NBFC Sector

BFSI India I Equities
Sector Report 5 December, 2022
India – BFSI: Digitize or Die Sensex: 62869

Nifty: 18696
Kaitav Shah, CFA | Research Analyst
Yuvraj Choudhary, CFA | Research Analyst
Sagar Rungta | Research Associate
All prices as on 2nd December, 2022
Anand Rathi Share and Stock Brokers Limited (hereinafter “ARSSBL”) is a full-service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Report. This report is
intended for the sole use of the Recipient. Disclosures are present in the Appendix.
Investment Summary: BFSI one of two
India is a Fintech With the 3rd highest unicorn in the world. Capital is now shifting from payments to lending tech, insurtech and
wealth-tech. Fintech space is likely to become $1 trillion AUM by FY30.
powerhouse
The 3T model and We believe that the efficient utilization of the Indian digital superhighway built on combination of JAM, flexible
Regulator and NPCI is driving a realistic increase in Total addressable market(TAM) in the retail and MSME credit
realistic increase in TAM space . We explain the structural changes in what we call the 3T model.
Ticket-size We believe lower tickets are catalyzing financial diversification , with a whole set on SENP category becoming
eligible. Banks/NBFCs willing to experiment in the NTB and underserved category will be able to tap the middle
middle class and lower middle class more effectively.
Tenure On account of easy access to STPL,BNPL, we assume that a 25 year old today will land up taking 15 loans over the
his lifetime as against 3-4 earlier. Banks/NBFCs having customer ownership and have effective PPC strategy will
win here..
Time to launch new Open banking, APIs are driving faster turnaround time to implement financial products . Partnerships between
product Banks, NBFC and Fintechs are happening at a increasing pace . We would want to position ourselves in
Banks/NBFCs which have an edge in technology .
Large NBFCs withstood India NBFCs have weathered several Liquidity shocks like Demon, IFL&FS crisis , GST and the Pandemic and have
emerged stronger out of them. Many NBFCs are diversifying into digital lending to tap into the new customers and
multiple liquidity shocks diversify their product mi. 2
Source: Company, Anand Rathi Research
Investment Summary: BFSI two of two
Deep-dive into NBFCs We analyze data on several aspects very closely. Pricing power and higher liquidity on balance are likely to sustain
NIM despite the increase in interest rates. BAF’s customer acquisition prowess is unassailable. In terms of tech
spending, BAF is matched well by L&T finance and Poonawalla. Sundaram and SHTF are the laggards here. BAF
write-offs much higher proportion of Stage 3 assets than others .
How we look at the BFSI  Customer experience, customer ownership and customer retainership will likely drive valuations
 Runway for profitable growth in Banks and NBFCs with digital readiness, openness to tieups, strong tech
space architecture is likely to be higher…
 Globally Bigtech has overtaken fintech in terms of profitability and market share. In India also, the payments
space big-tech now has a lion’s share.
Top Picks We initiate coverage on BAF, Chola, MMFS, L&T Finance, Poonawalla Finance and SBI cards. Our top picks include
BAF(best fintech play) and MMFS(classic turnaround play). We have an underperform rating on SBIC on account
of no innovation in credit cards space, decreasing yields and increasing competition.
Key risks  Any macro economy shocks to the economy which can derail consumption .
 Any interest rate shock arising from higher than expected inflation..
 Aggressive competition by banks can lead to lower than expected yields.
Source: Company, Anand Rathi Research 3
Investment Summary: Company one of two
NBFC Snapshot Key Investment Arguments Key numbers(FY22-25) Key Risk
Bajaj Finance - Product penetration in Bharat - AUM Growth - 27% - Preparedness for Transformation
BUY - Best in class customer acquisition engine and product - PPOP CAGR - 28% to a Banking structure
TP : Rs 8959 innovation - ROA(FY25) - 4.5% - Underestimation of costs for
- Omni presence strategy to ward off challenges from Super App
Bigtech
Cholamandalam Finance - Digital lending products the net kicker - AUM Growth - 21% - Competition in Auto Finance
BUY - Strong distribution network and well diversified book. - PPOP CAGR - 18% increasing
TP : Rs 868 - Culture of strong processes and systems - ROA(FY25) - 2.8% - Digital lending book has not
seasoned yet…
Mahindra Finance - Strong Reinforcement at the Top Management level - AUM Growth - 19% - Churn at the CO level
BUY - Visible Improvement in Processes and System will drive - PPOP CAGR - 10% - Asset quality issue
TP : Rs 278 predictability - ROA(FY25) - 2.1%
- Shift in lending strategy to premium customer
4
Investment Summary: Company two of two
NBFC
Key Investment Arguments Key numbers(FY22-25) Key Risk
Snapshot
Poonawalla Finance - Strong Promoter drives the best in class CoF and attract - AUM Growth - 32% - Low Seasoning of Book
BUY and retain talent - PPOP CAGR - 44% - Management Cohesiveness
TP : Rs 396 - High growth led by Product breadth and partnerships - ROA(FY25) - 3.2%
L&T Finance - Recalibrating balance sheet towards retail finance - AUM Growth - 7% - High Operating Cost Model
BUY - Tech spends match with peers - PPOP CAGR - 9% - Potential Wholesale book write-
TP : Rs 106 - Wholesale book vulnerability offset by sale of non core - ROA(FY25) - 1.8% downs are a overhang
assets
SBI Cards - Increasing threat from substitutes could limit market - NII growth - 25% - Innovation in credit cards leading to
SELL share gains - PPOP CAGR - 22% expansion in realistic TAM
TP: Rs 779 - Outsized returns on credit card interest to get - RoA(FY25) - 4.4% - No regulatory action on MDR
limited…

5
Valuation Metrix one of two
BAF MMFS CIFC L&T Finance Poonawalla SBIC
Rating BUY BUY BUY BUY BUY SELL
Mcap (US $B) 49.3 3.5 7.4 2.8 2.9 9.8
- CMP 6,674 229 732 91 308 837
- Target Price 8,959 278 868 106 396 779
FY23 7.6 1.5 4.3 1.1 3.6 8.1
- Price to
FY24 6.2 1.4 3.6 1.0 3.2 6.4
Book(x)
FY25 5.0 1.2 3.0 0.9 2.9 5.1
FY23 36.3 16.3 25.5 16.7 39.4 37.2
- Price to
FY24 29.4 13.5 20.5 12.9 30.0 29.2
Earnings(x)
FY25 23.0 11.3 17.2 10.1 22.7 24.6
6
Valuation Metrix two of two
BAF MMFS CIFC L&T Finance Poonawalla SBIC
- RoA(%) FY23 4.6 1.9 2.6 1.2 3.1 5.2
FY24 4.5 2.0 2.6 1.5 3.2 5.0
FY25 4.5 2.1 2.7 1.8 3.3 4.6
- CRAR(%) FY23 25.8 28.8 18.9 24.1 38.5 19.9
FY24 23.5 27.8 19.4 24.2 31.6 20.2
FY25 22.5 26.9 19.1 24.4 25.8 19.9
- NNPA(%) FY23 0.7 2.8 4.1 3.1 0.8 0.7
FY24 0.7 2.6 3.6 2.8 0.7 0.5
FY25 0.7 2.4 3.2 2.7 0.6 0.4
7
India –Emerging as World’s
Premier Fintech HUB
8
India -Emerging as World’s Premier Fintech Hub
 India over the last seven years has emerged as World’s Premier Fintech Hub
 Transaction through UPI have grown at an staggering pace
 Aadhaar Authentication and EKYC numbers speak volumes about the use of Digital by business today.
7,000 12,000 5,000 20,000

4,500 18,000
6,000 10,000 4,000 16,000
5,000 3,500 14,000
8,000
3,000 12,000
4,000
6,000 2,500 10,000
3,000 2,000 8,000
4,000 1,500 6,000
2,000
1,000 4,000
1,000 2,000
500 2,000
- - 0 0
2018-19
2019-20
2020-21
2013-14
2014-15
2015-16
2016-17
2017-18
TTM
Apr-18
Jun-19
Jan-20
Feb-17
Sep-17
Jul-16
Mar-21
Nov-18
Aug-20
Oct-21
May-22
Feb-17
Feb-19
Feb-20
Feb-22
Feb-18
Feb-21
Aug-16
Aug-17
Aug-18
Aug-19
Aug-20
Aug-21
Volume (in Mn) Value (in bn) EKYC Vol(mn) Authentication Vol(mn)
9
India -World’s Premier Fintech Hub
 India has the third highest unicorns globally. Unicorns in India are expected to double in 3 years..
 Capital raised by Fintech’s has remained resilient.
 The mix however is now changing in favour of digital lending from Payments as the digital lending infra improves …
Global unicorn landscape Indian unicorns to double Investment mix in start up, %
France, 24, Others, 96, 100%
2% 9% 2022 100 90%
Germany, 2021 86 80%
26, 2% 70%
UK, 43, 4% 2020 42 60%
50%
Israel, 92, 2019 31 40%
8% Over 1000 30%
Global USA, 559, 2018 24
Unicorn 50% 20%
India, 100, 2017 14 10%
9% 0%
2016 13 2014 2015 2016 2017 2018 2019 2020
Payments Lending tech Insurance Tech
China, 173, 2015 11
16% Investment Tech Fintech SaaS Others
10
Source: Media reports, Anand Rathi Research
Key enablers of Digital Adoption
INTERNET AND COMBINATION OF ETERNAL SHOCKS RBI DYNAMIC DIGITISATION OF SKILLED TECHNICAL
MOBILE NPCI AND AADHAR HELPED REGULATOR PUBLIC RECORDS MANPOWER
Massive user base for Combination of NPCI Shocks like The single regulator has GST, income ta, vehicle Plenty of availability of
internet is a key and Aadhar has demonetization, GST, helped payments infra, registration created young and flexible
enabler for wealth, enabled all types of pandemic have served sandbox, Aadhar video digital trails which can manpower open to new
insurance and banking fintech models to to hasten transition to KYC and account be used algorithm of ideas helped the
products operate simultaneously digital aggregator fintech transition
750 MN SMART PHONE 1.1 BN AADHAR, 65 BN RS. 6.3 TN/MONTH UPI 135 MN GST 291MN VEHICLE 1.5 MN ENGINEERS
USERS AUTHENTICATION TRANSACTIONS REGISTRATION REGISTERED
GRADUATE EVERY YEAR IN
INDIA
11
India Stack – Backbone of Digital Innovation
GST, CAR REGISTRATION, TAXATION CONSENT E-SAHAMATI AND ACCOUNT

STAMP DUTY, INCOME TAX LAYER LAYER AGGREGATOR
NPCI, CREDIT/DEBIT CARD, CASHLESS PAPERLESS AADHAR-ENABLED EKYC, E-

CARDLESS PAYMENT LAYER LAYER SIGN, E-NACH, DIGILOCKER
OPEN CREDIT ENABLEMENT CREDIT E-COMMERCE OPEN NETWORK FOR DIGITAL

NETWORK (OCEN) LAYER LAYER COMMERCE (ONDC)
Source: Anand Rathi Research 12

RBI - SANDBOX
 RBI has institutionalized the process of innovative financial products by introducing sandbo .
 So far three cohorts have been launched and executed upon.
 This helps them also monitor risk and stay abreast of latest developments in tech.
COHORT 2 – CROSS BORDER

COHORT 1 – RETAIL PAYMENTS COHORT 3- MSME LENDING
PAYMENTS
6 companies exit test phase out 26 entities applied, out of which 22 entities applied, out of which
of 32 companies which had eight entities selected for test 8 have been selected in Sep’21
applied. phase in Dec’20
Source: RBI, Anand Rathi Research
13
India -A $1 trillion digital superhighway
Structural Drivers, Realistic increase in TAM, 3T model
14
India Fintech: US$ 1 trillion opportunity
 Out of the total number of unicorns, 44 unicorns with a total valuation of $ 93.0 Bn were born in 2021 and 19 unicorns with a total valuation of $ 24.70 Bn were
born in 2022
 Universe of Fintechs is rapidly evolving
 Digital Lending looks set to be the highest growth area as per a report.
 India moving from PIPE structure to PLATFORM Structure.
 Moving from End-to-End solutions to Open Architecture.
$ billion 2021 2030

Digital Lending (AUM) 38 515
Wealth Tech (AUM) 20 237
Insuretech (GWP) 6 80
Neo Banking(AUM) 40 215

Source: E&Y and Chiratae Ventures
15
Digital Lending : 3T factors drives structural increase in TAM
$21 bn digital • $500 bn AUM

lending expected by
2030 in digital
• Banks at Ticket size Tenure reduction Time to new lending alone
2030
2020
$18bn reduction product launch

• 3T model is
• NBFC’s lent Will drive credit in Tier
3 and below cities
Will increase velocity
of loans taken by
Technology enablers driving
$3bn Millennials, GenZ Product innovation realistic
Blue collared workers increase in
SENP TAM
Source: E&Y and Chiratae Ventures
16
3T-Structural Drivers of TAM -Ticket sizes
 Average ticket size of loan has dropped across the entire retail lending spectrum. Sharpest fall was seen in STPL and BL
 NBFCs dominate the roost in STPL,CD,TW,CV in terms of volume of loans, while PSU’s have a larger pie in Business loans and Affordable Housing Finance.
 Lower ticket sizes are likely to get accepted by lenders as they fit in to their traditional credit models. As a results a whole new universe of lending to lower
middle class and semi-rural has now become available
Active Loans –Lender wise (as of Mar'21)

100%
90%
Average ticket size YoY 2- Year
80%
(FY21,‘000) Growth % Growth %
70% Short term PL 9.1 4.1% -41.5%
60%
50% Consumer Durables 13.6 -1.1% -2.4%
40%
Two wheelers 58.6 9.2% 17.4%
30%
20% Affordable Housing 1469.4 2.2% 5.0%
10%
0% Business loans 65.5 -55% -44.2%
STPL CD TW AFHL BL CVL
Public Sector Banks Private Banks NBFCs Others
Commercial Vehicles 212.5 -9.4% -16.4%
17
Source: CRIF, Anand Rathi Research
3T-Drivers of TAM -Ticket sizes
 We estimate the annual increase in TAM possible due to lower ticket sizes.
 A whole new universe of lower middle class and semi-rural has now become available for lending with the reduction in ticket sizes.
 With the reduction in ATS, middle class and lower middle class now becoming eligible for consumer finance loans. This could drive the realistic TAM much higher.
 Our estimates suggest personal finance market size could increase by Rs 1250bn in small ticket sized loans.
Sensitivity of Analysis of TAM with a decrease in ticket sizes

(Rs bn) Sensitivity Analysis (% of households penetration)
30% 40% 50% 60% 70%
15,000 563 750 938 1,125 1,313
Key assumptions
Average 20,000 750 1,000 1,250 1,500 1,750
 We assume 12 cr households in the middle class and lower middle class
ticket sizes who will be eligible for a loan for small ticket sizes.
25,000 938 1,250 1,563 1,875 2,188
of new
loans(Rs) 30,000 1,125 1,500 1,875 2,250 2,625  With convenience improving, we believe realistic TAM has now increased
35,000 1,313 1,750 2,188 2,625 3,063

3T-Drivers of TAM -Ticket sizes
 Ticket Sizes(average have dropped) .While 5L-10L plus loans form the largest size in terms of value , however the volume of loans below 1L has jumped
significantly from 35% to 85%.
 A whole new universe of young Indians, lower middle class, and semi-rural has now become available for lending.
 NBFCs dominate the roost in STPL,CD,TW,CVL….
NBFCs operate in a different league Originations in Volume Originations in Value

