PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES INDIA PVT LTD
THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBU...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Investment thesis
In the past few months, there has...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Expect outperformance to continue
Power Finance and...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
EXHIBIT 2: Tariff revisions for discoms of largest ...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Asset quality has been stable, probability of asset...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
EXHIBIT 5: POWF – post outperformance, still about ...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
EXHIBIT 7: FX markets have remained stable, USD-INR...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Valuations remain attractive, we prefer POWF and RE...
Still some upside left
RECL outperforms market by 9%; expect O/P to continue
RECL is up 24% in the past six months, outper...
Rural Electrification RECL IN Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Investment thesis
Power sector reforms have led to...
Rural Electrification RECL IN Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
EXHIBIT 1: RECL – what’s changed EXHIBIT 2: RECL –...
Rural Electrification RECL IN Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Financial statements
Rural Electrification
Profit ...
Rural Electrification RECL IN Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Financial statements
Rural Electrification
Balance...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Financial statements
Power Finance
Profit and Loss ...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Financial statements
Power Finance
Balance Sheet (I...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Disclaimers and Disclosures
APPENDIX
DISCLAIMERS AN...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
History of change in investment rating and/or targe...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Punjab National Bank (PNB IN)
Avneesh Sukhija start...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
Hong Kong: This report is prepared for professional...
INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija
BNP PARIBAS 20 MARCH 2014
professional clients and is not intended for, and s...
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Bnp paribas india diversified financials-e rr group- powf &amp

  1. 1. PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES INDIA PVT LTD THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 16 POWF & RECL: risk-reward remains favourable POWF & RECL: stock outperformance set to continue as risk-reward still seems favourable POWF and RECL are up 40% on average over the past six months vs 13% for the BSE Sensex (ie 27% outperformance). This has been mainly due to currently-depressed valuations, sustained earnings growth, attractive dividend yields and key government initiatives for the power sector, in our view. Despite the recent uptick, our ‘what if’ analysis suggests more upside in both names. Several variables still in favour of POWF and RECL We expect several variables to continue working in favour of POWF and RECL: 1) government reforms in the power sector, the effects of which should be visible over the next two to three years; 2) a favourable risk-reward scenario as highlighted by our ‘what if’ analysis; 3) the recent stabilization in money/FX markets, which should help to address concerns on unhedged forex exposures; and 4) currently-depressed valuations with attractive potential dividend yields of more than 5% in FY15E. Increasing earnings estimates and TPs to factor in improved power sector fundamentals We increase our residual-income-based target prices for POWF and RECL by 17% and 15%. This reflects increased EPS estimates to factor in stable NIMs and reduced credit costs on the back of the government’s positive measures to alleviate stress in the power sector. We increase our EPS estimates for POWF by 12% in FY14 and 9% in FY15, and for RECL by 20% in FY14 and 26% in FY15. Key risks to our TPs and estimates are insufficient fuel supply, SEB losses on account of higher T&D losses and no further tariff hikes, which can de-rail the balance sheet repair for SEBs. BNPP recommendations Company BBG code Rating Share price Target price Upside/downside Rural Electrification RECL IN BUY 211.30 248.00 +17.4% Power Finance POWF IN BUY 180.50 202.00 +11.9% Source: BNP Paribas estimates 20 MARCH 2014 SECTOR REPORT INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija avneesh.sukhija@asia.bnpparibas.com +91 22 6196 4352 Chetan Ganatra chetan.ganatra@asia.bnpparibas.com +91 22 6176 5619 Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.
  2. 2. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Investment thesis In the past few months, there has been a positive momentum on the power sector policy front. The government has moved swiftly to clear fuel supply issues for power producers, awarded environmental clearances for power plants and fuel supplier Coal India. From a lender’s perspective, all these initiatives should accrue benefits over the next two to three years. In the near term, we believe these positive steps have ensured reduced tail risk for lenders, as the probability of asset quality shock has gone down substantially. And over the next two to three years, as fundamentals of the power sector improve, we can expect an improvement in loan growth for POWF and RECL. To factor in these positive developments, we increase our earnings estimates and target price for POWF and RECL. For POWF, the increase in TP is about 17%, and for RECL it is about 15%. Catalysts No disruption in fuel supply, especially coal supply from Coal India. Further tariff hikes, which would lead to an improvement in the financials of state electricity boards. A pick up in loan growth, as environment clearances and fuel linkages are awarded to power plants. Risks Coal India (COAL IN) fails to meet its production targets. No further tariff hike by state electricity boards, which can again deteriorate the fundamentals of producers. BVPS sensitivity analysis ROE scenarios FY15E Base Scenario 1 Scenario 2 Scenario 3 ROE (%) POWF 18.8 13.8 17.1 20.1 RECL 24.5 19.8 23.3 26.1 ROA (%) POWF 2.53 1.91 2.28 2.55 RECL 3.15 2.60 2.97 3.18 BVPS (INR) POWF 219 208 217 222 RECL 228 216 225 231 Source: BNP Paribas estimates Note: Refer page 5 and 6 for details. Source: BNP Paribas estimates 18.8 13.8 17.1 20.1 24.5 19.8 23.3 26.1 0 5 10 15 20 25 30 BASE Scenario 1 Scenario 2 Scenario 3 POWF RECLFY14 ROE (%) 2
