FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT - Please refer to the final pages of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as research analysts with FINRA (v1.0.5.2)

MARKET UPDATE

India | Financials | Large Cap | 25-June-2014

HDFC Limited

Best diversified play; reiterate BUY

HDFC has underperformed the Bankex by 7% since Mar-2014 on

concerns over increasing competition and investors shifting into

cyclicals, and now trades at multi-year low valuation on its core

book despite performing strongly. In our opinion if the housing

market were to improve the company will benefit significantly given

its competitive advantage. Over the past three years, the company’s

subsidiaries have strengthened their market positioning, gained

market share and improved return ratios. HDFC Limited is holding

company for some of the best managed financial institutions in India

(banking, mortgage, life insurance, asset management, non-life

insurance). We re-iterate BUY with a revised fair value of Rs1,200.

Trading at historically low multiples despite strong performance

HDFC Limited has been one of the biggest underperformers over the past

three months given investors’ concerns on a) the competitive environment, b)

lower growth in profit and c) stress in real estate. Although the company grew

its loan book 16%YoY, had stable margins and strong credit quality, HDFC’s

focus on the retail segment against a backdrop of macroeconomic

sluggishness meant its growth in standalone profit was subdued at 12% for the

full year.

Uptick in economy will also benefit HDFC

If the economic environment were to improve and the government were to

act on its election promise of 100 new cities then the housing market should

receive a boost. In such a scenario HDFC will benefit disproportionately given

HDFC enjoys competitive advantages on account of its low cost of funds, low

operating costs and strong underwriting. This has enabled the company to

remain competitive in a commodity-like mortgage segment, growing c.20%

YoY with return ratios (RoEs) of more than 25%. Moreover, the company has

pricing power in the corporate segment where competitive intensity is low

and it charges lower interest rates compared to its competition.

Subsidiaries have strengthened their market positioning

Each of HDFC’s subsidiaries have gained market share and improved return

ratios in the last five years despite a slowdown in the economy and regulatory

intervention in their respective segments (Life Insurance and Asset

management). The subsidiaries have gained on account of a) cost efficient

distribution channel (HDFC Bank), b) strong HDFC brand, c) strong focus on

costs and d) strong parent balance sheet.

Valuation – strong compounding story

HDFC’s core mortgage book is trading at 2.7x FY16E book value, close to its

lowest valuation in the past four years. We have valued the mortgage business

at 4.0xFY16E BV which we believe is justified given its high growth visibility

and return ratios. We have increased our FV on HDFC from Rs1,000 to

Rs1,200 as a) we increase valuation for mortgage business (58% of valuation)

from Rs567 to Rs693 on account of reducing our CoE assumption by 100bps

to 13%, b) stake in HDFC Bank is now valued at Rs340 vs. Rs297 previously as

our banking team increased their FV, c) life, general insurance & asset

management now valued at Rs71, Rs19, Rs32 versus Rs61, Rs14 and Rs27

previously as we tweak our estimates and roll-over to FY16.

Accounting & corporate governance GREEN

Franchise Strength GREEN

Earnings Momentum GREEN

BUY 23% upside

Fair Value Rs1,200.00

Bloomberg ticker HDFC IN

Share Price Rs975.00

Market Capitalisation Rs1,519,196.00m

Free Float 100%

INR m Y/E 31-Mar 2013A 2014A 2015E 2016E

Total Income 72,567 81,683 95,732 112,167

Operating expenses 5,153 5,962 6,936 7,775

Operating Profit 67,414 75,721 88,796 104,392

Profit before Tax 65,728 74,402 86,760 102,041

Profit after Tax 48,483 54,402 63,334 74,490

EPS 31.6 35.4 41.2 48.5

Loan Book 1,700,462 1,971,000 2,322,235 2,760,043

Y/E 31-Mar 2013A 2014A 2015E 2016E

Core P/E 19.2 16.3 13.2 11.1

Core P/BV 4.3 3.8 3.2 2.7

Core ROA 2.5% 2.5% 2.5% 2.5%

Core ROE 29.3% 25.8% 26.3% 26.7%

Dividend Yield 1.3% 1.4% 1.7% 2.0%

All share price data as at close on 20-Jun-2014

Source: Espirito Santo Investment Bank Research, Company

Data, Bloomberg

70

80

90

100

110

120

Jul 2013

Aug 2013

Sep 2013

Oct 2013

Nov 2013

Dec 2013

Jan 2014

Feb 2014

Mar 2014

Apr 2014

May 2014

Jun 2014

HDFC IN vs BSE500 Index

Share Price Performance

Analysts Santosh Singh, CFA +91 22 43156822 santosh.singh@espiritosantoib.co.in Espirito Santo Securities India Private Limited Nidhesh Jain +91 22 4315 6823 nidhesh.jain@espiritosantoib.co.in Espirito Santo Securities India Private Limited

Page 2 of 13

Source: Espirito Santo Investment Bank Research, Company Data, Bloomberg

Valuation Metrics 2013 2014 2015E 2016E 2017E

Recommendation: BUY Core P/E 19.2 16.3 13.2 11.1 9.2

Fair Value: INR 1200 Core P/BV 4.3 3.8 3.2 2.7 2.3

Core ROA 2.5% 2.5% 2.5% 2.5% 2.6%

Share Price: INR 975 Core ROE 29% 26% 26% 27% 27%

Upside / Downside 23% Dividend Yield 1.3% 1.4% 1.7% 2.0% 2.3%

3 Month ADV ($m) 35 Standalone BVPS 163 180 202 228 259

Free Float 100% Core Mortgage BVPS 108 124 146 171 202

52 Week High / Low 532-931

Bloomberg: HDFC IN Equity Implied Valuation Ratios 2013 2014 2015E 2016E 2017E

Model Published On: 25 June 2014 P/E 28.3 24.1 19.5 16.4 13.5

P/BV 6.4 5.6 4.8 4.0 3.4

Shares In Issue (mm) 1,558

Market Cap ($bn / Rs bn) $25 bn/Rs.1519bn P&L Summary 2013 2014 2015E 2016E 2017E