4.5 100% 100%
4.0 90% 90%
3.5 80% 80%

70% 70%
3.0
60% 60%
2.5
50% 50%
2.0
40% 40%
1.5 30% 30%
1.0 20% 20%
0.5 10% 10%
0.0 0% 0%
Public Sector Banks Private Banks NBFC's FY18 FY19 FY20 FY21 FY22 FY18 FY19 FY20 FY21 FY22
FY21 FY22 10L+ 5L-10L 2L-5L 1L-2L < 1L 10L+ 5L-10L 2L-5L 1L-2L < 1L
19
Source: CRIF, Anand Rathi Research
Entry level age declining + Tier-ing down
 Share of Tier 2 and below (rural and semirural)in credit enquiries now inching to 50%...
 The shoppers from Tier II and Tier III cities accounted for over 61.3% of the overall market share in FY 2022, increasing from 53.8% in FY 2021.
 Entry level age for first loan is declining.
 26% of customers between age 18-25
Inquiry Volumes by Consumer Age (3M ended period) Inquiry Volumes by City Tier (3M ended period)
100% 120%
90%
80% 100%
70%
80%
60%
50% 60%
40%
30% 40%
20%
10% 20%
0% 0%
Jan-20 Jan-21 Jan-22 Rural Semi-urban Urban Metro
18-30 31-45 46+ Mar-20 20
Mar-21 Mar-22
Source: Unicommerce,Wazir , Anand Rathi Research 20
Source: TU,Bobbit A
3T-Drivers of TAM – Tenure
 Reduction in tenure has ensured higher velocity of loan.
 Using a combination of Seamless technology and customer convenience , Fintechs are able to disburse loans in shorter tenure. This is driving a structural change in
the velocity of loans taken over the life cycle of a borrower
For NBFCs, only 23% of loans are above 1yr tenure For Banks,87% of loans have tenure above 1yr
Upto 30 days 31-60 days 61-90 days

91 days to one year More than one year Upto 30 days 31-60 days 61-90 days
91 days to one year More than one year
Source :RBI, Anand Rathi Research 21
3T – Drivers of TAM - Tenure
Frequency of Loans to increase over borrower Life cycle .
 Significant majority of Gen- people born between 1960’s and early 80’s would in their life cycle end with max 3 loans 1) Housing, 2) Car and 3) Personal Loan
 With advent of STPL,BNPL,CC EMI , CD etc we believe Millennials and Gen Z will land up taking an average of 15 loans over their life period..
Sensitivity Analysis; Increase in TAM due to higher frequency of loan

(Rs bn) (% of households penetration)
30% 40% 50% 60% 70%
5 3750 5000 6250 7500 8750
• We run a sensitivity analysis to see potential overall Number of
10 7500 10000 12500 15000 17500
market size over the life time for millennials when they loans taken
move from a 3 loan phenomenon to 15 loans. over life time 15 11250 15000 18750 22500 26250
of an 20 15000 20000 25000 30000 35000
individual
25 18750 25000 31250 37500 43750
Source : Company, Anand Rathi Research 22

Higher frequency - Survey of Borrowers using BNPL
 With technology , BNPL type products have now got high convenience factor.
 Eventually we believe that BNPL will lead to higher frequency and shorter tenure of personal finance loans…..
Online Shopping 73%
Food Delivery 28% Multiple times a month 46%

Pay on Time 82%
Bill Payments 22%
Once a month 32%
Online Travel 19%
eHealth 15% Forget Sometimes 17%

< Once a month 17%
Ride Holing 8%
Ed-Tech 8%
< Once in 6 months 5% Quite irregular 1%
Offline Purchases 5%
0% 20% 40% 60% 80% 0% 10% 20% 30% 40% 50% 0% 20% 40% 60% 80% 100%
Source :Reedseer, Anand Rathi Research 23

3T-Drivers of TAM – Tenure
 While PL dominates digital loans for NBFCs “others” includes CD loan, education loans,
 Lending through BNPL has now becomes widely prevalent in terms of volume.
 Banks have higher proportion of Vehicle loans and Gold loans as compared to NBFCs…
 Data as end Dec’2020.
NBFC - Analysis of Digital Loans Bank – Analysis of Digital Loans

52.8%
51.8%
60.0% 60.0%
50.8%
50.0% 50.0%
37.2%
38.2%
36.1%
34.4%
40.0% 40.0%
27.6%
30.0%
20.8%
30.0%
16.5%
20.0%
11.9%
20.0%
4.0%
7.4%
3.2%
10.0%
2.4%
0.7%
0.4%
0.4%
10.0%
2.1%
0.7%
0.5%
0.2%
0.1%
0.0%
0.0%
0.0% Personal loans Vehicle Loans Gold loans SME loans Buy Now Pay Others
Personal Vehicle Gold loans SME loans Buy Now Pay Others Later
loans Loans Later Amount disbursed (%) Number of loans (%)
Amount disbursed (%) Number of loans (%)
Source: RBI, Anand Rathi Research 24

3T-Drivers of TAM – Time to Launch
Faster product launches will ensure financialisation of entire consumption basket for the average Indian
 As Barriers to entry reduce, Fintechs are driving rapid innovative products.
 The time to launch has reduced with EKYC,E-sign and alternate lending data like GST, Advance tax, Transaction data through Wallets becoming available as a Play and
Play model
 Time taken to introduce a new product has decreased significantly. To launch a credit card product,24 month to under 12 months.
New Unsecured Lending Products Value added services provided
BNPL Free credit score
Reducing Barriers to Entry - Plug and Play available
POS Finance Automated GST filing
Skill finance Automated Advance Filing
Education Fee finance HR services
Supply chain finance
INSTANT Receivable Finance
EKYC/VKYC/E- CREDIT ALTERNATIVE Laptop Finance
SIGN SCORECARDS LENDING DATA
AND LOGIC Medical Finance
Food Finance
Lifestyle Finance
Marriage Loan
25
Strong credit demand in India is well
established
26
Things we know about Indian credit market … and those we do not
INDIA -CREDIT DEMAND IS BUT THERE ARE BIG

WELL ESTABLISHED QUESTIONS AS WELL
 Transition from Savings to  Who can build a lending
Consumption led model using
 Mobile first  Technology
 Data driven decisions-More  Alternative data and
informed  Unleash it profitably at
 From Centralized to scale.
Customised
27
High young population with evolving consumption patterns
 India’s consumption growing at 2nd fastest amongst the large nations and has potential to grow at this rate in the medium term.
 India has a large young population whose consumption patterns are changing and will continually evolve. The share of Services in consumption basket has been
constantly increasing.
Private Consumption per Capita($)

Restaurants and Miscellaneous Goods , 15.0% 50,000 10.0%
Hotels, 4.6% Non Alcoholic
and Services, 1.0% 45,000
Beverages, 32.1% 8.0%
Education, 0.8% 40,000
6.0%
Recreation and 35,000
30,000 4.0%
Culture, 2.5%
Alcoholic 25,000 2.0%
Communication, Beverages, 20,000 0.0%
14.6% Tobacco, 0.4% 15,000
-2.0%
Clothing and 10,000
Footwear, 2.2% 5,000 -4.0%
Transport, 5.1% - -6.0%
Household and Housing, Water,
Health, 2.6% Electricity, Gas, 4.8%
Furnishing, 14.4%
Private Consumption per Capita Growth(5 yr CAGR)

Source: CEIC, Anand Rathi Research
28
Significant credit under-penetration
 Credit penetration remains low at 20% and is likely to increase as a result of the 3T model.
 With one of the fastest rising PCI and Consumption per capita, India credit demand will remain healthy.
 Huge underserved population
 TU defines underserved as population as having one credit card and no loans
Credit penetration – strong potential No. of Consumers (mn)

22.0% 900 814
21.0% 800
21.0% 20.5% 700
20.0% 600
20.0%
500 408
19.0%
19.0% 400
18.0% 300
18.0% 179 164
200
100 63
17.0%
0
16.0% Credit Eligble Credit Credit Served Newly Acquired Credit
Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Adult Population Unserverd Underserved
Source: Transunion, Anand Rathi Research 29

India: A Mobile First Nation
30
Mobile Trends Usage – India drives global growth
 Global Fintech app installs have increased a robust pace (up35% YoY) to more than 5.5billion.
 Finance app downloads in India top 1billion driving the global growth
 India has highest digital penetration across global. Daily time spent on mobile is 4.8 hours
 Payments leads the Fintech app installs overall. Asset management and crypto are growing above par
 Global Cost per Installs has increased rapidly for fintech to $3.4. Increasing premiumisation of customer will follow….
Global app downloads Share of download in Fintech apps Global Cost per Install
(bn)
7.0 (US$)
Stock 4.0
5.9 Trading, 7% 3.40
6.0 3.5
5.0 4.6 Crypto, 2% 3.0 2.77
4 2.5
4.0 3.4
2.0
3.0
Banking, Payment, 1.5 1.11
1.05
2.0 34% 57% 1.0
1.0 0.5
0.0 0.0
2018 2019 2020 2021 H1 2020 H2 2020 H12021 H2 2021
Source: Adjust,App Annie, Anand Rathi Research 31
Funnel for online transactors is high
 In FY22, according to Unicommerce, overall E-commerce volume grew by 70% YoY. Electronics and Home appliances, grew by 34% YoY.
 Relative Rank for Top BFSI apps amongst all apps, compared on the basis of Active Users and Revenue through App.
 While overall position was lost in terms of revenue, BAF has managed to gain users.
Relative Rank of Top BFSI Apps

Access to Internet -50% of Population Active User Revenue
Sep'22 Aug'22 Sep'22 Aug'22
Smart phone users – 34-38% Paytm 12 14 109 102
Phone Pe 8 8 126 119
Kotak 73 72 127 120
Online service users – 20-
22% Google Pay 7 7 129 122
Bajaj Finserv 64 70 130 123
Online BOB world 67 67 133 126
shoppers – YoNO 30 29 134 128

11-13% Groww 72 76 139 134
Source: Adjust, App Annie, Anand Rathi Research 32
Democratization of Indian financial sector
Traditional Banking Model
 Since independence, banks have been at the centre of the financial
Depositor system and have reigned supreme in the period.
 Customers either NBFCs, Depositors or Borrowers had to adhere to the

processes ,however inconvenient , of the banks.
 Financial inclusion was a distant dream, except in the last decade.
 The digital superhighway built in the last 8 years has however

structurally changed the BFSI industry.
Bank
 Supervised by RBI , Fintechs are now making The Customer the key
focus. User experience and convenience are becoming the buzzwords.
NBFCs Borrower
33
Moving From Centralization to Customization
 …..This is driving the Customization of
 Customer is becoming more
Product suite and enhanced customer
sophisticated
Bank experiences.
 Customer is also becoming
Account  In addition to the customization new business
younger… P2P Platforms
Aggregators models are evolving with the blessings of the
 Data availability is much more
regulator.
democratized and available
instantly…….
NBFCs Customer Fintechs
 This will lead to  Organizations that put Customer

enhanced competition Web3/Blockch service as the key edifice of their
TREDS
amongst existing players ain policy are likely to thrive.
Bigtechs
34
Assessing Interest rate impact on NBFCs
35
Interest Rate Susceptibility
 Retail inflation above the RBI’s comfort zone, rate hikes would continue. As per our house view, another 50-60bp rate hike is still on the cards although a
pause or a small hike is likely in the net policy.
 Systemic liquidity is quite calibrated to neutral, from a large surplus a year ago.
 Banks Exposure to NBFCs is increasing after peaking in Mar’20
 In terms of borrowing mix for NBFCs, Banks form a large constituent..
Share of Non Food credit(%) Borrowing Mix of NBFCs(%)
100% 2% 4% 4% 2%
10%
Retail inflation, % 90%
12%
12%
5%
14% 14%
5%
80% 4%
70%
7.8 5.5 5.7 60% 35% 35% 34%
7.0 7.0 7.0 6.7 7.0 7.4 6.8 6.4 5.6
50%
42%
4.9
5.7 6.0 6.1 40% 10% 9% 9%
4.9 30% 7%
0.77 1.22 1.2 20%
0.50 0.43 34% 34% 36%
10% 27%
2.3 2.4 2.5 2.4 2.4 0%
FY18 FY20 FY22 Sep-22
2019 2020 2021 2022 SEP'22 Banks & FI Seccuritisation NCD/Sub Debt
Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 HFCs Public NBFCs Other NBFCs CP Fixed Deposits Others
Source: RBI, Crisil, Anand Rathi Research 36
Interest Rates Susceptibility – Duration Gap Analysis
 For NBFCs, a large part of the advances matures in the below 1 year category. The proportion of such loans has also increased across the board, indicating the
duration of book has been reducing.
 Poonawalla has seen the sharpest improvement in duration in both 1 yr and under 6 months bucket.
 L&T Finance has the net lowest duration. Could be attributed to its increasing share of rural loans.
 Chola and SHTF trail their peers in terms of duration. Chola’s higher duration book can be eplained by a higher proportion of LAP and HL over the years.
Advances maturing in more than 1 yr Advances maturing in less than 6 months

60% 45%
40%
50%
35%
40% 30%
25%
30%
20%
20% 15%
10%
10%
5%
0% 0%
BAF Chola MMFS L&T Finance Poonawalla SHTF SUF BAF Chola MMFS Poonawalla SHTF SUF
FY22 FY21 FY20 FY22 FY21 FY20
Duration Gap Analysis- Borrowings – Have Positive ALM
 Similar to Advances for NBFCs, a large part of the borrowings also matures in the FY23. However there is a positive gap in between Loans and Borrowings.
 There is no uniform trend in the borrowings duration below 1 year.
 BAF has the highest proportion of below 6 months borrowings duration and has the highest positive ALM.
 Chola has a higher proportion of borrowings maturing in FY23, relative to its advances.
Borrowings maturing in 1 yr Borrowings maturing in 6 months

70% 30%
60% 25%
50% 20%
40%
15%
30%
10%
20%
5%
10%
0% 0%
BAF Chola MMFS L&T Finance Poonawalla SHTF SUF BAF Chola MMFS Poonawalla SHTF SUF
Deep Dive into NBFCs
 Credit Sourcing Prowess
 Tech spends
 Asset quality
 Concentration Analysis
39
Investment in Tech -BAF is in a different league
 BAF’s tech spends are far ahead of peers in absolute terms and would compare with large private banks.
 L&T Finance is the second largest spender on technology in absolute terms.
 Shriram and Sundaram Finance are at the bottom of that league.
Intangibles Outstanding related to Technology(Rs m)

5,000
4,500
4,000
Proxy Assumption; 3,500
 While technology is a qualitative factor, however to improve the front 3,000
end(UI/U) and the backend (cloud, scalability, APIs, AI, ), would leave 2,500
2,000
a trail in the balance sheet.
1,500
 Since technology spends are not widely reported in the P&L(BAF and
1,000
Chola do), we picked up Intangible assets, related only to computer 500
software as a proxy for the tech spends to compare across the set. 0
BAF Chola MMFS L&T Finance Poonawalla SHTF SUF
FY22 FY21 FY20

40
Tech Spends Comparison
 Tech will produce a sustainable competitive advantage , hence we use proxies to understand the tech spends for NBFCs.
 We compare intangibles assets related to tech a) with the asset base and b) as % of Pre provisioning profits, both L&T Finance and Poonawalla both
stand out along-with Bajaj Finance. Bajaj Finance has accelerated its tech spends in FY22, inline with the commentary being given.
 Relatively, Shriram transport seems to be the lowest spender on technology.
Intangibles as % of Gross Assets (bps) Intangibles as % of PPOP

