Equitymaster Agora Research Private Limited

Independent Investment Research

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Bluechips...Where to From Here?

Sensex 40,000.

The prediction seems far more believable today that it did a year and half back, when we first wrote about it.

Our premise for the prediction was that corporate earnings, which were at multi year lows, will lift off. And we did
not expect Sensex to touch 40,000 in 2018 but only by 2020.

Our prediction was not entirely wrong. Profit margins of Indian companies did begin to recover this year, but were
far muted compared to our expectations. Demonetisation and GST took a huge toll and delayed the recovery by
several quarters. And though 2017 looked better than 2016, corporate earnings continue to stay at decade lows.

Earnings Still at Decade Lows

The rise from Sensex 24,000 to Sensex 33,000 in eighteen months was on the back of re-rating of stocks and flow
of domestic funds, more than anything else. As a share of bank deposits, Indian households now own nearly as
much equities (directly or in funds) as they did in 2008 and 1996.

Household Financial Assets and Liabilities (% of Bank Deposits)

1992 38% 39% 70% 21%

1996 22% 35% 56% 39%

2002 9% 36% 39% 38%

2008 19% 43% 18% 50%

2013 3% 31% 27% 54%

2016 7% 43% 44% 56%

2017 17% 40% 27% 40%

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 Source: RBI
* LIC
**Public Provident fund

Sensex 40,000 presents an upside of 20% from current levels. While there is no doubt of the target being
eventually achieved, a temporary correction in the interim cannot be ruled out. Unless earnings recovery and
domestic fund flow into stocks remain steady, even the best bluechips could be subject to temporary correction.

Our focus in StockSelect, currently, is therefore on stocks that have minimal cyclical and valuation downside. So
that even if Sensex 40,000 takes longer than expected, the recommended stocks deliver at least 15-20% returns
per annum.

The Silver Lining Amidst Dark Clouds in Housing Finance

Housing finance is one of the most secure business models.

I wrote this in The India Letter recommendation report in October 2014.

Since then stocks of housing finance companies have sold like hot cakes. Stocks of HDFC, Gruh Finance, CanFin
Homes and LIC Housing gained between 75% to 540% in the last three years.

But what is it that drew investors to these stocks?

Their unique moat.

Most banks didn't see the opportunity in housing credit until it was too late. Plus, they shied away from lending to
an unbanked population. Meanwhile, specialized housing finance companies cashed in on the latent demand for
housing credit in smaller towns.

While their growth has been spectacular, housing credit in India is still less than a fifth of total bank credit. We are
clearly nowhere close to a housing bubble.

The opportunity is huge. The rise in the housing finance stocks, therefore, is no surprise.

Housing finance, as a sector, will continue to grow. But with almost every bank and non-bank company taking a
share of the pie, the space is now saturated. Only few will make profits or sustain credit quality. In fact, rating
agencies can already see the credit quality of housing loans worsening.

The housing finance space today is not just clouded by uncertainty on profits but also asset quality. Loans against
property (LAP), which have multiplied over the years, are expected to be the loss leaders. As per rating agency
CRISIL, delinquencies in the Rs 1.7 trillion LAP business could touch 3.3% this fiscal.

LIC Housing Finance (LICHFL), one of India's oldest housing finance companies, however, has sustained a secure
business model. A lion's share of 82% of LICHFL's customers belong to the salaried class, nearly half of whom are
central government employees. Low-risk retail home loan products form its core business, accounting for 88% of
the loan portfolio.

This coupled with falling cost of funds has helped net interest margins (NIMs) improve from 2.2% in FY13 to 2.8%
in FY17. At the same time, the financial entity undertakes adequate risk protection measures to limit defaults.

Although LICHFL has some exposure to LAP, such loans are offered only to the salaried segment against self-

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occupied and residential properties that are free from any legal disputes. Additionally, the value of the LAP is not
more than a quarter of the property's actual value. On an average, the loan amount extended is less than half the
mortgage value. Thanks to these prudent lending practices, LICHFL's gross and net NPAs have stayed below 1%
and 0.5% of loan book, respectively, over past five years. The share of non-housing loans comprising of LAP and
developer loans stands at 17% at present. Going ahead, the company wants to limit the share of this loan segment
to not more than 13-14% of the overall loan portfolio.

Yet another factor that offers LICHFL a unique edge over peers is its network. The company possesses one of the
industry's most extensive marketing network in India: nine regional offices, 22 back offices and 249 marketing
offices covering over 450 locations. In addition, the company has appointed over 11,452 intermediaries to extend
its marketing reach. 70% of its loans are therefore originated by LICHFL's own network.