FII holding 76% Net Interest Income 59,275 66,656 78,905 93,456 111,146

Fee Income 2,413 2,952 3,513 4,215 5,058

Other Income 10,879 12,075 13,314 14,496 15,788

Total Income 72,567 81,683 95,732 112,167 131,993

Operating expenses 5,153 5,962 6,936 7,775 8,649

Operating Costs 2,691 3,170 3,702 4,074 4,456

Employee Costs 2,462 2,792 3,235 3,700 4,193

Operating profit 67,414 75,721 88,796 104,392 123,344

Provisions 1,450 1,000 1,717 2,033 2,422

Espirito Santo Securities Analyst Profit after provisions 65,964 74,721 87,078 102,359 120,922

Santosh Singh, CFA Depreciation 236 319 319 319 319

(91) 22 43156822 PBT 65,728 74,402 86,760 102,041 120,603

santosh.singh@espiritosantoib.co.in Less:Tax (17,245) (20,000) (23,425) (27,551) (32,563)

Nidhesh Jain PAT 48,483 54,402 63,334 74,490 88,040

(91) 22 43156823 EPS 32 35 41 48 57

nidhesh.jain@espiritosantoib.co.in

Balance Sheet Summary 2013 2014 2015E 2016E 2017E

Shareholding Pattern (Mar'14)

Equity 3,093 3,121 3,121 3,121 3,121

Reserves and Surplus 246,907 273,310 307,257 347,184 394,373

Networth 250,000 276,431 310,378 350,305 397,494

Borrowings 1,588,281 1,842,980 2,163,057 2,563,869 3,055,248

Total Sources of funds 1,838,281 2,119,411 2,473,436 2,914,173 3,452,742

Loan Book 1,700,462 1,971,000 2,322,235 2,760,043 3,295,535

Investments 136,135 139,127 141,907 144,827 147,893

Fixed Assets 2,379 2,805 2,805 2,805 2,805

Other Assets 6,314 6,299 6,299 6,299 6,299

Net working Capital (7,008) 181 190 200 210

Total Application of funds 1,838,281 2,119,411 2,473,436 2,914,173 3,452,742

Key Ratios 2013 2014 2015E 2016E 2017E

Loan Book Growth Yield on Loans 12.2% 11.9% 11.7% 11.6% 11.6%

Cost of funds 9.3% 9.3% 9.1% 9.0% 9.0%

Spread 2.9% 2.6% 2.6% 2.6% 2.6%

NIM 3.8% 3.6% 3.7% 3.7% 3.7%

Gross NPAs 0.7% 0.7% 0.7% 0.7% 0.7%

Net NPAs 0.0% 0.0% 0.0% 0.0% 0.0%

Capital Ratios 2013 2014 2015E 2016E 2017E

CAR 16% 18% 17% 17% 16%

Tier 1 CAR 14% 15% 14% 14% 14%

Asset/Equity (x) 7.4 7.7 8.0 8.3 8.7

Efficiency Ratios 2013 2014 2015E 2016E 2017E

RoE & RoA Trends Fee Income/Total Income 3% 4% 4% 4% 4%

Cost/Total Income 7% 7% 7% 7% 7%

Cost/Average Assets 0.3% 0.3% 0.3% 0.3% 0.3%

Growth Ratios 2013 2014 2015E 2016E 2017E

Loan Book 21% 16% 18% 19% 19%

NII 19% 12% 18% 18% 19%

PAT 18% 12% 16% 18% 18%

HDFC

Promoter

0%

FII

76%

DII

12%

Others

12%

-

500

1,000

1,500

2,000

2,500

3,000

FY13A FY14A FY15E FY16E

Rs. b

n

0%

5%

10%

15%

20%

25%

30%

35%

FY13A FY14A FY15E FY16E

RoA RoE

Page 3 of 13

HDFC has underperformed in the past two years

HDFC Limited has seen a de-rating in the past three years post the conversion

of call option by NCD holders in August 2012 and is now trading one standard

deviation below its historical mean. The company also was one of the biggest

underperformers among financials post 31-Mar-2014 (up 9% vs Bankex 18%). In

our opinion, the reasons for this underperformance are

Concerns on increasing competitive intensity: Over the past two years

PSU banks have started focusing on retail loans, especially housing loans

as growth avenues from other sectors were bleak. Moreover, the removal

of pre-payment penalties by the regulator in October 2011 further

increased the expectation of pressure on spreads.

Reported profitability growth declined: HDFC Limited’s reported

standalone PAT growth declined from > 20% in FY10 and FY11 to 12% in

FY14 (see figure 2).

Stress in the real estate sector: The weak macro economy had an impact

on the real estate sector, with players across the sector weighed down

(LINK) and multiple instances of defaults by developers including Hirco

PLC, Orbit Corp were mentioned in the media. HDFC Limited had

exposure to Hirco which it was able to recover in Q4FY14.