30 4.5%
4.0%
25
3.5%
20 3.0%
2.5%
15
2.0%
10 1.5%
1.0%
5
0.5%
0 0.0%
BAF Chola MMFS L&T Finance Poonawalla SHTF SUF BAF Chola MMFS L&T Finance Poonawalla SHTF SUF
41
Concentration in Advances and Borrowings
 As expected, Advances granularity is very high for the entire pack. Chola and SHTF are the most diversified, whilst BAF has the highest concentration on
account of its Mortgage exposures.
 In case of borrowings, there is significant concentration risk. BAF , SHTF and Chola are most diversified, whilst Poonawalla and Sundaram Finance are least
Advances Concentration -Exposure to top 20 Advances Borrowings concentration -Exposure to top 10 borrowers
5% 90%
80%
4% 70%
60%
3%
50%
40%
2%
30%
1% 20%
10%
0% 0%
BAF Chola MMFS Poonawalla SHTF SUF BAF Chola MMFS L&T Finance Poonawalla SHTF SUF
FY22 FY21 FY20 FY22 FY21
42
Credit Sourcing Prowess – BAF is miles ahead
 We compared the new assets originated or purchased in Stage 1, reported by the company, to the closing gross assets for the same year.
 This ratio after having dipped in FY21 on the credit slowdown, has bounced back sharply.
 BAF leads the pack for FY20/21/22.
 Poonawalla is the most improved in terms of new additions.
 Sundaram lags in new asset generation.
 Chola has broadly been consistent in all three years.
New assets to total opening assets
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY22 FY21 FY20
43
Asset quality-Gross addition to Stage 2
 The number has declined for Sundaram and Bajaj Finance and Poonawalla, whilst for  Reduction in the Roll forward from Stage 2 to stage 3 has helped the
others its has moved up. valuations of NBFCs. L&T Finance and Poonawalla were the most improved.
 Gross addition to Stage 2 is highest for SHTF and MMFS and seems to be a good  At 50%, BAF is the most aggressive in roll forward and then write-offs these
predictor for asset quality issues. assets.
Gross addition to Stage 2- MMFS the only one to show a rise in Roll forward from Stage 2 to Stage 3
35% FY22 60%
30% 50%
25%
40%
20%
30%
15%
10% 20%
5% 10%
0%
0%
BAF Chola MMFS L&T Finance Poonawalla SHTF
Asset quality continued..
 The high percentage of more than 100% of assets derecognized (or repaid) in Stage 3, validates the aggressive write-off stance of BAF. . L&T Finance and
Poonawalla also have turned aggressive in FY22 in writing off.
 PCR on Stage 3 is most relevant and we have seen general increase in trend from FY20 to FY22.L&T Finance has the highest PCR whilst Chola has the lowest
provision coverage .
 Note , that the aggressive write-off and PCR coverage on Stage 3 could be reflective on the security of the underlying lending.
% Assets derecognized or repaid (Stage 3) PCR on Stage 1
6%
Poonawalla
5%
SHTF
4%
L&T Finance
3%
MMFS
2%
Chola
1%
BAF
0%
-120% -100% -80% -60% -40% -20% 0% BAF Chola MMFS L&T Finance Poonawalla SHTF SUF
45
Provision coverage improves for Stage 2 and 3 assets
 BAF has highest Coverage on Stage 2 assets, while L&T Finance has seen the largest jump.
 On the other hand, Sundaram Finance has the lowest coverage on Stage 2 assets
 PCR on Stage 3 is most relevant . We have seen general increase in trend from FY20 to FY22.L&T Finance has the highest coverage followed by BAF.
 Chola has the lowest provision coverage .
PCR on Stage 2 PCR on Stage 3

30% 80%
25% 70%
20% 60%
15% 50%
10% 40%
5% 30%
0% 20%
BAF Chola MMFS L&T Finance Poonawalla SHTF SUF BAF Chola MMFS L&T Finance Poonawalla SHTF SUF
Valuation Charts
- Stock Premium/Discount
- Standard deviation charts for P/B
47
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar-20 Sep-12
May-20 Mar-13
Sep-13
Jul-20
Mar-14
Sep-20 Sep-14
Nov-20 Mar-15
Jan-21 Sep-15
Source: Bloomberg, Anand Rathi Research

Mar-21 Mar-16
Sep-16
May-21
Apr-17
Jul-21 Oct-17
Sep-21 Apr-18
Nov-21 Oct-18
Apr-19
Jan-22
Oct-19
CIFC vs BAF-BAF trades at a premium
Mar-22 BAF vs SBIC -BAF trades at a premium Apr-20

May-22 Oct-20
Jul-22 Apr-21
Nov-21
Sep-22
May-22
Nov-22 Nov-22
-2SD
Premium – Discount Charts -1yr forward
-2SD
-1SD
-1SD
Mean
+1SD
Mean
+2SD
+1SD
+2SD
0.0
0.5
1.0
1.5
2.0
2.5
0.0
0.2
0.4
0.6
0.8
1.0
1.2
3.0
3.5
1.4
Sep-12 Sep-12
Mar-13 Mar-13
Sep-13 Sep-13
Mar-14 Mar-14
Sep-14 Sep-14
Mar-15 Mar-15
Sep-15 Sep-15
Mar-16 Mar-16
Sep-16 Sep-16
Apr-17 Apr-17
Oct-17 Oct-17
Apr-18 Apr-18
Oct-18 Oct-18
Apr-19 Apr-19
Oct-19 Oct-19
CIFC vs MMFS – Trades at a premium
STFC vs MMFS – At mean premium
Apr-20 Apr-20
Oct-20 Oct-20
Apr-21 Apr-21
Nov-21 Nov-21
May-22 May-22
Nov-22 Nov-22
-2SD
-2SD
-1SD
-1SD
Mean
Mean
+1SD
+2SD
+1SD
+2SD
48
-1.0
0.0
1.0
2.0
4.0
5.0
6.0
7.0
3.0
10.0
12.0
0.0
2.0
4.0
8.0
6.0
Sep-12 Sep-12
Mar-13 Mar-13
Oct-13 Oct-13
May-14 May-14
Dec-14 Dec-14
Jul-15 Jul-15
Jan-16 Jan-16
Aug-16 Aug-16
Mar-17 Mar-17
Oct-17 Oct-17
BAF
PFL

May-18 May-18
Nov-18 Nov-18
Jun-19 Jun-19
Jan-20 Jan-20
Aug-20 Aug-20
Mar-21 Mar-21
Sep-21 Sep-21
Apr-22 Apr-22
Nov-22 Nov-22
-2SD
-1SD
-2SD
Mean
+1SD
+2SD
-1SD
Mean
+1SD
+2SD
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0.0
0.5
1.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1.5
Sep-12 Sep-12
Mar-13 Mar-13
Oct-13 Oct-13
Standard Deviation -1 yr forward basis
May-14 May-14
Dec-14 Dec-14
Jul-15 Jul-15
Jan-16 Jan-16
Aug-16 Aug-16
Mar-17 Mar-17
CIFS
Oct-17 Oct-17
L&TFH
May-18 May-18
Nov-18 Nov-18
Jun-19 Jun-19
Jan-20 Jan-20
Aug-20 Aug-20
Mar-21 Mar-21
Sep-21 Sep-21
Apr-22 Apr-22
Nov-22 Nov-22
-2SD
-1SD
Mean
+1SD
+2SD
-2SD
-1SD
Mean
+1SD
+2SD
0.0
1.0
2.0
3.0
4.0
5.0
6.0
30.0
35.0
40.0
45.0
50.0
55.0
65.0
70.0
75.0
80.0
60.0
Mar-20 Sep-12
May-20 Mar-13
Jul-20 Oct-13
May-14
Sep-20 Dec-14
Nov-20 Jul-15
Jan-21 Jan-16
Mar-21 Aug-16
May-21 Mar-17
Jul-21 Oct-17
SBIC
MMFS
Sep-21 May-18
Nov-21 Nov-18
Jan-22 Jun-19
Mar-22 Jan-20
Aug-20
May-22 Mar-21
Jul-22 Sep-21
Sep-22 Apr-22
Nov-22 Nov-22
-2SD
-1SD
Mean
+1SD
+2SD
-2SD
-1SD
Mean
+1SD
+2SD
49
Companies Section
50
BFSI
Initiating coverage
Rating: Buy
Target Price: 8,959
Current market price: 6,674
Key data BAF IN

Bajaj Finance (BAF) 52-week high / low
Sensex / Nifty
Rs8045 / 5220
62869 / 18696
The financial supermarket 3-m average volume $94.7m
Bajaj Finance is at the forefront of technology and product innovation in the country and the only player who seems Market cap Rs4085bn / $50299.7m
to be well placed against the threat of big tech. A wide Product suite, increasing penetration and agile management Shares outstanding 605m
will drive earnings growth of 28% over FY22-25e. We initiate coverage on the stock with a target price of Rs 8959 .
At our target price, the stock will trade at 7PBV and 45 PE. The premium valuations are justified given the long
runway in consumer finance and best understanding of the interplay between technology and finance. Shareholding (%) Sep'22 Jun'22 Mar'22
Promoters 55.9 55.9 55.9
- of which, Pledged - - -
Free float 43.9 43.8 43.8
- Foreign institutions 20.5 20.0 21.4
- Domestic institution 12.2 12.0 11.2
- Public 11.3 11.8 11.1
51
BAF - Investment Summary
Summary Bajaj Finance is at the forefront of technology and product innovation in the country and the only player who seems to be
well placed against the threat of big tech. A wide Product suite, increasing penetration and agile management will drive
earnings growth of 28% over FY22-25e. . We initiate coverage on the stock with a target price of Rs 8959 . At our target
price, the stock will trade at 6.7xPBV on FY25e, which we believe is justified given long runway in consumer finance and
best understanding of interplay of technology and finance.
BAF is financializing consumption in India. BAF has many firsts to its credit in lending including short duration EMI,
Multiple loan drivers, rural CD etc . Its strategy of doing localized proof of concept and then unleashing products at scale has a lot of steam
best in class NIM left. Currently Housing and gold loan are growing at a clip, faster than other products. Deeper product penetration into
Bharat provides visibility to a longer runway of growth. Multiple growth fronts, large distribution franchisee, and new
products will drive 28% loan CAGR over the FY22-25e . BAF has been able to maintain its NIM at industry high
standards and we expect the trend to continue .
Bajaj Finance has operated more as a fintech than a typical NBFC, focussing on new product innovation, customer
Fintech role model, high service and PPC (product per customer) . It also reflects in it’s Technology spend, which is the highest amongst NBFCs.
tech spends… At Rs 4bn, BAF doubled it’s tech spend . BAF’s software expenses as a % of AUM and PPOP are 40bps and 4%
respectively, higher than most NBFCs. BAF has also launched the beta version of its superapp which is likely to start
firing in the next 6 months making all of its product digitally available. We believe a customer base of 60m , would
provide a strong feeder to the app and improve PPC.
BAF’s asset quality further improved in 1HFY23 with GS3 at 1.5% and PCR at 63% , with no hangover of Covid visible.
Best in class asset Tailwinds in consumer finance and conservative underwriting standards of BAF are likely to keep credit costs
quality unchallenging at 1.4% over FY23-25e. A strong capital adequacy of +23% will support the high growth.
52
BAF - Investment Summary
Valuation We pencil in a strong 27% loan CAGR over FY22-25e driving 28% PPOP growth over the same period. We initiate
coverage on the stock with a Buy rating at a target price of Rs8,959 derived from our multistage DDM model. The long
runway of growth will sustain premium valuations.
Key Risks 1) Outsized marketing spends on the super-app could impact the earnings negatively.
2) Conversion to a bank earlier could impact earnings
Financial Summary Y/E Mar’ (Rs mn) FY21 FY22 FY23e FY24e FY25e FY25e Bear Case Base Case Bull case
Net interest income 164,000 213,820 271,593 335,099 418,903
Loan CAGR 22% 28% 33%
NIM (%) 10.0 11.4 11.5 11.1 10.9 (FY22-25e)
Operating profit 119,892 143,586 184,244 230,844 297,274
BVPS (FY25e) 1156 1338 1406
PAT 44,198 70,282 111,247 137,956 176,493
PBV (Multiple) 2.9x 6.7x 10.0x
EPS (Rs.) 73.5 116.5 183.8 227.2 289.7
BV (Rs.) 613.7 724.6 877.4 1,077.7 1,337.8 a.Strong a. Credit card
competition approval
P/E (x) 90.8 57.3 36.3 29.4 23.0
P/BV (x) 10.9 9.2 7.6 6.2 5.0 a.Banking business a. Super app
Catalyst
Dividend yield (%) 0.1 0.3 0.3 0.4 0.4 Firing
RoA (%) 2.6 3.7 4.6 4.5 4.5
CRAR(%) 28.3 27.2 25.8 23.5 22.5

BAF - Technology led Product Innovation gives long runway of growth
7 products, more than 50% market Product innovation juggernaut
Consumer Finance share in subvention fees
 BAF has overall 44 lending products, highest amongst non banks and more than
5 loan products perhaps several smaller banks.
Commercial Loans
Focus on select sectors
 BAF has several firsts to its name in the lending products including CD loans,
12 loan products- fastest growth lifestyle financing, rural CD loans, medical financing etc.
Housing Finance amongst Peers
Product Juggernaut
 Housing Loan which has so far lower penetration than other products is likely
7 loan products- to see faster growth..
Rural Finance
Early mover advantage
 BAF has also introduced Gold loan financing this year and expects to grow 200
standalone GL branches..
SME 5 loan products
 Product innovation coupled with Network and Technology create

Payments PPI,UPI,BBPS strong moats for BAF.
Partnerships Insurance and Credit card tieups -

strong fee generation

BAF - Products encompass entire Consumer wallet spend and investment
Consumer wallet spends Consumer investments
13.1 million consumer
51 OEM on marketplace
purchases financed
Durables Broking
Fashion and Health

Insurance
122000 points of sale,
2000+ locations +10000 products listed
Furnishings
Deposits
Education
Personal loan
1million+ products on
NO Cost EMIs
Home loan
Used Car,2Wheelers
Business loan  Finances the entire gamut of wallet of a consumer including fashion, eyewear, cycles, insurance, tyre, car
accessories etc in both urban and rural
Payments

BAF - Best in class customer acquisition engine
BAF’s nationwide Network Penetration ……Feeds its expanding Customer base
66 3.0
100%
55 2.5
80%
44 2.0
60%
33 1.5
40%
22 1.0
20%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
0%
Total Franchise New to Bajaj Finance Customers (RHS)
FY19
FY20
FY21
FY22
Urban CD stores Rural CD stores …. which in turn drives the Loan growth
Digital product stores Lifestyle retail stores
EMI card retail spends stores Bajaj Auto dealers, sub-dealerships and ASSC 35% 50.0%
Direct Sales Agents 28% 40.0%
21% 30.0%
14% 20.0%
Post Covid, customer momentum has 7% 10.0%
Of the 25 m EMI cards, only 8.7m
again increased driving loan growth. 0% 0.0%
purchases were seen. Significant
upside from here. -7% -10.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Source: Company, Anand Rathi Research AUM Growth yoy NII growth yoy (RHS) 567
BAF - Demography of Loans changing….
 Bajaj Finance is gradually increasing depth and penetration of its product’s into Bharat. This will drive the next leg of growth for BAF over a
longer period of time.
 NIM remains best in class and we expect this to sustain on account of it’s pricing power.
Loan book mix - Rural and commercial gain scale High Yield product mix drives the Best in class NIM and PPOP
100%
10.0% 6.0%
80%
9.5% 5.0%
60%
40% 9.0% 4.0%
20% 8.5% 3.0%
0% 8.0% 2.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
7.5% 1.0%
Auto Finance Consumer Sales Finance Consumer B2C 7.0% 0.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Rural Sales Finance Rural B2C SME
Securities Lending IPO Financing Commercial Lending
Mortgages PPOP as a percentage of RoA Credit Cost (RHS)

BAF - NIM and asset quality improvement drive best in class ROA
NIM further improves and costs maintained Covid pain written off …reflecting in Lower NPAs
43% 15% 3.5%
3.0%
36% 2.5%
2.0%
29% 12% 1.5%
1.0%
22%
0.5%
15% 9% 0.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
GNPA NNPA
C/I Ratio NIM (RHS)
Capital adequacy provides comfort to growth High RoE and ROA
70% 26% 30%
25%
56% 25%
20%
42% 24%
15%
28% 23% 10%
14% 22% 5%
0% 21% 0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
ROA ROE
PCR Tier 1 (RHS)
BAF - New Tech journey takes off in 2019, accelerates in Covid
FY23 Future ready Improved UI/UX, upgraded web experience, super app
penetration to rise.
FY22 Launch Sales One app, debt collection app, five different market
Omnipresent places launched, Bajaj Pay and mobile app undergo deep
upgradations,600 API stacks upgraded.
strategy and its
various parts
FY21 Deepen data Bajaj Pay launched Deepen implementation and start
analysis and uses tools implemented in previous years. Migration of
execution of use APIs launched
cases
FY20 Year of ‘ Implementation of AI,ML, Statistical tools,

