 58.4
Capital adequacy ratio 18.1 15.8 13.9 15.2
Tier 1 ratio 18.1 15.8 13.9 15.2
Equity Tier 1 ratio 18.1 15.8 13.9 15.2
The price relative chart measures performance against the S&P BSE SENSEX
Per share 03/17A 03/18E 03/19E 03/20E
IDX which closed at 31,309.49 on 05-Jun-2017
Shares (wtd avg.) (mn) 319 319 319 319
EPS (Credit Suisse) (Rs) 21.51 28.92 40.29 54.40 On 05-Jun-2017 the spot exchange rate was Rs64.33/US$1
BVPS (Rs) 137.83 162.01 197.24 279.80
Tangible BVPS (Rs) 137.83 162.01 197.24 279.80
DPS (Rs) 4.50 4.51 4.51 4.51
Earnings 03/17A 03/18E 03/19E 03/20E
Growth (%)
Revenue 24.1 36.0 35.4 33.7
Operating expense 7.6 27.9 24.8 27.1
Pre-provision profit 47.5 44.3 45.1 38.8
Net profit 34.2 34.5 39.3 35.0
Valuation 03/17A 03/18E 03/19E 03/20E
EPS growth (%) 31.7 34.5 39.3 35.0
P/E (x) 25.5 19.0 13.6 10.1
P/B (x) 3.99 3.39 2.79 1.96
P/TB (x) 4.0 3.4 2.8 2.0
Dividend yield 0.8 0.8 0.8 0.8
Profitability & margins (%) 03/17A 03/18E 03/19E 03/20E
ROE stated 17.7 19.4 22.6 23.0
ROE - CS adj. 17.7 19.4 22.6 23.0
ROA - CS adj. 2.7 2.8 3.1 3.1
Gearing (x) 6.5 7.0 7.4 7.4
Source: Company data, Thomson Reuters, Credit Suisse estimates

6 June 2017
Retail portfolio of scale

Figure 59: Retail lending could piggy back on 1200+
established nationwide presence in broking Figure 60: IIFL among the few diversified companies
business (1,112 NBFC branches already) to have built a retail loan book
1,400 Number of retail touchpoints 250 120%
1,200+ 1,182
1,200 100%
200
976
1,000 918
823 80%
150
800 703
60%
600 100
427 40%
400
245 220 50 20%
200
- 0%
- IIFL Rcap Edelweiss ABNL - Motilal JM Financial
MMFS
IIFL
LIC HF
Indiabulls
Bajaj Finance
Chola
HDFC
STFC
SCUF
NBFC
Retail loan book (Rs bn) (LHS) Retail % of total loan book (RHS)
Figure 61: Home loans, CV, MSME and gold are Figure 62: We expect a 28% CAGR in AUM over the
focus areas next three years
MFI MSME & 45% IIFL AUM growth %

Capital Market 1% Others
5% 5% 40%
35%
Construction &
CS estimate
Home Loans 30%
Real Estate
24%
14% 25%
CV 20%
13%
LAP 15%
25% Gold
13% 10%
5%
IIFL Loan book - Rs222.8bn 0%
Focus areas Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E
Source: Company data, Credit Suisse estimates Note: Mar-2017 includes the NBFC assets transferred to wealth management for consistent
comparison. Source: Company data, Credit Suisse estimates
Figure 63: Home loans key focus area—here IIFL’s Figure 64: Management intends to expand off-book
higher cost of funds could risk NIM compression funding—the appetite needs to be tested
8.50% 25%
Incremental cost of funds Off book funding % of total funding
21% 20%
8.20%
20%
7.90% 14% 14%

8.00% 15% 13%
7.83%
9%
7.60% 10%
6%
7.50% 5%
2% 2%
0%
7.00%
IIFL PNB HF Indiabulls HF LIC HF

6 June 2017
Figure 65: IIFL currently sitting on higher funding Figure 66: …rating improvements should help see
costs vs peers… funding cost benefit—with access to bond markets
11.00% FY17 funding cost %
Company CRISIL ICRA
9.00% HDFC AAA/Stable AAA/Stable
LICHF AAA/Stable NA
7.00% Bajaj Finance AAA/Stable AA+/Positive
Indiabulls AA+/Positive AA+/Stable
5.00%
STFC AA+/Stable NA
MMFS AA+/Stable NA
Chola NA AA/Positive
3.00%
IIFL (Finance) AA/Stable AA/Stable
MMFS
LICHF
IIFL
Chola
Edelweiss
Indiabulls
BHAFIN
Bajaj Finance
STFC
SCUF
Edelweiss* AA/Stable AA/Stable

SCUF AA-/Positive AA/Stable
Source: Company data, Credit Suisse estimates Note: Rating for Housing finance and retail finance subsidiary in case of Edelweiss
Source: Company data, ICRA, CRISIL
Figure 67: While we expect strong loan growth with scope for funding cost
improvement, we believe NIM could come under some pressure because of
mortgage focus
NBFC business NIM %
6.4%
6.2% 6.2%
CS estimates
6.0% 5.9% 5.9%
5.8% 5.8%
5.8% 5.7% 5.7% 5.7% 5.7%
5.6%
5.6%
5.4%
5.2%
5.0%
1HFY16 2HFY16 1HFY17 2HFY17 1HFY18E 2HFY18E 1HFY19E 2HFY19E 1HFY20E 2HFY20E
Figure 68: Overall credit costs should remain Figure 69: Operating leverage should continue to
stable—with higher share of home loans helping play out
1.5% Credit costs % of AUM 70% NBFC Cost/ Income %
59%
1.3% 60%
1.1% 50%
40%
0.9% CS estimate 40%
31%
0.7%
30%
0.5%
20%
0.3%
10%
0.1%
0%
-0.1% Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E FY14 FY17 FY20E
Source: Company data, Credit Suisse estimates Note: Calculated as Opex/(NII+Other income).