  3. 3. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Expect outperformance to continue Power Finance and RECL have provided a return of 60% and 24%, respectively, in the past six months, as compared with the broader index (up 13%) and BANKEX (up 31%). The primarily rationale for the outperformance appears to be depressed valuations, attractive dividend yields, sustained earnings growth and positive steps taken by the Government of India with regards to the power sector. The outperformance of POWF and RECL is broadly in line with our thesis and we believe this outperformance will continue on account of: 1) government reforms in the power sector, the effects of which should be visible over the next two to three years; 2) our scenario analysis (detailed later in this report) suggesting a best-case upside for POWF/RECL of about 35% from current levels; 3) recent stabilization in FX markets, which should help to address concerns on unhedged forex exposures; and 4) POWF and RECL trading below their long-term averages with attractive potential dividend yields of more than 5% in FY15E. We prefer POWF and RECL over public sector banks for an infrastructure (especially power) recovery trade – structural issues like market share loss in retail assets, and liabilities and huge capital requirements plague public sector banks. Power sector reforms to keep POWF and RECL going Recently, the government has taken several initiatives to improve the fundamentals of the power sector, we think these steps are positive for the sector and there is no major risk associated risk as far as implementation of these steps is concerned. EXHIBIT 1: Key initiatives in the power sector that have led to outperformance Power sector reforms Implications for lenders (NBFCs/banks) Key risks Providing fuel linkages for operating power plants and plants scheduled to start operations in FY15. Positive from an asset-quality perspective, as fuel supply will ensure that plants are able to operate at their optimal peak load factors (PLF). Only if Coal India is not able to supply the agreed quantity; this seems unlikely as the government has given environmental clearances for mining about 27MT of coal. Restructuring of state electricity boards under FRP (Financial Restructuring Plan) Alleviates default risk, and helps to improve purchasing power of SEBs. No major risk. Bonds issued under the FRP are government guaranteed. State electricity boards have raised power tariffs in their respective states as prescribed under FRP covenants. Improvement in repayment capacity of SEBs a positive for lenders. No major risk. SEBs can't go back on tariff reductions once they have accepted the FRP terms. Source: BNP Paribas As banks curtailed lending to discoms, state governments were forced to allow their discoms to apply to state regulators for tariff hikes. The Indian central government used the Appellate Tribunal of Electricity (APTEL) to have state regulators revise tariffs annually. From 2011 onwards, state regulators have allowed regular tariff revisions. 3
  4. 4. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 EXHIBIT 2: Tariff revisions for discoms of largest states - FY11-FY14* States FY11 FY12 FY13 FY14 Avg (%) (%) (%) (%) (%) Tamil Nadu 9.0 9.1 36.7 3.6 14.6 Rajasthan 0.0 12.9 10.9 13.6 9.4 Uttar Pradesh 0.0 0.0 8.8 40.0 12.2 Delhi 0.0 12.4 16.8 5.0 8.6 Jammu & Kashmir 11.6 11.9 6.1 8.5 9.5 Andhra Pradesh 3.8 5.2 2.7 21.0 8.2 Haryana 16.8 3.9 18.7 13.0 13.1 Punjab 9.8 8.7 18.5 9.1 11.5 Bihar 2.0 17.6 9.8 6.9 9.1 Karnataka 6.7 6.1 2.6 4.3 4.9 Gujarat 2.0 3.3 1.5 6.2 3.3 Orissa 22.2 19.7 11.8 2.4 14.0 Maharashtra NA 0.0 16.5 10.0 8.8 Madhya Pradesh 10.7 6.1 7.2 0.8 6.2 Himachal Pradesh 11.2 8.7 13.0 3.4 9.1 West Bengal NA 0.0 19.3 NA 9.7 Uttaranchal 3.0 5.3 7.1 5.2 5.2 Kerala 0.0 0.0 30.2 12.0 10.6 Chhattisgarh 0.0 14.2 17.5 0.0 7.9 Jharkhand NA 18.5 16.0 16.0 16.8 *Note: Actual tariff hikes in many states should be much higher as they would fluctuate with increases in power purchase costs, which are now allowed to be a pass-through. Sources: State electricity boards and regulators Coal supply likely to improve over the next three years The government has provided fuel supply linkages to power plants that are currently in operation or due to be commissioned in FY15. Coal India will be the major fuel supplier for all of the coal-based power plants (which are 58-60% of total power capacity). Our Metals & Mining research team forecasts mid-single-digit growth for coal production from Coal India, which should be sufficient to meet the PLF requirement of c60% (cash flow breakeven). EXHIBIT 3: Coal production to grow in mid-single digits over the next three years Sources: Coal India; BNP Paribas estimates 431 436 452 466 489 521 552 (1.0) 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 400 420 440 460 480 500 520 540 560 FY11 FY12 FY13 FY14E FY15E FY16E FY17E Production (LHS) Change (RHS)(m tonnes) (y-y %) 4