Implementation big data readiness, Facial recognition, API stack, OCR, NLP
FY19 Launch Data as Oil ‘focus on large volume of data capture and its effective utilizations for
business and risk management. BAF used AI, ML, Phyton to create niche
products for customers and straight through processing.
BAF - Annexure 1
Technology factor Intended outcomes FY20 FY21 FY22
Customer Data platform Multi channel orchestration Implemented
Sales one APP Improve Sales productivity Implemented
Debt Management One App Improve collections and compliance Implemented
Enterprise Tech To manage scale and agility Being modernized Deepening of modernization
Development Operations Deliver app and services at high velocity Implemented
For heavy lifting on payment solutions,
Big data readiness Microsoft Azure Microsoft Azure Microsoft Azure
marketplaces, productivity apps
Design of Experiments and at
New product innovation Implemented Deepened learning
initial stage
Proof of concepts New product innovation Implemented Deepened learning
AI and Machine Learning Straight through processing Implemented Deepened learning
R/Phyton Analytics Implemented Deepened learning
Facial recognition Analytics Implemented Deepened learning
Data scientists Analytics 100
OCR,Natural Language processing frictionless customer experience Experimented Gone lIne
API stack To ensure minimal Latency and accept higher User loads - Process of Migrating Migrated 600 APIs
Cyber security defense Migrated to Cloud based firewall

BAF - Super App (Best placed to counter Big-tech)
Software proxy cost
FY21 FY22 FY23e
5 new market places 25 3.5%
OMNI channel strategy Move seamlessly between
launched
physical and digital 3.0%
20
EMI store marketplace Launched 2.5%
Insurance marketplace Launched 15 2.0%
Launched
Broking marketplace 10 1.5%
Investment marketplace Launched 1.0%
Build omni-channel Build for merchant, QR 5
Bajaj Pay Implemented Deepen product suite 0.5%
payments experience code, POS machines
0 0.0%
55 core features,
FY20
FY21
FY22
Mobile App Improve User experience 50 features to be added
Completely rebuilt
% of Assets(bps) % of PPOP
Web app revamped web experience
Sep’22 FY23 (e) Sep’22 FY23 (e) Sep’22 FY23 (e)

App downloads 12.59 53-55m IN app programs 87 100+ Digital EMI card acq 100k 300-325k
Wallet accounts 11.80m 18.5m Bajaj Mall Loans 562k 2.6-2.8m Personal Loan 24bn 100bn
QRs 78 100 Insurance bazaar 235k 250-275 Credit card 50k 200k

BAF - Financials
Income statement (Rs m) FY21 FY22 FY23e FY24e FY25e Balance Sheet (Rs m) FY21 FY22 FY23e FY24e FY25e
Net Interest Income 164,000 213,820 271,593 335,099 418,903 Share Capital 1,203 1,207 1,211 1,215 1,219
Other Equity 367,981 435,920 529,875 653,255 813,907
Growth (%) 30.4 27.0 23.4 25.0
Net Worth 369,184 437,127 531,086 654,470 815,125
Other Income 7,852 4,373 4,810 5,291 5,820
Borrowings 1,316,335 1,652,319 2,126,789 2,728,562 3,508,618
Total income 171,852 218,193 276,403 340,390 424,723 Growth (%) 25.5 28.7 28.3 28.6
Growth (%) 27.0 26.7 23.1 24.8 Other liabilities 29,185 35,608 42,326 55,024 71,531
Operating expenses 51,960 74,607 92,159 109,546 127,449 Total Liabilities 1,714,704 2,125,054 2,700,201 3,438,056 4,395,274
Salary 24,987 35,897 44,871 53,845 63,537

Cash & Cash Equivalents 21,643 36,803 58,396 84,821 133,361
PPOP 119,892 143,586 184,244 230,844 297,274 Investments 183,969 122,455 134,701 148,171 162,988
Growth (%) 19.8 28.3 25.3 28.8 Advances 1,469,627 1,917,687 2,450,218 3,136,279 4,014,437
Provisions Growth (%) 30.5 27.8 28.0 28.0

59,969 48,548 33,503 43,912 58,123
Other assets 39,465 48,108 56,886 68,786 84,488
PBT 59,923 95,038 150,741 186,932 239,151
Total Assets 1,714,704 2,125,054 2,700,201 3,438,056 4,395,274
Tax 15,724 24,756 39,494 48,976 62,657
PAT 44,198 70,282 111,247 137,956 176,493 AUM 1,529,470 1,974,520 2,532,072 3,210,477 4,061,172
Growth (%) 59.0 58.3 24.0 27.9 RWA 1,289,570 1,588,032 2,327,707 3,199,004 4,175,014
BAF - Key Ratios
Key Ratios FY21 FY22 FY23e FY24e FY25e Du Pont Analysis (%) FY21 FY22 FY23e FY24e FY25e
NIM(%) 10.0 11.4 11.5 11.1 10.9 Operating Income 15.4 16.3 16.6 16.5 16.3
Cost to Income (%) 30.2 34.2 33.3 32.2 30.0
Interest Expense 5.7 5.1 5.4 5.6 5.6
Credit Cost (%) 4.1 2.9 1.5 1.6 1.6
Net interest income 9.8 11.1 11.3 10.9 10.7
ROA (%) 2.6 3.7 4.6 4.5 4.5
ROE(%) 12.8 17.4 23.0 23.3 24.0 Other Income 0.5 0.2 0.2 0.2 0.1
GNPA(%) 1.7 1.5 1.5 1.5 1.5 Total income 10.2 11.4 11.5 11.1 10.8
NNPA(%) 0.7 0.7 0.7 0.7 0.7 Operating expenses 3.1 3.9 3.8 3.6 3.3
RWA/Assets(x) 0.8 0.7 0.8 0.8 0.8
of which salary 1.5 1.9 1.9 1.8 1.6
CRAR (%) 28.3 27.2 25.8 23.5 22.5
PPOP 7.1 7.5 7.6 7.5 7.6
Tier 1(%) 25.1 24.7 22.8 20.5 19.5
EPS (Rs) 73.5 116.5 183.8 227.2 289.7 Provisions 3.6 2.5 1.4 1.4 1.5
BVPS (Rs) 613.7 724.6 877.4 1,077.7 1,337.8 PBT 3.6 5.0 6.2 6.1 6.1
ABVPS (Rs) 604.8 714.2 864.1 1,060.4 1,315.5 Tax 0.9 1.3 1.6 1.6 1.6
Dividend Yield(%) 0.1 0.3 0.3 0.4 0.4
ROA 2.6 3.7 4.6 4.5 4.5
P/E (x) 90.8 57.3 36.3 29.4 23.0
Equity Multiplier 4.9 4.8 5.0 5.2 5.3
P/B (x) 10.9 9.2 7.6 6.2 5.0
P/ABV (x) 11.0 9.3 7.7 6.3 5.1 ROE 12.8 17.4 23.0 23.3 24.0

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64
BFSI
Initiating coverage
Rating: Buy
Target Price: 868
Current market price: 732
Key data CIFC IN

Cholamandalam Investment & Finance Company(CIFC) 52-week high / low
Sensex / Nifty
Rs818 / 469
62869 / 18696
-Well Oiled Machine ……Upping its Ante in Digital 3-m average volume $13.6m
Chola is a well diversified NBFC which is upping it’s ante in digital and unsecured consumer finance. Chola emerged Market cap Rs599bn / $7373.9m
unscathed from Covid despite a large proportion of SENP category borrowers on account of strong underwriting skills Shares outstanding 822m
and collection processes. Its vehicle finance book is well diversified with increasing focus on higher yielding assets.
We initiate coverage on the stock with a target price of Rs 868 . At our target price the stock will trade at 3.6xPBV, Shareholding (%) Sep'22 Jun'22 Mar'22
premium to other NBFCs on account of its strong promoter group and sanguine understanding of vehicle finance.
Promoters 51.5 51.5 51.6
- of which, Pledged 2.2 2.2 2.2
Free float 48.5 48.5 48.5
- Public 7.9 8.1 7.8
65
CIFC - Investment Summary
Summary Chola is a well diversified NBFC which is upping it’s ante in digital and unsecured consumer finance. Chola emerged
unscathed from Covid despite a large proportion of SENP category borrowers on account of strong underwriting skills
and collection processes. Its vehicle finance book is well diversified with increasing focus on higher yielding assets. We
initiate coverage on the stock with a target price of Rs 870 . At our target price the stock will trade at 3.6xPBV, premium
to other NBFCs on account of its strong promoter group and sanguine understanding of vehicle finance.
Chola’s diversification from Asset Finance to MSME Finance to now Digital have been in a non- disruptive fashion with
Diversifying loan mix focus on total returns. Their ability to set up sound processes drives their scalability in each model. Despite Covid, Chola
and deepening has gained significant market share in Asset financing and LAP business over the past two years by deepening its branch
penetration penetration(1151 branches). Whilst Chola is geographically well diversified, western region has witnessed increased
disbursements (up 200 bps share to 22% from FY20). Within Asset finance, Chola expects HCVs and tractors to pick
up. We built in a loan CAGR of 21% over FY22-25,driven by improving prospects in HCV , LAP and new businesses.
Chola marked it’s entry into Consumer and Small Enterprise Loans (CSEL) business division to fuel its next phase of
Digital consumer credit growth in the unsecured consumer and SME ecosystem through and end-to-end digital lending platform. For this
is the next leg of growth purpose Chola also acquired Payswiff technologies. Chola intends to grow by tapping the fintech ecosystem and grow
its partnerships. Share in Disbursements from the new businesses has already touched 20%.Over the next three
years, digital lending would emerge as a meaningful growth area for Chola.
Best in class asset Chola emerged out of the pandemic unscathed a testament to its policies and systems. Chola did not witness any large
increase in credit costs, unlike other peers. With GS3 /NS3 of 3.8% and 2.3% we expect asset quality to remain benign
quality driven by strong going ahead . Capital adequacy of 18.4% is adequate for the 21% CAGR over FY22-24
processes 66
CIFC- Investment Summary
Valuation We pencil in a healthy 21% loan CAGR over FY22-25e driving 18% PPOP growth over the same period. We initiate
coverage on the stock with a Buy rating at a target price of Rs868 ,derived from our multistage DDM model.
Key Risks  Increasing competition in Vehicle Finance space could impact the growth.
 New business lines see higher than expected delinquencies
Y/E March (Rs mn) FY21 FY22 FY23e FY24e FY25e FY25e Bear Case Base Case Bull case
Net interest income 50,039 58,431 69,117 84,866 100,068 18% 20% 25%
Loan CAGR
NIM (%) 7.4 7.6 7.6 7.7 7.7 (FY22-25e)
PPOP 34,265 37,880 42,810 53,331 62,234 BVPS(FY25e) 229 244 259
PAT 15,214 21,589 23,660 29,505 35,305 PBV (Multiple) 1.0x 3.6x 5.8x
EPS (Rs.) 18.5 26.3 28.7 35.7 42.7
a. Lower loan a.Unsecured
BV (Rs.) 117.0 143.3 169.6 203.4 244.1 growth on lending growth
account of scales up faster.
P/E (x) 39.5 27.8 25.5 20.5 17.2
strong b.Yields will move
P/BV (x) 6.3 5.1 4.3 3.6 3.0 Catalyst competition up faster
Dividend yield (%) 0.9 0.9 1.0 1.0 1.0 b. Higher credit
cost led by
RoA (%) 2.2 2.7 2.6 2.6 2.7 unsecured
CRAR(%) 19.1 19.6 18.9 19.4 19.1 lending

CIFC - Product Diversification well spaced out
2021-22
2016-20
 2017 – NPA recognition moves to 90 days  2021 - Acquired Payswiff Tech
 Setup of GaadiBazaar Dealer Platform  Launched Consumer and Small Enterprise Loan
 2019 - AUM crosses Rs 500bn  Secured Business and Personal Loan.
 2020- Maiden issue of Masala Bonds
2011-15
2006-10  2011- Launch Mobile App
 2012 - Launched Tractor Business
 2006-JV with DBS Bank  2013 - Launched HL business
 2007- Launched Home Equity  2014- Launched CE Business.
 2009- Exited Consumer Finance
 2010 - Focus on Secured Business

CIFC - Product Diversification
Emerging Line of Business
Home Home
Vehicle loans
CSE
Finance Equity Lower Middle End to end digital
Pan India presence Middle class and
of more than 1100 SENP Income Group Process
branches
ATS – 14 lakhs
Work through
Product Spectrum ATS – 45 lakhs Partnership model
in across vehicles
56% LTV
Used vehicles now LTV – 52% 26% customers Supply chain

the largest are NTB finance, Term
component at 28% loan, Equipment
Finance, LAS
Digitized business 388 branches(380

are co-shared) 217 branches
operations
Digital oriented 11 states

journey

CIFC - Product Wise Breakup
 Home Equity business is the biggest turnaround in terms of disbursement
 AUM growth remain strong in FY22 and Sep’22. All businesses are contributing in terms of AUM growth. Home Loans has become 3x in 3 years on account of
higher duration and has significant runway of growth.
Disbursements (Rs m) AUM (Rs m)

Vehicle Finance Home Equity Housing Loan Vehicle Finance Home Equity Housing Loan
FY22 254,390 58,620 15,710 528,810 171,150 52,690
FY21 202,490 36,270 15,420 504,150 147,770 43,450
FY20 233,870 36,620 15,050 442,060 129,600 31,250
FY19 249,830 38,270 11,570 406,060 116,260 19,120

CIFC - Product Wise Profitability
 Credit cost in all lines of business reduced after peaking in FY21.
 Credit cost with respect to peers also remains best in Class.
 Home equity Credit cost are the lowest in all the segments.
 However at PBT level, Housing loans are delivering the highest RoA ( Pre tax).
Credit cost PBT - ROA

VF Home Equity HL VF Home Equity HL
FY22 1.4% 0.7% 0.9% 4.1% 3.0% 4.5%
FY21 2.5% 1.1% 1.5% 2.7% 2.2% 3.1%
FY20 1.9% 0.8% 0.8% 2.2% 2.0% 2.5%
FY19 0.9% 0.0% 0.3% 3.6% 2.8% 2.8%

CIFC - AUM growth picks up
AUM mix - New businesses are the next leg of growth
Chola grows faster than peers even in Covid 100%
30% 45%
25% 80%
36%
20% 60%
27%
15% 40%
18%
10%
9% 20%
5%
0% 0% 0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
AUM Growth yoy NII growth yoy (RHS) Vehicle Finance LAP Home Loans Others
Vehicle Finance AUM - HCV lost share,2W make a comeback

100%
80%
60%
40%
20%
0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
LCV MUV HCV Used Vehicles Tractor CE 3 Wheeler & SCV Two Wheelers
CIFC - Disbursement mix evolving rapidly
Madhya Pradesh Andhra Pradesh Karnataka
Maharashtra
6% 5% Kerala 6%
10%
• Well diversified geographically - No state more than 10% 5%
Gujarat Telangana
• West and South see rise in disbursements at the cost of East zone 4% 4%
West Bengal
• Within Vehicle Finance, UVs, HCV and 2W gain share 5% Tamil Nadu
8% Haryana
Odisha Delhi 3%
6% 1%
Jharkhand Himachal Pradesh
3% Punjab 1%
Chattisgarh 2%
Rajasthan
6% Bihar Assam Uttarakhand 7%Uttar Pradesh
6% 4% 1% 7%
Disbursement breakup: West and South make headway VF disbursements –UVs,2W,HCV gain share
100%
100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
South North East West Tractor CE HCV LCV Car
3 Wheeler Older Vehicles Mini LCV MUV Two wheelers
CIFC - NIM and productivity trend
 NIM for Chola expanded till Jun’22. However the latest quarter saw increasing rates catch-up with Chola .While NIM could remain soft near term, but could get
boosted by the new business engine over medium term. We built in stable NIM over FY23-25e.
 While Cost-Income has increased, however it is being led by other expenses. This we believe is a combination of variable and tech investment that Chola is
undergoing. Proportion of salary has reduced in the Opex mix.
NIM declines in Q2, expected to remain steady Operating Expense Mix changing structurally
10,000 46.0%
10.0% 8.4%
9,000 43.0%
9.5%
8.1% 8,000
9.0% 40.0%
7,000
8.5% 7.8% 6,000
8.0% 37.0%
5,000
7.5% 7.5% 4,000 34.0%
7.0% 3,000
7.2% 31.0%
6.5% 2,000
6.0% 1,000 28.0%
6.9%
5.5% 0 25.0%
5.0% 6.6%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Employee Expenses Others C/I Ratio (RHS)