Ability to control costs and delinquencies will be a huge advantage to the business if and when the housing
finance industry goes through a duress.

How Will LIC Housing Finance Improve its Fortunes?

Strong Parentage and a Trusted Brand

LIC Housing Finance (LICHFL) is among the country's oldest housing finance companies. Incorporated
in 1989, the company is promoted by the state-owned Life Insurance Corporation (LIC) of India.

LIC is the country's biggest insurance provider and enjoys significant brand recognition and trust.
LICHFL benefits from its strong parentage and enjoys a strong brand recall among Indian consumers.

Moreover, the association with LIC further adds on to the reliability with respect to the custody of
documents until such time that the property remains mortgaged during the loan tenure.

Besides lending its brand power to the company, LIC also plays a major role in mobilizing its large agent
network for LICHFL's use. In fact, over 62% of LICHFL's loan originations take place through the LIC's
agent network.

LIC's backing has not only enabled LICHFL to use the latter's huge agent network to originate loans but
also to source funds at competitive rates. Since the housing finance company enjoys the parentage of
LIC, it is able to raise funds at cheaper rates due to strong credit ratings accorded to its borrowing
programs.

Government Boost to Affordable Housing

The government remains keen on spurring growth in the housing sector. In this regard, the government
has a strong focus on both urban development and affordable housing.

The government wants to develop 100 smart cities and has outlined a target to provide housing for all by
2022. Softening interest rates and higher tax benefits on interest and principal payments have acted as
a catalyst in mobilizing demand for home loans

Moreover, the affordable housing segment was granted the infrastructure status in the Union Budget,
2017-18. The central government also announced the extension of the housing for all subsidies to the
middle-income group under the credit linked subsidy component of the scheme to provide interest
subsidy on the housing loans.

3 3
This is expected to provide a boost in volume of construction activities across the country and act as a
catalyst to meet the objectives of 'Housing to All by 2022'. The credit offtake towards affordable
segment of housing will lead to creation of supply as developers will have access to lower cost funding.
This is expected to spur growth in affordable dwelling units, which will propel demand for small-ticket
housing loans.

Further, with structural reforms like Real Estate Regulation and Development Act, 2016 (RERA) and
Goods and Service Tax (GST), are set to bring in transparency and reinforce consumers' trust in the
sector, adding to growth in newer projects.

Therefore, LICHFL with an established presence in the sector, will be able to capitalize on the growth
potential. Going ahead, the housing finance company is targeting to grow at an average rate of 15% per
annum.

Consistent Growth in Loan Book and Profitability

LICHFL's loan portfolio has grown at a compounded annual rate of over 21% in the past decade to reach
a size of Rs 1.4 trillion as on 31st March 2017. LICHFL is today the third largest HFC in the country.

Loan Book has Grown at a Robust Rate

Since the housing finance company enjoys the parentage of LIC, it is able to raise funds at cheaper rates
due to strong credit ratings accorded to its borrowing programs. Besides, LICHFL has also been
replacing bank borrowings with low cost non-convertible debentures that account for around 80% of the
funding basket as compared to a share of 50% in FY09. Therefore, backed by improved asset
composition and low-cost funding mix, the HFC has improved its profitability. The housing finance
company's NIMs (net interest margins) have expanded from 2.2% in FY13 to 2.8% in FY17. The return on
equity has improved from 15.8% to 19% over the same period.

The fact that the housing finance company has been continuously paying dividend since 1990 is an
icing on the cake. The dividend payout ratio averaged 20% in the past decade.

Stable Asset Quality and Prudent Risk Management

LICHF has a sharp focus on the low risk retail home loan segment, which make up to 83% of the HFC's
portfolio. Moreover, the HFC caters predominantly to the salaried class with sufficient collateralised
lending, which make up 83% of its customers, half of which are central government employees.

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Apart from focusing on the salaried middle-income class, LICHFL maintains stringent credit appraisal
systems and processes to keep credit risks under control. The HFC has conservative underwriting
policies and maintains loan to value ratio (LTV) of upto 55% for retail housing loans. To mitigate the risk
associated with volatility in real asset prices coupled with uncertainty in cash flows from LAP loans, the
LTV in this segment has been kept low at 25-26%.

Prudent Lending Practices Contain Slippages

Among non-housing loans, the share of LAP (loan against property) loans stands at around 13% whereas
the share of the riskier project loans is 4%.