Figure 1 HDFC Limited has de-rated in the past three years Figure 2 Standalone PAT growth declined in last three years

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data

Figure 3 HDFC Limited remained one of the biggest underperformers since Jan2013

Since 15-May-14 Since 01-Jan-13 Since 31-Mar-14

Absolute

performance

Relative to

Bankex

Absolute

performance

Relative to

Bankex

Absolute

performance

Relative to

Bankex

Mahindra Finance 10% 4% 21% 15% 8% -8%

HDFC Limited 7% 1% 16% 10% 9% -7%

Sundaram Finance 22% 15% 76% 67% 38% 17%

Rural Electrification 26% 20% 37% 30% 50% 27%

Shriram Transport Finance 6% 0% 14% 8% 13% -4%

Power Finance 27% 21% 44% 37% 55% 31%

LIC Housing 7% 2% 7% 2% 36% 15%

Bajaj Finance 19% 13% 56% 48% 15% -2%

IDFC 6% 1% -26% -30% 5% -11%

BANKEX 6% 18% 18%

Source: Espirito Santo Investment Bank Research, Company Data

1.0

2.0

3.0

4.0

5.0

6.0

7.0

3/0

6

3/0

7

3/0

8

3/0

9

3/10

3/11

3/12

3/13

3/14

PB Std Dev(-2) Std Dev(-1)

Mean Std Dev(+1) Std Dev(+2)

24%25%

17%18%

12%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012 2013 2014

Sta

nd

alo

ne

PA

T g

row

th

Page 4 of 13

Concerns on future loan book growth outlook: HDFC is the largest NBFC

in India with a loan book of around Rs2trillion ($33bn) as of FY14 and

market share of more than 15% in individual housing. Investors’ concern

that outlook for future loan book growth is bleak is overdone in our view.

Concerns, though justified, are largely exaggerated

We believe that the investors’ concerns are overly exaggerated given:

Gained market share & retained spreads: In the past two years, HDFC

Limited has gained market share in the individual segment it operates in

despite increasing competitive intensity (see figure 5). In addition to this

the company maintained spreads in its individual business (see charts

below). We expect the company to continue gaining market share from

banks on account of a) reduced focus from banks on housing loans as

growth in wholesale portfolio starts and b) inherent competitive

advantages the company enjoys in terms of cost of funding, cost of

operations and strong underwriting.

Reduction in NIMs was by choice and not forced: The main reason behind

the company showing lower growth in PAT for the year was reduction in

NIMs on a blended basis (see table below), which was mainly due to the

fact that the company relied on the individual segment for growth rather

than the corporate segment (see figure 9). This was clearly by choice

given that the company didn’t want to grow its corporate portfolio faster

when the economic environment was deteriorating. However, the

company clearly holds a competitive advantage in this segment which it

has shown over the last many years. We think as the economic

environment improves, NIMs will return to a growth trajectory. We expect

the company to maintain 18% CAGR loan book growth over the next five

years.

Figure 4 HDFC is able to maintained spreads Figure 5 HDFC Limited maintained market share in retail home loans

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data

Accounting profit growth remained strong: Though the reported profit

growth declined in FY13 and FY14 on account of a) decline in ‘Profit from

Sale of Investments’, b) shift towards the individual segment from the

corporate segment (Individual business has first year strain on account of

acquisition cost), and c) decline in zero coupon bonds adjustments from

balance sheet (see charts below).

HDFC’s credit quality remained impeccable: Despite increased stress in

the real estate sector, HDFC’s credit quality remained strong with GNPA

of just 0.69% in the non-housing segment as of FY14. In one large account

which turned delinquent, the company was able to recover entire money

with a year.

2.24%

2.25%

2.26%

2.27%

2.28%

2.29%

2.30%

2.31%

2.32%

2.33%

2.34%

FY10 FY11 FY12 FY13 FY14

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

20

10

20

11

20

12

20

13

20

14

HD

FC

Mark

et

Sh

are

in

re

tail

ho

usin

g l

oan

s

Page 5 of 13

Figure 6 Premium amortised through Balance Sheet (Rs Mn) Figure 7 Profit from Sale of Investments (Rs Mn)

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data

India mortgage market is long way from maturity: Despite the concerns

on the size of the company and size of the sector, we are upbeat on the

growth potential of the sector. We expect the sector to growth at 17%-

18% CAGR over next five years and HDFC Limited to gain market share on

account of a) lower penetration of mortgages at just 9% of GDP versus

20% for other emerging markets and more than 30% for developed

markets, b) favorable demographics with median age of less than 30

years versus average house acquisition age of 35 years and c)

comfortable ticket size for (Rs2.2mn).

Figure 8 Core PBT (Rs Bn) Figure 9 Individual proportion has increased in last two years

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data

New government can provide further impetus to this segment

Most of the stocks in the Indian financial sector are up as the market expects

the new government to speed up reforms. While analyzing the government’s

focus areas, we found many reasons to be upbeat on the housing space

Prime Minister, Mr. Narendra Modi, has promised housing for all by 2022

(LINK).

In the election manifesto, the BJP had promised to build 100 new hi-tech

cities (LINK).

Affordable housing a top priority for Modi government (LINK).

