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21 October 2015 Asia Pacific/India Equity Research Regional Banks (Diversified Financials IN (Asia)/Insurance IN (Asia)/Banks IN (Asia))

House of Debt Research Analysts Ashish Gupta 91 22 6777 3895 [email protected] Kush Shah 91 22 6777 3862 [email protected] Prashant Kumar 91 22 6777 3942 [email protected]

SECTOR REVIEW

Still in the Woods Figure 1: ~20-90% debt with House of Debt groups under high stress Low Stress

Moderate Stress

High Stress

100% 90% 80% 70% 60% 50% 40% 30%

20% 10% 0% Lanco Group

Jaypee Group

GMR Group

Videocon Group

GVK Group Essar Group Adani Group

Reliance ADAG

JSW Group

Vedanta Group

Source: Company data, Credit Suisse

■ Degree of financial stress rising. Three years since our first 'House of Debt' report, we find that despite attempts at deleveraging, financial stress at these groups has intensified further. All the groups saw further rises in debt in FY15, which is now up 7x over past eight years to ~12% of system loans. Their interest cover dropped to 0.8x vs 0.9x in FY14 and debt/EBITDA rose to 7x. Moreover, while their loans are still "standard" at the banks, in past few weeks ~35-65% of debt of four groups (Jaypee, Lanco, Essar, and GMR) has been downgraded to default by rating agencies. ■ De-leveraging hasn’t yielded results. Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their debt/EBITDA have deteriorated further as the relatively better assets (contributing to as much as 70% of EBITDA) were sold. Many of their projects now have 20-70% cost overruns pushing their capital costs even above replacement costs. With a significant (30-60%) capacity still under construction, a large (15-170% of P&L interest) is still being capitalised. ■ High forex and commodity exposure weigh on the outlook. Most of the groups have high exposure to commodities and downswing here adds to their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency, their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt (aggregate US$48 bn, equivalent to ~100% of system GNPAs) for some of these groups is now facing severe stress. Including this, total stressed loans of Indian banks would be at ~17%. We therefore continue to prefer consumer lenders over corporate lenders. Our preferred banks are HDFC Bank and IndusInd. We remain cautious on SBI (N), ICICI (N), PNB (U), and BOI (U). DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse 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.

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21 October 2015

Focus table and charts Figure 2: Debt servicing ratios have deteriorated for most groups Rs mn

Gross Debt FY13

EBITDA

FY14

FY15

FY15

Adani Group Essar Group* GMR Group GVK Group Jaypee Group JSW Group Lanco Group Reliance ADAG Vedanta Group Videocon Group

811,220 844,404 960,313 986,448 999,497 1,014,646 408,249 450,459 479,766 269,640 310,268 339,332 636,541 729,792 751,637 461,180 530,278 581,715 410,844 440,824 471,024 1,135,439 1,218,940 1,249,564 996,108 1,012,272 1,033,404 407,681 N/A 454,055

Total

6,523,349 6,944,415 7,335,456

EBIT

PAT

FY15

Int cover (x)

Debt/EBITDA (x)

Debt/equity (x)

FY15

FY14

FY15

FY14

FY15

FY14

FY15

123,704 83,709 25,546 7,397 61,383 130,257 16,939 165,027 231,954 (1,127)

88,485 19,481 28,360 (7,877) 7,421 (27,333) 341 (8,347) 44,511 (17,272) 88,015 31,461 5,802 (20,367) 112,611 45,435 107,601 (234,837) (16,492) 51,196

1.1 0.3 0.4 0.5 0.8 2.0 0.1 1.2 1.6 (0.3)

1.3 0.8 0.2 0.0 0.6 1.9 0.2 1.3 1.3 (0.3)

7.3 11.1 16.0 21.7 11.1 4.1 24.6 7.4 1.8 285.5

6.5 8.5 16.8 32.0 11.9 4.2 23.1 6.8 2.3 N.M.