  5. 5. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Asset quality has been stable, probability of asset quality shock fading away Power Finance and RECL have been able to manage their asset quality well, even in the current slow-growth and high-interest rate scenario. With the government taking positive steps in the power sector, which should lead to an improvement in the fundamentals of the power sector, we expect asset quality to remain stable and do not foresee any asset quality shocks in the medium term. EXHIBIT 4: Asset quality remains stable; we do not expect any shocks Sources: Company data; BNP Paribas Scenario analysis indicates further upside We have looked at different scenarios – moderating loan growth, significant increase in provisions and NIM compression. Our scenario analysis indicates further upside for Power Finance and Rural Electrification, with potential downside of about 30% and upside of roughly 35% on a 12-month horizon. In our worst-case scenario, the two stocks still have c30% downside from current levels. We think that, post government reforms, the probability of the worst case panning out has gone down substantially. In our other scenarios, with the market improving, we estimate our covered infrastructure finance companies can provide an average return of about 35% over 12-months, implying a favourable risk-reward ratio. Scenario assumptions Scenario 1: Loan growth is 5ppt lower than our base-case estimate, NIMs are 25bp lower and provisions double our base case estimates. We assume that some of the projects with strong promoter background also start defaulting. Scenario 2: everything remains the same as our base-case; only provisions double. We again assume that some of the projects with strong promoter background also start defaulting. Scenario 3: loan growth is 5ppt higher than our base-case estimate and 25bp margin expansion. We assume Coal India diverts coal from its e-auction and doubles incremental supply to 50m tonnes from 25m tonnes. 1.04 1.02 0.97 0.92 0.71 0.69 0.67 0.65 0.48 0.46 0.44 0.41 0.39 0.37 0.35 0.34 0.0 0.2 0.4 0.6 0.8 1.0 1.2 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 (%) POWF RECL 5
  6. 6. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 EXHIBIT 5: POWF – post outperformance, still about 36% upside remains in our best-case scenario Particulars Current assumptions Scenario 1 Scenario 2 Scenario 3 Assumptions Loan growth CAGR FY13-16E (%) 12.6 7.6 12.6 17.6 NIM - FY13-16E (%) 4.4 3.9 4.4 4.6 Credit Costs - FY14-16E (bps) 23 49 45 21 Impact Implied fair value (INR) 202 135 186 243 P/ABV - FY14E (x) 1.04 0.71 0.96 1.24 P/ABV - FY15E (x) 0.92 0.65 0.86 1.08 ABV - FY14E (INR) 195 191 194 197 ABV - FY15E (INR) 219 208 217 225 P/E - FY14E (x) 5.6 4.4 5.2 6.1 P/E - FY15E (x) 5.2 4.9 5.3 5.5 ROE - FY14E (%) 19.9 16.8 19.5 21.5 ROE - FY15E (%) 18.8 13.8 17.1 21.1 ROA - FY14E (%) 2.66 2.27 2.61 2.83 ROA - FY15E (%) 2.53 1.91 2.28 2.72 Upside / Downside from CMP (%) 12.9 (24.5) 4.0 35.8 Sources: Company data; BNP Paribas estimates EXHIBIT 6: RECL– post-outperformance, still about 36% upside remains in our best-case scenario Particulars Current assumptions Scenario 1 Scenario 2 Scenario 3 Assumptions Loan growth CAGR FY13-16E (%) 12.2 7.2 12.2 17.2 NIM - FY13-16E (%) 5.3 5.0 5.3 5.5 Credit Costs - FY14-16E (bps) 38 84 77 35 Impact Implied fair value (INR) 248 143 185 296 P/ABV - FY14E (x) 1.26 0.74 0.95 1.49 P/ABV - FY15E (x) 1.09 0.65 0.83 1.26 ABV - FY14E (INR) 197 193 195 199 ABV - FY15E (INR) 228 219 225 234 P/E - FY14E (x) 5.3 3.5 4.1 5.8 P/E - FY15E (x) 4.8 3.3 3.8 5.0 ROE - FY14E (%) 25.8 22.8 24.6 27.6 ROE - FY15E (%) 24.5 20.7 23.3 27.1 ROA - FY14E (%) 3.28 2.94 3.12 3.46 ROA - FY15E (%) 3.15 2.76 2.97 3.34 Upside / Downside from CMP (%) 13.6 (34.5) (15.0) 35.8 Sources: Company data; BNP Paribas estimates Currency has remained stable – reduced risk from unhedged exposure for now One of the key investor concerns for Power Finance and RECL has been on the unhedged portions of their forex exposure. For Power Finance, unhedged exposure is about 83% and for RECL its roughly 35%. FX market volatility has subsided meaningfully post RBI initiatives to shore up FX reserves. The stability of the FX market has helped to reduce the risk from unhedged FX exposures to the earnings of both companies. 6
  7. 7. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 EXHIBIT 7: FX markets have remained stable, USD-INR near July-13 levels Sources: Bloomberg; BNP Paribas Increasing earnings estimates and target price – reiterate BUY Despite the recent run-up in the share prices of POWF and RECL, we still expect outperfornance to continue. We increase our earnings and target price estimates for Power Finance and RECL primarily to account for higher margins and lower credit costs. Previously, we had expected margin contraction. However, money markets have stabilized and wholesale borrowing rates have returned to pre-volatility levels (July 2013), such that margins had actually slightly expanded y-y as of 3QFY14. We expect this trend to continue for the next few quarters. We model lower steady state credit costs, as power sector reforms initiated by the government have ensured the tail risk fades which should support asset quality. EXHIBIT 8: POWF– earnings change factors in higher margins EXHIBIT 9: RECL– earnings change factors in higher margins NIM (%) FY14E FY15E FY16E Current 4.72 4.64 4.56 Prior 4.20 4.26 3.69 Variance (bps) 52 38 87 NIM (%) FY14E FY15E FY16E Current 4.91 5.05 4.96 Prior 4.23 4.12 4.15 Variance (bps) 68 93 81 Source: BNP Paribas estimates Source: BNP Paribas estimates EXHIBIT 10: POWF – what’s changed EXHIBIT 11: RECL – what’s changed EPS FY14E EPS FY15E EPS FY16E TP Current (INR) 41.4 42.3 47.2 202 Prior (INR) 36.8 39.0 46.5 173 Variance (%) 12.5 8.5 1.5 16.8 EPS FY14E EPS FY15E EPS FY16E TP Current (INR) 48.1 52.0 54.8 248 Prior (INR) 40.0 41.3 44.2 215 Variance (%) 20.5 25.8 24.0 15.3 Source: BNP Paribas estimates Source: BNP Paribas estimates As a consequence, we increase our residual income based target price for POWF by about 17% and for RECL by roughly 15%. EXHIBIT 12: POWF residual income – valuation assumptions EXHIBIT 13: RECL residual income – valuation assumptions Residual income assumptions Risk free rate (%) 7 Beta 1.1 Equity risk premium (%) 6 Cost of equity (%) 14 Residual income assumptions Risk free rate (%) 7 Beta 1.1 Equity risk premium (%) 6 Cost of equity (%) 14 Source: BNP Paribas estimates Source: BNP Paribas estimates 45 50 55 60 65 70 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 (INR) 7
