Equitymaster Agora Research Private Limited

Independent Investment Research

We have not recommended Yes Bank since 2014 and never as a safe stock, in StockSelect.

Being India's fourth largest private sector bank with marketcap exceeding Rs 500 bn, keeping the stock out of our
recommendations may have surprised you. Especially, subscribers who tracked the bank's reported financial
numbers and its stock price over the last four years, may have wondered why we let go of such a multibagger
opportunity.

The reason - We were hoping that the RBI will do what it did recently... ensuring a change of management at the
bank.

The credit quality fear amongst financial institutions, particularly NBFCs, after the default of IL&FS, brought in the
much-needed correction in stocks over the last week.

In the case of Yes Bank, the fear of change in guard along with the market crash stimulated the slide in the stock
price.

For someone, hoping for a better management and cheaper valuations for Yes Bank, there has never been a better
time to consider the stock.

Here's why...

Our biggest reservation about Yes Bank has been the quality of lending and the management's approach in
provisioning for non-performing assets. Which is why we weren't impressed even as the bank kept reporting high
double-digit growth in loan book with reasonably good margins, over last four years.

Yes Bank's Aggressive Growth Since Inception

Not that the slippage in asset quality wasn't visible at all. For the gross and net NPA to advances went up from
0.2% to 1.3% and zero to 0.7%, respectively, between FY14 and FY18.

But the market kept offering the bank steep valuations only for its growing balance sheet. Not the kind of business

1
we would recommend safety first investors to buy.

The recent change of management, under the supervision of the RBI, brings the hope that Yes Bank's lending and
provisioning policies will finally follow best practices. And the bank will be more transparent in reporting facts.

No doubt, the bank can be expected to report relatively slower growth and ever higher NPAs in the near term.

But, the cleaning up of the books once and for all will bode well for this otherwise profitable franchise.

We have reviewed my estimates for Yes Bank, taking into account reasonably conservative growth and NPA
provisions.

The nearly 40% correction in the stock of Yes Bank over the past month, leaves sufficient upside for long term
investors, even after factoring in near term negatives.

We alerted subscribers about the buying opportunity in the stock of Yes Bank with a special update on 21st
September 2018.

And as promised, this issue of StockSelect carries further details on the stock.

How Will Yes Bank Improve Its Fortunes?

Strong Retail Franchise

After a very promising start in 2004, Yes Bank has had a good haul over the past 14 years. That it started
operations in 2004, when the Indian economy and banking sector were just taking off, was a huge positive.
Since then, it has been a one-way track for the bank in terms of growth and profitability. The growth, however,
has been at the cost of equity dilution at regular intervals.

If one normalizes the supernormal growth witnessed in the initial years, the performance so far has been on
expected lines and satisfactory. From the start, Yes Bank never tried to invade the territory of PSU or private
sector banking majors. It was not a typical big ticket corporate lender. Nor did it venture into retail lending
aggressively until 2014.

The bank's focus on growth of its retail franchise has been admirable. In the last three years, for instance, Yes
Bank has grown the deposits in current and savings accounts (CASA) at an average annual rate (CAGR) of 51%.
At the same time, its retail loans have grown at an average annual rate (CAGR) of 53%. Its physical presence
through 1,100 branches may not appear expansive. But the digital channels have had a big role in the bank's
growth. The bank plans to get to 1,250 branches by 2020. This strong retail franchise will continue to be critical
for Yes Bank's growth in the coming years.

Control over Operating Costs

Yes Bank is amongst the few private sector banks that has kept a tight leash on costs despite aggressive
growth over the past decade. The bank's average cost to income ratio has been around 39% since 2010 (one of
the best in the sector). Also, the revenue per employee and profit per employee has grown by almost 50% over
the past eight years.

Adequately Capitalised for Growth

Yes Bank had a capital adequacy ratio of 17.3% with Tier-I capital of 12.8% at the end June 2018. Further, the
bank is well compliant with Basel II norms as most of its corporate borrowers are rated. Thus, we believe that
Yes Bank is adequately capitalised to fund its balance sheet growth over next three years. Therefore, in the
absence of additional dilution, the return on equity is expected to substantially firm up.