6 June 2017
Figure 70: Well capitalised NBFCs

25.0% 22.2% Tier I %
20.0% 18.1%
15.2% 14.6% 14.0% 14.0% 13.6% 13.2%
15.0%
11.8%
10.0%
5.0%
0.0%
LICHF
MMFS
IIFL
Edelweiss
Bajaj Finance
Chola
STFC
HDFC
SCUF
Note: Sep-16 number for LICHF; consolidated for Edelweiss
Figure 71: ROA tree for lending business

Mar-2015 Mar-2016 Mar-2017 Mar-2018E Mar-2019E Mar-2020E
Interest income 16.7% 14.5% 14.4% 14.4% 14.4% 14.2%
Interest expense 10.0% 9.0% 8.6% 8.6% 8.6% 8.6%
NIM 6.7% 5.5% 5.8% 5.9% 5.8% 5.7%
Other income 0.9% 0.8% 0.8% 0.7% 0.7% 0.7%
Operating expense 3.6% 2.8% 2.6% 2.5% 2.2% 2.0%
PPoP 4.0% 3.5% 3.9% 4.1% 4.3% 4.4%
Loan losses and provisions 0.8% 0.6% 0.8% 0.8% 0.8% 0.8%
PBT 3.3% 2.9% 3.1% 3.2% 3.5% 3.6%
Taxes 1.1% 1.0% 1.1% 1.1% 1.2% 1.3%
ROA 2.2% 1.9% 2.0% 2.1% 2.3% 2.3%
Note: before minority.
Leading wealth management franchise

Figure 72: Within 8-9 years of starting the business, Figure 73: Under-penetrated market, exit of MNCs
IIFL has grown quickly to become the largest wealth and IIFL's strong position should allow 35-37%
manager in India growth over the next three years
1,400 Wealth managment AuAs (Rs bn) 60% Wealth management AUA % yoy
1,200
50%
1,000
40% CS estimate
800
30%
600
400 20%
200 10%
-
0%
IIFL Kotak Edelweiss JM Financial L&T Finance Motilal
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E

6 June 2017
Figure 75: IIFL running amongst most cost efficient

Figure 74: Rising share of higher yielding segments WM operations; however, there is scope to improve
should help yields—we conservatively expect given leverage on non-RM costs; we build in slower
flattish yields opex leverage going forward
Yield* % 80% Wealth management Cost/ Income %

1.20%
1.05% CS estimate 69%
0.94% 70%
1.00% 0.93% 0.92% 0.91%
0.88%
60%
0.80% 60%
0.80%
51%
50%
0.60%
40%
0.40%
30%
0.20%
20%
0.00% FY14 FY17 FY20E
Mar-14 Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E
* Note: Yield of non-fund based revenue on ex-custody and ex-NBFC asset AUA. Note: Calculated as total opex/ (total revenue – interest exp) Source: Company data, Credit
Suisse estimates
Figure 76: We expect healthy ROE expansion—driven by lending- and fee-based businesses
Consol ROE tree on balance sheet assets FY15A FY16A FY17A FY18E FY19E FY20E
Interest income/ assets 15.3% 13.7% 11.9% 10.9% 11.2% 10.7%
NIM 5.8% 4.8% 3.6% 2.9% 3.2% 2.9%
Non-interest income/ assets 8.2% 7.2% 7.6% 8.5% 9.2% 9.6%
Opex/ assets 8.6% 7.1% 5.7% 5.5% 5.5% 5.2%
PPoP/ assets 5.4% 5.0% 5.5% 6.0% 6.9% 7.2%
Tax/ assets 1.6% 1.5% 1.6% 1.9% 2.1% 2.2%
Minority/assets 0.2% 0.2% 0.5% 0.7% 0.8% 0.9%
ROA 2.9% 2.7% 2.7% 2.8% 3.1% 3.1%
ROE 19.0% 17.3% 17.7% 19.4% 22.6% 23.0%
Figure 77: Group and subsidiary holding structure could be more efficient; leads to holdco discount at
multiple levels; PE partners in subsidiaries may need to be given exit at some point
Promoters Fairfax Group Others

29.1% 35.6% 35.3%
IIFL Holdings
CDC General Atlantic
15.4*% 84.6*% 57.7% 23.2%
IIFL Finance IIFL Wealth

19.1%
Employees
Note: * Upon conversion of CDC’s investment in IIFL Finance

6 June 2017
Valuations reasonable given growth profile

50 SCUF 35
IBHFL
Edelweiss 30
LICH BHAFIN
40 IIFL
EPS growth FY19
BoB 25 SCUF IIFL

Chola
ROE FY19
MMFS
PNB 20 SHTF Yes HDFC HDFC bk Bajaj Fin
Chola
30 IBHFL Edelweiss IndusInd
UBI SBI Axis IndusInd 15 Axis
SHTF Yes BoB
J&K SBI ICICI
LICH IDFC Bk HDFC bk Kotak 10 UBI Kotak
20
Bajaj Fin IDFC Bk
BHAFIN ICICI BoI PNB
5
10 HDFC IOB
0
0 5 10 15 20 25 30 35 0.0 1.0 2.0 3.0 4.0 5.0 6.0
P/E FY19 P/B FY19
35 IBHFL
50
J&K 30
BHAFIN
40 PNB BHAFIN 25 SCUFLICH
EPS growth FY20
SHTF Chola
BoB IIFL IndusInd
ROE FY20
MMFS IIFL
Chola 20 HDFC bk
30 IBHFL IndusInd EdelweissYes
SHTF MMFS J&K HDFC
BoB
Edelweiss Kotak 15 Axis
SCUF
20 Axis HDFC bk ICICI Kotak
LICH Yes UBI
ICICI 10
IDFC Bk PNB
UBI HDFC IDFC Bk
10 5
IOB
0
0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
0 5 10 15 20 25 P/B FY20
P/E FY20
Figure 82: IIFL brief management profile

Name Designation Profile
Nirmal Jain Founder and Chairman of IIFL Holdings - Founded Probity Research and Services, later re-christened India Infoline in 1995
- Launched the online trading platform in 1999
- An MBA from the Indian Institute of Management (IIM), Ahmedabad, Chartered Accountant and a
Cost Accountant
R Venkataraman Co-Promoter and managing director of - Joined IIFL board in 1999
IIFL Holdings - Prior to that, held senior managerial positions in ICICI Ltd, including ICICI Securities Limited. Has
also served as the AVP of G E Capital Services India in their private equity division
- Holds a Bachelor in Technology in Electronics and Electrical Communications Engineering from
Indian Institute of Technology, Kharagpur and an MBA from the Indian Institute of Management,
Bengaluru.