CoF( Reported) NIM (RHS)
CIFC - Asset Quality (Safe landing in Covid)
Asset quality Improved; GS3 and NS3 decline
PPOP remains steady and Credit cost has now declined 8%
6.6% 5.0% 7%
5.5% 4.0% 6%
5%
4.4% 3.0%
4%
3.3% 2.0% 3%
2.2% 1.0% 2%
1%
1.1% 0.0%
0%
0.0% -1.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
GS3 NS3
PPOP as a percentage of RoA Credit Cost (RHS)
Adequately capitalized for growth
17.0% 50.0%
16.5%
40.0%
16.0%
15.5% 30.0%
15.0% 20.0%
14.5%
10.0%
14.0%
13.5% 0.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Source: Company, Anand Rathi Research Tier 1 PCR (RHS) 75
CIFC - Financials
Other Equity 94,357 116,047 138,006 166,272 200,336
Growth (%) 16.8 18.3 22.8 17.9
Net Worth 95,998 117,690 139,652 167,923 201,990
Other Income 607 919 1,038 1,173 1,325
Borrowings 637,300 691,735 861,932 1,025,699 1,200,068
Total income 50,646 59,350 70,155 86,039 101,393 Growth (%) 8.5 24.6 19.0 17.0
Operating expenses 16,381 21,469 27,345 32,709 39,159 Total Liabilities 746,442 824,780 1,021,463 1,219,464 1,435,654
Salary 7,910 9,572 12,444 14,932 17,919

PPOP 34,265 37,880 42,810 53,331 62,234
Investments 15,836 20,552 22,607 24,868 27,354
PPOP Growth (%) 10.6 13.0 24.6 16.7 Advances 658,393 741,447 926,809 1,102,903 1,290,396
Provisions 13,786 8,804 10,923 13,567 14,654 Growth (%) 12.6 25.0 19.0 17.0
PBT 20,479 29,076 31,887 39,764 47,580 Other assets 19,414 19,763 19,257 23,216 28,251
Total Assets 746,442 824,780 1,021,463 1,219,464 1,435,654
Tax 5,265 7,487 8,227 10,259 12,276
PAT 15,214 21,589 23,660 29,505 35,305 AUM 688,618 751,867 934,626 1,122,891 1,321,129
Growth (%) 41.9 9.6 24.7 19.7 RWA 619,325 715,366 880,468 1,058,786 1,251,684

CIFC - Key Ratios
Key Ratios (%) FY21 FY22 FY23e FY24e FY25e Du Pont Analysis (%) FY21 FY22 FY23e FY24e FY25e
Cost to Income (%) 32.3 36.2 39.0 38.0 38.6
Credit Cost (%) 2.3 1.3 1.3 1.3 1.2
ROA (%) 2.2 2.7 2.6 2.6 2.7
ROE(%) 17.1 20.2 18.4 19.2 19.1 Other Income 0.1 0.1 0.1 0.1 0.1
RWA/Assets(x) 0.8 0.9 0.9 0.9 0.9
of which salary 1.1 1.2 1.3 1.3 1.3
CRAR (%) 19.1 19.6 18.9 19.4 19.1
PPOP 4.9 4.8 4.6 4.8 4.7
Tier 1(%) 15.2 16.5 15.9 15.9 161
BVPS (Rs) 117.0 143.3 169.6 203.4 244.1 PBT 3.0 3.7 3.5 3.5 3.6
ABVPS (Rs) 107.8 121.2 146.7 179.5 218.9 Tax 0.8 1.0 0.9 0.9 0.9
Dividend Yield(%) 0.9 0.9 1.0 1.0 1.0
ROA 2.2 2.7 2.6 2.6 2.7
P/E (x) 39.5 27.8 25.5 20.5 17.2
Equity Multiplier 7.8 7.4 7.2 7.3 7.2
P/B (x) 6.3 5.1 4.3 3.6 3.0
P/ABV (x) 6.8 6.0 5.0 4.1 3.3 ROE 17.1 20.2 18.4 19.2 19.1

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78
BFSI
Initiating coverage
Rating: Buy
Target Price: 278
Key data MMFS IN

Mahindra & Mahindra Financial Services (MMFS) 52-week high / low
Sensex / Nifty
Rs235 / 128
62869 / 18696
- From CYCLICAL to PREDICTABLE 3-m average volume $15.9m
Mahindra Finance is walking the path of transformation, from a cyclical model to a more predictable business model. Market cap Rs272bn / $3351.3m
MMFS has cumulatively provided an astounding 13% of its AUM over the last three years, to cleanse its book. For Shares outstanding 1236m
investor confidence and transparency, MMFS is now rolling out disclosures on its AUM and collection efficiency on a
monthly basis. A Strong promoter group, process reengineering and tightening of credit norms will drive a 31% PAT Shareholding (%) Sep'22 Jun'22 Mar'22
CAGR over FY22-25. We initiate coverage on the stock with a target price of Rs 278 . At our TP, the stock will trade at
Promoters 52.2 52.2 52.2
1.5x on FY25e BV.
Free float 47.6 47.6 47.6
- Public 8.6 12.1 13.6
79
MMFS - Investment Summary
Summary Mahindra Finance is walking the path of transformation , from a cyclical model to a more predictable business
model . MMFS has cumulatively provided an astounding 13% of its AUM over the last three years, to cleanse its
book. For investor confidence and transparency, MMFS is now rolling out disclosures on its AUM and collection
efficiency, monthly. A Strong promoter group, processes reengineering and tightening of credit norms will drive a
31% PAT CAGR over FY22-25. We initiate coverage on the stock with a target price of Rs 278 . At our TP, the
stock will trade at 1.5x on FY25e BV.
Over the last 24 months , MMFS has reinforced its top management by bringing in credible professionals from top notch
Structural banks, in key executive positions like Chief Business Officer, Chief Risk Officer, CFO and Chief Digital officer. This we
Transformation believe has catalysed structural changes in process and policy and gear’s up MMFS for the next leg of growth. Our
underway channel checks suggest improved focus and rigour in execution at the ground level . An improved focus and Rural
tailwinds will drive a 19% loan CAGR over FY22-24,compared to a consolidating balance sheet between FY20-22.
Product mix widening, New product launches by parent entity in both SUV and tractors should drive growth and support yields. With an eye
on the more premium customer base, MMFS will compensate the lower yields with better credit cost. MMFS’s well
Risk adjusted NIM to diversified funding mix and a CoF at 6.6% ,is comparable to peers. As a result we expect risk adjusted NIM to
improve improve by 200 bps to 7% by FY25e.
MMFS was one of the most impacted NBFCs in terms of its asset quality with GS3/NS3 at 15.5% and 7.8% at the peak.
Asset quality issues have Since then , MMFS has improved its asset quality consistently over the last 18 months, with MMFS having provided
peaked out nearly 13% (FY22 loans), over FY20-22.The latest trend in collection efficiencies paints a stable picture. We expect
asset quality to improve going ahead and build in a more predictable credit cost of 2% over FY23-25, with focus on
higher quality customers. 80
MMFS - Investment Summary
Valuation We pencil in a healthy 19% loan CAGR over FY22-25e driving 31% PAT growth over the same period. We initiate
coverage on the stock with a Buy rating at a target price of Rs278, derived from our multistage DDM model.
Key Risks 1) CXO level exits could derail our story of structural growth change.
2) Rising competition could impact margins…
Loan CAGR
NIM (%) 8.2 8.3 8.6 8.9 9.0 12% 17% 20%
(FY22-25e)
PPOP 46,648 41,742 39,305 46,347 54,897
BVPS(FY25e) 172 185 194
PAT 5,123 10,847 17,317 21,008 25,090
EPS (Rs.) 6.0 9.0 14.0 17.0 20.3 PBV (Multiple) 0.9x 1.8x 3.3x
BV (Rs.) 128.9 138.2 150.2 166.1 185.3 a) Rural headwinds
a)Increase in share
P/E (x) 38.1 25.5 16.3 13.5 11.3 can impact loan
of higher yielding
growth and asset
P/BV (x) 1.8 1.7 1.5 1.4 1.2 loans due to rural
Catalyst quality
Dividend yield (%) - - 1.7 2.0 2.2 tailwinds
b)Increasing
RoA (%) 0.3 1.3 1.9 2.0 2.1 b)Strong recovery in
competition would
w/off assets
CRAR(%) 26.0 27.8 28.8 27.8 26.9 impact NIM
MMFS – Transformation starts at the Top
Group Momentum to Rub off Goals for 2025
Post changes at the group level , where Dr Anish Shah was brought in as MD, Mahindra and
Mahindra, both the parent and several group subsidiaries have started delivering on
growth and outperformed indices.
Catalyzing Change at the Top

Dr Anish Shah has catalyzed MMFS in his capacity as the Chairman of MMFS. We have seen
an influx of top notch professionals into MMFS from private banks , NEO Banks and
consumption companies.
We believe MMFS has built a credible top management team with a strong succession plan . This
will catalyze product innovation, digital adoption and improve customer segmentation and
eventually lead to the goals set for 2025.

MMFS - Reinforcing Top Management for the next leg of growth
Mr. Raul Mr. Vivek Ms. Mallika Mr. Mohit Mr. V
MD-Mahindra
Insurance
CTO
COO
CRO
CFO
Rebello Karve Mittal Kapoor Seshadri
2020 2020 2021 2020 2021

Two decades of Vivek is a Chartered Mallika has more than Mohit joined the Prior to joining
COO
CRO
CTO
CFO
MD-Mahindra Insurance
experience with Axis Accountant (1994), a 23 years of extensive Mahindra Group in Mahindra Insurance
Bank , specializing in Cost Accountant experience in risk October 2020 from DBS Brokers Ltd in Feb’21 ,
Rural and Agri finance. (1993). Prior to joining management across Bank where he was He was the President
He led key businesses MMFS, he was Group key private sector the head of and COO for
including Rural CFO of Marico banks of the country. Technology Cholamandalam MS
Lending, Farmer She has held key Risk optimization and head General Insurance Co.
Funding, Gold Loans, and Regulatory of Asia Hub at Ltd .
MSME lending, positions with HDFC Hyderabad, bank’s first
Commodity Loans, Bank, ICICI Bank and technology
Tractor & Farm IndusInd Bank development center
Equipment Lending, outside Singapore.
Agri-Value chain.

MMFS – Out of Consolidation phase, rural tailwinds
AUM growth turns positive end FY22… …with Strong disbursement growth
20.0% 38.0% 100%
15.0%
28.0% 80%
10.0%
5.0% 18.0% 60%
0.0% 8.0% 40%
-5.0% 20%
-2.0%
-10.0%
0%
-15.0% -12.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Auto/Utility Tractors Cars CV & CE Pre-owned Vehicles & Others SME
AUM Growth yoy NII growth yoy (RHS)
Product Mix; Emphasis on higher quality customers
1,20,000
 After a period of consolidation in FY20 and FY21, MMFS is back to the
1,00,000
growth ways with a differentiated strategy.
80,000
 Focus is to leverage on parent’s premium segment customers. The
60,000
bottom tail of customers will get filtered out.
40,000
20,000
 45%+ of MMFS’s vehicles financed are Mahindra Cars.
0  Change in strategy, focussed management and rural tailwinds should
drive a 19% loan growth over FY22-25e.
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Auto/ Utility vehicles Tractors Cars CV and CE Used Vehicles SME & Others
84
MMFS –Higher NIM and cost -income
North and South gain traction in disbursements NIM improves despite lower share of high yield assets
100% 7.0% 9.0%
80% 6.0%
8.0%
5.0%
60%
4.0% 7.0%
40%
3.0% 6.0%
20% 2.0%
5.0%
0% 1.0%
0.0% 4.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
East North South West Central
Int Exp/Assets(Reported) NIM (RHS)
Up fronting of tech and people costs
60.0%
50.0%
40.0%
MMFS is lagging on its cost side on account of up-fronting of costs in tech ,
30.0% branch, and people . With a higher growth in FY24/25, operating leverage
20.0% should start kicking in and cost-income should remain stable..
10.0%
0.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Cost-income Non Salary expense( as % of Opex)

MMFS - Asset quality issues have peaked out
GNPA and NNPA decline after peaking in Jun’21 Repossession efforts gain way
18.0% (Rs m) (Rs m)
3,50,000 16,000
15.0%
3,00,000 14,000
12.0%
2,50,000 12,000
9.0%
2,00,000 10,000
6.0%
1,50,000 8,000
3.0%
1,00,000 6,000
0.0%
50,000 4,000
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
GNPA NNPA Contracts under NPA Repossesed Assets (RHS)
High capital adequacy and adequate coverage
70.0% 25.0%
 Post peaking out in Jun’21, GNPA and NNPA have consistently
62.0% 23.0%
improved.
54.0% 21.0%
 Number of live contracts in NPA have also declined.
46.0% 19.0%
38.0% 17.0%  At more than 20% ,capital is no challenge for MMFS.
30.0% 15.0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
PCR Tier 1 (RHS)

MMFS - Financials
Other Equity 155,300 166,497 182,827 202,724 226,578
Growth (%) 2.3 9.7 18.4 17.6
Net Worth 157,764 168,963 185,295 205,194 229,050
Other Income 1,703 1,343 1,517 1,715 1,938
Borrowings 683,837 650,005 748,079 861,360 1,007,791
Total income 68,629 69,831 76,621 90,633 106,470 Growth (%) -4.9% 15.1% 15.1% 17.0%
Operating expenses 21,981 28,089 37,317 44,286 51,573 Total Liabilities 855,871 837,811 956,030 1,096,006 1,275,129
Salary 13,840 16,131 20,325 24,797 29,260

PPOP 46,648 41,742 39,305 46,347 54,897
Investments 125,251 89,250 111,563 128,297 141,127
PPOP Growth (%) -10.5 -5.8 17.9 18.4 Advances 670,757 676,597 791,618 926,194 1,083,647
Provisions 39,987 26,904 15,903 17,957 20,992 Growth (%) 0.9% 17.0% 17.0% 17.0%
PBT 6,661 14,838 23,402 28,390 33,905 Other assets 19,234 23,422 22,329 24,205 26,702
Total Assets 855,871 837,811 956,030 1,096,006 1,275,129
Tax 1,538 3,991 6,084 7,381 8,815
PAT 5,123 10,847 17,317 21,008 25,090 AUM 646,080 649,610 786,316 933,425 1,092,395
Growth (%) 111.7 59.6 21.3 19.4 RWA 569,440 564,826 722,545 843,592 979,818

MMFS - Key Ratios
Cost to Income (%) 32.0 40.2 48.7 48.9 48.4
Credit Cost (%) 5.7 4.0 2.2 2.1 2.1
ROA (%) 0.3 1.3 1.9 2.0 2.1
ROE(%) 2.0 6.5 9.7 10.8 11.6 Other Income 0.2 0.2 0.2 0.2 0.2
RWA/Assets(x) 0.7 0.7 0.8 0.8 0.8
of which salary 8.7 9.5 11.0 12.1 12.8
CRAR (%) 26.0 27.8 28.8 27.8 26.9
Tier 1(%) PPOP 5.6 4.9 4.4 4.5 4.6
22.2 24.3 25.6 24.3 23.4
BVPS (Rs) 128.9 138.2 150.2 166.1 185.3 PBT 0.8 1.8 2.6 2.8 2.9
ABVPS (Rs) 109.1 121.3 132.2 146.9 164.6
Tax 0.5 0.5 0.7 0.7 0.7
Dividend Yield(%) - - 1.7 2.0 2.2
ROA 0.3 1.3 1.9 2.0 2.1
P/E (x) 38.1 25.5 16.3 13.5 11.3
P/B (x) 1.8 1.7 1.5 1.4 1.2 Equity Multiplier 6.0 5.1 5.0 5.3 5.5
P/ABV (x) 2.1 1.9 1.7 1.6 1.4 ROE 2.0 6.5 9.7 10.8 11.6