Acquiring a larger customer base and balance sheet size is a daunting task even during buoyant times. The

2
 same becomes even more difficult when there are liquidity constraints in the economy and customers'
borrowing appetite shrinks. We believe that Yes Bank has now acquired the scale and agility to counter an
economic slowdown.

Key Challenges for Yes Bank

Higher Provisioning Needed to Stabilise Asset Quality

The problems in Yes Bank's asset quality came into limelight when the RBI exposed the divergence in NPA
reporting in 2017. For FY17, Yes Bank had reported gross NPAs of Rs 20 bn, while the RBI's assessment was
four times higher at Rs 84 bn. Similarly, at the net level too, the NPAs as per RBI were nearly 3 to 4 times higher
than the bank's reported numbers. Prior to that, in FY16, Yes Bank had reported just a sixth of the bad loans
assessed by the banking regulator.

Yes Bank has NPAs of Rs 234 m from the list of stressed accounts shared by the RBI account classified under
(National Company Law Tribunal) NCLT-1. The provision coverage ratio on them is 50%. Further, the bank has a
total exposure of Rs 6.5 bn to the list of NCLT-2 accounts, with a provision coverage ratio of 43%.

Yes Bank's provisioning pressures are therefore far from over. We do expect the bank to take the hit of additional
provisions on its profits in the next two fiscals.

Management Succession - a Near Term Uncertainty

The management transition at Yes Bank, after the exit of CEO, Rana Kapoor, over next six to nine months, will not
be without its fair share of hurdles and uncertainties. These may take a toll on the growth and profitability of the
bank.

Increased Competition from NBFCs and Payment Banks in the Retail segment

Yes Bank aims to penetrate further in the retail segment and corner a larger deposit base. The objective,
however, is marred by challenges not limited to stiff competition from well established players in the sector, but
also the changing face of the banking sector with the growth of mobile wallets and the introduction of payments
banks. With a focus on technology and innovation, Yes Bank is well placed to tackle these challenges, but its
growth may not be very consistent.

Longer than Expected Delay in Credit Demand

The credit revival in the banking sector, to an extent, depends on the resolution of NPAs in sectors like steel and
power generation, where a number of companies are going through the insolvency process. It is possible that
the stronger players might not opt for greenfield projects and instead bid for insolvent companies available at
discounted valuations.

Delay in NPA resolution for the banking sector, slowdown in capacity utilization and sluggishness in NPA growth
in the near future could delay credit demand and therefore hurt the rating volume of credit rating companies.

More about one of India's Fastest Growing Private Sector Bank

Yes Bank, is India's fourth largest private bank, and is a full service commercial bank with a comprehensive
product suite of financial markets, investment banking, corporate finance, branch banking, business and
transaction banking, and wealth management business lines across the country. As opposed to other NBCFs
converting to banks, Yes Bank is the only greenfield bank license awarded by the Reserve Bank of India in the last
two decades.

A Word About the Management

While Yes Bank has witnessed strong growth since its inception, we have had reservations about the quality of

3
lending and the management's approach in provisioning for non-performing assets. Recently, the Reserve Bank of
India mandated a change in management for the bank by shortening the term of the bank's promoter and CEO Mr.
Rana Kapoor. The recent change of management, under the supervision of the RBI, brings the hope that Yes
Bank's lending and provisioning policies will finally follow best practices. And the bank will be more transparent in
reporting facts.

Key Management Personnel

Mr. Rana Kapoor is the founder, Managing Director and CEO of Yes Bank. He holds an MBA from Rutgers'
University in New Jersey, USA and a Bachelor's degree in Economics (Honours) from the University of Delhi. Prior
to joining Yes Bank, he was the CEO and MD of Rabo India, and had spent 16 years at Bank of America and as GM
of ANZ Grindlays' Investment Bank (ANZIB) in India.