6 June 2017
Asia Pacific/India
Diversified Financial Services
Edelweiss Financial Services Ltd (EDEL.BO)

Rating OUTPERFORM
Price (05-Jun-17, Rs) 178.85 INITIATION
Target price (Rs) 220.00
Upside/downside (%)
Mkt cap (Rs/US$ mn)
23.0
149,429/ 2,323
Diversity of a bank in a non-bank
Number of shares (mn) 835.50
Free float (%) 63.1 ■ We initiate coverage on Edelweiss with an OUTPERFORM rating and a
52-wk price range 189.80-70.50 target price of Rs220. The company has come a long way from its
ADTO-6M (US$ mn) 8.3
Target price is for 12 months.
advisory/capital market origins. It is a key player in structured mid-corporate
credit and agri- (warehouse-based) financing. It is the largest asset
Research Analysts reconstruction company in the country by margin. The company has equity
Sunil Tirumalai partners in key subsidiaries such as ARC and insurance, giving it a
91 22 6777 3714
sunil.tirumalai@credit-suisse.com
comfortable capital position.
Viral Shah ■ Diversified loan book should facilitate a 26% CAGR over the next three
91 22 6777 3827
viral.shah@credit-suisse.com
years. Focus areas for Edelweiss include home loans, SME financing and
agri-credit. The company has actually been running these segments on a
smaller scale for the last 2-4 years, and post the learning phase is now ready
to expand faster in these spaces. Given the relatively small book for the
company and the opportunities in these segments, we believe it should be
able to clock a 26% CAGR. We build in flat margins and credit costs, leading
to a gradual improvement in lending ROAs. We expect ~Rs60 bn in capital
infusion in the ARC over the next three years.
■ Non-lending businesses should help deliver non-linear growth.
Edelweiss is a top-5 wealth manager in India, and is using its full-fledged
portfolio to grow this business (similar to the market leader IIFL). The
company should also benefit from a secular rise in financial investments in
India (mutual fund and broking). Overall, we expect a 34% EPS CAGR over
the next three years.
■ Valuation. Edelweiss is trading at 12.7/2.4 FY19E P/E/P/B, respectively (11x
P/E ex-insurance losses). Given the growth/ROE outlook we are comfortable
with these valuations. Our TP is based on 13x P/E multiple on 24-month
forward EPS (ex-insurance). We assign zero value to the insurance business
which is in the investment phase—this is a long-term option value on the
stock. Please see page 24 for key risks.
Share price performance Financial and valuation metrics
Year 3/17A 3/18E 3/19E 3/20E
Pre-provision op profit (Rs mn) 12,769.7 17,747.1 22,867.9 28,403.7
Pre-tax profit (Rs mn) 9,579.7 13,093.7 18,479.8 22,946.5
Net attributable profit (Rs mn) 5,992.5 8,314.7 11,698.0 14,580.4
EPS (CS adj.) (Rs) 7.28 9.99 14.05 17.51
Change from previous EPS (%) n.a. - - -
Consensus EPS (Rs) n.a. 9.47 11.96 15.00
EPS growth (%) 45.3 37.2 40.7 24.6
P/E (x) 24.6 17.9 12.7 10.2
The price relative chart measures performance against the Dividend yield (%) 0.7 1.0 1.4 1.8
S&P BSE SENSEX IDX which closed at 31,309.49 on BVPS (CS adj.) (Rs) 51.95 62.06 76.23 93.86
05/06/17. On 05/06/17 the spot exchange rate was P/B (x) 3.44 2.88 2.35 1.91
Rs64.33/US$1 ROE (%) 15.0 17.5 20.3 20.6
Performance 1M 3M 12M ROA (%) 1.5 1.7 2.0 2.0
Absolute (%) 5.5 35.0 147.5 Tier 1 ratio (%) 14.0 14.1 13.6 13.2
Relative (%) 0.7 27.1 130.9 Source: Company data, Thomson Reuters, Credit Suisse estimates

