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PCG RESEARCH INVESTMENT IDEA 18 Mar 2017
ICICI Prudential Life Insurance Co. Ltd.
Private Client Group - PCG RESEARCH P a g e | 1
Industry CMP Recommendation Add on Dips to band Target Time Horizon
Life Insurance 371 BUY ON DECLINES 355-335 394-428 6 - 8 QUARTERS
HDFC Scrip Code ICIPRUE
BSE Code 540133
NSE Code ICICIPRULI
Bloomberg IPRU
CMP as on 17 Mar 17 371
Equity Capital (Rs Cr) 1435.3
Face Value (Rs) 10
Equity O/S (Cr) 143.5
Market Cap (Rs Cr) 53,171.6
Book Value (Rs) 37.16
Avg. 52 Week Volumes
2563757
52 Week High 377
52 Week Low 273
Shareholding Pattern (%)
Promoters 80.7
Institutions 7.6
Non Institutions 11.7
PCG Risk Rating* Yellow * Refer Rating explanation
Nisha Sankhala [email protected]
ICICI Prudential Life Insurance Company Ltd. (ICICI Prudential Life) is a joint venture between
ICICI Bank Ltd., one of India's largest private sector banks and Prudential Corporation Holdings
Limited.
ICICI Prudential Life began its operations in fiscal year 2001 and has consistently been the market
leader amongst private players in the Indian life insurance sector. The Company offer a range of
life insurance, health insurance and pension products and services to its customers. Every fiscal
year since fiscal 2002, it have consistently generated the most new business premiums on a retail
weighted received premium basis among all private sector life insurers in India.
We recommend ICICI Pru buy between 355-335 for the targets of 394-428 for the time period of 2
years.
INVESTMENT RATIONALE:
The penetration of insurance in the market is very low compared to other emerging economies. India presents
immense opportunities to expand the life insurance business given the vast untapped potential, favorable
demographics, rising prosperity, rising household income and the increasing awareness of the need for
financial protection.
Growth rate of total premium written by the insurance industry has outpaced the GDP growth rate over the
period of FY2002-FY2016. Going forward also we believe the trend will continue and Insurance industry has a
whole will have tremendous change and ICICI Pru is in best place to augur benefit.
ICICI Pru has consistent leadership in the private life industry with strong brand name. In terms of RWRP
market share of company was around 11.3% in FY16 which increased to 13% in 9MFY2017. It has leveraged
the strong and established brands “ICICI Bank” and “Prudential”, to build “ICICI Prudential” into a recognized
and trusted brand in its own right.
ICICI Pru has Experienced Senior Management Team which helps the company make timely strategic and
business decisions in response to evolving customer needs and market conditions. Company’s CEO, Mr.
Sandeep Bakhshi has been with the Company for over five years and carries 32 years of experience in the
finance sector.
The Company has Strong Financials and Healthy Balance Sheet. Its persistency ratio & solvency ratio are top
among the other players. Expense ratio is also very low with declining trend. ROE and Dividend payout ratio of
the company are also attractive.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 2
ICICI Pru has diversified Multi-channel Distribution Network. They offer products and services through the
branches of bank partners, individual agents, corporate agents, employees, offices and website.
The Company has entered into a bancassurance relationship with ICICI Bank, Standard Chartered Bank,
Capital Small Finance Bank Limited etc. The annualized premium equivalent through bancassurance was
29.64bn in fiscal 2016, which constituted 58.6% of company’s retail annualized premium equivalent.
The company has adopted strategies like Expanding protection business, improving customer retention,
maintaining market-leading cost efficiency etc. to generate new business premium at high level of growth.
About the IPO:
In September, 2016 the Company came out with the Initial Public Offering (IPO) of Rs 5440.23 - 6056.79 Cr.
The issue was priced in a band of Rs300-Rs334 per share. Promoters - ICICI Bank had proposed to offer
181341058 equity shares of the company to the public by way of an IPO. Hence there was not any change in
the shareholders’ funds of the Company.
RISK & CONCERNS:
1. High Competition: Insurance industry is becoming highly competitive with 52 players operating in the
industry. Companies are competing on price and also using low price and high returns strategy for
customers to lure them.
2. Regulatory Hurdles: Changing laws, rules and regulations and legal uncertainties may adversely affect
the business and financial performance of the company.
3. Dependence on Bancassurance partners: The Company has entered into the agreement with ICICI
Bank, Standard Chartered Bank and Capital Small Finance Bank Limited for selling its Products. Which
constituted 58.6% of company’s retail annualized premium equivalent so company is heavily dependent
on the Bancassurance partners.