Mr. Raj Ahuja, the Chief Financial Officer of the Bank is a Chartered Accountant (ICAI), Cost Accountant (ICWAI)
and also holds a bachelor's degree in Commerce from the Sri Ram College of Commerce, University of Delhi. Mr.
Ahuja has over 26 years of experience managing Finance and allied areas, Operations, Fintech, Compliance and
Regulatory aspects.

Risk Analysis
In order to further improve our risk analysis of companies we have come out with a revised Equitymaster Risk
Matrix (ERM®). The ERM® is broken down in to 4 sub heads namely industry risk, performance risk, management
risk and balance sheet risk. (For details please refer to the ERM® at the end of the report).

Regulatory risk:

Some businesses are subject to regulations by external government agencies. These companies are subject to
regulatory risk since they do not have the liberty to operate in a free environment. Excessive regulations can
create bureaucratic hassles and impede growth. Thus, higher the regulation, higher is the risk for any business.
The banking sector is subject to various regulations imposed by the Reserve Bank of India in terms of capital
adequacy, lending norms, provisioning requirements etc. Based on these parameters, we assign a risk rating of 4
to the stock.

Cyclicality risk:

An industry cycle is characterized by an upturn as well as downturn. Businesses whose fortunes typically swing
with industry cycles are known as cyclical businesses. Cyclical businesses do well during an industry upturn
and vice versa. On the other hand, there are some businesses based on consumption stories that are non-
cyclical. These businesses are immune to industry cycle changes and have less risk. In short, if the business is
cyclical higher is the risk. The banking sector is extremely cyclical and is in fact a reflection of the macro
economy. The sector typically witnesses average credit growth at 1.5 times GDP growth. Based on this, we
assign a score of 4.

Competition risk:

Every industry is characterized by competition. However, some industries where entry and exit barriers are
typically low have higher competition risk. Low barriers means more players can enter into the industry thereby
intensifying competition. Low product differentiation also intensifies competition risk. The banking sector is
already very fragmented and competitive with newer banks having fetched licenses already and more in
pipeline. As explained earlier competition in the banking sector is expected to become extremely stiff in coming
years. Given Yes Bank's relatively strong positioning on the private sector, we assign a score of 6 to the stock on
this parameter.

4
 Income growth:

Over the eight -year period (actual history of past 5 years and explicit forecast for the next 3 years) Yes Bank's
income CAGR is 17.6%. We assign a rating of 6 to the stock on this parameter.

Net profit growth:

Over the eight-year period (actual history of past 5 years and explicit forecast for the next 3 years) the net profit
CAGR stands at of 17.7%. We assign a risk rating of 6 to the stock on this parameter.

Net Interest margins:

Net interest margin (NIM) is a measurement of the spread that the financial entity makes on its average earning
assets (typically loans, investments and balance with other banks). Banks that are able to fetch sufficient low
cost funds and lend them with a good spread or invest in high yielding assets have steady NIMs. The higher the
NIM, the easier it is for financial entities to tide over volatility in interest rates. The average NIM for Yes Bank
over the eight -year period (actual history of past 5 years and explicit forecast for the next 3 years) stands at
3.1%, which is slightly higher than the industry average. We assign a score of 6.

Net profit margins:

Net profit margin is a measurement of what proportion of a company's revenue is left over after paying for all the
variable and fixed costs inclusive of interest and depreciation charges. Net margin is the final measure of
profitability. It reflects the total profits the company takes home. Higher the margin, better it is for the company
as it indicates better pricing power and effective cost management. The average net margins over the eight
-year period (actual history of past 5 years and explicit forecast for the next 3 years) stand at 18.4%. We assign a
score of 6.

Return on net worth (RoNW):

RoNW is an important tool to assess a company's potential to be a quality investment by determining how well
the management is able to allocate capital into its operations for future growth. A RoNW of above 15% is
considered decent for companies that are in an expansionary phase. The average RoNW over the eight-year
period (actual history of past 5 years and explicit forecast for the next 3 years) stands at 17.3%. We assign a
score of 6.