  8. 8. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Valuations remain attractive, we prefer POWF and RECL to PSBs Even after the recent outperformance, Power Finance’s 1 year fwd P/BV multiple is close to 1 standard below its long-term mean and RECL’s multiple is close to its mean. We believe that at current valuations, the risk reward is still favourable and the potential dividend yield of more than 5% in FY15E will cap the downside from current levels. We would also suggest investors who want to position for recovery in infrastructure (particularly in the power sector) to BUY POWF and RECL instead of public-sector banks, as the PSBs grapple with structural issues, such as erosion of market share (in retail assets and liabilities), under-provisioning for stressed assets, cost pressures from employee wage revisions and huge capital requirements to comply with BASEL III regulations. EXHIBIT 14: Stock price performance over past six months EXHIBIT 15: Dividend yield still attractive vs PSBs Sources: Bloomberg; BNP Paribas Note: PNB – Punjab National Bank (PNB IN), BOB – Bank of Baroda (BOB IN), SBIN – State Bank of India (SBIN IN) Sources: Bloomberg; BNP Paribas estimates EXHIBIT 16: POWF - valuations still below LT average EXHIBIT 17: RECL – trading close to the long term average Sources: Bloomberg; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates 80 90 100 110 120 130 140 150 160 170 2-Sep 2-Oct 2-Nov 2-Dec 2-Jan 2-Feb 2-Mar (indexed to 100) POWF RECL SENSEX BANKEX 5.8 5.7 5.1 3.6 2.5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 POWF RECL PNB BOB SBIN (%) Dividend yield - FY15E 0.4 0.9 1.4 1.9 2.4 2.9 3.4 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 P/BV (x) +1 SD -1 SD Avg 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 P/BV (x) +1 SD -1 SD Avg 8
  9. 9. Still some upside left RECL outperforms market by 9%; expect O/P to continue RECL is up 24% in the past six months, outperforming the Sensex by about 9%. A major part of this outperformance can be attributed to stable money/forex markets, positive government policy initiatives in the power sector, a restructuring package for state electricity boards coming through, and depressed valuations/attractive dividend yields. Recent power sector reforms reduce tail risk Recent reforms in the power sector, such as providing fuel linkages for the operating and near-completed plants, tariff hikes by SEBs, and environmental clearances for mines of Coal India (COAL IN), have led to improved sector fundamentals – this has led to a reduction in tail risk for lenders. Scenario analysis suggests more upside We run a scenario analysis factoring in loan growth 5% above/below our base-case estimate, double the credit cost in the worst case and a 25bp lower NIM (see our accompanying sector report POWF & RECL: risk-reward remains favourable for details). We calculate a best-case upside of about 28% and worst-case downside of 41%. We increase our TP 15% and FY14E/15E earnings 21-25% We raise our earnings estimates for FY14/15/16 by 20%/26%/24% and our residual income-based target price by about 15% to factor in an increase in margins and lower credit costs. RECL still trading below the long-term mean; expect further upside Sources: Bloomberg; BNP Paribas estimates 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 (x) +1 SD -1 SD Avg 20 MARCH 2014 CHANGE IN NUMBERS 6INDIA / DIVERSIFIED FINANCIALS RURAL ELECTRIFICATION RECL IN BUYUNCHANGED TARGET PRICE INR248.00 CLOSE INR211.30 UP/DOWNSIDE +17.4% PRIOR TP INR215.00 CHANGE IN TP +15.3% HOW WE DIFFER FROM CONSENSUS MARKET RECS TARGET PRICE (%) 9.3 POSITIVE 18 EPS 2014 (%) 4.2 NEUTRAL 8 EPS 2015 (%) 2.3 NEGATIVE 2 Avneesh Sukhija avneesh.sukhija@asia.bnpparibas.com +91 22 6196 4352 Chetan Ganatra chetan.ganatra@asia.bnpparibas.com +91 22 6176 5619 KEY STOCK DATA YE Mar (INR m) 2013A 2014E 2015E 2016E Operating Profit 51,388 66,406 73,320 77,249 Rec. net profit 37,925 47,543 51,324 54,075 Recurring EPS (INR) 38.41 48.15 51.98 54.76 Prior rec. EPS (INR) 38.41 39.97 41.32 44.17 Chg. In EPS est. (%) 0.0 20.5 25.8 24.0 EPS growth (%) 34.6 25.4 8.0 5.4 Recurring P/E (x) 5.5 4.4 4.1 3.9 Dividend yield (%) 3.9 6.7 7.4 7.8 Price/book (x) 1.2 1.0 0.9 0.8 ROE (%) 23.7 25.1 23.2 21.2 ROA (%) 3.24 3.36 3.14 2.96 Share price performance 1 Month 3 Month 12 Month Absolute (%) 8.9 3.3 2.5 Relative to country (%) 5.3 (0.2) (8.8) Next results May 2014 Mkt cap (USD m) 3,409 3m avg daily turnover (USD m) 5.2 Free float (%) 33 Major shareholder GOI (67%) 12m high/low (INR) 242.60/151.05 3m historic vol. (%) 36.4 ADR ticker - ADR closing price (USD) - Issued shares (m) 987 Sources: Bloomberg consensus; BNP Paribas estimates (40) (30) (20) (10) 0 10 124 174 224 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 (%)(INR) Rural Electrification Rel to MSCI India 9