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MMFS - Valuation charts – 1yr forward
Feb-22 Aug-20
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May-22
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PE Chart
Jun-19
Jan-20
Aug-20
Mar-21
Sep-21
Apr-22
Nov-22
15.0x
35.0x
55.0x
75.0x
89
BFSI
Initiating coverage
Rating: Buy
Target Price: 396
Key data POONAWAL IN

Poonawalla Fincorp (PFL) 52-week high / low
Sensex / Nifty
Rs344 / 181
62869 / 18696
-From Fringe to Frontline 3-m average volume $16m
Poonawalla Fincorp (erstwhile Magma Fincorp) has witnessed, perhaps, one of the fastest successful turnarounds in Market cap Rs235bn / $2896.3m
the BFSI sector. A strong promoter led takeover is driving processes, technology and cost of funds improvement at Shares outstanding 765m
the NBFC. With digital at its core for the new management, we expect a robust growth, competitive cost of funds and
benign asset quality to drive PFL in its next leg of growth. We initiate coverage with a target price of Rs 396, valuing Shareholding (%) Sep'22 Jun'22 Mar'22
it at 3.7x FY25e PBV derived using multistage DDM method.
Promoters 61.5 61.5 61.5
- of which, Pledged 32.5 32.5 97.4
Free float 38.5 38.5 38.5
- Public 25.9 25.5 25.7
90
PFL - Investment Summary
Summary Poonawalla Fincorp (PFL, erstwhile Magma Fincorp) has witnessed, perhaps, one of the fastest successful turnarounds
in the BFSI sector. A strong promoter led takeover is driving processes, technology and cost of funds improvement at the
NBFC. With digital at its core for the new management, we expect a robust growth, competitive cost of funds and benign
asset quality to drive PFL in its next leg of growth. We initiate coverage with a target price of Rs 396, valuing it at 3.7x
FY25e PBV derived using multistage DDM method.
Post takeover of erstwhile Magma Fincorp by Poonawalla group in Q4FY21, a major structural overhaul in management,
Transformation strategy, processes and technology has been implemented. Pre-takeover, the focus for the NBFC was agri/commercial
from a fringe to loans to SENP customers in semi-urban/rural areas . However, PFL now focuses on granular retail and MSME finance
frontline products like pre-owned cars, PL, BL, LAP, predominately in urban markets, led by technology. Further, PFL intends to
introduce products like credit/EMI card, consumer finance etc.) PFL has already attained leadership on monthly
disbursement basis in three product categories – Business Loans, Pre-Owned Cars and Loans to Professionals. A best in
class cost of funds and a strong capital base (45% CRAR) will buoy consol AUM growth CAGR of 30% over FY23-FY25e.
Low CoF and tech A strong promoter has fueled a sharp decline in cost of funds (down ~250 bps post takeover) for PFL in 18 months. A
healthy balance sheet combined with a competitive CoF (7.1% in Sep’22) allows PFL to compete with larger NBFCs
fuels customer mix to and banks. Pre-acquisition, PFL was a DSA heavy model with high opex and prone to cyclical downturns. However
premium under the new avatar, PFL’s spending on tech has been comparable to best in FY20 and FY21. We believe a competitive
CoF and superior customer experience will allow PFL to build a premium customer franchisee.
Conservative PFL has developed conservative underwriting practices along with strong risk management which resulted in 60+ DPD
underwriting standards of sub 0.4% for the entire book (focused book) which originated over the last 15 months, including Covid period. Our
to keep credit cost channel checks also suggests underwriting is prioritized over growth. Ahead, we expect credit cost to remain benign at
1.5% of advance over FY24/25e
benign 91
PFL - Investment Summary
Valuation PFL has the ability to grow its AUM at 30%+ with a sustainable RoAs of 3%+ in the medium to long run. With
strong parentage, it has the resources to sharply gain market share. We initiate coverage on the stock with a Buy
rating at a TP of Rs396 on its FY25e book.
Key Risks  Execution risk – the new management has come from different org. across the financial services. Different
backgrounds could be a impediment in the management team working as a cohesive unit.
 Higher slippages from the unseasoned book
Financial Summary
Loan CAGR
NIM (%) 7.0 7.8 9.5 9.8 9.7 17% 30% 45%
(FY22-25e)
PPOP 6,937 5,677 8,259 12,364 17,780
BVPS(FY25e) 94 106 125
PAT (5,644) 3,739 5,896 7,856 10,384
EPS (Rs.) (20.7) 4.9 7.7 10.3 13.6 PBV (Multiple) 2.0x 3.7x 5.0x
BV (Rs.) 81.4 79.2 86.1 94.9 105.8 1) Delay in pickup Sharp pickup in
P/E (x) (14.7) 62.9 39.9 30.0 22.7 of Consumer Consumer Finance
P/BV (x) Finance business business and MSME
3.8 3.9 3.6 3.2 2.9
Catalyst 2) Higher credit cost business, driving
Dividend yield (%) - 0.1 0.3 0.5 0.9 on account of growth and yields
RoA (%) (4.0) 2.5 3.1 3.2 3.3 adverse impact on higher
CRAR(%) 20.3 49.1 38.5 31.6 25.8 MSME sector
PFL - Transformation from Fringe to Frontline
Pre-takeover Post-takeover
Dec’20 Sep’22
Promoter led Professional led

Management
Geography Rural/Semi-urban Metro/Urban
Customers SENP/SEP Premium salaried & SENP
Sourcing DSA heavy Digital led
Cost of funds 9.60% 7.12% CoF(%) Dec’20 Sep’22

PFL 9.60 7.12
CRAR 28.0% 44.90%
BAF 7.78 6.91
NNPA/Stage 3 4.50% 0.83% LTFH 7.82 7.33

PFL - Products overview
Existing products Upcoming products
Pre-Owned Cars Digital Business Loans Machinery Loans Consumer Finance
Digital Consumption Loan Merchant Cash Advance

Affordable Home Loans Digital Personal Loans
Affordable LAP Digital Loans to Profession Medical Equipment Loan EMI Card
Auto Lease Digital SME LAP Supply Chain Finance Supply Chain Finance
Amongst its existing products, PFL has already attained leadership on monthly disbursement basis in three product categories –
Business Loans, Pre-Owned Cars and Loans to Professionals.

PFL – Strong AUM growth ,led by improvement in CoF
Focused products drives Disbursement In turn driving the AUM growth
(Rsm)
40,000 (Rsm)
1,80,000
35,000 1,60,000
36,250
1,70,150
30,000 1,40,000
1,53,790
25,000 1,20,000
1,36,050
27,380
12,850
1,00,000
11,720
20,000
1,16,020
1,09,000
21,640
43,750
15,000 80,000
36,260
6,980
29,740
60,000
22,810
10,000 15,430
3,020
15,450
12,950
40,000
960
5,000
0 20,000
0
2FQY22
3QFY22
4QFY22
1QFY23
2QFY23
2FQY22
3QFY22
4QFY22
1QFY23
2QFY23
Organic Acquired
Focused Discontinued
Sharpest turnaround in CoF in an NBFC Leading to highest ever ROA for Poonawalla
10% 9.50% 9.50% 9.80% 4.0% 3.40% 3.60%
10% 9.10% 3.5% 3.10%
9.56% 8.80% 2.60%
9% 3.0% 2.50%
9% 7.90% 9.05% 2.5% 1.80%
8% 2.0% 1.40% 1.38% 1.49%
1.10% 1.20% 1.30%
8% 8.03% 1.5%
7% 7.41% 1.0%
7% 6.92% 7.12% 0.5%
6% 0.0%
1QFY22
2FQY22
3QFY22
4QFY22
1QFY23
2QFY23
1QFY22
2FQY22
3QFY22
4QFY22
1QFY23
2QFY23
NIM CoF RoA Cost/avg AUM

PFL - Visible improvement in asset quality
Sharp improvement in GS3 GS2 trending downwards
4.5% 70.0% 16.0% 25.0%
4.0% 60.0% 14.0%
3.5% 12.0% 20.0%
3.0% 50.0%
40.0% 10.0% 15.0%
2.5%
2.0% 8.0%
30.0% 10.0%
1.5% 6.0%
20.0%
1.0% 4.0% 5.0%
0.5% 10.0% 2.0%
0.0% 0.0% 0.0% 0.0%
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Gross Stage -3 Ratio Stage -3 PCR (RHS) Gross Stage -2 Ratio Stage -2 PCR (RHS)
Restructured pain easing Better underwriting, buffer aids credit cost

(Rsm)
10,000 7.0% 1.5% 0.92%
6.0% 1.0%
8,000
5.0% 0.5% 0.01%
6,000 4.0% -0.15% -0.33%
0.0%
4,000 3.0% -0.5% -0.91%
2.0% -1.0%
2,000 1.0%
-1.5%
0 0.0%
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Restructured book % of AUM (RHS) Provisions (% of AUM)

PFL - Key Management
Name Position Background
Abhay Bhutada MD & CEO Previously worked for Bank of India & then started his loan consulting business (TAB Capital)
Sanjay Miranka CFO Last role was with Aditya Birla Finance as head of capital markets and later as CFO
Previously worked in various lending functions in ICICI Bank, Standard Chartered, GE, Cholamandalam, Reliance &
Manish Choudhari President & Chief of Staff
Magma.
Has been associated with companies like Standard Chartered, Barclays Bank, GECIS, LG & Blue Star. Was last
Ankur Kapoor COO
associated with Aditya Birla Finance as head of operations & customer service.
Vineet Tripathi CBO Prior to joining PFL, has worked players like Tata Capital, Citigroup & Bandhan Bank.
Anup Agarwal Chief Internal Auditor Known for his work with SBI, Kotak Mahindra Bank & Citibank across multiple divisions.
Manoj Gujaran Chief Compliance Officer Was previously the company secretary of IIFL Wealth Finance Ltd.
Has rich experience in tech implementation with marquee companies like Sundaram Finance, Polaris Software Labs,
Kandarp Kant CTO
Citi & Oracle.
Rajendra Tathare CRO In his last role, he was head of credit underwriting for loan products with Fullerton India Credit Company.
Over the past 16 years in Magma, he has been instrumental in developing the Company’s operations across India.
Mahender Bagrodia Head – Collections
Currently, his role involves collections management.

PFL - Financials
Net Interest Income Share Capital 539 1,530 1,530 1,530 1,530
10,652 11,943 18,201 24,755 32,506
Other Equity 21,404 59,030 64,358 71,062 79,402
Growth (%) 12.1 52.4 36.0 31.3
Net Worth 21,943 60,560 65,887 72,592 80,932
Other Income 1,868 1,305 1,567 1,880 2,256 Borrowings 104,330 99,088 138,724 194,213 269,956
Total income 12,520 13,249 19,767 26,634 34,761 Growth (%) -5.0 40.0 40.0 39.0
Operating expenses Total Liabilities 132,122 164,427 211,007 275,436 362,542

5,583 7,571 11,508 14,270 16,982
Salary 3,815 5,192 7,826 9,704 11,548
PPOP 6,937 5,677 8,259 12,364 17,780 Investments 1,774 0 0 0 0
PPOP Growth (%) -18.2 45.5 49.7 43.8 Advances 113,612 148,507 196,029 258,759 341,561
Provisions 14,480 776 345 1,819 3,842 Growth (%) 30.7 32.0 32.0 32.0
Other assets 8,989 9,950 7,137 7,621 10,051
PBT (7,543) 4,902 7,914 10,545 13,938
Total Assets 132,122 164,427 211,007 275,436 362,542
Tax (1,898) 1,163 2,018 2,689 3,554
- - - - -
PAT (5,644) 3,739 5,896 7,856 10,384 AUM 142,250 165,790 218,843 288,872 381,312
Growth (%) 166.2 57.7 33.2 32.2 RWA 126,400 129,928 179,356 239,629 326,288

PFL - Key Ratios
Cost to Income (%) 44.6 57.1 58.2 53.6 48.9
Credit Cost (%) 9.5 0.5 0.2 0.7 1.1
ROA (%) (4.0) 2.5 3.1 3.2 3.3 Net interest income 7.5 8.1 9.7 10.2 10.2
ROE(%) (22.8) 9.1 9.3 11.3 13.5
Other Income 1.3 0.9 0.8 0.8 0.7
GNPA(%) 3.7 2.7 2.1 1.8 1.6
NNPA(%) 1.2 1.1 0.8 0.7 0.6 Total income 8.8 8.9 10.5 11.0 10.9
RWA/Assets(x) 1.0 0.8 0.9 0.9 0.9 Operating expenses 3.9 5.1 6.1 5.9 5.3
CRAR (%) 20.3 49.1 38.5 31.6 25.8
Tier 1(%) PPOP 4.9 3.8 4.4 5.1 5.6
17.4 46.6 36.7 30.3 24.8
EPS (Rs) (20.7) 4.9 7.7 10.3 13.6 Provisions 10.2 0.5 0.2 0.7 1.2
BVPS (Rs) 81.4 79.2 86.1 94.9 105.8
PBT (5.3) 3.3 4.2 4.3 4.4
ABVPS (Rs) 77.6 77.6 84.6 93.2 103.9
Dividend Yield(%) - 0.1 0.3 0.5 0.9 Tax (1.3) 0.8 1.1 1.1 1.1
P/E (x) (14.7) 62.9 39.9 30.0 22.7
ROA (4.0) 2.5 3.1 3.2 3.3
P/B (x) 3.8 3.9 3.6 3.2 2.9
P/ABV (x) 4.0 4.0 3.6 3.3 3.0 ROE (22.8) 9.1 9.3 11.3 13.5

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PFL – Valuation charts - 1 yr forward
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3.5x
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POONAWAL
Jun-22
-1,800
-1,300
-800
-300
200
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1,200
Sensex Jul-22 Jul-12

Jan-13
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PE Chart
Apr-18
Oct-18
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Dec-19
Jul-20
Feb-21
Sep-21
Apr-22
Nov-22
15.0x
35.0x
55.0x
75.0x
100
BFSI
Initiating coverage
Rating: Buy
Target Price: 106
Key data LTFH IN

L&T Finance Holdings (L&TFH) 52-week high / low
Sensex / Nifty
Rs92 / 59
62869 / 18696
-Reorienting with Retail finance 3-m average volume $7.7m
We appreciate L&T Finance’s successful attempt at reorienting its balance sheet, more in favour of retail finance, now Market cap Rs219bn / $2697.2m
at 51% vs 26% in FY16 and intend to sell off non-core assets. Over the next three years, L&T Finance targets to Shares outstanding 2478m
further increase share of granular loans to three fourths of it’s book. In terms of simplification, L&T Finance has now
rationalized its businesses from 22 to 10 and reduced number of operating entities to two, down from seven. A Shareholding (%) Sep'22 Jun'22 Mar'22
marked improvement in asset quality, tech driven retail franchisee and simpler operating structure will drive
Promoters 66.2 66.2 66.3
earnings CAGR of 38% over FY22-25.We initiate coverage on the stock with a target price of Rs 106 . At our target
price the stock will trade at 1.1xPBV FY25e. - of which, Pledged - - -
Free float 33.8 33.8 33.7
- Public 21.7 21.8 22.3
101
L&TFH - Investment Summary
Summary We appreciate L&T Finance’s successful attempt at reorienting its balance sheet more in favour of retail finance, now at
51% vs 26% in FY16 and intend to sell off non core assets. Over the next three years, L&T Finance targets to further
increase share of granular loans to three fourths of its book. In terms of simplification, L&T Finance has now rationalized
its businesses from 22 to 10 and reduced number of operating entities to two, down from seven. A marked improvement
in asset quality, tech driven retail franchisee and simpler operating structure will drive earnings CAGR of 38% over
FY22-25.We initiate coverage on the stock with a target price of Rs 106 . At our target price the stock will trade at
1.1xPBV FY25.
L&T Finance has reoriented its positioning from an all-in-one diversified NBFC(closer to a Bank structure) to a retail
Reorientation to focused lender. Share of granular loans has now increased to more than 51% compared to 26% in FY26. At present retail
retail products comprise of vehicle finance, MFI and affordable housing loans.. L&T Finance has launched several products in
using tech the farmer ecosystem ,consumption and SME ecosystem. In FY22, L&T Finance has spent on tech ahead of its peers at
3% of PPOP and 21 bps of Gross assets. We believe that the tech journey of L&T Finance is credible and should bring in
efficiencies over time. Share of retail will cross 75% by FY25 in overall loan mix.
Simplification of L&T Finance in its second cycle has simplified its corporate structure and business model both. It has exited
unfocussed business line items, has stopped growth in real estate vertical, follows an asset light approach in
structure to improve renewables and now has consolidated all the different lending arms in 2 entities. A leaner structure will help L&T
focus on retail Finance run faster in retail. We expect retail loan CAGR of 25% over the next two years vs overall AUM growth of 8%
Improvement in Asset Asset quality has improved with GNPA peaking at 6% in FY22. Collection efficiencies remain above 95% in all retail
quality, buffer from product lines except farmer finance. While the potential stress in real estate book remains, we expect profits from sale of
sale of non core assets non-core assets(Rs 23bn) to be utilized judiciously. We built in a lower credit cost of 2.5% over FY22-25.
102
L&TFH - Investment Summary
Valuation We pencil in a high 25% retail loan CAGR over FY22-25e.Overall loan growth could be muted on account of
rundown in infra and real estate book. We initiate coverage on the stock with a Buy rating on undemanding
valuations at a target price of Rs106. At our TP, the stock will trade at 1.1x FY25e BV.
Key Risks  Delay in efficiencies kicking in.