Going ahead, the housing finance company wants to limit the share of LAP and developer loans to not
more than 14-15% of the overall loan portfolio.

LICHFL's Falling NPAs

These conservative lending practices have ensured that LICHFL's asset quality has continued to remain
benign over the years. It's gross Non-Performing Assets (NPA) as a percentage of total advances ratio
averaged at 0.5% in the past seven years. Since the housing finance company has been making

5 5
 substantial provision for NPAs, the net NPAs on its books averaged at 0.2% during this period.

Key Challenges for LIC Housing Finance

Competition from Banks and NBFCs

The housing finance industry is one of the most competitive segments of the Indian economy, with the
banking sector having a significant presence. Housing Finance business is on an upward trajectory, due
to growing economy, increased urbanization, government incentives, acceptability of credit in society
and rise in nuclear families. With the result, the housing finance industry has attracted lot of Companies
in the market thereby increasing competition to maintain/grow market share and profitability.

Banks have an edge over housing finance companies due to access to relatively low-cost funds raised
through deposits. Therefore, with every drop in the interest rates, propelled by banks, housing finance
companies will be forced to follow the suit, or they risk losing market share. While LICHFL continues to
innovate with new product offerings meant to compete with banks, any significant drop in the interest
rates will affect the competitive power of the HFC.

Dependence on LIC Agent Network

LICHFL's promoter has been involved in providing the company funds as well as access to its vast agent
network. LIC's agents sell home loans for LICHFL. This network is extremely important to LICHFL as over
62% of home loan originations happen through the LIC agent network. While its importance cannot be
undermined, it also goes to show how dependent LICHFL is on LIC's agent network. If LIC were to de-
prioritize these agents for selling home loans, it would lead to a significant hassle for the HFC. While
LICHFL is taking steps to explore other avenues of originations like through its 100% subsidiary LICGFL
Financial Services, it remains largely dependent on the LIC agent network.

LIC Agents Make up Majority of Originations

Single Product Entity

LICHF is a single product entity, in the sense that it has a narrow focus on the housing finance sector,
and has very little option for diversification in the event of falling market share in the housing finance
industry. Also, since housing finance is a typically low yielding asset class (as against high yielding
assets like car loans or personal loans available to banks), the possibility of improving the NIM (net
interest margin) remains restricted to the growth of volumes in the industry.

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More About India's Leading Housing Finance Company
Incorporated in 1989, LIC Housing Finance Limited is one of the largest Housing Finance companies in India, with
the key objective of providing long term finance to individuals for the purchase or construction of a house or a flat
for residential purposes. The company also provides finance on an existing property for business or personal
needs, and also gives loans to professionals for buying their office space and equipment. Over the last few years
the HFC has sharpened its focus on the affordable housing sector and has managed to grow substantially. The
HFC also has one of the industry's most expansive marketing network in the country, with over 249 marketing
offices along with international representative offices in Dubai and Kuwait. In addition, the company has
appointed over 11,452 intermediaries to extend its marketing reach. 70% of its loans are therefore originated by
LICHFL's own network.

A Word about the Management

LICHFL has an efficient and experienced management. In its nearly three decades of existence the HFC has
managed to carve out for itself a piece of the housing sector pie. The management has been proactive to the
changes in the industry and has been able to consistently come up with innovative product offerings that add
value. In fact, LICHFL first introduced life insurance linked mortgages to India. The management has also framed a
zero-tolerance policy for NPAs, which has had a marked effect of the asset quality of the HFC. Thus, with a prudent
and innovative management, LICHFL is poised to tap the growth in the country's housing finance sector.

Key Management Personnel

V.K. Sharma, is the Chairman of the company. He holds a M.Sc. in Botany from Patna University. He has been in
employment with LIC since 1981. Mr V.K. Sharma took charge as Chairman, Life Insurance Corporation of India in
December 2016. Prior to his taking over as Managing Director, LIC of India, in November 2013, he was the
Managing Director & Chief Executive Officer of LIC Housing Finance Limited (LICHFL).

Vinay Sah, is the Managing Director (MD) & Chief Executive Officer (CEO) of the company. He was appointed as
CEO effective from April 2017, and prior to that he was Executive Director- Marketing and Product Development at
LIC of India since 2015-16. Mr. Sah holds a Masters in Science (Statistics) from Lucknow University. In a career
spanning over three decades in the Corporation, Mr. Sah has successfully handled various portfolios like
marketing, IT, personnel and administration. He had the distinction of serving as Zonal Manager in-charge of
Western Zone and East Central Zone.