  10. 10. Rural Electrification RECL IN Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Investment thesis Power sector reforms have led to an improvement in the overall fundamentals of the sector, which should benefit lenders in terms of falling credit costs and stable asset quality. RECL’s operating metrics have remained stable over last few quarters– asset quality trends continue to improve and the net interest margin has remained stable amid an uncertain business environment. Outstanding sanctions of INR560b (4x of FY13 disbursements) indicate that loan growth in FY15/16 will remain strong. We increase our earnings estimate for RECL for FY14E/15E/16E by 20%/26%/24% and our residual income- based target price by about 15% to account for an increase in margins and lower credit costs. Catalyst Key catalyst for the stock could be successful implementation of SEB restructuring packages and an earlier pick-up in the investment cycle than we expect, as this would help sustain loan growth and also improve asset quality. Risks to our call Fuel supply shortages can create an issue for asset quality. Furthermore, a persistent slowdown in the domestic economy would further delay a recovery in the investment cycle. This would be negative for the company’s asset quality and future growth. Company background Key assumptions RECL is an infrastructure finance company, lending mostly to power projects into generation, transmission and distribution. It also finances state electricity boards, power equipment manufacturing companies, etc. Residual income assumptions Risk-free rate (%) 7 Beta 1.1 Equity risk premium (%) 6 Cost of equity (%) 14 Source: BNP Paribas estimates Principal activities (FY14E, BNP Paribas estimates) Earnings sensitivity Credit costs (%) 0.10 0.20 0.28 (Base) 0.30 0.40 FY15E EPS (INR) 53.9 52.9 52.0 50.8 49.7 Key executives Source: BNP Paribas estimates Age Since Title Rajeev Sharma 53 2011 Chairman / Managing Director Ajeet Kumar 53 2012 Director Finance http://www.recindia.nic.in/ A 10bp reduction in credit cost leads to about 2% upside in EPS, all else being equal. Net Interest Income, 98.0% Non Interest Income, 2.0% 10
  11. 11. Rural Electrification RECL IN Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 EXHIBIT 1: RECL – what’s changed EXHIBIT 2: RECL – earnings change factors in higher margins EPS FY14E EPS FY15E EPS FY16E TP Current (INR) 48.1 52.0 54.8 248 Prior (INR) 40.0 41.3 44.2 215 Variance (%) 20.5 25.8 24.0 15.3 NIM (%) FY14E FY15E FY16E Current 5.15 5.32 5.31 Prior 5.12 4.75 4.97 Variance (bps) 2.7 57.0 33.5 Source: BNP Paribas estimates Source: BNP Paribas estimates 11
  12. 12. Rural Electrification RECL IN Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Financial statements Rural Electrification Profit and Loss (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Interest income 102,640 132,910 166,729 185,502 210,461 Interest expense (63,788) (80,063) (97,901) (106,565) (121,190) Net interest income 38,852 52,847 68,828 78,937 89,272 Net fees & commission 736 1,290 1,104 1,260 1,540 Foreign exchange trading income 0 0 0 0 0 Securities trading income 0 0 0 0 0 Dividend income 1,715 1,536 332 346 353 Other income 0 0 0 0 0 Non interest income 2,451 2,826 1,436 1,606 1,893 Total income 41,303 55,673 70,264 80,543 91,165 Staff costs (1,710) (1,518) (1,526) (1,523) (1,597) Other operating costs (1,140) (1,086) (925) (1,484) (1,678) Operating costs (2,849) (2,604) (2,451) (3,007) (3,274) Pre provision operating profit 38,453 53,069 67,813 77,536 87,891 Provisions for bad and doubtful debts (523) (250) (1,402) (4,200) (10,625) Other provisions 0 (1,431) (4) (16) (16) Operating profit 37,931 51,388 66,406 73,320 77,249 Recurring non operating income 0 0 0 0 0 Associates 0 0 0 0 0 Goodwill amortization 0 0 0 0 0 Non recurring items 0 0 0 0 0 Profit before tax 37,931 51,388 66,406 73,320 77,249 Tax (9,761) (13,463) (18,864) (21,996) (23,175) Profit after tax 28,169 37,925 47,543 51,324 54,075 Minority interests 0 0 0 0 0 Preferred dividends 0 0 0 0 0 Other items 0 0 0 0 0 Reported net profit 28,169 37,925 47,543 51,324 54,075 Non recurring items & goodwill (net) 0 0 0 0 0 Recurring net profit 28,169 37,925 47,543 51,324 54,075 Per share (INR) Recurring EPS * 28.53 38.41 48.15 51.98 54.76 Reported EPS 28.53 38.41 48.15 51.98 54.76 DPS 9.00 8.25 14.12 15.59 16.43 Growth Net interest income (%) 19.3 36.0 30.2 14.7 13.1 Non interest income (%) (36.6) 15.3 (49.2) 11.8 17.9 Pre provision operating profit (%) 10.6 38.0 27.8 14.3 13.4 Operating profit (%) 9.1 35.5 29.2 10.4 5.4 Reported net profit (%) 9.6 34.6 25.4 8.0 5.4 Recurring EPS (%) 9.6 34.6 25.4 8.0 5.4 Reported EPS (%) 9.6 34.6 25.4 8.0 5.4 Income breakdown Net interest income (%) 94.1 94.9 98.0 98.0 97.9 Net fees &commission (%) 1.8 2.3 1.6 1.6 1.7 Foreign exchange trading income (%) 0.0 0.0 0.0 0.0 0.0 Securities trading income (%) 0.0 0.0 0.0 0.0 0.0 Dividend income (%) 4.2 2.8 0.5 0.4 0.4 Other income (%) 0.0 0.0 0.0 0.0 0.0 Operating performance Gross interest yield (%) 11.40 11.80 11.90 11.86 11.70 Cost of funds (%) 8.27 8.33 9.76 10.06 10.85 Net interest spread (%) 3.13 3.46 2.14 1.80 0.85 Net interest margin (%) 4.31 4.69 4.91 5.05 4.96 Cost/income (%) 6.9 4.7 3.5 3.7 3.6 Cost/assets (%) 0.30 0.22 0.17 0.18 0.18 Effective tax rate (%) 25.7 26.2 28.4 30.0 30.0 Dividend payout on recurring profit (%) 31.5 21.5 29.3 30.0 30.0 ROE (%) 20.6 23.7 25.1 23.2 21.2 ROE - COE (%) 5.5 8.6 10.0 8.1 6.1 ROA (%) 2.97 3.24 3.36 3.14 2.96 RORWA (%) 3.16 3.37 3.42 3.21 3.02 *Pre exceptional, pre-goodwill and fully diluted Sources: Rural Electrification; BNP Paribas estimates 12
  13. 13. Rural Electrification RECL IN Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Financial statements Rural Electrification Balance Sheet (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Gross customer loans 980,376 1,274,450 1,405,034 1,571,786 1,815,643 Total provisions (670) (890) (3,519) (7,318) (17,368) Interest in suspense 0 0 0 0 0 Net customer loans 979,706 1,273,560 1,401,514 1,564,468 1,798,275 Bank loans 12,225 0 0 0 0 Government securities 8,060 0 0 0 0 Trading securities 0 0 0 0 0 Investment securities 107 6,606 6,986 7,142 7,195 Cash & equivalents 35,330 14,843 14,843 14,843 14,843 Other interest earning assets 0 0 0 0 0 Tangible fixed assets 880 801 800 800 800 Associates 0 0 0 0 0 Goodwill 0 0 0 0 0 Other intangible assets 0 0 0 0 0 Other assets 0 9,264 104,872 151,150 93,145 Total assets 1,036,308 1,305,073 1,529,014 1,738,402 1,914,258 Customer deposits 0 0 0 0 0 Bank deposits 0 0 0 0 0 Other interest bearing liabilities 843,243 1,077,910 1,271,665 1,447,713 1,588,442 