 Higher than expected deterioration in wholesale lending especially real estate…
Loan CAGR
NIM (%) 5.8 6.0 6.4 6.6 6.9 5% 7% 10%
(FY22-25e)
PPOP 46,714 43,060 69,370 49,180 54,184 BVPS(FY25e) 94 102 110
PAT 7,382 8,491 19,312 17,565 22,289
EPS (Rs.) PBV (Multiple) 0.6x 1.6x 3.4x
3.0 3.4 7.8 7.1 9.0
BV (Rs.) 76.0 80.6 87.9 94.4 102.4
P/E (x) 30.5 26.6 11.7 12.9 10.1 Retail credit Faster than
P/BV (x) 1.2 1.1 1.0 1.0 0.9 growth is expected retail
Catalyst slower than credit growth and
Dividend yield (%) 1.9 0.5 0.5 0.7 1.1
expected wholesale book
RoA (%) 0.3 0.8 1.8 1.5 1.8 also picking up.
CRAR(%) 23.8 22.9 24.3 23.6 23.1
L&TFH - Reorienting the NBFC towards Lakshya 2026
 L&T Finance has reduced the line of products from 22 in FY16 and
Focus on businesses brought it down to 10.
with inherent
strengths  Share of defocused business has now reduced to under 10%.
 Huge focus on being tech first. Tech costs as % of  Sale of L&T MF consummated
PPOP match BAF.
 Organization structure has been verticalized to make

it more leaner
 Majority of leadership have taken additional roles.
 L&T Finance has reduced the number of

lending entities from 7 and brought it down to
Change in Processes Leaner Corporate 2.
and Hierarchy structure  This has helped reduce duplication of work.

L&TFH - Retail product momentum strong
Rural Finance Farmer Consumer

Finance Two wheelers HL/LAP Finance
Customer base 14 m 0.8 million 5.5 m 60k 0.25 m
Channel penetration
1600 Branches 2000+ Dealerships 5000+ Dealerships 1000+ channel
partners App driven, cross sell
24 hours 45 secs 20 mins

TAT 90 seconds 18 mins
Farmer ecosystem,
New products and
Rural Business Consumer loan, SENP,BL,OD and Flexi Partnerships and cross
Ecosystem, Micro LAP, Warehouse Finance,
cross-sell Pre approved Loans OD sells
Pragati, Top up loans,

L&TFH - High tech investments
Tech costs as % of AUM and PPOP Rural Business Farm
2W
Housing Consumer-
Finance Finance Loans
23 3.3%
22 3.2% Sourcing √ √ √ √ √
3.1%
21
3.0%
20
2.9%
Underwriting √ √ √ + √
19
2.8%
18 2.7% Disbursement √ √ √ √ √
17 2.6%
FY20
FY21
FY22
% of Assets (bps) % of PPOP
Collections + + + √ √
Employee/
App used by Employee Customer
Customer
+ Denotes both manual and digital processes

√ Denotes Digital processes

L&TFH - Granularization of Balance sheet
Retail driving AUM growth(Rs m) PL and Tractors drive retail growth(Rs m)
12,00,000 5,00,000
10,00,000
4,00,000
8,00,000
3,00,000
6,00,000
2,00,000
4,00,000
2,00,000 1,00,000
0 0
FY16
FY17
FY18
Fy19
FY20
FY21
FY22
FY20
FY21
FY22
Retail Wholesale Defocussed Farm 2W Micro loans Consumer loans Retail Housing and LAP Others
Retail Disbursement growth picks up
1,60,000
1,40,000
1,20,000
1,00,000
80,000
60,000
40,000
20,000
0
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Retail Disbursements Wholesale Disbursement 107
L&TFH - High tech investments, diversified liability mix
Better cost of funds supports NIM Liability mix chart - Well diversified mix
8.5% 7.5%
8.0% 100%
7.0%
7.5% 80%
6.5%
7.0%
6.5% 6.0% 60%
6.0% 5.5%
5.5% 40%
5.0%
5.0% 20%
4.5% 4.5%
4.0% 4.0% 0%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
CoF(Calc) NIM (RHS) Bank Loan NCD Pvt Retail NCD CP ECB Others
Cost-Income has risen steadily impacting PPOP
5.5% 40%
5.0% 35%
4.5% 30%
4.0% 25%
3.5% 20%
3.0% 15%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
PPOP as a percentage of AUM Cost-Income (RHS)
L&TFH - Improvement in Asset quality
Asset quality improvement Credit cost comes off, adequate capital adequacy
8.00% 6.0% 21%
7.00% 5.0% 20%
6.00% 4.0% 19%
5.00%
4.00% 3.0% 18%
3.00% 2.0% 17%
2.00% 1.0% 16%
1.00%
0.00% 0.0% 15%
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
GNPA NNPA Credit Cost Tier 1 (RHS)
Retail collection efficiency has picked up

105.0%
100.0%
95.0%
90.0%
85.0%
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Rural Business Finance & Micro Finance Farmer Finance
Two-Wheeler Retail Housing 109
Source: Company, Anand Rathi Research Consumer Loans
L&TFH - Financials
Other Equity 163,038 174,737 192,811 208,891 228,705
Growth (%) 0.6 10.1 9.5 11.9
Net Worth 187,732 199,477 217,556 233,640 253,458
Other Income 4,005 3,939 28,026* 5,199 5,719
Borrowings 885,558 852,012 892,061 945,147 1,020,759
Total income 65,407 65,696 96,001 79,625 88,992 Growth (%) -3.8 4.7 6.0 8.0
Growth (%) 0.4 46.1 -17.1 11.8 Other liabilities 16,178 17,315 20,171 26,222 34,089
Total Liabilities 1,089,468 1,068,804 1,129,788 1,205,009 1,308,306
Operating expenses 18,693 22,636 26,631 30,445 34,808
Salary 9,381 10,948 13,029 14,983 17,230
PPOP 46,714 43,060 69,370 49,180 54,184 Investments 91,994 122,411 129,756 138,839 149,946
PPOP Growth (%) -7.8 61.1 -29.1 10.2 Advances 870,583 825,065 874,569 935,789 1,010,652
Growth (%) -5.2 6.0 7.0 8.0
Provisions 36,357 30,833 41,543 23,871 24,145
Other assets 42,621 41,623 37,046 42,192 48,387
PBT 10,357 12,227 27,827 25,309 30,039 Total Assets 1,089,468 1,068,804 1,129,788 1,205,009 1,308,306
Tax 5,231 3,736 8,515 7,745 7,750
PAT 7,382 8,491 19,312 17,565 22,289 AUM 940,140 883,400 916,491 975,058 1,040,298
Growth (%) 15.0 127.4 -9.0 26.9 RWA 788,790 871,840 934,022 1,031,643 1,148,992
*Non recurring gains on sale of Mutual fund business 110
L&TFH - Key Ratios
Cost to Income (%) 28.6 34.5 27.7 38.2 39.1
Credit Cost (%) 4.1 3.6 4.9 2.6 2.5
ROA (%) 0.3 0.8 1.8 1.5 1.8
ROE(%) 1.7 4.4 9.3 7.8 9.2 Other Income 0.4 0.4 2.5 0.4 0.5
RWA/Assets(x) 0.7 0.8 0.8 0.9 0.9
of which salary 5.0 5.5 6.0 6.4 6.8
CRAR (%) 23.8 22.9 24.3 23.6 23.1
PPOP 4.3 4.0 6.3 4.2 4.3
Tier 1(%) 18.8 19.7 23.3 22.6 22.1
BVPS (Rs) 76.0 80.6 87.9 94.4 102.4 PBT 0.9 1.1 2.5 2.2 2.4
ABVPS (Rs) 69.9 66.0 77.1 83.9 91.4 Tax 0.7 0.3 0.8 0.7 0.6
Dividend Yield(%) 1.9 0.5 0.5 0.7 1.1
ROA 0.3 0.8 1.8 1.5 1.8
P/E (x) 30.5 26.6 11.7 12.9 10.1
P/B (x) Equity Multiplier 6.5 5.6 5.3 5.2 5.2
1.2 1.1 1.0 1.0 0.9
P/ABV (x) 1.3 1.4 1.2 1.1 1.0 ROE 1.7 4.4 9.3 7.8 9.2

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L&TFH – Valuation charts - 1yr forward
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Jul-22
-
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112
BFSI
Re-initiating coverage
Rating: Sell
Target Price: 779
Key data SBICARD IN

SBI Cards & Payments Services Ltd. (SBIC) 52-week high / low
Sensex / Nifty
Rs1029 / 656
62869 / 18696
- Superior returns face headwinds 3-m average volume $14.9m
With advent of alternative products like BNPL, a decreasing revolver’s share and competition turning hotter, we Market cap Rs789bn / $9714.1m
expect yields to remain muted and marketing costs to increase. However non-balance sheet linked fee income will Shares outstanding 945m
drive earnings CAGR of 20% over FY22-FY25e. We re-initiate coverage on the stock with a ‘SELL’ rating and a TP of Rs
779. At our TP the stock will trade at 4.8x FY25e P/B and 24x FY25e P/E. Shareholding (%) Sep'22 Jun'22 Mar'22
Promoters 69.4 69.6 69.6
Free float 30.6 30.4 30.4
- Public 4.7 5.8 8.5
113
SBIC - Investment Summary
Summary With advent of alternative products like BNPL, decreasing revolver’s share and heating up competition, we expect yields
to remain muted and marketing costs to increase. However non-balance sheet linked fee income will drive earnings CAGR
of 20% over FY22-FY25e. We re-initiate coverage on the stock with a ‘SELL’ rating and a TP of Rs 779 .At out TP, the
stock will trade at ~4.8 x FY25 P/B and 24 x FY25 P/E
We believe that the realistic credit card TAM has not increased significantly (beyond ‘stated income’ borrowers) due to
Realistic TAM not lack of innovation in the credit cards business. Credit card outstanding loans in its entirety has grown ~27%/~70% vs
very high, consumer durable loans which shot up faster at ~61%/~395% over the last 1/3 years . Non linear growth in the UPI
alternative products transactions, BNPL and consumer durable loans segment is driving a double whammy namely; a) restricting the revolver
component; and b)a reduction in asset yields. While SBIC is the second largest credit card issuer in the country, if we
restrict tear away consider BAF EMI cards( a partial substitute), the market share drops significantly. With other banks turning aggressive
growth and regulatory headwinds (NBFCs to be allowed to issue credit cards), market share could peak soon. The high
competitive intensity has already brought its yields on average advances to a historical quarter low of 17.3% as on Sep’22
and we expect it to drop to 17% levels by FY25e.
Low revolve rates a The share of revolvers has declined to 24% in Sep’22 vs 40% in Mar’20. They are not going to be anywhere near the
industry wide latter levels in the near future and is an industry wide phenomenon . With increasing competition, the yields on
phenomenon revolvers have potential to decline further. We build in a 24% Pre provisioning profit (PPOP) CAGR over FY22-25e.
Non-Interest Income Non-interest income consists majorly of fee based income, the driver for which is principally spends growth. We expect
to buoy earnings SBIC spends to grow at robust pace of ~38% CAGR over FY23e-FY25e and shall drive earnings. As on FY22 this
income comprises ~49% of revenue from operations and we forecast it to go upwards to ~52% by FY25e.
114
SBIC - Investment summary
Valuation We pencil in a lower revolver rate to continue and competition from alternative products to keep yields at 17.4%
for FY23e. We expect spend based fees to form a larger share of earnings pie, going ahead. We initiate coverage
on the stock with a SELL rating with a target price of Rs779. At our TP, the stock will trade at 4.8x FY25e BV &
24x FY25e EPS, based on residual income model.
Key Risks  Regulator does not grant Credit card license to NBFCs and Fintechs.
 Status quo on MDR fees .
 Higher than expected share of revolvers.
Net interest income 39,033 38,387 45,478 59,542 76,460 Net operating 21% 30% 37%
NIM (%) 16.1% 13.3% 11.5% 11.3% 11.2% income CAGR
PPOP (FY22-25e)
39,623 44,280 53,042 65,540 83,524
PAT EPS (FY25e) 21 33.7 40
9,845 16,161 21,254 27,040 32,041
EPS (Rs.) 10.5 17.2 22.4 28.5 33.7 ROE (FY25e) 18% 21% 27%
BV (Rs.) 67.0 82.2 103.7 130.9 162.9 PE (Multiple) 20x 24x 30.0x
P/E (x) 80.0 48.8 37.2 29.2 24.6 1) Lower MDR fees 1)Status quo on
P/BV (x) 12.5 10.2 8.1 6.4 5.1 2)Strong MDR fees
competition from 2) Higher mix of
Dividend yield (%) 13.1 10.5 8.3 6.5 5.2 Catalyst Fintech+ NBFC revolvers
RoA (%) 3.8% 5.2% 5.2% 5.0% 4.6%
CRAR(%) 24.8% 23.8% 21.9% 21.8% 21.1%
Source: RBI, Company, Anand Rathi Research 115
SBIC - Alternate Products restrict tearaway growth
Stated income individuals outgrowing CIF
(No mn)
Lack of innovation & alternatives gaining fame; The payments and credit 70
industry is seeing a lot of innovation recently with alternative payment instruments 60
becoming popular among millennials and the non-credit cards customer base. The 50
innovation coupled with the UPI success story poses risk to the credit card penetration 40
as multiple alternatives are available in today’s world even for a new to credit (NTC) 30
customer. The rate of adoption of BNPL & EMI cards in the last four years is 20
significantly higher in comparison to credit cards. 10
0
FY18
FY19
FY20
CIF Individual income tax returns
(No mn) Partial Substitutes to Cards - Grow faster (No mn)
80 940 PPOP growth will lag spends growth
100%
70 910 80%
60 880 60%
50 850 40%
40 820 20%
30 790 0%
20 760 -20%
10 730 -40%
0 700
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
FY18
FY19
FY20
FY21
FY22
Credit Cards BAF EMI Debit Cards (RHS) Spends YoY growth NII YoY growth
Source: RBI, Company, Anand Rathi Research Advances YoY growth PPoP YoY growth 116
SBIC - UPI volume growing much faster than credit cards
UPI volumes & value growing multifold UPI catering to lower ticket sizes while credit card target
(Rsm) (Nos.) more premium spends
1,50,00,000 8,000
ATS/transaction/month Credit Cards UPI
6,000
1,00,00,000
Mar-19 3,556 1,669
4,000
50,00,000 Mar-20 3,086 1,656
2,000 Mar-21 3,836 1,848
0 0 Mar-22 4,787 1,777
Mar-19 Mar-20 Mar-21 Mar-22 Oct-22
Oct-22 5,049 1,658
Credit Card Values UPI Values Credit Card volume (RHS) UPI Volumes (RHS)
CIF - Others gaining share, AMEX is back, HDFCB getting aggressive Credit card spends market share
Others American Express Others
American Express HDFC Bank Citi Bank 2% 8%
2% 13% 21% 4% HDFC Bank
Citi Bank
IndusInd Bank 29%
3%
IndusInd Bank 6%
3% RBL Bank
RBL Bank 4%
5% Kotak Mahindra
Kotak Mahindra Bank
Bank State Bank of India 3%
6% 19% Axis Bank
9%
Axis Bank ICICI Bank ICICI Bank State Bank of India
11% 17% 17% 18% 117
Source: RBI,Company, Anand Rathi Research
SBIC - Threat from substitutes - CC vs BNPL vs EMI card
Consumer point&ofsubstitutes
Credit card view Credit Cards BNPL EMI Cards
Repayment options Minimum amount due + interest No Cost EMI + interest on late payment No Cost EMIs
Use cases Almost everywhere (PoS, online, UPI) Select retailers (PoS, online) Partner stores across 3000+ cities
OTP based online, Tap-and-Pay, QR code scan- OTP based swipe & online
Process OTP based swipe & online, Tap-and-Pay
and-pay
Interest free period 50 days Subjective to product (can go up to 48 months) No interest, only fees
Interest cost Up to 48% Up to 24% No cost EMIs
Cashback, reward points, air miles, lounge
Benefits No such benefits No such benefits
access, etc.
Individuals older than 18 years with a Not mandatory to have credit history.
Eligibility Individual between the age of 21-65 years with a
regular income can apply. Credit rating is Individual between the age of 18-55 years can
regular income can apply. Credit rating is essential.
essential. apply.
• KYC documents • KYC documents
• Cancelled cheque • Bank account • Cancelled cheque
Documentation
• Passport size photograph • KYC documents • Passport size photograph
• Income proof, etc. • Signed ECS mandate
Source: RBI, Company, Anand Rathi Research 118