6 June 2017
Edelweiss Financial Services Ltd (EDEL.BO / )

Price (05 Jun 2017): Rs178.85; Rating: OUTPERFORM; Target Price: Rs220.00; Analyst: Sunil Tirumalai
Earnings Drivers 03/17A 03/18E 03/19E 03/20E Company Background
Credit book AUM growth 37.94 27.91 25.86 24.56 Edelweiss is one of India's diversified non-banking financial services
Credit book asset quality (Credit costs % 1.56 1.81 1.37 1.36 companies providing a broad range of financial products and
Non-credit
of AUM) revenue growth 40.20 21.89 21.55 21.55 services across the credit, non-credit and life insurance businesses.
Credit book NIM 15.93 15.73 15.75 15.72
Life insurance cost/income 136.5 135.1 133.6 132.1 Blue/Grey Sky Scenario
Income Statement (Rs mn) 03/17A 03/18E 03/19E 03/20E
Interest income 66,336 83,309 103,710 127,959
Interest expense 28,097 33,607 41,964 52,511
Net interest income 38,239 49,701 61,745 75,448
Fee and commission income 0 0 0 0
Trading income 0 0 0 0
Total non-interest income 0 0 0 0
Total income 38,239 49,701 61,745 75,448
Personal expense 0 0 0 0
Other expenses 25,469 31,954 38,877 47,044
Total expenses 25,469 31,954 38,877 47,044
Pre-provision profit 12,770 17,747 22,868 28,404
Loan loss provisions 3,190 4,653 4,388 5,457
Operating profit 9,580 13,094 18,480 22,947
Other non-operating inc./(exp.) - - - -
Pre-tax profit 9,580 13,094 18,480 22,946
Taxes 3,947 5,281 7,251 8,946
Net profit before minorities 5,632 7,813 11,229 14,001
Reported net profit 5,992 8,315 11,698 14,580
Net profit (Credit Suisse) 5,992 8,315 11,698 14,580
Balance Sheet (Rs mn) 03/17A 03/18E 03/19E 03/20E
Gross customer loans 261,409 334,381 420,862 524,229
Risk provisions 2,241 2,802 3,362 4,035
Net customer loans 258,269 330,456 416,095 518,437
Interbank loans - - - - Our Blue Sky Scenario (Rs) 264.00
Investment & securities 0 0 0 0 Our blue sky scenario assumes faster-than-expected growth in the
Cash & cash equivalents 34,545 44,188 55,616 69,276 NBFC and ARC segment, better yield on wealth management AUA
Fixed assets 0 0 0 0 and a higher multiple.
Other assets 152,280 140,266 171,902 210,312
Total assets 445,094 514,910 643,613 798,026 Our Grey Sky Scenario (Rs) 154.00
Total deposits 0 0 0 0 Our grey sky scenario assumes slower-than-expected growth in the
Other liabilities 392,256 454,259 571,733 712,145 NBFC and ARC segment, higher-than-expected asset quality stress
Total liabilities 392,256 454,259 571,733 712,145 and a lower multiple.
Shareholders' equity 43,254 51,669 63,468 78,149
Total liabilities & equity 445,094 514,910 643,613 798,026 Share price performance
Asset quality & Capital 03/17A 03/18E 03/19E 03/20E
Asset Quality (%)
NPL/ gross loans 1.4 1.4 1.3 1.2
B/S loan loss coverage 61.9 61.9 61.9 61.9
Loan/ deposit ratio - - - -
Capital ratios (%)
Capital adequacy ratio 17.0 17.1 16.5 13.2
Tier 1 ratio 14.0 14.1 13.6 13.2
Equity Tier 1 ratio 14.0 14.1 13.6 13.2
Per share 03/17A 03/18E 03/19E 03/20E
Shares (wtd avg.) (mn) 823 833 833 833
EPS (Credit Suisse) (Rs) 7.28 9.99 14.05 17.51
BVPS (Rs) 51.95 62.06 76.23 93.86
Tangible BVPS (Rs) 51.95 62.06 76.23 93.86
DPS (Rs) 1.30 1.80 2.52 3.13 The price relative chart measures performance against the S&P BSE SENSEX
Earnings 03/17A 03/18E 03/19E 03/20E IDX which closed at 31,309.49 on 05-Jun-2017
Growth (%) On 05-Jun-2017 the spot exchange rate was Rs64.33/US$1
Revenue 41.9 30.0 24.2 22.2
Operating expense 32.9 25.5 21.7 21.0
Pre-provision profit 64.0 39.0 28.9 24.2
Net profit 48.2 38.8 40.7 24.6
Deposit - - - -
Valuation 03/17A 03/18E 03/19E 03/20E
EPS growth (%) 45.3 37.2 40.7 24.6
P/E (x) 24.6 17.9 12.7 10.2
P/B (x) 3.44 2.88 2.35 1.91
P/TB (x) 3.4 2.9 2.3 1.9
Dividend yield (%) 0.7 1.0 1.4 1.8
Profitability & margins (%) 03/17A 03/18E 03/19E 03/20E
ROE stated 15.0 17.5 20.3 20.6
ROE - CS adj. 15.0 17.5 20.3 20.6
ROA - CS adj. 1.5 1.7 2.0 2.0
Gearing (x) 10.2 10.2 10.1 10.3
Source: Company data, Thomson Reuters, Credit Suisse estimates

6 June 2017
Diversity of a bank in a non-bank

Figure 83: Edelweiss present across lending and fee-based activities; insurance is in investment phase
PAT contribution
Credit
 Retail credit
 Corporate credit Rs4,470mn
 Distressed credit 73%
(ARC)
Franchise
 Wealth management Rs1,930mn

EDELWEISS  Asset management 32%
 Capital markets
Insurance
Rs(1,100)mn
 Life insurance -18%
BMU, Corp & others

 Liquidity cushion Rs790mn
 ALM 13%
Figure 84: Loan book diversified across wholesale and retail with agri, SME and
mortgages being the key focus areas (Mar-2017)
Loan book Rs228bn*
SME & Others

Retail credit
30%
Wholesale Mortgage Wholesale
31% credit
Focus areas
Loan Against Structured
Shares Agri & Collateralized
9% Rural Credit
Finance 16%
10%
Retail Mortgage
4%
* Note: excluding capital deployed in ARC.


6 June 2017
Figure 86: ARC growth has been quick in recent

Figure 85: Strong growth should continue—off a years; we expect moderation as capital requirement
small base goes up under RBI rules
45% 42% 600,000 120,000
Rs mn
40%
500,000 100,000
35% 30%
28%
30%
24% 25% 400,000 80,000
25% 23% 22% 22% 21%
18% 19%
20% 17% 17% 300,000 60,000
14% 14%
15% 11%
200,000 40,000
10%
5%
100,000 20,000
0%
Indiabulls
MMFS
LICHF
IIFL
Edelweiss*
Chola
SCUF
STFC
- -
FY15 FY16 FY17 FY18E FY19E FY20E
ARC AUM Rs (LHS) Capital deployed by Edelweiss (RHS)

3Y historical CAGR 3Y forecast CAGR
* Note: AUM growth for Edelweiss is excluding capital deployed in ARC. Source: Company data, Credit Suisse estimates
Figure 87: We expect ~100 bp/year improvement in cost-income ratio for NBFC
business
37.0% NBFC Cost/ Income %
35.9%
36.0% 35.4% CS estimate
35.0%
34.0%
34.0%
33.0% 32.6%
32.0%
31.0%
30.0%
FY17 FY18E FY19E FY20E
Figure 88: Gradual increase in ROA expected (credit business)

Credit business ROA tree FY16A FY17A FY18E FY19E FY20E
NII 16.2% 15.9% 15.7% 15.8% 15.7%
OPEX 3.0% 2.6% 2.5% 2.4% 2.3%
Credit costs 0.9% 1.3% 1.5% 1.1% 1.1%
PBT 3.2% 3.2% 3.0% 3.5% 3.6%
ROA 2.1% 2.1% 2.0% 2.3% 2.4%

6 June 2017
Figure 89: Ex-Insurance profit growth to be stronger Figure 90: High liquidity as a percentage of balance
than credit book growth sheet vs other NBFCs
80% 74% 20% Liquidity as % of balance sheet assets
18%
70% 18%
16%
60%
CS estimate 14%
50% 11%
40% 12%
38%39% 36% 37%
40% 33%35% 10%
28% 26% 8%
30% 25%24% 6%
6%
20% 3% 3%
4% 3%
2%
10% 2%
0% 0%
Mar-15 Mar-16 Mar-17 Mar-18E Mar-19E Mar-20E Indiabulls Edelweiss STFC SCUF LICHF MMFS Chola
Loan book growth Net income (ex-insurance) growth
Figure 91: Better ratings should help improve funding costs—leading to upside
to our flat NIM estimates
ASB/CBLO*
Others 5%
7%
Retial & Corp