2.9 4.6 5.4 7.4 6.9 1.8 16.1 1.2 0.4 8.4

3.1 3.9 7.1 12.2 7.1 1.8 43.8 1.1 0.7 3.8

844,789

466,654 (168,461)

0.9

0.8

6.8

7.0

1.9

2.1

Source: Company data, CS *Essar P&L numbers are for FY14, debt is based on data available for FY15 rest assumed to be same as FY14

Figure 3: High share of debt rated as default 65%

600

Debt rated as default (Rs bn)

Figure 4: Debt to market cap increased for all companies

% of total group debt

70% 60%

500 36%

400

38%

37%

30.0

FY14

Debt to Market cap (x)

FY15

25.0

50%

20.0

40%

15.0

30%

10.0

20%

5.0

300 200 100

10%

-

Jaypee Infra

0% Jaypee

Essar

GMR

Lanco

Adani Power

GMR Infra

Videocon JP Power

GVK Power

JP Ass

Source: Company data, CARE, ICRA, CRISIL, Credit Suisse

Source: Company data, Credit Suisse

Figure 5: Large cost overruns in multiple projects

Figure 6: Debt/EBITDA to rise post asset sales

80%

% increase in project cost

70%

70.0

60%

FY15 Debt/Ebitda (x)

Lanco Infra

FY15 Debt/Ebitda post asset sale (x)

60.0

50%

50.0

40%

40.0

30% 20%

30.0

10%

20.0

0%

10.0

JP Power

Lanco Infra

Source: Company data, Sigma Insights, Credit Suisse

Source: Company data, Credit Suisse

Figure 7: Debt levels haven't come down, despite asset sales

Figure 8: Total stressed loans for Indian banks at ~17%

GMR Infra

Videocon

Total system problem loans (%) 2.2%

150

110 429 355

398

4.5%

390

16.6%

5.4%

4.5% FY13 Net Asset sales FY15 Net Debt Debt

Source: Company data, Credit Suisse

House of Debt

Jun-13 NetAsset salesDec-14 Net Debt Debt

Gross NPAs

Restructured ex Stressed House SEBs of Debt

Steel & Others

Total Problem Loans

Source: Company data, Credit Suisse

2

21 October 2015

House of Debt Degree of financial stress rising Three years since our first 'House of Debt' report, we find that despite attempts at deleveraging, financial stress at these groups has intensified further. All these groups saw further rises in debt in FY15 (up 7x over the past eight years to ~12% of system loans). The overall interest cover for the House of Debt companies is now at 0.8x vs 0.9x in FY14. About 80% of the debt is with groups that had debt/EBITDA>6x in FY15 and nearly half with groups where IC group profits Businesses with debt/EBITDA interest Cash positive business Healthy profitability; diversification against high commodity exposure Cash rich companies with healthy EBITDA generation

Source: Company data, Credit Suisse

….but~20-90% of group debt under high stress However, with pressure on the steel and power businesses, 20-90% of debt (aggregates ~US$48 bn, equivalent to 100% of system GNPAs) for some of these groups. Lanco and Jaypee have the highest share of stressed loans (at ~80-90%) while GMR, GVK, Essar and Videocon have close to two-thirds of their debt under stress. Figure 47: Large share of debt is facing high stress Low Stress

Moderate Stress

High Stress

100% 90% 80% 70% 60% 50% 40% 30%

20% 10% 0% Lanco Group

Jaypee Group

GMR Group Videocon GVK Group Essar Group Adani Group Reliance Group ADAG

JSW Group

Vedanta Group

Source: Company data, Credit Suisse

We have classified debt as high stress based on 1.

If debt has been downgraded to "D" by rating agencies

2.

Power projects:

3.

o

if operational project is at debt/EBITDA >12x or

o

an under construction has had more than 35% cost overrun, or

o

it is a gas-based projects or

o

operating at PLF of less than 40%

Commodity exposure – If debt/EBITDA > 12x

House of Debt

18

21 October 2015

Figure 48: Large share of debt is in "high stress" bucket Share of debt with groups Adani Group

Low Stress 377,313

Adani Power

Moderate High Stress Comments Stress 250,797 318,196 250,797

Abbott Point Terminal Adani Ent

200,000

Adani Ports

177,313

Essar Group

383,256

-

Essar Steel

363,032 Debt to EBITDA at 16.6x 383,256

Low risk

Essar Shipping GMR Group

53,383 Debt to EBITDA at 23x 158,847

-

GMR Energy

GMR Male Others GVK Group

10,000 68,847 120,060

219,272 115,213 Gas based capacity of ~900MW; ~50-70% overrun in coal & hydro plants.