-

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014

Pre

miu

m a

mo

rtis

ed

th

rou

gh

Bala

nce

Sh

ee

t

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011 2012 2013 2014

Pro

fit

fro

m S

ale

of

Inve

stm

en

ts

-

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013 2014

Co

re P

BT

(R

s B

n)

66

%

66

%

66

%

65

%

66

%

66

%

68

%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Individuals Corporate Others

Page 6 of 13

According to NHB, as of 2013 there was a shortage of 18.78 mn units in urban

areas only. Assuming Rs3.0mn housing cost per unit and 80% financing this

provides a housing finance opportunity of Rs4.5trn from the urban market

alone versus housing loan industry size of Rs7.5trn as of Mar’13.

HDFC Limited is now one of the cheapest among tier-1 NBFCs

Our analysis suggests HDFC Limited is now the cheapest among the NBFCs,

with the lowest premium for future business/growth. We have compared the

inherent value, defined as the addition of value of existing loan book and net

worth, of HDFC with Tier-1 NBFCs (MMFS and SHTF). Housing being a long

term business and with very little additional operating cost for recovery adds

significant value versus NBFCs which average loan book tenure of less than 3

years and significant operating cost involved in collections.

Adjusted for value of current business, HDFC is trading at 1.8x FY14 Inherent

value versus 2.2x for MMFS and 1.7x for SHTF (see table below).

Figure 10 Home loans contribute higher than vehicle loan in value creation

Home Loan - Cash Flow @ 1.75% of Loans

Years 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Loan Outstanding 100 97 94 90 87 82 77 72 66 59 52 43 34 23 12 -

Average loan

99 96 92 88 84 80 75 69 63 55 47 39 29 18 6

Cash Flow

1.7 1.7 1.6 1.5 1.5 1.4 1.3 1.2 1.1 1.0 0.8 0.7 0.5 0.3 0.1

Present Value of Cash Flow

1.6 1.4 1.2 1.0 0.9 0.7 0.6 0.5 0.4 0.3 0.2 0.2 0.1 0.1 0.0

Total Present Value

9.1 Vehicle Loan - Cash Flow @ 3.5% of Loans

Years 0 1 2 3 4

Loan outstanding 100 79 55 28 - Average loan

89 67 42 14

Cash Flow

3.1 2.3 1.5 0.5 Present Value of Cash Flow

3 2 1 0

Total Present Value

6.3

Source: Espirito Santo Investment Bank Research, Company Data

Figure 11 HDFC has one of the lowest premium for growth

AUM (A) Net Worth (B) Multiple (C)

Inherent Value (IV)

= (A*C+B) Market Cap Mkt Cap/IV

MMFS 341,331 50,942 6.3% 72,446 156,410 2.2

SHTF 531,021 82,732 6.3% 116,187 198,330 1.7

HDFC 2,177,630 192,924 9.10% 391,088 721,471 1.8

Source: Espirito Santo Investment Bank Research, Company Data

In addition to the long term nature of the housing finance business, we believe

HFCs should always trade at premium to NBFCs with comparable RoEs on

account of a) the defensive nature of their loan book in terms of credit quality

and availability of collateral and b) negligible cost in servicing/unwinding

existing book. In addition to this, in case of structural decline in cost of capital

a long tenured book is much more valuable than a short tenured book.

Best diversified play on the Indian financial sector

In our opinion, HDFC Limited is the best diversified play on the Indian

Financial Sector and for a diversified firm gives exposure to a top 3 franchise

in each segment. HDFC Limited provides investors an opportunity to partner

India’s largest mortgage book, best managed private sector bank, largest

NBFC, third largest and one of the best managed Life Insurance and top-5

general Insurance (see figure 12).

Page 7 of 13

Low cost of funding and operating

costs coupled with strong underwriting

standards ensures pole position for

HDFC Limited in the mortgage

financing segment.

Figure 12 HDFC Limited is top ranked across segments (as of FY14)

Rank Bank

Ranked by Advances

NBFC

Ranked by AuM

Life Insurance

Ranked by AuM

General Insurance

Ranked by Gross

Premium

Asset Management

Ranked by AuM

1 ICICI Bank Rs3,319bn

HDFC Ltd

Rs2,258bn ICICI Pru Life

Rs748bn ICICI Lombard

Rs69bn HDFC Mutual Fund

Rs1,130bn

2 HDFC Bank Rs3,030bn

LIC Housing Rs913bn

SBI Life Rs539bn

Bajaj Allianz Rs45bn

ICICI Pru MF Rs1,068bn

3 Axis Bank Rs2,301bn

Shriram Transport Rs531bn

HDFC Standard Life

Rs489bn

IFFCO Tokio Rs29bn

Reliance MF Rs1,035bn

4 Yes Bank Rs556bn

Dewan Housing Rs448bn

Bajaj Life Rs333bn

HDFC ERGO

Rs29bn Birla Sun Life MF

Rs891bn

5 Indusind Bank

Rs551bn Indiabulls Rs412bn

Birla Life Rs234bn

Reliance Rs24bn

UTI Mutual Fund Rs742bn

Source: Espirito Santo Investment Bank Research

Best quality mortgage financier with pricing power

HDFC Limited is the best quality mortgage financier with a consistent growth

pattern and industry-leading return ratios. Our calculation suggests that HDFC

generates more than 25% RoEs on its mortgage book, which is one of the

highest in a commodity-like segment. Moreover, the company only targets

high quality borrowers at lower yields in the non-housing segment. This to us

suggests that the company has significant competitive advantage on cost of

funding, underwriting and operating costs.

Cost of funding: HDFC Limited has the most diversified sources of borrowings

with more than 30% of borrowings coming from fixed deposits (highest

among NBFCs). Moreover, the company is extremely flexible in accessing

funds from various sources depending on the situation; for example, the

company has reduced the proportion of bank loans to 13% in Dec’13 from 37%

in 2010. On the institutional side, HDFC Limited enjoys a favourable position

and is able to access funds at the lowest cost, given its brand, track record

and AAA rating.