15% Debt
Market/Mutual
funds
42%
Banks
31%
Total borrowings Rs333.8bn

* Note: Asset Specific Borrowing. As at 31 Mar-2017.
Figure 92: Edelweiss can expect equity infusion from partners in subsidiaries; however, the multi-level
holding structure leads to inefficiency
Promoters Others
36.9% 63.1%
Edelweiss
CDPQ Tokio Marine
25*% 75*% 51% 49%
Edelweiss ARC Life Insurance

Note: * On a fully diluted basis, Edelweiss’s shareholding in ARC will fall to 60%

6 June 2017
Figure 93: Edelweiss consolidated ROE tree

Consol DuPont on balance sheet assets FY15A FY16A FY17A FY18E FY19E FY20E
Credit business - Interest income/ assets 7.7% 8.4% 9.3% 10.2% 10.8% 10.8%
NIM 0.2% 0.6% 2.4% 3.3% 3.6% 3.6%
Other income/assets (includes all revenues excluding credit business) 8.4% 7.3% 6.9% 7.0% 7.0% 6.8%
Opex/ assets 5.8% 5.7% 6.2% 6.6% 6.7% 6.5%
PPoP/ assets 2.7% 2.3% 3.1% 3.7% 3.9% 3.9%
Tax/ assets 0.8% 0.7% 1.0% 1.1% 1.2% 1.2%
Minority interests/ assets 0.0% -0.1% -0.1% -0.1% -0.1% -0.1%
ROA 1.4% 1.2% 1.5% 1.7% 2.0% 2.0%
ROE 10.9% 12.1% 15.2% 17.7% 20.5% 20.7%
Figure 94: Edelweiss brief management profile

Name Designation Profile
Rashesh Shah Founder, Chairman and CEO of Edelweiss group - Founded Edelweiss in 1996
- An MBA from the Indian Institute of Ahmedabad, he also
holds a diploma in international trade
- Has served on boards and committees of various
companies and public institutions like NSE, SEBI
Venkat Ramaswamy Co-founder and Executive director, Edelweiss - Co-heads ARC and global asset management
Financial Services businesses
- Previously worked at the project financing team at ICICI
Ltd
- Is an MBA from the University of Pittsburgh, US
50 SCUF 35
IBHFL
Edelweiss 30
40 LICH BHAFIN
IIFL
EPS growth FY19
BoB 25 SCUF IIFL

Chola
ROE FY19
MMFS
PNB Chola 20 SHTF Yes HDFC HDFC bk Bajaj Fin
30 IBHFL Edelweiss IndusInd
UBI SBI Axis IndusInd 15
SHTF Yes BoB Axis
J&K SBI ICICI
20 LICH IDFC Bk HDFC bk Kotak 10 UBI Kotak
Bajaj Fin IDFC Bk
BHAFIN ICICI BoI PNB
5
10 HDFC IOB
0
0 5 10 15 20 25 30 35
0.0 1.0 2.0 3.0 4.0 5.0 6.0
P/E FY19 P/B FY19

6 June 2017
35 IBHFL
50
J&K 30
BHAFIN
40 PNB BHAFIN 25 SCUFLICH
EPS growth FY20
SHTF Chola
BoB IndusInd
ROE FY20
IIFL MMFS IIFL
Chola 20 HDFC bk
30 IBHFL EdelweissYes HDFC
SHTF MMFS IndusInd J&K BoB
15 Axis
SCUF Edelweiss Kotak
Axis HDFC bk UBI ICICI Kotak
20 LICH Yes 10
ICICI PNB
UBI IDFC Bk IDFC Bk
HDFC 5
10 IOB
0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
0
P/B FY20
0 5 10 15 20 25
P/E FY20

6 June 2017
Company profiles
JM Financial (Not covered)
■ Founded in 1973, JM Financial started off as an investment advisory firm, and over the
years has diversified into a number of businesses with its latest foray being into the
housing finance business for which the company has applied for a licence with the
National Housing Bank (NHB).
■ JM has operations spanning capital markets, wealth management, asset management,

and lending business which also includes ARC. Currently, the lending book of JM is
more skewed towards the wholesale segment (86% of the total Rs120 bn credit book).
JM Financial ARC has grown to become the second-largest ARC in India with an AUM
of ~Rs120 bn.
■ Currently, the company's developer lending book consists primarily of mid-income

housing projects with a negligible portion of affordable housing projects. Management
claims profit margins being low for the builders in the affordable housing segment as
the reason for this. The company sees opportunity in direct lending for home loans to
the retail category, especially in the affordable housing segment—hence the intent to
float a separate HFC.
■ JM Financial has grown its loan book at a 45% CAGR and its PBT at a 37% CAGR
over the last two years. The stock currently trades at 3x FY17 P/B and 21.3x FY17 P/E.
Figure 99: Summary financials Figure 100: Loan book breakdown (Mar-2017)
FY15 FY16 FY17* ARC cap
NBFC loan book AUM (Rs mn) 53,880 72,150 113,430 employed
NBFC loan book AUM % yoy 81% 34% 57% 5%
Du-pont (on total assets)
NII 13.8% 12.1% 11.5% Capital
Market/ LAS
Opex 6.5% 4.9% 4.4% 14%
Structured
Pretax profit 7.3% 7.2% 7.1% credit
Taxes 2.2% 2.3% 2.4% 13%
Minorities/associates -0.4% -0.7% -1.2%
ROA 4.7% 4.2% 3.4%
Avg leverage 3.1 3.7 4.5
RoE 14.6% 15.3% 15.6% Construction
CRAR (%) 35.0% 28.8% 24.1% fin
Valuations & stock information 68%
MCap (US$ bn) 1.6 Retail
book
Promoter % 65%
ADTO ($mn) 2.3
P/E 0 30.3 25.0 21.3
JM Financial AUM (Rs119bn)
P/B 0 4.1 3.6 3.1
1 week 1M 6M 12M
Stock performance -3% 6% 93% 169%
* Note: ARC figures in the statement of profit and loss are consolidated on line by line basis Source: Company data
from October 1, 2016. The ARC was an “Associate” of JM Financial Limited till September

