>INDIAN FINANCIAL SERVICES (GOLDMAN SACHS)

■ A steady and gradual ascent
After a sluggish FY09, we expect a turnaround in the Indian retail finance market (in particular, housing, cars and CVs). A comparison of India’s penetration levels with developed and emerging markets, when juxtaposed against demographic trends and income levels, reflects significant long-term potential here. We estimate 13%-18% CAGR in mortgages and car loans over FY10E-FY20E, driven by: rising per-capita income, urbanization, favorable demographics, declining household size. Further, vehicle penetration is likely to get an impetus from increasing road density and a changing product mix in favor of higher-value vehicles.

Retail finance on comeback trail; preferred picks: HDFC Bank, Shriram Transport, IndusInd

Recent market dynamics
In our view, the past 8 quarters saw three key trends emerge: (1) a slowdown in lending by ICICI Bank benefited HDFC Bank and KMB in car/CV finance markets, and LICHF in the mortgage segment, (2) most companies introduced low fixed-rate mortgage schemes to protect their market share, and (3) retail loan growth showing signs of revival – yoy growth in Nov 2009 was 13% vs. 4% in March.

Preferred picks: HDBK, SRTR, INBK
We believe investors could leverage the retail theme through: HDFC Bank (Buy, on CL; a profitable company in the car and CV markets), Shriram Transport (Buy—a profitable NBFC focused on CV finance), IndusInd Bank (Buy—focused on CVs/2W/ 3W segments; restructuring story with high growth potential). We think HDFC, ICICI Bank, and KMB (all Neutral-rated) are also likely to benefit from a retail finance upturn. While valuations are close to/above median multiples currently, we expect further rerating towards historical peaks on strong growth and profitability. We have a Sell on SBI (high provisions and market share focus, will likely impact long-term profitability) and LICHF (on CL; risk of spread compression amid market share focus).

Key risks: Property prices in key markets are currently close to early-2008 peak levels. We believe this may
impact property demand, despite its significant long-term potential, as purchases may be postponed. Hardening of interest rates too could adversely impact housing, car and CV demand.

To read the full report: INDIAN FINANCIAL SERVICES