4. Investment Risk: Company’s ULIP product heavily depend upon the performance of capital market so
any major down fall in the equity market will lead to negative impact on Company’s fund under
management and also profitability.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 3
VIEW & VALUATION:
Embedded Value FY17 FY18 FY19
Total Shareholder's Fund 5998 7168 8733
Net Profit 1896 2461 2939
Present Value of Net Profit 2743 2238 2429
Embedded Value 8741 12148 16143 Source: Company, HDFC sec Research
The embedded value of ICICI Prudential in FY19 stood at Rs.16.1bn which gives per share value of 115. If we
value with the multiple of 3.5x the Fair value of the company arrives at 394 and giving it multiple of 3.8x
derives target value at 428.
Assumptions:
Cost of capital has been taken as 10%.
We expect the PAT will have a compounded annual growth of 25% in FY17-19.
We assumed that the new business will have 27% CAGR in FY17-19.
We have taken 2 multiples (3.5x and 3.8x) for price targets till FY19.
The Insurance Industry of India has been under penetrated compared to other emerging markets so India
presents immense opportunities to expand the life insurance business given the vast untapped potential,
favorable demographics, rising prosperity, rising household income and the increasing awareness of the need
for financial protection. At Company level also ICICI Pru has market leadership, strong financial position and
Diversified Multi-channel Distribution Network. The company has also adopted strategies like Expanding
protection business, improving customer retention, maintaining market-leading cost efficiency etc. to
generate new business at high level of growth.
The valuation of the Company has improved recently but looking at the future potential of the Company it
seems well justified. We recommend ICICI Pru buy between 355-335 for the targets of 394-428 for the time
period of 2 years.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 4
BUSINESS BACKGROUND:
ICICI Prudential Life Insurance Company Ltd. (ICICI Prudential Life) is a joint venture between ICICI Bank
Ltd., one of India's largest private sector banks, and Prudential Corporation Holdings Limited.
ICICI Prudential Life began its operations in fiscal year 2001 and has consistently been the market leader
amongst private players in the Indian life insurance sector. The Company offer a range of life insurance,
health insurance and pension products and services to its customers. Every fiscal year since fiscal 2002, it
have consistently generated the most new business premiums on a retail weighted received premium basis
among all private sector life insurers in India.
The Company also has a wholly owned subsidiary, ICICI Prudential Pension Funds Management Company
Limited, which is registered as a fund manager with the Pensions Fund Regulatory and Development
Authority of India.
ICICI Prudential Life has an extensive multi-channel sales network across India including through the
branches of bank partners, individual agents, corporate agents, employees, offices and website.
ICICI Prudential Life is the first private life insurer to attain assets under management of 1 trillion and In-
force sum assured of over 3 trillion. ICICI Prudential Life is also the first insurance company in India to be
listed on NSE and BSE.
Shares Holding pattern of ICICI Prudential Life (as on Dec 2016)
Share Holder Share Holding %
Promoter group 80.7
ICICI Bank 54.9
Prudential Corporation Holdings 25.8
Institutions 7.6
MF 2.8
FPI 4.6
Non-institutions 11.7
Azim Premji 4
Compass Value Investments 2
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 5
INDUSTRY OVERVIEW:
The size of the Indian life insurance sector was ~ 3.7 trillion on a total premium basis in FY16, making it the
10th largest life insurance market in the world and the 5th largest in Asia. The total premium in the Indian life
insurance sector grew at a CAGR of approximately 17% between FY01 and FY16. Despite this, India
continues to be an underpenetrated insurance market with a life insurance penetration of 2.7% in fiscal
2015, as compared to other part of the world. At $43 in fiscal 2015, the insurance density in India also
remains very low as compared to other developed and emerging market economies. According to Swiss Re,
Economic Research & Consulting “Mortality Protection Gap Asia-Pacific 2015”, the Protection Gap for India
was approximately US$8.5 trillion as of December 31, 2014, which was much higher compared to its Asian
counterparts.
Government has recently announced its plans to divest USD1.63 billion worth of stake in PSU general
insurance companies to execute the steep disinvestment target of USD10.78 billion, in FY17.
Oriental Insurance Company, National Insurance Company, New India Assurance, United India Insurance and
national reinsurer General Insurance Corporation of India, or GIC Re, are the five companies that will be
listed on stock exchanges. This will attract more investors in the insurance sector.