Operating costs: HDFC Limited has the lowest operating costs (after adding

costs of HDFC Sales Private Limited) as a proportion of its loan book among

HFCs in spite of a) just 17% of sourcing from DSAs, b) fixed deposit origination

through branches. The reason in our view is its scale advantage and

origination through HDFC Bank (24% of total origination).

Strong underwriting: HDFC Limited accumulated credit losses of just 4bps

(on cumulative disbursements as of Dec’13) despite more than 30% of its loans

exposed to non-housing segment.

We believe that these competitive advantages are sustainable given a) its

experience in the industry, b) superior financial position and c) strong brand

name. In addition to this, HDFC enjoys rare pricing power among the housing

finance companies in the corporate portfolio.

Page 8 of 13

Figure 13 Funding Profile (HDFC Limited) Figure 14 Opex Ratio as proportion of AUM Figure 15 Sourcing

Source: Espirito Santo Investment Bank Research, Company Data Source: Espirito Santo Investment Bank Research, Company Data, * HDFC

operating expenses included operating expenses of HDFC Sales Private

Limited

Source: Espirito Santo Investment Bank Research, Company Data

Untapped pricing power in the corporate portfolio

The company lends to high quality corporates and real estate developers at

very competitive rates (average yields of less than 13%, lowest among HFCs).

In this segment, HDFC Limited remains the preferred choice of developers on

account of a) the formers’ understanding of the real estate market, b) balance

sheet size and capability to lend large ticket size loans, c) lower cost of

funding and d) banks’ averseness towards real estate developer.

We believe the company can easily pass on any increase in cost of funding to

this segment as we have seen during September-October of last year when

the company passed on 100bps increase in cost of funding in this segment.

Mortgage book Du-Pont

Table 1 HDFC Mortgage book Du-Pont

2011 2012 2013 2014 2015E 2016E 2017E

NII* 3.8% 3.6% 3.6% 3.6% 3.7% 3.7% 3.8%

Fee Income 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Total Income 4.0% 3.8% 3.8% 3.7% 3.9% 3.9% 4.0%

Staff cost 0.2% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1%

Other opex 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.1%

Operating profit 3.7% 3.5% 3.5% 3.4% 3.6% 3.6% 3.7%

Provisions 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%

Depreciation 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

PBT 3.6% 3.4% 3.4% 3.4% 3.5% 3.5% 3.6%

PAT 2.6% 2.5% 2.5% 2.5% 2.5% 2.6% 2.6%

RoE 35.3% 33.5% 29.3% 25.8% 26.8% 26.9% 27.4%

Leverage (x) 13.5 13.6 11.8 10.5 10.5 10.5 10.5

Source: Espirito Santo Investment Bank Research, Company Data, * NII is calculated after deducting premium amortized on zero coupon bonds

Subsidiaries have performed well

Table 2 Segmental RoEs of HDFC Limited

2010 2011 2012 2013 2014

Mortgage book 31% 35% 33% 29% 26%

Life Insurance -45% -16% 36% 41% 43%

General Insurance -75% -10% 8% 29% 28%

Asset Management 61% 51% 48% 49% 44%

GRUH Finance 28% 31% 34% 33% 32%

HDFC Bank 16% 17% 18% 20% 21%

Consolidated 19% 20% 22% 22% 22%

Source: Espirito Santo Investment Bank Research, Company Data

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

Bonds Deposits Loans

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

HDFC* LICHF DEWH IHFL

Op

ex/A

UM

DSAs, 18%

HDFC

Bank, 24%HDFC

Sales

Private

Ltd., 46%

Direct ,

12%

Page 9 of 13

Figure 16 Difference in per share valuation of

key subsidiaries between ESS and consensus

(Rs)

Cons. ESS % diff

HDFC Life 68 78 16%

HDFC Ergo 6 19 237%

HDFC AMC 21 32 52%

Source: Espirito Santo Investment Bank Research, Bloomberg, Company data

Over the last five years, post the financial crisis, HDFC Limited’s subsidiaries

have gained market share, strengthened their market positioning, gained scale

and improved their profitability. All this has happened across the subsidiaries

in spite of adverse regulatory environment and weak macro-economic

fundamentals. In our previous note we had analysed the improvement in

fundamentals of subsidiaries (link). Below we provide the valuation

methodology for valuing each individual subsidiary.

HDFC Standard Life

We have valued the company on Appraisal Value method on FY16E

Embedded value and a 12x NBAP multiple (see table below).

Table 3 HDFC Life’s Valuation

Value Comments

a) Expected Embedded Value

FY16 90,992

Based on NBAP margin of 16% in FY15 & FY16

and 15% APE growth for FY15 and FY16

b) FY16 NBAP 6,473

We have assumed 18% VNB Margin and 20%

growth for FY15 and FY16

c) NBAP Multiple 12

d) Value of future business 77,671

Total Appraisal Value (a+d) 168,663

Source: Espirito Santo Investment Bank Research, Company Data

HDFC Ergo general Insurance: We have valued the company on discounted

cash flow methodology with valuation of Rs30,295mn.

Here again, the company has grown on the back of high growth in HDFC Bank

with around 40% of business coming from HDFC Bank.

HDFC Asset Management: We have valued the company on discounted cash

flow methodology with valuation of Rs.82,800, 5.5% of FY15E AUM and 14.6x

FY16E PAT.