Risk Analysis
In order to further improve our risk analysis of companies we have come out with a revised Equitymaster Risk
Matrix (ERM®). The ERM® is broken down in to 4 sub heads namely industry risk, performance risk, management
risk and balance sheet risk. (For details please refer to the ERM® at the end of the report).

Regulatory risk:

Some businesses are subject to regulations by external government agencies. These companies are
subject to regulatory risk since they do not have the liberty to operate in a free environment. Excessive
regulations can create bureaucratic hassles and impede growth. Thus, higher the regulation, higher is
the risk for any business. The banking and housing finance sector is subject to various regulations
imposed by the Reserve Bank of India and the National Housing Bank in terms of capital adequacy,
lending norms, provisioning requirements etc. Based on these parameters, we assign a risk rating of 4
to the stoct .

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Cyclicality risk:

An industry cycle is characterized by an upturn as well as downturn. Businesses whose fortunes

typically swing with industry cycles are known as cyclical businesses. Cyclical businesses do well
during an industry upturn and vice versa. On the other hand, there are some businesses based on
consumption stories that are non-cyclical. These businesses are immune to industry cycle changes and
have less risk. In short, if the business is cyclical higher is the risk. The banking and housing finance
sector is extremely cyclical and is in fact a reflection of the macro economy. Based on this, we assign a
score of 4 .

Competition risk:

Every industry is characterized by competition. However, some industries where entry and exit barriers
are typically low have higher competition risk. Low barriers mean more players can enter into the
industry thereby intensifying competition. Low product differentiation also intensifies competition risk.
The banking sector is already very fragmented and competitive with newer banks having fetched
licenses already and more in pipeline. As explained earlier, housing finance companies face still
competitions from banks as well as other HFCs. Given LICHFs relatively strong positioning on the
affordable housing sector, we assign a score of 6 to the stock on this parameter.

Income growth:

Over the eight -year period (actual history of past 5 years and explicit forecast for the next 3 years)
LICHF has grown its lone book by a CAGR of 12.7%. We assign a rating of 5 to the stock on this
parameter.

Net profit growth:

Over the eight-year period (actual history of past 5 years and explicit forecast for the next 3 years) the
net profit CAGR stands at of 11.1%. We assign a risk rating of 4 to the stock on this parameter.

Net Interest margins:

Net interest margin (NIM) is a measurement of the spread that the financial entity makes on its average
earning assets (typically loans, investments and balance with other banks). Banks and housing finance
companies that are able to fetch sufficient low cost funds and lend them with a good spread or invest in
high yielding assets have steady NIMs. The higher the NIM, the easier it is for financial entities to tide
over volatility in interest rates. The average NIM for LICHFL over the eight -year period (actual history of
past 5 years and explicit forecast for the next 3 years) stands at 2.6%, which is at par with the industry
average. We assign a score of 6.

Net Margins:

Net profit margin is a measurement of what proportion of a company's revenue is left over after paying
for all the variable and fixed costs inclusive of interest and depreciation charges. Net margin is the final
measure of profitability. It reflects the total profits the company takes home. Higher the margin, better it
is for the company as it indicates better pricing power and effective cost management. The average net
margins over the eight -year period (actual history of past 5 years and explicit forecast for the next 3
years) stand at 13.9%. We assign a score of 5.

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Return on net worth (RoNW):

RoNW is an important tool to assess a company's potential to be a quality investment by determining

how well the management is able to allocate capital into its operations for future growth. A RoNW of
above 15% is considered decent for companies that are in an expansionary phase. The average RoNW
over the eight-year period (actual history of past 5 years and explicit forecast for the next 3 years)
stands at 17.1%. We assign a score of 6.

Cost to income ratio:

This ratio helps assess the operating cost efficiency of a financial entity. It primarily takes into account
the operating cost for the company vis-a-vis income by way of net interest earned and other income.
Financial entities that are lean in terms of cost to income ratio manage to retain a healthy profit margin
across cycles. The average cost to income ratio for LICHFL over the eight -year period (actual history of
past 5 years and explicit forecast for the next 3 years) stands at 14.4%. We assign a score of 8.

Transparency:

Transparency is the key to any business. Transparency can be gauged by assessing the past dealings of
the company with various stake holders be it the customers, suppliers, distributors or shareholders. The
easiest way to gauge the same is checking the level of disclosures in the company's quarterly financial
updates and communication with minority shareholders. Most importantly, the management's
willingness to explain its stance if there is a negative development in the company or stock shows its
forthrightness. Transparent managements would get a higher rating. The management of LICHFL has
been quite transparent in its operations. Also, it is very forthcoming with information about the key risks
to the business. We thus we assign a rating of 8.