6 June 2017
L&T Finance Holdings (Not covered)

■ Promoted by infrastructure major L&T, L&T Finance Holdings provides financial
services across the retail and wholesale segments. It started off as a wholesale-
focused financier but over the years it has diversified into various retail segments.
■ Its lending book is split between the wholesale and retail book at 31% and 69%,
respectively. Within these segments, rural lending, home and infrastructure financing
have been identified as the key segments by management.
■ Management targets improving ROE to 18-20% by FY20. They expect to achieve this
by increasing market share in identified focus products and higher sell downs.
■ The company has grown its loan book at a 19% CAGR and its normalised PBT at a 2%
CAGR over the last two years. The stock currently trades at 2.6x FY17 P/B and 22.4x
FY17 P/E.
FY15* FY16 FY17
Lending loan book AUM (Rs mn) 472,320 582,560 666,480 Corporate
loans
Lending loan book AUM % yoy 18% 23% 14% CV/ vehicle
3%
Du-pont (on total assets) 10%
Home Loans/
NII 5.4% 5.4% 5.4% Retail LAP
Opex 1.7% 2.3% 1.9% book
12%
PPoP 3.7% 3.2% 3.6%
Other income 0.3% 0.3% 0.3% MFI
Credit costs 1.9% 1.3% 2.3% 5%
Pretax profit 2.1% 2.1% 1.6% SME & Others
Taxes 0.7% 0.7% 0.1% 4%
Minorities/associates 0.0% 0.0% 0.0% Infra fin Construction
ROA 1.8% 1.5% 1.5% 49% fin
Avg leverage 6.7 7.2 7.8 7%
RoE 11.7% 10.6% 11.9%
Structured
Valuations & stock information
credit
MCap (US$ bn) 3.6 10%
Promoter % 64%
ADTO ($mn) 8.2 LTHF AUM (Rs666bn)
P/E 27.3 27.3 22.4
P/B 3.0 2.8 2.6
1 week 1M 6M 12M
Stock performance -2% -6% 50% 65%
Note: * Exceptional gains of Rs1,439 mn on sale of investment in City Union Bank. Source: Company data

6 June 2017
Motilal Oswal (Not covered)

■ Founded in 1987, Motilal Oswal started as a broking unit. Over the years, it has
entered the institutional equities, asset and wealth management and housing finance
businesses.
■ In FY15, the company entered the housing finance segment by starting a housing
finance company, Aspire Housing. Within three years, the HFC has built a loan book of
Rs41 bn with 120 branches across nine states in India.
■ Management has identified the home loan business in the HFC as a key focus area for
growth. Going forward, management intends to deploy incremental cash flow in this
HFC apart from using it to seed its private equity funds.
■ In its asset management business, the company has an AUM of Rs203 bn growing at a
two-year CAGR of 84% and AUM of Rs101 bn in its wealth management business
growing at a two-year CAGR of 55%. The stock currently trades at 9x FY17 P/B and
44.7x FY17 P/E.
FY15 FY16 FY17* Capital
Aspire Housing AUM (Rs mn) 3,574 21,000 41,000 Market/ LAS
Aspire Housing AUM % yoy 488% 95% 6%
NII 31.1% 22.6% 20.2%
Opex 22.8% 17.0% 13.6%
Pretax profit 8.3% 5.6% 6.6%
Taxes 2.2% 1.5% 2.1%
Minorities/associates 0.1% 0.1% -0.1% Retail
ROA 6.2% 4.2% 4.4% book
Avg leverage 1.9 2.9 4.2 Home
Loans/ LAP
RoE 12.0% 12.4% 18.5% 94%
MCap (US$ bn) 2.5
Promoter % 71%
ADTO ($mn) 1.8 Motilal AUM (Rs43bn)
P/E 112.1 95.2 44.7
P/B 12.4 11.2 9.0
1 week 1M 6M 12M
Stock performance 10% 19% 112% 229%
Note: Exceptional items comprise of profit on sale of investments made in India Business Source: Company data
Excellence Funds of Rs891 mn and a write-off on account of doubtful non-performing assets
of Rs279 mn.

6 June 2017
Reliance Capital (Not covered)

■ Reliance Capital is a diversified financial services firm with operations across capital
markets, credit , asset and wealth management; life and general insurance.
■ Its lending businesses comprise of mortgage, SME, CV, LAP, constitute ~63% of
Reliance Capital's PBT as disclosed in stock exchange filings, with asset management
(29%), General and Life insurance (4%) and others being the residual contributors.
■ The company has identified the consumer durable financing segment as a new vertical.
It also plans to list its housing finance subsidiary in 1H FY18. It had an AUM of Rs112
bn as of Mar-2017.
■ Reliance Capital plans to convert itself into a core investment company and as part of
this initiative, the company has stated that it plans to exit some of its non-core
investments such as in media and entertainment assets. The stock currently trades at
0.8x FY17 P/B and 12.8x FY17 P/E.
FY15 FY16 FY17
Corporate
Lending businesses AUM (Rs mn) 199,200 225,200 279,300 loans
Lending businesses AUM % yoy growth 15% 13% 24%
4%
NII 2.7% 2.5% 3.4% Infra fin
Opex 10.7% 9.5% 17.5% 7%
Non interest revenues 10.7% 10.1% 16.1%
Constructn
Pretax profit 2.6% 3.0% 2.1%
fin Home
Taxes 0.5% 1.1% 0.6%
13% Loans/ LAP
ROA 2.2% 1.9% 1.5% 41%
Avg leverage 3.5 3.9 4.6
RoE 7.4% 7.4% 6.7%
SME &
Others
MCap (US$ bn) 2.2
26%
Promoter % 52% Retail
ADTO ($mn) 30.1 book CV/ vehicle
P/E 13.9 12.7 12.8
9%
P/B 1.0 0.9 0.8
1 week 1M 6M 12M
Stock performance -7% -18% 29% 37%
Reliance Capital AUM (Rs273bn)
Source: Company data Source: Company data