GRUH Finance: We have used the current market value of the GRUH in our

valuation of HDFC Limited.

HDFC Bank: We are valuing HDFC Limited’s stake in HDFC Bank at the fair

value of our banking team, which is Rs975 per share.

Change in estimates

Table 4 Change in estimates

Old New % change

Rs millions FY14E FY15E FY14E FY15E FY14E FY15E

Loan Book 2,378,679 2,804,979 2,322,235 2,760,043 -2% -2%

Net Interest Income 81,266 95,855 78,905 93,456 -3% -3%

Total Income 98,916 115,305 95,732 112,167 -3% -3%

Operating expenses 7,068 7,920 6,936 7,775 -2% -2%

Pre Provisioning Profit 91,848 107,385 88,796 104,392 -3% -3%

Provisions 1,759 2073 1,717 2,033 -2% -2%

PBT 89,769 104,992 86,760 102,041 -3% -3%

PAT 65,532 76,644 63,334 74,490 -3% -3%

EPS (Rs)-Diluted 43 50 41 48 -3% -3%

Source: Espirito Santo Investment Bank Research, Company Data

Page 10 of 13

We have tweaked our FY15 and FY16 estimates on the back of FY14 numbers.

There are minor downgrades in our loan book and profitability estimates by

2%-3%.

Valuation

Figure 17 HDFC Limited SOTP Valuation

Stake Valuation Rs / Share Valuation Methodology

HDFC Bank 23% 530,516 340 Based on our target price of Rs.975

HDFC Standard Life 72% 122,112 78 Appraisal Value Method (FY16E EV+12xFY16E NBAP)

HDFC General Insurance 74% 28,920 19 Discounted Cash Flow (12x FY16 Earnings)

HDFC Asset Management 60% 49,258 32 Discounted Cash Flow (5.5% of FY16E AUM)

GRUH Finance 59% 42,727 27 Based on market value

Mortgage business

1,079,184 693 Excess return method (4.0x FY16E adjusted BV)

Other investments

11

Total SOTP

1,200

Source: Espirito Santo Investment Bank Research, Company Data

We have valued the company on a SOTP basis (valuation methodology for

individual companies mentioned above). HDFC’s core mortgage book is

trading at 2.7x FY16E book value, which is one of the lowest valuations for the

stock in the recent past. We have valued the mortgage business at 4.0x FY16E

book value which we feel is justified given sustainable RoEs of more than 25%,

high visibility on growth and low cyclicality in business.

On a consolidated basis, the company is trading at 2.9x FY16E book value,

which is one standard deviation below its historical mean valuation. We value

it at 3.6x FY16E book value. We believe HDFC Limited is a strong

compounding story with 18%-20% annual returns from current levels over the

longer term.

Figure 18 Relative Valuation Table *HDFC Limited valuations are of core mortgage book (priced as of 20th

June 2014)

Rating Mkt

Cap

CMP

(Rs)

3 Month

ADV

Fair

Value ROE (%) P/E P/B Adj

Div Yield

(%)

HFCs $mn $mn Rs FY15E FY16E FY15E FY16E FY15E FY16E FY15E

Dewan Housing Buy 690 313 6.3 300 19.0% 19.0% 6.6 5.6 1.2 1.0 2.6%

HDFC Limited* Buy 25,593 975 64.7 1,200 26.0% 27.0% 13.0 11.0 3.2 2.7 1.6%

LIC Housing Buy 2,712 320 20.2 310 19.7% 19.6% 10.2 8.8 1.9 1.6 1.7%

Rating

Mkt

Cap

CMP

(Rs)

3 Month

ADV

Fair

Value ROE (%) P/E P/B Adj

Div Yield

(%)

NBFCs $mn $mn Rs FY15E FY16E FY15E FY16E FY15E FY16E FY15E

Bajaj Finance Ltd Neutral 1,712 2,057 2.1 1,500 19.6% 19.8% 11.9 10.0 2.1 1.8 0.9%

Mahindra Finance Buy 2,615 272 10.7 295 20.0% 22.0% 13.4 10.8 2.6 2.2 1.4%

Manappuram Sell 340 24 1.5 23 15.4% 15.0% 4.8 4.6 0.6 0.6 15.1%

Shriram Transport Neutral 3,257 860 11.3 655 17.0% 18.0% 12.7 10.5 2.0 1.7 1.0%

SKS Microfinance Buy 556 264 7.9 241 36.0% 31.0% 14.3 11.8 4.4 3.2 0.0%

Shriram City Union Buy 1,526 1,390 1.7 1,100 18.0% 19.0% 15.1 12.0 2.5 2.1 0.8%

Sundaram Finance Buy 1,669 902 0.8 740 21.3% 20.8% 13.6 11.7 2.7 2.2 1.2%

Cholamandalam Neutral 905 378 0.6 300 19.0% 19.0% 11.9 10.0 2.0 1.8 1.1%

Source: Espirito Santo Investment Bank Research, Company Data

Page 11 of 13

Valuation Methodology

We have valued HDFC Limited’s mortgage book using an excess return on

equity methodology with a CoE of 13%. We have used a two-stage model with

a thirty eight year time horizon: 10 years of explicit forecast and the

subsequent years of declining RoE to CoE.

Figure 19 HDFC DCF disclosures

Source: Espirito Santo Investment Bank Research, Company Data

Risks to Fair Value

Economic risk factors: Any deterioration in the macro-economic scenario that

could impact housing prices negatively will be a key risk for the stock. Any

further intensification in the competitive scenario in the Indian mortgage

industry may affect the company’s margins. An increase in interest rates from

current levels could also impact margins.