Non interest bearing liabilities 47,390 52,620 52,620 52,620 52,620 Hybrid Capital 0 0 0 0 0 Total liabilities 890,633 1,130,530 1,324,285 1,500,333 1,641,062 Share capital 9,875 9,875 9,875 9,875 9,875 Reserves 135,801 164,669 194,854 228,195 263,321 Total equity 145,675 174,544 204,729 238,069 273,196 Minority interests 0 0 0 0 0 Total liabilities & equity 1,036,309 1,305,074 1,529,014 1,738,402 1,914,258 Supplementary items Risk weighted assets (RWA) 969,139 1,278,971 1,498,434 1,703,634 1,875,972 Average interest earning assets 900,513 1,126,633 1,401,514 1,564,468 1,798,275 Average interest bearing liabilities 771,641 960,576 1,003,430 1,059,673 1,116,494 Tier 1 capital 138,130 166,337 193,804 224,141 256,105 Total capital 145,675 176,147 206,332 239,672 274,799 Gross non performing loans (NPL) 4,845 4,900 8,086 13,110 26,893 Per share (INR) Book value per share 148 177 207 241 277 Tangible book value per share 140 167 207 241 277 Growth Gross customer loans (%) 19.3 30.0 10.2 11.9 15.5 Average interest earning assets (%) 21.2 25.1 24.4 11.6 14.9 Total assets (%) 20.7 25.9 17.2 13.7 10.1 Risk weighted assets (%) 19.5 32.0 17.2 13.7 10.1 Customer deposits (%) 0.0 0.0 0.0 0.0 0.0 Leverage & capital measures Customer loans/deposits (%) 0.0 0.0 0.0 0.0 0.0 Equity/assets (%) 14.1 13.4 13.4 13.7 14.3 Tangible equity/assets (%) 14.1 13.4 13.4 13.7 14.3 RWA/assets (%) 93.5 98.0 98.0 98.0 98.0 Tier 1 CAR (%) 14.3 13.0 12.9 13.2 13.7 Total CAR (%) 15.0 13.8 13.8 14.1 14.6 Asset quality Change in NPL (%) 2,322.4 1.1 65.0 62.1 105.1 NPL/gross loans (%) 0.5 0.4 0.6 0.8 1.5 Total provisions/gross loans (%) 0.1 0.1 0.3 0.5 1.0 Total provisions/NPL (%) 13.8 18.2 43.5 55.8 64.6 Valuation 2012A 2013A 2014E 2015E 2016E Recurring P/E (x) * 7.4 5.5 4.4 4.1 3.9 Recurring P/E @ target price (x) * 8.7 6.5 5.2 4.8 4.5 Reported P/E (x) 7.4 5.5 4.4 4.1 3.9 Dividend yield (%) 4.3 3.9 6.7 7.4 7.8 Price/book (x) 1.4 1.2 1.0 0.9 0.8 Price/tangible book (x) 1.5 1.3 1.0 0.9 0.8 Price/tangible book @ target price (x) 1.8 1.5 1.2 1.0 0.9 * Pre exceptional, pre-goodwill and fully diluted Sources: Rural Electrification; BNP Paribas estimates 13
  14. 14. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Financial statements Power Finance Profit and Loss (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Interest income 125,695 172,438 215,058 219,606 244,451 Interest expense (83,528) (111,605) (136,303) (133,582) (139,431) Net interest income 42,167 60,833 78,755 86,025 105,020 Net fees & commission 997 0 0 0 0 Foreign exchange trading income 0 0 0 0 0 Securities trading income 0 0 0 0 0 Dividend income 992 0 0 0 0 Other income 500 288 1,162 3,365 3,459 Non interest income 2,488 288 1,162 3,365 3,459 Total income 44,655 61,121 79,917 89,390 108,479 Staff costs (801) (809) (876) (1,028) (1,108) Other operating costs (563) (641) (1,258) (1,426) (1,822) Operating costs (1,365) (1,451) (2,134) (2,454) (2,930) Pre provision operating profit 43,290 59,670 77,783 86,935 105,549 Provisions for bad and doubtful debts (365) 0 (1,226) (7,220) (16,537) Other provisions (1) 0 (1) (3) (3) Operating profit 42,924 59,670 76,556 79,712 89,009 Recurring non operating income 0 0 0 0 0 Associates 0 0 0 0 0 Goodwill amortization 0 0 0 0 0 Non recurring items 1,410 0 0 0 0 Profit before tax 44,334 59,670 76,556 79,712 89,009 Tax (11,620) (15,474) (21,870) (23,914) (26,703) Profit after tax 32,714 44,196 54,686 55,799 62,306 Minority interests 0 0 0 0 0 Preferred dividends 0 0 0 0 0 Other items 0 0 0 0 0 Reported net profit 32,714 44,196 54,686 55,799 62,306 Non recurring items & goodwill (net) (1,410) 0 0 0 0 Recurring net profit 31,304 44,196 54,686 55,799 62,306 Per share (INR) Recurring EPS * 23.72 33.48 41.43 42.27 47.20 Reported EPS 24.78 33.48 41.43 42.27 47.20 DPS 5.68 9.04 11.19 11.41 12.75 Growth Net interest income (%) 25.9 44.3 29.5 9.2 22.1 Non interest income (%) (14.9) (88.4) 303.4 189.7 2.8 Pre provision operating profit (%) 21.7 37.8 30.4 11.8 21.4 Operating profit (%) 21.1 39.0 28.3 4.1 11.7 Reported net profit (%) 24.9 35.1 23.7 2.0 11.7 Recurring EPS (%) 3.9 41.2 23.7 2.0 11.7 Reported EPS (%) 8.6 35.1 23.7 2.0 11.7 Income breakdown Net interest income (%) 94.4 99.5 98.5 96.2 96.8 Net fees &commission (%) 2.2 0.0 0.0 0.0 0.0 Foreign exchange trading income (%) 0.0 0.0 0.0 0.0 0.0 Securities trading income (%) 0.0 0.0 0.0 0.0 0.0 Dividend income (%) 2.2 0.0 0.0 0.0 0.0 Other income (%) 1.1 0.5 1.5 3.8 3.2 Operating performance Gross interest yield (%) 10.97 11.90 12.88 11.84 12.34 Cost of funds (%) 8.28 8.74 9.32 8.22 8.00 Net interest spread (%) 2.69 3.15 3.56 3.61 4.34 Net interest margin (%) 3.68 4.20 4.72 4.64 5.30 Cost/income (%) 3.1 2.4 2.7 2.7 2.7 Cost/assets (%) 0.11 0.09 0.12 0.13 0.14 Effective tax rate (%) 26.2 25.9 28.6 30.0 30.0 Dividend payout on recurring profit (%) 23.9 27.0 27.0 27.0 27.0 ROE (%) 17.2 19.7 21.1 18.8 18.5 ROE - COE (%) 2.1 4.6 6.0 3.7 3.4 ROA (%) 2.60 2.87 3.11 2.89 2.89 RORWA (%) 2.68 2.94 3.17 2.95 2.95 *Pre exceptional, pre-goodwill and fully diluted Sources: Power Finance; BNP Paribas estimates 14