6 June 2017
Piramal Enterprises (Not covered)

■ Piramal Enterprises’ business interests span multiple sectors such as healthcare,
financial services and IT. It entered financial services in FY11-12.
■ Of all of its business segments, the biggest growth driver in recent years has been
financial services, where the company runs an NBFC of its own. PEL's financial
services business consists of a wholesale lending book (NBFC) and an alternative
asset management business. Besides, it is also the largest effective shareholder in
listed Shriram group companies (STFC and SCUF) with board representation in both
the companies.
■ Until date, its focus has been on wholesale lending—across real estate financing and
structured corporate credit. With strong growth in recent years, the company is now the
second-largest builder financier (behind HDFC). Recently it has applied for an HFC
licence to NHB and will be entering the retail home loans segment.
■ The stock currently trades at 3.3x FY17 P/B and 38.8x FY17 P/E
FY15* FY16 FY17 Structured
Lending business AUM (Rs mn) 47,660 130,480 244,000 credit
Lending business AUM % yoy growth 67% 174% 87% 11%
Consolidated P&L (Rs mn)
Total income 53,770 66,330 87,810
Total costs 42,370 47,050 50,480
OPBITDA 11,400 19,280 37,330
OPM % 21% 29% 43%
PBT - before exceptionals 3,390 7,140 13,200
PAT 26,900 7,100 10,820
Net income 28,490 9,040 12,520
EPS (Rs) 165 52 73 Construction
Valuations & stock information fin
MCap (US$ bn) 7.5 89%
Promoter % 51%
ADTO ($mn) 6.1
P/E 17.0 53.7 38.8
P/B 4.1 3.8 3.3
1 week 1M 6M 12M Piramal AUM (Rs227bn)
Stock performance 3% 10% 69% 95%
Note: FY2015 PAT includes exceptional gain on sale of 11% stake in Vodafone India for Rs89 Source: Company data
bn (investment of Rs58.6 bn made in FY2012) partly offset by the amount written down on
account of scaling back of investments in NCE research.

6 June 2017
Aditya Birla Nuvo (Not covered)

■ Part of the Aditya Birla group, Aditya Birla Nuvo (ABNL) has operations across financial
services, manufacturing of textile, agrochemicals, insulators and it has also tied up with
the Abraaj Group to enter the solar power generation business.
■ The financial services business, currently housed under AB Nuvo, has operations
across lending, insurance, asset management, broking, advisory and private equity
businesses.
■ ABNL has announced a composite scheme of arrangements whereby it will be merged

with Grasim industries, another AB group company, with shareholders of ABNL getting
shares in Grasim in the ratio of 15:10. This will be followed by the demerger and listing
of the financial services business from the enlarged Grasim with every shareholder of
Grasim getting shares in the financial services business in the ratio of 7:5.
■ ABNL is currently trading at 1.4x FY17 P/B and 24.7x FY17 P/E.
FY15* FY16 FY17
Lending business m etrics
AUM (Rs mn) 175,500 277,280 388,390
AUM % yoy grow th 52% 58% 40%
NII (Rs mn) 12,260 18,570 Corporate Home
NIM % 5.4% 5.6% loans Loans/ LAP
Consolidated P&L (Rs m n) 26% 31%
Total revenues 265,150 133,150 145,770
Total costs 207,170 102,550 106,510
EBITDA 57,980 30,600 39,260
EBITDA margin % 22% 23% 27% Structured Capital
credit Market/ LAS
PBT - before exceptionals 23,380 17,610 12,390 Retail
book 27% 12%
PAT 14,920 16,400 9,570
Net income 14,160 16,130 9,080
Valuations & stock inform ation SME &
MCap (US$ bn) 3.5 Construction Others
Promoter % 63% fin 3%
ADTO ($mn) 8.9 1%
ABNL AUM (Rs331bn)
P/E 15.8 13.9 24.7
P/B 1.7 1.7 1.4
1 w eek 1M 6M 12M
Stock performance 6% -1% 38% 64%
Note: (1) In FY16, exceptional gain includes profit of Rs3,550 mn attributable to discontinued Source: Company data
operations pertaining to cessation of Pantaloons Fashion & Retail Ltd.(PFRL) as a subsidiary
pursuant to the de-merger of Madura Fashion & Lifestyle into PFRL w.e.f. 1st April 2015.
(2) FY15 as per IGAAP. Financials for FY16 and 17 are as per Ind AS.

6 June 2017
Companies Mentioned (Price as of 05-Jun-2017)

ABNL (ABRL.BO, Rs1717.05)
ASL (AVEU.NS, Rs789.75)
Axis Bank Limited (AXBK.BO, Rs513.05)
BNP Paribas (BNPP.PA, €63.1)
Bajaj Finance Ltd (BJFN.BO, Rs1359.45)
Bank of Baroda (BOB.BO, Rs178.8)
Bank of India (BOI.BO, Rs146.45)
Barclays PLC (BARC.L, 211.7p)
Bharat Financial Inclusion Ltd. (BHAF.BO, Rs746.05)
Centrum Capital (CENC.BO, Rs47.95)
Cholamandalam Finance (CHLA.BO, Rs1049.5)
Deutsche Bank (DBKGn.F, €15.645)
Edelweiss Financial Services Ltd (EDEL.BO, Rs178.85, OUTPERFORM, TP Rs220.0)
HDFC Bank (HDBK.BO, Rs1635.75)
HSBC (HSBA.L, 681.4p)
HSBC (0005.HK, HK$68.25)
Housing Development Finance Corp (HDFC.BO, Rs1605.95)
ICICI Bank (ICBK.BO, Rs319.65)
IDFC Bank (IDFB.BO, Rs59.15)
IIFL Holdings Limited (IIFL.BO, Rs549.35, OUTPERFORM, TP Rs650.0)
Indiabulls Housing Finance Ltd (INBF.BO, Rs1169.0)
Indian Overseas Bank (IOBK.BO, Rs25.95)
IndusInd Bank (INBK.BO, Rs1507.3)
International Business Machines Corp. (IBM.N, $152.41)
JM Financial (JMSH.BO, Rs125.3)
Jammu and Kashmir Bank (JKBK.BO, Rs84.1)
Julius Baer (BAER.S, SFr49.9)
Kotak Mahindra Bank Ltd (KTKM.BO, Rs967.15)
L&T Finance Holdings Limited (LTFH.BO, Rs132.05)
LIC Housing Finance Ltd (LICH.BO, Rs738.65)
MOFSL (MOFS.BO, Rs1129.7)
Magma Fincorp (MAGM.BO, Rs131.05)
Mahindra and Mahindra Financial Services Ltd (MMFS.BO, Rs373.35)
Morgan Stanley (MS.N, $42.89)
Muthoot Finance (MUTT.NS, Rs433.6)
Piramal Healthcare Ltd (PIRA.BO, Rs2806.75)
Power Finance Corporation (PWFC.BO, Rs125.6)
Punjab National Bank Ltd (PNBK.BO, Rs153.3)
RHFL (RHFL.NS, Rs779.35)
Reliance Capital Ltd (RLCP.BO, Rs557.4)
Royal Bank of Scotland (RBS.L, 259.7p)
Rural Electrification Corporation (RURL.BO, Rs188.55)
Shriram City Union Finance Ltd (SHCU.BO, Rs2311.2)
Shriram Transport Finance Co Ltd (SRTR.BO, Rs1022.7)
Standard Chartered (STAN.L, 753.0p)
Standard Chartered (2888.HK, HK$74.9)
State Bank Of India (SBI.BO, Rs287.35)
Tokio Marine Holdings (8766.T, ¥4,864)
UBS Group AG (UBSG.S, SFr15.44)
Union Bank of India (UNBK.BO, Rs160.45)
Yes Bank Ltd (YESB.BO, Rs1519.95)
Disclosure Appendix
Analyst Certification
Sunil Tirumalai and Ashish Gupta each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed
in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation
was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
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May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July
2011.