Business risk factors: Moreover, HDFC Limited and its subsidiaries are

dependent on HDFC Bank for distribution which may get impacted on account

of regulations as explained in our previous note (LINK). Moreover, if HDFC

Bank starts to lose market share our growth assumptions for future years may

be under risk.

Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.

Cost of Equity 13.0%

Shares in Issue 1,558

Rs. Mn Rs./share

Free cash flow to equity NPV 1,079,184 693

Rs. Mn Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Mar-25 Mar-26 Mar-27 Mar-28 Mar-29 Mar-30 Mar-31 Mar-32 Mar-33

Beginning book Value 192,924 226,871 266,797 313,987 369,929 435,940 513,147 602,825 705,898 824,228 959,421 1,093,338 1,242,873 1,409,368 1,594,205 1,798,803 2,024,604 2,273,059 2,545,616

Net Profit 55,296 65,786 79,722 95,877 114,068 134,667 157,217 181,417 209,011 239,515 273,298 305,175 339,785 377,219 417,547 460,818 507,052 556,239 608,336

Cost of Equity 25,080 29,493 34,684 40,818 48,091 56,672 66,709 78,367 91,767 107,150 124,725 142,134 161,574 183,218 207,247 233,844 263,199 295,498 330,930

ROAE 29% 29% 30% 31% 31% 31% 31% 30% 30% 29% 28% 28% 27% 27% 26% 26% 25% 24% 24%

Excess Return 30,216 36,293 45,038 55,059 65,977 77,995 90,508 103,050 117,245 132,365 148,574 163,041 178,211 194,001 210,301 226,973 243,853 260,741 277,406

Discount Factor 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1

Present Value 27,503 29,233 32,104 34,732 36,831 38,531 39,569 39,869 40,142 40,106 39,838 38,687 37,422 36,051 34,584 33,032 31,406 29,718 27,980

Rs. Mn Mar-34 Mar-35 Mar-36 Mar-37 Mar-38 Mar-39 Mar-40 Mar-41 Mar-42 Mar-43 Mar-44 Mar-45 Mar-46 Mar-47 Mar-48 Mar-49 Mar-50 Mar-51 Mar-52

Beginning book Value 2,843,701 3,168,698 3,521,934 3,904,648 4,317,978 4,762,925 5,240,336 5,750,874 6,294,988 6,872,891 7,484,534 8,129,573 8,807,357 9,516,898 10,256,855 11,025,519 11,820,802 12,640,229 13,480,936

Net Profit 663,260 720,888 781,050 843,529 908,056 974,309 1,041,913 1,110,437 1,179,395 1,248,249 1,316,408 1,383,233 1,448,042 1,510,116 1,568,703 1,623,027 1,672,300 1,715,727 1,752,522

Cost of Equity 369,681 411,931 457,851 507,604 561,337 619,180 681,244 747,614 818,348 893,476 972,989 1,056,845 1,144,956 1,237,197 1,333,391 1,433,318 1,536,704 1,643,230 1,752,522

ROAE 23% 23% 22% 22% 21% 20% 20% 19% 19% 18% 18% 17% 16% 16% 15% 15% 14% 14% 13%

Excess Return 293,579 308,957 323,199 335,925 346,719 355,129 360,669 362,823 361,047 354,773 343,418 326,388 303,086 272,919 235,311 189,710 135,596 72,498 -

Discount Factor 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Present Value 26,204 24,404 22,592 20,780 18,981 17,204 15,463 13,766 12,122 10,541 9,030 7,595 6,241 4,973 3,795 2,707 1,713 810 -

HDFC excess return on equity calculation

Housing Dev Fin HDFC IN

Report date Recommendation Fair value Share price

2014 April 2 Buy Rs1000.00 Rs880.00

2013 August 30 Buy Rs865.00 Rs650.00

February 25 Neutral Rs838.00 Rs815.05

2012 November 27 Neutral Rs837.06 Rs779.35

2011 December 9 Neutral Rs722.00 Rs669.00

Source: Bloomberg, Espirito Santo Investment Bank Research

B

B

NN

N

600

650

700

750

800

850

900

950

1000

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

Page 12 of 13

IMPORTANT DISCLOSURES

120614

This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the Financial Group controlled by Espírito Santo Financial Group S.A. (“Banco Espírito Santo Group”).

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.

Ratings Distribution

Espirito Santo Investment Bank Research hereby provides the distribution of the equity research ratings in relation to the total Issuers covered and to the investment banking clients as of end of March 2014.

Explanation of Rating System Ratings Distribution

12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months

SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months

As at end March 2014 Total ESIB Research

Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

12 Month Rating:

Buy 199 46.1% 26 81.3% 6.0%

Neutral 135 31.3% 4 12.5% 0.9%

Sell 97 22.5% 2 6.3% 0.5%

Restricted 0 0.0% 0 0.0% 0.0%

Under Review 1 0.2% 0 0.0% 0.0%

TRADING RATING DEFINITION

TRADING BUY Analyst expects a positive short-term movement in the share price (max duration 3 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period

TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 3 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period

Trading Rating:

Trading Buy 0 0.0% 0 0.0% 0.0%

Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 432 100% 32 100% 7.4%

For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com.

Share Prices

Share prices are as at the close of business on the day preceding publication, unless otherwise specified.

Coverage Policy

Espírito Santo Investment Bank Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. Espírito Santo Investment Bank Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.