  15. 15. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Financial statements Power Finance Balance Sheet (INR m) Year Ending Mar 2012A 2013A 2014E 2015E 2016E Gross customer loans 1,295,740 1,604,647 1,738,217 1,981,214 2,214,795 Total provisions (446) (981) (2,259) (7,328) (21,591) Interest in suspense 0 0 0 0 0 Net customer loans 1,295,294 1,603,666 1,735,958 1,973,887 2,193,204 Bank loans 9,534 0 0 0 0 Government securities 0 0 0 0 0 Trading securities 0 0 0 0 0 Investment securities 540 1,910 591 591 591 Cash & equivalents 78,386 47,538 22,992 8,034 13,570 Other interest earning assets 0 0 0 0 0 Tangible fixed assets 760 743 730 730 730 Associates 0 0 0 0 0 Goodwill 0 0 0 0 0 Other intangible assets 0 0 0 0 0 Other assets 0 44,308 56,702 56,572 63,876 Total assets 1,384,515 1,698,166 1,816,972 2,039,814 2,271,971 Customer deposits 0 0 0 0 0 Bank deposits 0 0 0 0 0 Other interest bearing liabilities 1,157,150 1,395,827 1,529,470 1,718,970 1,908,470 Non interest bearing liabilities 18,512 61,797 9,520 4,660 4,660 Hybrid Capital 0 0 0 0 0 Total liabilities 1,175,662 1,457,624 1,538,990 1,723,630 1,913,130 Share capital 13,199 13,200 13,200 13,200 13,200 Reserves 195,654 227,341 264,781 302,983 345,641 Total equity 208,853 240,541 277,982 316,184 358,841 Minority interests 0 0 0 0 0 Total liabilities & equity 1,384,515 1,698,166 1,816,972 2,039,814 2,271,971 Supplementary items Risk weighted assets (RWA) 1,339,536 1,664,202 1,780,632 1,999,017 2,226,532 Average interest earning assets 1,145,501 1,449,480 1,669,812 1,854,922 1,980,269 Average interest bearing liabilities 1,008,827 1,276,489 1,462,649 1,624,220 1,742,845 Tier 1 capital 197,467 226,451 261,157 296,569 336,111 Total capital 208,853 296,577 277,982 316,184 358,841 Gross non performing loans (NPL) 13,580 13,687 13,131 18,219 33,775 Per share (INR) Book value per share 158 182 211 240 272 Tangible book value per share 150 172 211 240 272 Growth Gross customer loans (%) 30.1 23.8 8.3 14.0 11.8 Average interest earning assets (%) 27.7 26.5 15.2 11.1 6.8 Total assets (%) 35.4 22.7 7.0 12.3 11.4 Risk weighted assets (%) 34.6 24.2 7.0 12.3 11.4 Customer deposits (%) 0.0 0.0 0.0 0.0 0.0 Leverage & capital measures Customer loans/deposits (%) 0.0 0.0 0.0 0.0 0.0 Equity/assets (%) 15.1 14.2 15.3 15.5 15.8 Tangible equity/assets (%) 15.1 14.2 15.3 15.5 15.8 RWA/assets (%) 96.8 98.0 98.0 98.0 98.0 Tier 1 CAR (%) 14.7 13.6 14.7 14.8 15.1 Total CAR (%) 15.6 17.8 15.6 15.8 16.1 Asset quality Change in NPL (%) 487.9 0.8 (4.1) 38.7 85.4 NPL/gross loans (%) 1.0 0.9 0.8 0.9 1.5 Total provisions/gross loans (%) 0.0 0.1 0.1 0.4 1.0 Total provisions/NPL (%) 3.3 7.2 17.2 40.2 63.9 Valuation 2012A 2013A 2014E 2015E 2016E Recurring P/E (x) * 7.6 5.4 4.4 4.3 3.8 Recurring P/E @ target price (x) * 8.5 6.0 4.9 4.8 4.3 Reported P/E (x) 7.3 5.4 4.4 4.3 3.8 Dividend yield (%) 3.1 5.0 6.2 6.3 7.1 Price/book (x) 1.1 1.0 0.9 0.8 0.7 Price/tangible book (x) 1.2 1.1 0.9 0.8 0.7 Price/tangible book @ target price (x) 1.4 1.2 1.0 0.8 0.7 * Pre exceptional, pre-goodwill and fully diluted Sources: Power Finance; BNP Paribas estimates 15
  16. 16. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Disclaimers and Disclosures APPENDIX DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S) (BNP Paribas Securities India Pvt Ltd) ANALYST(S) CERTIFICATION Avneesh Sukhija, BNP Paribas Securities India Pvt Ltd, +91 22 6196 4352, avneesh.sukhija@asia.bnpparibas.com. Chetan Ganatra, BNP Paribas Securities India Pvt Ltd, +91 22 6176 5619, chetan.ganatra@asia.bnpparibas.com. The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst herein. Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations. IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report: Company Ticker Disclosure (as applicable) State Bank of India SBIN IN 2,3,4 BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the company. IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report: Company Ticker Price (as of 19-Mar-2014 closing price) Interest N/A N/A N/A N/A 1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations. 2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act, BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired. 7. the listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks 8. The Company is recognized as having considerable interests with BNPPSK. 9. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying. 16
  17. 17. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 History of change in investment rating and/or target price Power Finance (POWF IN) Avneesh Sukhija started covering this stock from 13-Jun-2012 Price and TP are in local currency Valuation and risks: TP is based on residual income model and key risks are shortfall in fuel supply and no further tariff hikes by SEBs. Sources: Bloomberg; BNP Paribas Rural Electrification (RECL IN) Avneesh Sukhija started covering this stock from 13-Jun-2012 Price and TP are in local currency Valuation and risks: TP is based on residual income model and key risks are shortfall in fuel supply and no further tariff hikes by SEBs. Sources: Bloomberg; BNP Paribas State Bank of India (SBIN IN) Avneesh Sukhija started covering this stock from 05-Sep-2013 Price and TP are in local currency Valuation and risks: Key risks to our SOTP-based TP are continued economic slowdown and worsening of asset quality. Sources: Bloomberg; BNP Paribas Date Reco TP 18-Mar-11 BUY 400.00 14-Sep-11 Not Rated 13-Jun-12 BUY 192.00 88.00 138.00 188.00 238.00 288.00 338.00 388.00 438.00 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (INR) Power Finance Target Price Date Reco TP 18-Mar-11 BUY 380.00 14-Sep-11 Not Rated 13-Jun-12 BUY 202.36 132.00 182.00 232.00 282.00 332.00 382.00 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (INR) Rural Electrification Target Price Date Reco TP 18-Mar-11 BUY 3,000.00 16-Sep-11 Not Rated 12-Oct-11 BUY 2,102.00 7-Mar-12 HOLD 2,253.00 11-May-12 BUY 2,258.00 10-Nov-12 HOLD 2,137.00 21-Feb-13 BUY 2,575.00 5-Sep-13 REDUCE 1,226.00 24-Jan-14 HOLD 1,589.00 1,103.00 1,603.00 2,103.00 2,603.00 3,103.00 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (INR) State Bank of India Target Price 17