Premium as a % GDP as of FY15
Source: Company, HDFC sec Research
Insurance Density (Prem. Per Capita (in$)) as of FY15
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 6
The Indian life insurance sector was opened for private companies in 2000, which witnessed the
commencement of operations by four private companies in the first year itself and 22 companies between
2000 and 2010. As of March 31, 2016, there are a total of 24 companies in the Indian life insurance sector
with Life Insurance Corporation being the only public sector life insurer. The private sector has grown
significantly since 2000 and it accounted for 51.5% of the life insurance sector, on an RWRP basis, in fiscal
2016. Historically, life insurance products were savings oriented. However, since 2000, there was a shift from
largely tax savings-based par sales to multiple products.
New Business:
Growth FY13 FY14 FY15 FY16 9MFY17
Private 1.9% -3.4% 15.9% 13.6% 22.7%
LIC -4.1% -3.4% -26.3% 2.9% 16.6%
Industry -1.9% -3.4% -10.3% 8.1% 19.8%
Evolution of life insurance industry in India:
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 7
INVESTMENT RATIONALE:
Favorable demography to drive macro growth
As we see above, India has huge Insurance market but the penetration in the market is very low compared
to other emerging economies. India presents immense opportunities to expand the life insurance business
given the vast untapped potential, favorable demographics, rising prosperity, rising household income and
the increasing awareness of the need for financial protection.
Growth rate of total premium written by the insurance industry has outpaced the GDP growth rate over the
period of FY2002-FY2016. Going forward also we believe the trend will continue and Insurance industry has a
whole will have tremendous change and ICICI Pru is in best place to augur benefit.
Consistent Leadership in the Industry with Strong Brand name
ICICI Pru has consistently generated the most new business premiums on a retail weighted received
premium basis among all private sector life insurers in India for every year since fiscal 2002. Its market
share, on a retail weighted received premium basis, in the Indian life insurance sector increased from 5.9%
in fiscal 2012 to 11.3% in fiscal 2016 and its market share among the 23 private sector life insurance
companies in India has also increased from 16.1% to 21.9% in the same period. From fiscal 2012 to fiscal
2016, its retail weighted received premium grew at a CAGR of 15.2% compared to a CAGR of 6.7% in the
private sector and a decline of 2.1% per annum in the overall Indian life insurance sector for the same
period.
ICICI Pru’s has leveraged the strong and established brands of its Company’s shareholders, “ICICI Bank” and
“Prudential”, to build “ICICI Prudential” into a recognized and trusted brand in its own right. The brand has
been ranked as one of the best brands in the insurance category as per “BrandZ Top 50 Most Valuable Indian
Brands” in 2014 and 2015, a study published by WPP and conducted by Millward Brown.
ICICI Pru a market leader in private market
Market Share FY2012 FY2013 FY2014 FY2015 FY2016 9MFY2017
LIC 64% 62% 62% 51% 49% 47%
ICICI Prudential 6% 7% 7% 11% 11% 13%
SBI Life 4% 5% 6% 8% 10% 11%
HDFC Life 6% 7% 5% 7% 8% 6%
Max Life 3% 3% 4% 5% 5% 5%
PNB Met Life 1% 1% 1% 2% 2% 2%
Bajaj Allianz 3% 3% 2% 2% 2% 2%
(RWRP basis Source: Company, HDFC sec Research)
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 8
Experienced Senior Management Team
The company has a management team with extensive experience and know-how in the Indian Life insurance
industry. Company’s CEO, Mr. Sandeep Bakhshi has been with the Company for over five years. He joined
ICICI Group in 1986 in the project financing group of ICICI Limited. He has over 32 years of experience in
the banking, financial services and insurance sector.
28 of the top 36 members of the management team have worked within the ICICI Group for over 10 years
and have an average work experience of 20 years. Senior managerial personnel in the actuary, investment,
underwriting and claims department have an average functional experience of over 16 years. The
management’s experience will help the company make timely strategic and business decisions in response to
evolving customer needs and market conditions.
Strong Financials Healthy Balance Sheet
The Company has strong balance sheet with an excellent capital positioning, which leads solvency ratio
to 320.0% compared to the IRDAI-prescribed control level of 150.0%.
ICICI Pru has delivered consistence return to its shares holders. Since 2012 ROE of the company has
remain above 30%. It also has decent track record of distributing income in terms of dividend to its
shareholders. Its dividend payout ratio stood at 64.52%
The 13th month persistency ratio, which has been increasing in recent years, has reached to 82.4% in
FY16, one of the highest in the Indian life insurance sector. Likewise 49th month persistency ratio, at
62.2% in FY16, was also one of the highest in the Indian life insurance sector.