Representation to Investors

Espírito Santo Investment Bank Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.

Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries.

All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are Espírito Santo Investment Bank Research present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information.

Espírito Santo Investment Bank Research has not entered into any agreement with the issuer relating to production of this report. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents.

Ownership and Material Conflicts of Interest

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within Espírito Santo Investment Bank Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion.

Banco Espírito Santo Group has a qualified shareholding (1% or more) in Oi and Providência. Bradesco has an indirect qualified shareholding (4.8%) in Banco Espírito Santo, S.A. and a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.

Pursuant to Polish Ministry of Finance regulations, we inform that Banco Espírito Santo Group companies and/or Banco Espírito Santo de Investimento, S.A. Branch in Poland do not have a qualified shareholding in the Polish Securities Issuers mentioned in this report higher than 5% of its total share capital.

Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis. Mr. Ricardo Abecassis Espírito Santo Silva, a member of the board of Banco Espírito Santo de Investimento, S.A., is a board member of Brazil Hospitality Group.

Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri, Usiminas and Vale.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in share offerings of 4imprint, Brazil Hospitality Group, Capital Park, CTT, EDP, Iguatemi, Just Retirement, Klabin, Liberbank, Mota-Engil, Oi, Prime Car Management (Masterlease), Sports Direct and Zon Optimus.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in the bond issues of the following companies: Abengoa, Altri, EDP, Globe Trade Centre, Kredyt Inkaso and Sonae.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, Abengoa, Altri, Brazil Hospitality Group, Burford Capital, Capital Park, Casino Guichard, Dinamia, EDP, EDP Renovaveis, Ence, Galp Energia, Globe Trade Centre, Godrej Consumer Products, Iguatemi, Inditex, IQE, Just Retirement, Kcom Group, Klabin, Kredyt Inkaso, Kruk, Laird, Liberbank, Mota-Engil, Novae Group Plc, Oi, Prime Car Management (Masterlease), REN, Semapa, Sonae, Sonaecom, Sports Direct, SVG Capital, Ted Baker, Xchanging and Zon Optimus.

Page 13 of 13

Banco Espírito Santo Group has been a partner to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil and Banco Espírito Santo Group, through ES Concessões, S.G.P.S., S.A., have created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions, in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist.

Market Making UK

Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com.

Confidentiality

This report cannot be reproduced, in whole or in part, in any form or by any means, without Espírito Santo Investment Bank Research’s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A.

Regulatory Authorities

For information on the identity of the Regulatory Authorities that supervise the entities included within Espírito Santo Investment Bank Research please see http://www.espiritosantoib-research.com.

IMPORTANT DISCLOSURES FOR U.S. PERSONS

This report was prepared by Espírito Santo Investment Bank Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. Neither Banco Espírito Santo de Investimento, S.A. nor these affiliates are registered as a broker-dealer in the United States and therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This report is provided for distribution to U.S. institutional investors in reliance upon the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended.

This report is confidential and not intended for distribution to, or use by, persons other than the addressee and its employees, agents and advisors.

E.S. Financial Services, Inc. is the U.S. distributor of this report. E.S. Financial Services, Inc. accepts responsibility for the contents of this report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor. Any U.S. person receiving this report and wishing to effect securities transactions in any security discussed in the report should do so only through E.S. Financial Services, Inc.

Contact Information

Garreth Hodgson Senior Managing Director / Head of Sales (212) 351-6054 ghodgson@espiritosantoib.com

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Hande Cuhruk Vice President (212) 351-6070 hcuhruk@espiritosantoib.com

Jack Fernandez Executive Director (212) 351-6064 jfernandez@espiritosantoib.com

James Kaloudis Executive Director (212) 351-6065 jkaloudis@espiritosantoib.com

Mike Williams Vice President (212) 351-6052 mwilliams@espiritosantoib.com

Pedro Marques Vice President (212) 351-6051 pmarques@espiritosantoib.com

Tatiana Sarandinaki Vice President (212) 351-6055 tsarandinaki@espiritosantoib.com

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Each analyst whose name appears in this report certifies the following, with respect to each security or issuer that the analyst covers in this report: (1) that all of the views expressed in this report accurately reflect the personal views of the analyst about those securities and issuers; and (2) that no part of the compensation of the analyst was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in this report.

The analysts whose names appear in this report are not registered or qualified as research analysts with the Financial Industry Regulatory Authority ("FINRA") and may not be associated persons of E.S. Financial Services, Inc. and therefore may not be subject to the applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account.

Ownership and Material Conflicts of Interest

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report.

For a complete list of the covered Issuers in which Banco Espírito Santo de Investimento, S.A. or its Affiliates hold stakes in excess of 1% and for information on possible material conflicts of interest arising from investment banking activities please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com.

Receipt of Compensation

For information on Receipt of Compensation from subject Issuers please see “Important disclosures for US persons” on http://www.espiritosantoib-research.com.

Representation to Investors

Espírito Santo Investment Bank Research has issued this report for information purposes only. All the information contained therein is based upon information available to the public and has been obtained from sources believed to be reliable. However, Espírito Santo Investment Bank Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are our present opinions only, and are subject to change without prior notice. Espírito Santo Investment Bank Research is not under any obligation to update or keep current the information and the opinions expressed herein. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries. Espírito Santo Investment Bank Research does not accept any form of liability for losses or damages which may arise from the use of this report. Please note that investing in any non-U.S. securities or related financial instruments discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission or subject to regulation in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in the United States.