SBIC - Regulatory overhang
Discussion paper by RBI : The discussion paper regarding charges on payment & settlement systems released in Oct’22 indicates the regulator’s keenness on making it a level playing
field. While the increase in interest rates gets reflected in the form of a higher MDR, benefits of decrease in interest rates do not seem to be passed on to the merchants in the form of lower
MDR. Also, the fact that Indians prefer to pay their credit card dues ahead of time often, rather than waiting for the due date, does not get reflected in lower MDR or in their CIBIL score.
Current SBIC Credit Card
Merchant Category (Current Current Debit Card MDR Our interpretation on potential Credit Card MDR
Type of Infra MDR
Debit card MDR) (Regulated by RBI) (Based on discussion paper)
(Not regulated by RBI)
Not exceeding 0.40% + cost of funds + credit cost
Small merchants PoS Infra
Not exceeding 0.40% Average not exceeding 1.4% (with a cap per transaction)
(turnover of Rs 0-2 mn) (Including online)
(with no charges for small transactions)
QR based Not exceeding 0.30% Average not exceeding 1.4% (with a cap per transaction)
(with no charges for small transactions)
Other merchants PoS Infra Not exceeding 0.90% + cost of funds + credit cost
Not exceeding 0.90% Average not exceeding 1.4%
(turnover >Rs 2 mn) (Including online) (with a cap per transaction)
QR based Not exceeding 0.80% Average not exceeding 1.4%
(with a cap per transaction)
Regulator open to let NBFCs in credit card business; As per the “RBI Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022” NBFCs shall not
undertake credit card business without prior approval of the RBI which as per our interpretation is that they can issue credit cards independently if they secure the regulator’s nod. This hints
at the possibility of allowing NBFCs to undertake credit card business with a pre-requisite of having a minimum NOF of Rs 1 bn. This will pose as risk to the market share of SBIC paving the
way for increased competition including NBFCs.
Source: RBI, Company, Anand Rathi Research
119
SBIC – Yields decline on lower revolver share
Yields & NIMs on a downward trend Transactors and EMI eat into revolver’s share
22% 20.5% 100%
19.8% 19.4%
20% 19.1%
18.2% 17.8% 80%
17.4% 17.3%
18%
15.4% 15.4% 60%
16% 14.5% 14.3%
13.6% 13.0% 40%
14% 12.8%
12.1%
12% 20%
10% 0%
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Yield on Advances NIMs Revovlers EMIs Transactors RBI RE
Non-interest income to anchor earnings
Non
100% (Rsm) Cards spends will continue to grow robustly
60,00,000 80.0%
80%
50,00,000 60.0%
60% 40,00,000
40.0%
40% 30,00,000
20.0%
20,00,000
20%
10,00,000 0.0%
0% 0 -20.0%
FY18
FY19
FY20
FY21
FY22
FY23e
FY24e
FY25e
FY18
FY19
FY20
FY21
FY22
FY23e
FY24e
FY25e
Net Interest Income Fee income Others
Spends Growth (RHS)
Source: RBI, Company, Anand Rathi Research Source: RBI, Company, Anand Rathi Research 120
SBIC - Financial Review
Cost to income ratio increasing Break up of fee income
62% 60.5% 60.0% 100%
59.1% 59.4%
60% 80%
58% 56.7% 57.4% 56.3%
60%
56%
54% 40%
52.6%
52% 20%
50% 0%
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
Cost to income ratio Subscription based Spends based Instance based
Asset quality improves, PCR sufficient CRAR drops sharply in 2Q on high asset growth
6.0% 90.0% 28%
26.1%
80.0% 26% 24.8% 25.0% 24.7%
5.0% 24.2% 23.8%
70.0% 23.7% 23.2%
4.0% 60.0% 24%
50.0% 22%
3.0% 22.6%
40.0%
20% 21.8% 21.3% 21.5%
2.0% 30.0% 20.9% 21.0%
20.0% 19.8% 20.2%
1.0% 18%
10.0%
0.0% 0.0% 16%
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
GNPA NNPA PCR (RHS) CRAR Tier 1

Source: RBI, Company, Anand Rathi Research Source: RBI, Company, Anand Rathi Research 121
SBIC - Unit Economics
Unit economics:
We analyse the average profitability of an online spend on a SBIC credit card based on three case scenarios. Note that this calculation is only on online spend and the unit economics may vary
for any particular card. Also, the profitability analysis will be different for online plus offline spends.
Unit Economics Case 1 Case 2 Case 3 Case 4
Per spend No revolve 1 month revolve 2 month revolve EMIs
Interchange earned 1.40% 1.40% 1.40% 1.40%
Interest earned 0.00% 3.50% 7.00% 2.50%
Total Income 1.40% 4.90% 8.40% 3.90%
Average expenses 2.00% 2.00% 2.00% 2.00%
Cost of funds 0.25% 0.75% 1.25% 1.25%
Total Expenses 2.25% 2.75% 3.25% 3.25%
Operating profit margin -0.85% 2.15% 5.15% 0.65%
Key Assumptions:
-Interest charged on revolvers at 42% p.a.
-Interest charged on EMIs at 30% p.a.
-Interchange earned at 1.4% per spend.
-Average sales promotion, reward points redemption & card transaction charges at 2% per spend.
-Cost of funds at 0.5% per month & Spends in the middle of the month.
Source:Anand Rathi Research 122

SBIC - Financials
Interest income Cash and cash equivalents 7,201 11,064 26,743 35,016 33,012
49,467 48,660 62,742 82,311 106,178
Receivables 815 1,685 1,882 2,058 2,124
Interest expenses 10,434 10,273 17,263 22,770 29,717 Loans 234,591 301,873 419,294 537,815 711,333
Net Interest Income (NII) 39,033 38,387 45,478 59,542 76,460 Other financial assets 1,949 2,133 2,560 3,072 3,686
Growth % 10% -2% 18% 31% 28% Property plant and equipment 565 392 431 474 498
Non -interest income Intangible assets 897 1,164 1,397 1,676 1,928
47,669 64,355 88,210 111,034 148,894
Right-of-use Assets 1,620 2,839 2,980 3,129 3,286
Fee income 39,077 52,266 72,678 94,481 127,549 Other non Financial assets 8,338 9,623 4,342 4,194 5,600
Net Operating income 86,702 102,742 133,688 170,576 225,354 Total Assets 270,129 346,484 478,174 610,041 788,132
Operating expenses 47,079 58,462 80,647 105,036 141,830 Payables 8,927 11,277 16,211 16,780 24,968
PPOP Debt Securities 59,329 71,063 101,126 129,711 171,560
39,623 44,280 53,042 65,540 83,524
Borrowings 106,635 146,801 208,904 267,954 354,405
Provisions and contingencies 26,386 22,558 23,438 28,713 39,348 Subordinated Liabilities 12,983 11,960 17,020 21,831 28,874
PBT 13,237 21,722 29,604 36,827 44,176 Other financial liabilities 8,761 15,727 25,163 37,745 41,519
Effective tax rate 26% 26% 28% 27% 27% Provisions 4,097 4,774 3,819 3,896 4,090
Other non financial liabilities 6,376 7,355 8,091 8,657 9,090
Tax 3,392 5,560 8,350 9,786 12,135
Total Liabilities 207,108 268,957 380,333 486,572 634,506
PAT 9,845 16,161 21,254 27,040 32,041 Net worth 63,020 77,527 97,840 123,468 153,626
Growth % -21% 64% 32% 27% 18% Total Liabilities and Equity 270,129 346,484 478,174 610,041 788,132

SBIC - Key Ratios
NIM 16.1% 13.3% 11.5% 11.3% 11.2% Interest Income/Average Assets 18.9% 15.8% 15.2% 15.1% 15.2%
Non -interest income / total inc. 55.0% 62.6% 66.0% 65.1% 66.1%
Interest Expense/Average Assets 4.0% 3.3% 4.2% 4.2% 4.3%
Cost-income 53.6% 56.9% 60.3% 61.6% 62.9%
Net interest income/Average Assets 14.9% 12.5% 11.0% 10.9% 10.9%
Gross NPA 5.0% 2.2% 2.2% 2.0% 1.7%
Non interest income (excl trading gains) / assets 18.2% 20.9% 21.4% 20.4% 21.3%
Net NPA 1.2% 0.8% 0.7% 0.5% 0.4%
Operating expense/Average Assets 18.0% 19.0% 19.6% 19.3% 20.3%
Dividend payout 0.0% 14.6% 4.5% 5.3% 5.9%
Credit-total debt 131.1% 131.3% 128.2% 128.2% 128.2% -Employee Benefit expenses 1.9% 1.5% 1.5% 1.6% 1.6%
EPS(Rs) 10.5 17.2 22.4 28.5 33.7 -Sales promotion 5.3% 5.6% 5.8% 5.8% 6.3%
BV (Rs) 67.0 82.2 103.7 130.9 162.9 -Reward points redemption 1.5% 2.0% 2.1% 2.1% 2.2%
Adj. BV (RS) 64.1 79.6 100.7 127.9 159.5 -Card transaction charges 1.4% 1.5% 1.6% 1.6% 1.7%
CAR (%) 24.8% 23.8% 21.9% 21.8% 21.1% -Fees & commission expenses 2.3% 3.3% 3.4% 3.4% 3.6%
- Tier 1 20.9% 21.0% 19.9% 20.2% 19.9%
-Other Opex 5.6% 4.9% 5.1% 4.9% 5.0%
RoE 16.9% 23.0% 24.2% 24.4% 23.1%
Provision(Impairments)/Assets 10.1% 7.3% 5.7% 5.3% 5.6%
RoA 3.8% 5.2% 5.2% 5.0% 4.6%
ROAA 3.8% 5.2% 5.2% 5.0% 4.6%
P/E (x) 80.0 48.8 37.2 29.2 24.6
P/B (x) 12.5 10.2 8.1 6.4 5.1 Equity Multiplier 4.5 4.4 4.7 4.9 5.0
P/ABV (x) 13.1 10.5 8.3 6.5 5.2 ROAE 16.9% 23.0% 24.2% 24.4% 23.1%

0
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PB Chart
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SBIC - Price & band charts
Nov-21
Feb-22
Dec-21 Apr-22
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Jan-22 Jul-22
Aug-22
Feb-22
Oct-22
Mar-22 Nov-22
7.0x
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4.0x
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SBICARD
May-22
Jun-22
0
200
400
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Oct-22 Feb-21
Nov-22 Mar-21
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Aug-21
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PE Chart
Nov-21
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Feb-22
Mar-22
May-22
Jun-22
Aug-22
Sep-22
Nov-22
35.0x
15.0x
55.0x
75.0x
125
Appendix
Anand Rathi Research
Analyst Certification
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Anand Rathi Ratings Definitions
Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below:
Ratings Guide (12 months) Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%
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BFSI India I Equities

Sector Report 5 December, 2022

India – BFSI: Digitize or Die Sensex: 62869

Kaitav Shah, CFA | Research Analyst

Yuvraj Choudhary, CFA | Research Analyst

Sagar Rungta | Research Associate

All prices as on 2nd December, 2022

NBFC Snapshot Key Investment Arguments Key numbers(FY22-25) Key Risk

Source: Company, Anand Rathi Research

FY24 0.7 2.6 3.6 2.8 0.7 0.5

FY25 0.7 2.4 3.2 2.7 0.6 0.4

Source: Company, Anand Rathi Research

7,000 12,000 5,000 20,000

GST, CAR REGISTRATION, TAXATION CONSENT E-SAHAMATI AND ACCOUNT

NPCI, CREDIT/DEBIT CARD, CASHLESS PAPERLESS AADHAR-ENABLED EKYC, E-

OPEN CREDIT ENABLEMENT CREDIT E-COMMERCE OPEN NETWORK FOR DIGITAL

Source: Anand Rathi Research 12

COHORT 2 – CROSS BORDER

Source: RBI, Anand Rathi Research

$ billion 2021 2030

Wealth Tech (AUM) 20 237

Neo Banking(AUM) 40 215

$21 bn digital • $500 bn AUM

$18bn reduction product launch

Active Loans –Lender wise (as of Mar'21)

Sensitivity of Analysis of TAM with a decrease in ticket sizes

35,000 1,313 1,750 2,188 2,625 3,063

Source: Company, Anand Rathi Research 18

NBFCs operate in a different league Originations in Volume Originations in Value

3.5 80% 80%

Upto 30 days 31-60 days 61-90 days

Sensitivity Analysis; Increase in TAM due to higher frequency of loan

Source : Company, Anand Rathi Research 22

Online Shopping 73%

Food Delivery 28% Multiple times a month 46%

eHealth 15% Forget Sometimes 17%

Source :Reedseer, Anand Rathi Research 23

NBFC - Analysis of Digital Loans Bank – Analysis of Digital Loans

Source: RBI, Anand Rathi Research 24

INDIA -CREDIT DEMAND IS BUT THERE ARE BIG

Private Consumption per Capita($)

Private Consumption per Capita Growth(5 yr CAGR)

Credit penetration – strong potential No. of Consumers (mn)

Source: Transunion, Anand Rathi Research 29

Relative Rank of Top BFSI Apps

Online BOB world 67 67 133 126

shoppers – YoNO 30 29 134 128

 Customers either NBFCs, Depositors or Borrowers had to adhere to the

 Financial inclusion was a distant dream, except in the last decade.

 The digital superhighway built in the last 8 years has however

NBFCs Customer Fintechs

 This will lead to  Organizations that put Customer

Advances maturing in more than 1 yr Advances maturing in less than 6 months

Borrowings maturing in 1 yr Borrowings maturing in 6 months

Intangibles Outstanding related to Technology(Rs m)

Source: Company, Anand Rathi Research

Intangibles as % of Gross Assets (bps) Intangibles as % of PPOP

PCR on Stage 2 PCR on Stage 3

Source: Bloomberg, Anand Rathi Research

Mar-22 BAF vs SBIC -BAF trades at a premium Apr-20

Source: Bloomberg, Anand Rathi Research

Key data BAF IN

Source: Company, Anand Rathi Research 53

 Product innovation coupled with Network and Technology create