Capital allocation:

Apart from honesty, capital allocation skills are equally important in assessing management quality. By
capital allocation we mean how the management chooses to deploy capital in the business or across
businesses. Managements that have in the past destroyed shareholder wealth by diversifying in
unrelated, unviable businesses or make expensive acquisitions would rank low on this parameter.
Further managements that focus on capital intensive growth at the cost of profitability would also fetch
a low rating. We assign a score of 7 to LICHFL on this parameter.

Promoter pledging:

Promoters typically pledge their shares to take a loan which is generally infused in the company. This
exercise is generally resorted to when all other sources of external liquidity dry out. The risk with this
strategy arises when share price falls. This triggers margin calls. If management is unable to provide
some sort of a collateral to the lending party from whom the money is borrowed that party may sell the
shares to recover its money. This accentuates the share price fall. Hence, higher the promoter pledging
higher is the risk. With none of the promoters' equity being pledged we assign rating of 10.

Net NPA to advances:

A good asset quality is the hallmark of good lending practice of a financial entity. Financial entities that
tend to have high non-performing assets (NPAs) during periods of economic stress deserve a lower
rating. Ones that have average net NPA ratio in excess of 1.5% are particularly risky. The average net

9 9
 NPA to advances ratio for LICHFL over the 8-year period (actual history of past 5 years and forecast for
the next 3 years) stands at 0.3%, which is amongst the best in the industry. We assign a score of 9 on
this parameter.

Capital adequacy ratio (CAR)

This is one of the most important factors that are used to judge the soundness and sustainability of a
financial institution's business over the longer term. It shows the ratio of capital to assets financed. The
National Housing Bank (NHB) has stipulated a minimum CAR of 12% for housing finance. Since LICHFL's
CAR at the end of March 2017 stood at 15.6%, we assign LICFHL a score of 8.

It may be noted that quality of loan book, return generating capability, earnings quality and management
risk get the highest weight in our matrix. Hence, scores assigned to these factors influence the overall
score.

Considering the above analysis, the total ranking assigned to the LICHFL is 90, that on a weighted basis, stands at
6.9. This makes the stock a low-risk investment from a long-term perspective. However, apart from the risk score
investors must take into account the latest valuations before investing in the stock.

ERM®

Regulatory risk $ 4 5.0% 0.2

Cyclicality risk $ 4 5.0% 0.2

Competition risk $ 6 5.0% 0.3

Sales growth 5 5.0% 0.3

Net profit growth 4 5.0% 0.2

Operating margins 6 5.0% 0.3

Net margins 5 5.0% 0.3

RoIC / RoNW 6 10.0% 0.6

Earnings Quality (OCF/PAT) 8 10.0% 0.8

Transparency $ 8 10.0% 0.8

Capital allocation $ 7 10.0% 0.7

Promoter pledging $ 10 10.0% 1.0

Debt to equity ratio 9 10.0% 0.9

Interest coverage ratio 8 5.0% 0.4

Final Rating 90 6.9

*Excluding extraordinary gains.

For qualitative factors, denoted by $ sign, lower the risk, higher the rating.
For any risk parameter if the score is below or equal to 4 it indicates high risk.
The risk score of these parameters is highlighted in red color. For risk parameters where the score is above 4 riskiness is low.

10 10
 The risk score of such parameters is highlighted in grey.

Updates On LIC Housing: Why Is the Stock Worthy of Investment

Previous Reports   Add: Alert | Portfolio
Backed by robust credit quality, growing loan
Market Data book, higher spreads and controlled operating Buy the stock
expenses by sweating the existing network, of LIC Housing
Price On Reco. Date (Rs) 565 (BSE)
LIC Housing Finance remains well poised to Finance at the
CMP - BSE / NSE (Rs) 565 / 564 improve its shareholders returns (ROE 19% in current price
Change Since Reco.  -0.0% FY17) in future. Moreover, with strong focus on of Rs 565 or
52-week High/Low (Rs) 690 / 920 the salaried class, the housing finance
lower.
NSE Symbol LICHSGFIN company is well protected from any major
BSE Code 500253 disturbances in the sector in future.
No. Of Shares 505 m
At the current price, the stock is trading at a about 1.8 times its estimated
Face value 2.0
FY20 price to adjusted book value (P/ABV). At these levels, we believe
FY17 DPS 6.2
there is sufficient margin of safety for long-term investors.
Dividend Yld (FY17 at current 1.1%
prices)
Thus, we recommend subscribers to consider buying the stock of LIC
Free Float 59.7%
Housing Finance at the price of Rs 565 or lower.
Market Cap (Rs m) 285,325

The FY20 target price of Rs 773 implies a CAGR of 13.2% in addition to

Premium Search the current dividend yield of 1.1%.