The ratio of cost to total weighted received premium, which is used to monitor expenses, declined from
17.9% in fiscal 2012 to 14.6% in fiscal 2016.
As on June 30, 2016, the company had 1.14 trillion of AUM, which is one of the largest insurance AUM
in India. Of these, 72.0% were in linked assets. Funds representing linked assets with identified
benchmarks had performed better than their respective benchmarks since inception.
Total gross premium collected by the Company grew 25.2% from 153.07 bn in FY2015 to 191.64 bn in
FY2016. Total expenses increased to 25.45 bn in FY2016 as compared to 22.58 bn in FY2015. While
the Profit after tax for the Company stood at 16.50 bn in FY2016 compared to 16.34 bn in FY2015.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 9
Diversified Multi-channel Distribution Network
The Company has diversified Multi-channel Distribution Network. They offer products and services through
the branches of bank partners, individual agents, corporate agents, employees, offices and website. The
company has one of the largest agency channels among private sector life insurance companies in India in
terms of premium, with 121,016 individual agents at March 31, 2016. And as of July, 2016, bank partners
had over 4,500 branches.
While talking about Direct Sales (through Employees, Offices and Websites) the growth reported CAGR of
52.8% between FY 14-16 and accounted 10% of retail annualized premium equivalent in fiscal 2016.
Strong Bancassurance Network: ICICI Pru has leverage the extensive and growing branch network of
partner banks to reach a growing number of customers and geographies. The Company has entered into a
bancassurance relationship with ICICI Bank, Standard Chartered Bank, Capital Small Finance Bank Limited
etc. The annualized premium equivalent through bancassurance was 29.64bn in fiscal 2016, which
constituted 58.6% of company’s retail annualized premium equivalent.
Focus on improving new business
ICICI Pru has consistently generated the most new business premiums on a retail weighted received
premium basis among all private sector life insurers in India for every year since fiscal 2002. And going
further also company has adopted strategies like Expanding protection business, improving customer
retention, maintaining market-leading cost efficiency etc. to generate new business at high level of growth.
ULIPS will remain growth driver
The household saving in the country has been continuously increasing and along with that the awareness
among the people for the financial planning has also been increased. This has lead the growth of ULIP
business. The AUM Size of the company at the end of 9MFY2017 stood at 1136.11 bn. Fund performance of
ICICI Pru has also remain high among the other players.
The focus of the people has been changed from Gold and Real estate to new investment avenues because of
recent demonetization drive of Government. So huge capital inflow is expected in the ULIP schemes.
ICICI Prudential Life has focused more on ULIPs than all other large peers. ULIPs comprised 80.8% of its
FY2016 APE as compared 25-50% for peers. This is the key driver of growth for ICICI Prudential Life. But
ULIPS have low margins as compared to protection business. So focusing on pure life protection business is
necessary for the high profitability of the company.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 10
Channel Mix - Retail Business
Source: Company, HDFC sec Research
Growth in Net Premium Income
Source: Company, HDFC sec Research
Product Mix of New Business Premium FY16
Source: Company, HDFC sec Research
Group Insurance still at nascent stage
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 11
Persistency Ratio of ICICI Pru FY14 FY15 FY16 9MFY17
13th Month 72% 79% 82% 83%
25th Month 68% 66% 71% 73%
37th Month 57% 64% 62% 64%
49th Month 20% 54% 62% 61%
61st Month 13% 15% 46% 65%
Cost Efficiency of ICICI Pru FY14 FY15 FY16 9MFY17
Expense ratio 13.6% 11.6% 11.0% 12.2%
Commission ratio 5.2% 3.8% 3.5% 3.7%
Cost/TWRP 18.8% 15.4% 14.5% 15.9%
Cost/ Average AUM 2.9% 2.5% 2.5% 2.7%
Source: Company, HDFC sec Research
PBT and margin trend…
Source: Company, HDFC sec Research
PAT to have 16% CAGR growth in FY15-19
1634 16531896
2461
2939
FY15 FY16 FY17E FY18E FY19E