6 June 2017
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Restricted 2%
*For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely
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Target Price and Rating

Valuation Methodology and Risks: (12 months) for Edelweiss Financial Services Ltd (EDEL.BO)
Method: We value Edelweiss Financial Services at a target price of Rs220 using an SOTP (sum-of-the-parts)-based valuation. We value the ex-life
insurance businesses (credit, wealth management and capital markets) at Rs220 using 13x 24-month forward earnings per share of Rs17
and give zero value to the insurance business which is in its investment phase—this is a long-term option value on this stock. We rate the
stock OUTPERFORM given the growth focus in credit business and siginificant opportunity in the wealth management business.
Risk: Key risks to our OUTPERFORM rating and target price of Rs220 for Edelweiss Financial Services are: (1) sharp asset quality deterioration
or yield compression in home loans or agri lending businesses; (2) regulatory changes constraining growth in the asset reconstruction
company (ARC); (3) increased compliance costs in franchise businesses like wealth management, broking and (4) higher-than-expected
cash burn in the life insurance business
Target Price and Rating
Valuation Methodology and Risks: (12 months) for IIFL Holdings Limited (IIFL.BO)
Method: We value IIFL Holding Ltd at a target price of Rs650 using 15x 24-month forward earnings per share of Rs43. We believe this is a fair
multiple given the established diversified retail lending franchise, good visibility on non-interest income growth (primarily wealth
management) leading to strong earnings growth visibility. We rate the stock OUTPERFORM as we believe it is undervalued in the context
of strong earnings growth expected over the next three years. Our target price implies an 18% upside to current price.

6 June 2017
Risk: Risks to our OUTPERFORM rating and target price of Rs650 for IIFL Holdings Limited include: (1) Sharper-than-expected net interest
margin compression in the home loan segment; (2) slower-than-expected market share gains in new growth areas of CV and SME lending
which have established incumbents; and (3) yield compression in the wealth management business due to adverse competitive pressure
or regulatory events.
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Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (IIFL.BO, EDEL.BO) within
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6 June 2017
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Credit Suisse - India Financials Sector (Jun-2017)

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India Financials Sector

■ Non-traditional players growing their lending books. The Indian lending

Source: Company data, Credit Suisse estimates

Figure 3: Deepening bond markets and upgrades to

FY12 FY13 FY14 FY15 FY16 FY17

Figure 5: Fee revenue streams in underpenetrated

IIFL Consol PBT (LHS) Edelweiss Consol PBT (LHS)

India Financials Sector 2

Rise of mini financial conglomerates

Stronger fee revenue streams a differentiating factor

Multiple levers for growth and ROE

Figure 7: FY19 P/B vs ROE Figure 8: FY19 P/E vs EPS growth

SCUF IIFL BoB

India Financials Sector 3

Sector valuation summary

ABNL 1,717 3.5 2.1 54.8 94%

Note: Priced as of 5 June 2017.

India Financials Sector 4

Diversified companies growing lending

Capital Markets Conglomerates

India Financials Sector 5

…now growing their lending businesses

Home Structured Constructio

Edelweiss AUM (Rs250bn) Piramal AUM (Rs227bn) IIFL AUM (Rs223bn)

ARC cap Capital Capital

JM Financial AUM (Rs119bn) Motilal AUM (Rs43bn)

Note: Figures in bubbles indicate loan book

India Financials Sector 6

Figure 13: Diversified players started with a focus on wholesale lending

Diversified NBFCs Traditional NBFCs Banks

Source: Company data, Credit Suisse estimates

■ Building a retail distribution/origination channel takes time—while wholesale loans are

■ Others, such as Edelweiss and LTFH, are in structured credit to mid-corporate

■ Companies with a capital market/broking business background are also leading in

India Financials Sector 7

India Financials Sector 8

IIFL Rcap ABNL - NBFC business L&T Finance Edelweiss

Source: Company data, Credit Suisse research

Retail credit now in focus for most players

Figure 19: Stated areas of focus in retail lending

India Financials Sector 9

Figure 20: Having low funding costs is important in housing finance;

Source: Company data, Credit Suisse research

India Financials Sector 10

Diversified book and small scale should allow strong

India Financials Sector 11

Stronger fee revenue streams are a

Insurance Others Solar power Asset mgmt Others

Edelweiss Ex-Insurance FY17 PAT

India Financials Sector 12

Wealth management: Untapped market

India Financials Sector 13

30,000 Next 10 cities

Figure 30: Wealth management space in India dominated by IIFL followed

AUM ($bn) (LHS) # RMs (RHS)

Source: Asian Private banker 2016, Credit Suisse estimates

India Financials Sector 14

Professionally managed wealth as % of GDP

Wealth management profitability in India at global standards

Figure 34: Climbing up the value chain—higher

India Financials Sector 15

Figure 35: Cost-to-income ratio in India superior to global benchmarks

Traditional capital markets: Opportunity still large

15.4% 84.6% 57.7% 23.2%