According to us, in a scenario of ideal allocation of funds, bluechip stocks

Rs 100 Invested Is Now Worth could be considered to comprise at least 60% of one's total equity
portfolio. Further, we believe that a single bluechip stock should ideally
not form more than 5-6% of the total portfolio. However, please note that
this allocation will vary from person to person. For something that works
best for you, we recommend you talk to your investment advisor.

Valuations Rationale

View Updated Chart

The banking and financial lending sector is dependent on credit growth.
This is in turn a function of how well the economy is performing. Unlike
Stock Price Performance other sectors, a financial institution's asset is cash and the ability to grow
the topline and is therefore, largely dependent on the capital base (net
worth in a broader sense). Therefore, more than the price to earnings ratio,
the price to adjusted book value (P/ABV) is relevant while valuing a
  LICHF Index*
banking / financial company. By P/ABV, we mean reducing net non-
Over 1 Year 3.9% 29.4% performing asset from the net worth and then, dividing it by the number of
Over 3 Years 6.5% 6.8% shares.
Over 5 Years 14.2% 11.8%
LIC Housing Finance is a housing finance company with a rich lending
* BSE Sensex
experience of over two decades. The entity has steadily grown in terms of
network, customer base and credit offtake. The housing finance company
Shareholding (%, September-17)
is amongst the best placed to sustain margins and asset quality. However,
given the downside risks to the sector, we remain conservative in
valuations. Therefore, we value it at a low and high band of 1.9 times - 2.4

11 11
 times price to adjusted book value.
Promoters 40.3

Banks, MFs, FIs & Others 5.7

Foreign Portfolio Investors 33.7

Indian Public 8.9

Others 11.4

Total 100.0

More On LIC Housing

All Recommendation Reports | Latest Update | Latest Stock Quote

Financials At A Glance

Interest Income 125,025 141,009 153,171 170,037 193,946

Interest Expense 93,068 102,314 109,045 129,924 149,744

Net Interest Income 31,957 38,695 44,126 40,113 44,202

Other Income 1,424 2,115 2,298 2,551 2,909

Other Expense 4,735 6,140 9,285 4,266 4,711

Provisions & Cont. 1,465 2,813 2,003 2,887 5,860

Tax 9,028 11,214 12,368 12,499 12,862

Profit after Tax 18,154 20,643 22,768 23,010 23,678

Net profit margin (%) 14.5% 14.6% 14.9% 13.5% 12.2%

Balance Sheet          

Net Fixed Assets 920 966 1,014 1,065 1,118

Loans and advances 1,251,732 1,354,142 1,503,098 1,698,500 1,953,275

Investments 2,768 2,708 3,006 3,397 3,907

Other assets 49,557 54,513 57,784 58,361 58,945

Total Assets 1,304,978 1,412,329 1,564,902 1,761,324 2,017,245

Networth 91,460 111,560 129,072 148,197 167,526

Debentures 883,030 918,062 1,093,162 1,235,273 1,420,564

Term Loans 39,413 93,392 243,229 281,025 323,178

Other Liabilities & provisions 291,074 289,316 99,439 96,829 105,978

Total liabilities 1,304,978 1,412,329 1,564,902 1,761,324 2,017,245

Valuations

Net interest income (Rs m) 31,957 38,695 44,126 40,113 44,202

PAT (Rs m) 18,154 20,643 22,768 23,010 23,678

No. of shares (m) 505 505 505 505 505

EPS (Rs) 36.0 40.9 45.1 45.6 46.9

Adjusted book value (Rs) 177.1 216.7 243.7 280.7 322.1

Price to earnings (x) 15.7 13.8 12.5 12.4 12.0

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 Price to adj book value (x) 3.2 2.6 2.3 2.0 1.8

Performance Review
On a month on month basis, BSE Sensex is up by 1%. The ruling party's victory in the recently concluded state
elections in Gujarat and Himachal Pradesh, gave market participants a reason to cheer.

However, as oil prices continue to reach new highs, fears of a spike in inflation continue to loom. The six-member
Monetary Policy Committee (MPC) of the RBI, however, kept the repo rate unchanged at 6% in its fifth bi-monthly
policy review of the fiscal year, maintaining the status quo.