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 12
Policy Holder’s Account/ Technical Account
(Rs Cr) FY15 FY16 FY17E FY18E FY19E
Net Premium Income 15160 18999 21761 25689 30707
Growth% 23 25 7 8 5
Income from Investments 18739 1208 1426 1540 1679
Growth% 103 -94 18 8 9
Other income 18 21 20 25 27
Total Income 33956 20228 23207 27254 32413
Commission 553 620 732 936 1199
Operating expenses 1968 2253 2591 3109 3792
Benefits paid (Net) 12248 12406 14267 16407 19278
Interim bonus paid 12 19 19 19 19
Change in valuation of policy liabilities 17956 3515 4043 4649 5486
Provision for taxation -51 -70 -50 -50 -80
Balance being funds for future appropriation 31 134 50 50 80
Transfer to Shareholders' A/C 1137 1210 1456 2034 2479
Source: Company, HDFC sec Research
Shares Holders Account
(Rs Cr) FY15 FY16 FY17E FY18E FY19E
Amounts transferred from
Technical A/C 1137 1210 1456 2034 2479
Income from investments 536 602 662 742 816
Revenue From
Operations(Net) 1673 1812 2118 2775 3294
Other income 1 0 0 0 0
Total Income 1674 1812 2118 2775 3294
Growth % 1 8 17 31 19
Total Expenses 90 38 80 100 100
PBT 1584 1774 2038 2675 3194
Growth % 4 12 15 31 19
Margin % 95 98 96 96 97
Tax Expenses -50 121 143 214 256
PAT 1634 1653 1896 2461 2939
Growth % 4 1 15 30 19
EPS 11 12 13 17 21
BV 37 37 42 50 61
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 13
Balance Sheet
As at March FY15 FY16 FY17E FY18E FY19E
SOURCE OF FUNDS
Share Capital 1431.7 1432.3 1432.3 1432.3 1432.3
Reserves 3431 3640 4315 5555 7201
Fair value change account 403 251 250 180 100
Shareholders' Funds 5265.5 5323.3 5997.5 7167.7 8733.4
Total Policy holder's Fund 93265.7 96578.4 104196.1 109347.4 115844.5
Funds for Future Appropriations 527.5 661.9 600.0 500.0 420.0
Total Source of Funds 99059 102564 110794 117015 124998
APPLICATION OF FUNDS
Investments 99491 103024 111158 117396 125294
Shareholders’ 5855.2 6212.4 6709.4 7246.1 7680.9
Policyholders’ 18858.0 21515.6 25388.4 27927.3 31278.5
Asset held to cover linked liabilities 74777.5 75295.8 79060.6 82223.0 86334.2
Loan 20.0 44.3 50.0 50.0 50.0
Fixed Assets 215 220 231 235 242
Total Current Assets 1489 1477 1614 1667 1831
Total Current Liabilities 2154.9 2201.3 2259.7 2333.1 2418.6
Net Current Assets -666.1 -724.0 -645.3 -666.5 -587.9
Debit Balance in P & L Account 19.1 44.2 50.0 50.0 50.0
Total Application of Funds 99059 102564 110794 117015 124998
Source: Company, HDFC sec Research
Key Ratio %
(Rs Cr) FY15 FY16 FY17E FY18E FY19E
PROFITABILITY
PBT Margin 94.7 97.9 96.2 96.4 97.0
APAT Margin 97.7 91.2 89.5 88.7 89.2
NBV growth 28.7 29.4 42.5 25.3 28.5
RoE 31.9 31.2 33.5 37.4 37.0
PER SHARE DATA
EPS 11.4 11.5 13.2 17.2 20.5
BV 36.8 37.2 41.9 50.0 61.0
Dividend 5.8 8.4 8.5 8.5 9.0
VALUATION
P/E 32.4 32.1 28.0 21.5 18.0
P/BV 10.1 10.0 8.8 7.4 6.1
Dividend Yield (%) 1.6 2.3 2.3 2.3 2.4
Source: Company, HDFC sec Research
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 14
Rating Chart
R E T U R N
HIGH
MEDIUM
LOW
LOW MEDIUM HIGH
RISK
Ratings Explanation:
RATING Risk - Return BEAR CASE BASE CASE BULL CASE
BLUE LOW RISK - LOW RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 20% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 15%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 15%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 20% OR
MORE
YELLOW MEDIUM RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 35% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 20%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 35% OR
MORE
RED HIGH RISK - HIGH RETURN STOCKS
IF RISKS MANIFEST PRICE CAN FALL 50% OR MORE
IF RISKS MANIFEST PRICE CAN FALL 30%
& IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 30%
IF INVESTMENT RATIONALE
FRUCTFIES PRICE CAN RISE BY 50%
OR MORE
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 15
Rating Definition:
Buy: Stock is expected to gain by 10% or more in the next 1 Year. Sell: Stock is expected to decline by 10% or more in the next 1 Year.
PCG RESEARCH
Private Client Group - PCG RESEARCH P a g e | 16
I, Nisha Sankhala, MBA, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or her relative or HDFC Securities Ltd. or its associate does have material conflict of interest. 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