  18. 18. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Punjab National Bank (PNB IN) Avneesh Sukhija started covering this stock from 24-Jan-2014 Price and TP are in local currency Valuation and risks: Key risks to our excess return based TP are continued economic slowdown and worsening of asset quality. Sources: Bloomberg; BNP Paribas Bank of Baroda (BOB IN) Avneesh Sukhija started covering this stock from 24-Jan-2014 Price and TP are in local currency Valuation and risks: Key risks to our excess return based TP are continued economic slowdown and worsening of asset quality. Sources: Bloomberg; BNP Paribas GENERAL DISCLAIMER This report was produced by BNP Paribas Securities India Pvt Ltd, member company(ies) of the BNP Paribas Group. This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. 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By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001). Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Date Reco TP 18-Mar-11 BUY 1,200.00 16-Sep-11 Not Rated 12-Oct-11 BUY 1,160.00 7-Mar-12 HOLD 958.00 4-Jan-13 BUY 1,006.00 22-Oct-13 Not Rated 24-Jan-14 REDUCE 520.00 368.00 468.00 568.00 668.00 768.00 868.00 968.00 1,068.00 1,168.00 1,268.00 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (INR) Punjab National Bank Target Price Date Reco TP 18-Mar-11 BUY 950.00 16-Sep-11 Not Rated 12-Oct-11 BUY 941.00 7-Mar-12 HOLD 890.00 11-May-12 BUY 799.00 23-Oct-12 REDUCE 650.00 21-Feb-13 HOLD 757.00 22-Oct-13 Not Rated 24-Jan-14 HOLD 683.00 401.00 501.00 601.00 701.00 801.00 901.00 1,001.00 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 (INR) Bank of Baroda Target Price 18
  19. 19. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, providing automated trading services, dealing in futures contacts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia) Limited for all matters and queries relating to this report. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. 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M.H.Thamrin No.1, Jakarta, 10310, Indonesia, is a fully subsidiaries company of BNP Paribas SA and is licensed under Capital Market Law No. 8 of 1995 and the holder of broker-dealer and underwriter licenses issued by the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK). PT BNP Paribas Securities Indonesia is also a member of Indonesia Stock Exchange. Neither this research publication nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This research publication is not an offer of securities in Indonesia. Some of the securities referred to in this research publication have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations, and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstance which constitute an offer within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD 1034. Singapore: This report is distributed in Singapore by BNP Paribas Securities (Singapore) Pte Ltd ("BNPPSSL") and may be distributed in Singapore only to an Accredited or Institutional Investor, each as defined under the Financial Advisers Regulations ("FAR") and the Securities and Futures Act (Chapter 289) of Singapore, as amended from time to time. In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Cadiz Securities (Pty) Ltd and BNP Paribas Cadiz Stock Broking (Pty) Ltd (hereinafter referred to as “BNPP Cadiz”) are licensed members of Johannesburg Stock Exchange and are authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNPP Cadiz does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: Information on securities that trade in Taiwan is distributed by BNP Paribas Securities (Taiwan) Co., Ltd. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas. Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Notice Published in accordance with “Communiqué Regarding the Principles on Investment Consultancy Activities and the Investment Consultancy Institutions” Series: V, No: 55 issued by the Capital Markets Board. The investment related information, commentary and recommendations contained herein do not constitute investment consultancy services. Investment consultancy services are provided in accordance with investment consultancy agreements executed between investors and brokerage companies or portfolio management companies or non-deposit accepting banks. The commentary and recommendations contained herein are based on the personal views of the persons who have made such commentary and recommendations. These views may not conform to your financial standing or to your risk and return preferences. Therefore, investment decisions based solely on the information provided herein may fail to produce results in accordance with your expectations. United States: This report may be distributed in the United States only to U.S. Persons who are “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a “major U.S. institutional investor”. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a US- registered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and 19
  20. 20. INDIA DIVERSIFIED FINANCIALS Avneesh Sukhija BNP PARIBAS 20 MARCH 2014 professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”)). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is authorised by the Autorité de Contrôle Prudentiel and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request.This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the Autorité de Contrôle Prudentiel whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Other Jurisdictions: The distribution of this report in other jurisdictions or to residents of other jurisdictions may also be restricted by law, and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report you agree to be bound by the foregoing instructions. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a particular stock, please contact the relevant BNP Paribas research team or the author(s) of this report. Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 19 March 2014 unless otherwise stated. RECOMMENDATION STRUCTURE Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving ( ): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) ( ): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating ( ): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. RATING DISTRIBUTION (as at 19 March 2014) Total BNP Paribas coverage universe 665 Investment Banking Relationship (%) Buy 339 Buy 4.40 Hold 217 Hold 3.70 Reduce 109 Reduce 2.80 Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2014 BNP Paribas Group 20

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