Meanwhile, it was a good month for pharma stocks, as the BSE Healthcare index rose 5.5% over the month.
Positive movement in the pharma sector proves why you shouldn't shun pharma stocks just yet.

While Indian indices remain firmly in the overvalued territory, small signs of earnings growth recovery are starting
to emerge, especially on the backdrop of continuing reform and the stabilization of the GST regime. However,
rising oil prices which hit a two and a half year high recently, threaten to slow down the domestic economic
recovery. December quarter earnings of companies will be eagerly awaited as they will set the pace of economic
recovery going forward.

In this month's performance review, there are changes in the views on some fundamentally strong stocks that
were already part of open position. We have discussed about them below.

The stock of Lupin is by 6% since last month. Lupin was issued a combined warning letter by the US Food and
Drug Administration (USFDA) on 7th November 2017 for its Goa and Indore (Pithampur Unit II) sites. We had sent
out a special update regarding the warning letter details in which we had recommended subscribers who have the
stock to consider holding on to it and not buy more at current levels.

The stock currently trades at 12.9 times its FY20 earnings. While the warning letter for Lupin is a critical issue, we
are confident on the management for a timely resolution. Also, the recent correction in price provides a reasonable
margin of safety. Lupin's promoters have recently bought 8.5 lakh shares from the open market in a span of 17
days.

Hence, we change our view from hold to buy. Our revised FY20 target price for the stock stands at Rs 1,507.

Apart from the above, the following stocks in the open position have been movers in the last month:

Shriram Transport Finance - Up 16.8%

Infosys - Up 7%

Sun Pharma - Up 6%

StockSelect Open positions as on 29th December 2017

December December

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 December

Mahindra & 22-Dec-14 Buy 631 937 747 18% Hold 25%
Mahindra

ONGC 23-Jan-15 Buy 232 Under 193 -17% Hold -

Review

Shriram Transport 24-Apr-15 Buy 1,036 1,556 1,448 40% Hold 7%

Finance

Axis Bank 25-Aug-15 Buy 502 704 555 10% Hold 27%

Power Finance 25-Aug-15 Buy 107 Under 121 14% Hold -

Corp Review

TCS 29-Oct-15 Buy 2,496 3,619 2,621 5% Buy 38%

Sun Pharma 29-Oct-15 Buy 880 Under 578 -34% Hold -

Review

Glenmark Pharma 22-Dec-15 Buy 938 1,140 584 -38% Buy 95%

HDFC Bank 25-Feb-16 Buy 944 1,832 1,858 97% Hold -1%

HDFC 25-Feb-16 Buy 1,042 2,195 1,708 64% Buy 29%

Cipla 23-Mar-16 Buy 533 739 612 15% Hold 21%

Tata Motors 25-Jan-17 Buy 548 654 423 -23% Buy 55%

IDFC Bank 23-Feb-17 Buy 63 Under 55 -12% Hold -

Review

IDFC Ltd 23-Feb-17 Buy 53 Under 62 17% Hold -

Review

Lupin Ltd*** 31-Mar-17 Buy 1,441 1,507 875 -39% Hold 72%

Infosys 26-May-17 Buy 996 1,572 1,034 4% Buy 52%

Tech Mahindra 2-Aug-17 Buy 402 575 503 25% Hold 14%

LIC Housing 29-Dec-17 Buy 565 773 565 ^ 0% Buy 37%

Finance

^ Price as on 29th December, 2017

*Calculated by dividing current price by recommended price
***Change in view or target price
NA- Please note, for stocks where returns are negative on point to point basis, and the recommendations that have not completed one year, CAGR cannot be
calculated.
##Please note: Subscribers must note that stocks with the highest expected returns may not necessarily be fundamentally the safest ones to invest your money.
These stocks also need to be evaluated on various qualitative parameters like management quality, competitive advantage and stability in earnings and profit
margins. We strongly recommend subscribers to go through our latest updates on all stocks before making any investment decisions.

The Top Stocks To Consider Buying Now

As you are aware, the list of top stocks allows subscribers to choose a handful of Best buys from amongst our buy
recommendation. The 'must have' criteria for stocks to be eligible in the list of best buys are a high rating on the
ERM®. The additional level of filter will be their return potential over a period of three years. But as you understand,
the list will not be static but will evolve over time.