GVK Hancock

65,345 Coal mines delayed on environmental concerns 120,060

Airport EBITDA>interest cost

Roads & Others Jaypee Group

38,706 Negligible EBITDA generation -

115,490

JP Power

91,018 Rating downgraded to D on delay in debt servicing

Jaiprakash Associate

252,800 Standalone debt downgraded to "D" rating

Others

115,490 92,941

JSW Steel JSW Energy Lanco Group

488,774

-

Debt to EBITDA 2.1x 30,421

39,000 Lower than expected offtake and profitability

EPC & others

30,421 360,820

R Infra

655,940

232,804

257,660 99,430

R Comm

Debt to EBITDA >7x 232,804 Ex- Rosa and Butibori, rest of the projects facing challenges. Sasan PPA tariff low, Chitrangi has seen 35% cost overrun

398,280 261,390

Vedanta Resources Videocon

440,603 294,158 Anpara downgraded to D; Amarkantak low tariff; Under construction projects (Vidarbha & Babandh) seeing 60-70% cost overrun; 35,445 Operating at sub-optimal PLF

Griffin coal mine

R Capital

FY15 Debt/ EBITDA 5x, rose to 7.2x in Jun-15

92,941

Power - Gas based

R Power

-

488,774

Power - coal based

Reliance ADA Group

539,147 195,329 Standalone rating downgraded to D; Nigrie rated D; Bara overrun ~33%

Jaypee Infra

JSW Group

Project contract cancelled by the government

90,000

Power Projects Airports

320,919 274,209 All major coal based projects in default; Gas based capacity of ~1.3GW operating at low PLF 36,711 Debt with highway projects already default rated

Highways Airport

678,091 214,976* Power business – 1.5GW is gas based, 1.8GW has seen 40% cost overrun

Essar Power Essar Oil, port & others

198,196 Tiroda, Kawai are re-financed under 5:25, classified as moderate stress; Rest primarily linked to Mundra 120,000 Australian coal mine project stuck on environmental as well as viability concerns

965,018 113,514

45,406

Commodity exposure; moderate pressure on sharp correction in commodity prices 295,136 Telecom and Oil & Gas exposure stressed

Source: Company data, Credit Suisse;*based on FY14 numbers

House of Debt

19

21 October 2015

Increasing risks for corporate focused lenders The corporate banks are already trading at multiples that are at a discount to the consumer lenders on account of the large reported differential in their asset quality trends over the past three years. However, debt for these groups is still "standard" in books of the banks, The rising intensity of stress for these borrowers and downgrades from rating agencies, increases the possibilities of these slipping to NPLs. The share of stressed loans with these groups is equivalent to ~4.5% of system loans (equiv to ~100% of current reported Gross NPAs). Including this, total system impaired loans would be at ~17% of system loans. As the pace of NPA recognition accelerates, it will pose risk to management's guidance and market expectations of impaired asset formation over the next 12-18 months. We remain cautious on corporate lenders, in particular the state-owned banks, as they are under-provisioned and undercapitalised. Figure 49: Exposure to at-risk sectors at 100-350% of networth for corporate lenders Funded Exposure to "at-risk" sectors (% of networth) 350 300 250 200 150 100 50 0 Canara

Union

OBC

SBI

BOI Power

PNB

BOB

Other Infra

Yes

ICICI

Axis

HDFCB

Steel

Source: Company data, Credit Suisse

Figure 50: Incl stressed "House of Debt" loans, total system stressed loans at ~17% Total system problem loans (%) 2.2%

4.5%

16.6% 5.4%

4.5%

Gross NPAs

Restructured ex SEBs Stressed House of Debt

Steel & Others

Total Problem Loans

Source: Company data, Credit Suisse estimates

House of Debt

20

21 October 2015

Adani Group The Adani Group has interests in mining, ports and the power sector. Adani Enterprise has coal mines in India, Australia and Indonesia with reserves in excess of 10 bn t. Adani Power has India's largest private sector power capacity with 11,040 MW of operating capacity (including acquisitions). Adani Ports has seven operating ports handling 145MT of cargo. While most other groups have been looking to deleverage, Adani has acquired port assets (in FY15) and two power plants (in FY16). Its debt levels in FY15 therefore went up another 16% to Rs840 bn and will increase further in FY16. Within the group, Adani Ports is well placed operationally and has healthy debt servicing ratios. This, however, accounts for only 20% of the group debt. Adani Power even prior to the recent acquisition accounts for >50% of group debt and has been incurring losses for the past four years. Most of its capacity is already commissioned and operating at a reasonable 67% PLF, despite which it continues to have interest cover