The valuations for most of the safest bluechips currently stand fairly expensive. The list for this month comprises
of Lupin, HDFC Ltd, and TCS. The potential upside allows subscribers to buy these stocks even at current prices.

As you can see in the Performance review, there are several other stocks on which we have recommended buy due

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to attractive valuations. However, most do not make it to the list of top 5 as their ERM® score do not meet the
stringent criteria for featuring in the list. As we had told you earlier, while we will aim to have 5 stocks in this list
every month, there could be exceptions once in a while.

Please do pay attention to our latest views on the stocks mentioned in this list every month. According to us, in a
scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at least 60% of one's total
equity portfolio. Further, we believe that a single bluechip stock should ideally not form more than 5-6% of the total
portfolio. However, please note that this allocation will vary from person to person. For something that works best
for you, we recommend you talk to your investment advisor.

Here is our list of Top Stocks To Consider Buying

HDFC Ltd
TCS
Lupin

Tanushree Banerjee (Research Analyst), is the editor of ValuePro, The India Letter, and
Stock Select, Equitymaster's oldest recommendation service. She is also the editor of
Equitymaster's most popular newsletter read by over 200,000 subscribers, The 5
Minute WrapUp. Tanushree started her career at Equitymaster covering the banking
and financial sector stocks along with scrutinizing the RBI policies. And over the last
decade, developed our research processes that have helped us pick out various
multibaggers, across all sectors. A firm believer of "safety first" when it comes to
investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham and Joel
Greenblatt.

Where StockSelect Fits In...

Stock markets tend to be very volatile. And putting too much money in a single stock
can be very risky. In our view, large cap/ blue-chip stocks are the safest of the lot.
Because of their large size, they may not grow as fast as small caps or mid caps. But
they are relatively more stable and resilient to negative macroeconomic developments.
This keeps them in good stead over the long term and makes them reliable wealth
creators.

According to us, large cap/ blue chip stocks should comprise at least 60% of one's
total equity portfolio. However, a single large cap/ blue-chip should not form more
than 5-6% of the total portfolio.. This allocation will of course vary from person to person. For something that works best for you,
we recommend you talk to your investment advisor.

Frequently Asked Questions

These are some of the Most Frequently Asked Questions on StockSelect. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that the bluechip stocks typically recommended in StockSelect, in general, have large market
capitalization and sufficient liquidity. As such, a spurt in the stock price, if any, post our recommendation, would
be marginal. If the stock price moves up sharply, we recommend subscribers to consider waiting till the initial
volatility settles down and the stock falls back in the 'buy' zone.

Can there be an overlap or contrary views on the stocks recommended under this service

15 15
and that of the other Equitymaster services?
Each of our product teams, be it StockSelect, Hidden Treasure, Smart Money Secrets or The India Letter, has its own
unique screen and checklist for selecting and recommending stocks. In rare cases, where there is a compelling
proposition to recommend a stock in more than one service simultaneously, there could be an overlap in stocks.
There could be contrary views on the same stock in different services, only in rare cases, where the investing
tenure or the investing philosophy of the two products are very different.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.

Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

Definitions of Terms Used

16 16
 Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014

INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
b. Except for Lupin Limited, Equitymaster has no financial interest in any other Subject Company forming a part of this report.
c. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made
solely for building track record of its services.
d. Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
e. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
f. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research
report.
g. Equitymaster's technical team/other research services have given a 'Buy at lower price' view on LIC Housing Finance Limited.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
c. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject
company in the past twelve months.
d. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or
brokerage services from the subject company in the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.

GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective

17 17
 of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.

Feedback:

If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

MORE ON LIC HOUSING MORE STOCKSELECT

Sorry! There are no related views on news for this HCL Technologies: A Dull Performance
(Quarterly Results Update - Detailed)
company
Dec 28, 2017

Improvement in profitability looks difficult for HCL

tech.

Future Supply Chain Solutions Ltd

(IPO)
Dec 4, 2017

Should you subscribe to the IPO of Future Supply

Chain Solutions Ltd?

Shalby Ltd.
(IPO)
Dec 2, 2017

Should you subscribe to the IPO of Shalby Ltd?

ITC Ltd.
(StockSelect)
Nov 23, 2017

StockSelect recommendation and Performance

Review for the month of November 2017

Shriram Trans Fin: On a Strong Footing Despite

IDFC Merger on Hold
(Quarterly Results Update - Detailed)
Nov 22, 2017

Shriram Transport Finance posts strong earnings

growth backed by revival in lending business and
lower cost of funds.

More Views on News     Recommended Reading

18 18
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