Cost to income ratio:

This ratio helps assess the operating cost efficiency of a financial entity. It primarily takes into account the
operating cost for the company vis-a-vis income by way of net interest earned and other income. Financial
entities that are lean in terms of cost to income ratio manage to retain a healthy profit margin across cycles.
The average cost to income ratio for Yes Bank over the eight -year period (actual history of past 5 years and
explicit forecast for the next 3 years) stands at 40.8%. We assign a score of 6.

Transparency:

Transparency is the key to any business. Transparency can be gauged by assessing the past dealings of the
company with various stake holders be it the customers, suppliers, distributors or shareholders. The easiest way
to gauge the same is checking the level of disclosures in the company's quarterly financial updates and
communication with minority shareholders. Most importantly, the management's willingness to explain its
stance if there is a negative development in the company or stock shows its forthrightness. Transparent
managements would get a higher rating. The management of Yes Bank has not been quite transparent in its
operations. Also it is not very forthcoming with information about the key risks to the business. We thus we
assign a rating of 4.

5
 Capital allocation:

Apart from honesty, capital allocation skills are equally important in assessing management quality. By capital
allocation we mean how the management chooses to deploy capital in the business or across businesses.
Managements that have in the past destroyed shareholder wealth by diversifying in unrelated, unviable
businesses or make expensive acquisitions would rank low on this parameter. Further managements that focus
on capital intensive growth at the cost of profitability would also fetch a low rating. Although Yes Bank has had
good return ratios in the past, given the bank's history of frequent equity dilution, we assign a score of 5 to Yes
Bank on this parameter.

Promoter pledging:

Promoters typically pledge their shares to take a loan which is generally infused in the company. This exercise is
generally resorted to when all other sources of external liquidity dry out. The risk with this strategy arises when
share price falls. This triggers margin calls. If management is unable to provide some sort of a collateral to the
lending party from whom the money is borrowed that party may sell the shares to recover its money. This
accentuates the share price fall. Hence, higher the promoter pledging higher is the risk. With 3.62% of the
promoters' equity being pledged at the end of the June 2018 quarter we assign rating of 5.

Net NPA to advances:

A good asset quality is the hallmark of good lending practice of a financial entity. Financial entities that tend to
have high non-performing assets (NPAs) during periods of economic stress deserve a lower rating. Ones that
have average net NPA ratio in excess of 1.5% are particularly risky. The average net NPA to advances ratio for
Yes Bank over the 8 year period (actual history of past 5 year and forecast for the next 3 years) stands at
0.7%. However, giver the divergence in reported NPAS, we assign a score of 3 on this parameter.

Capital adequacy ratio (CAR):

This is one of the most important factors that are used to judge the soundness and sustainability of a financial
institution's business over the longer term. It shows the ratio of capital to assets financed. The RBI has
stipulated a minimum CAR of 9% for banks as per Basel III. Since Yes Bank's CAR at the end of June 2018 stood
at 17.3%, we assign Yes Bank a score of 8.

It may be noted that quality of loan book, return generating capability, earnings quality and management risk get
the highest weight in our matrix. Hence, scores assigned to these factors influence the overall score.

Considering the above analysis, the total ranking assigned to the bank is 75 that, on a weighted basis, stands at
5.2. This makes the stock a medium-risk investment from a long-term perspective. However, apart from the risk
score investors must take into account the latest valuations before investing in the stock.

ERM®

Regulatory risk $ 4 5.0% 0.2

Cyclicality risk $ 4 5.0% 0.2

Competition risk $ 6 5.0% 0.3

Income growth 6 5.0% 0.3

Net profit growth 6 5.0% 0.3

6
 Net interest margins 6 5.0% 0.3

Net Profit margins 6 5.0% 0.3

RoIC/RoNW 6 10.0% 0.6

Cost/Income Ratio 6 10.0% 0.6

Transparency $ 4 10.0% 0.4

Capital allocation $ 5 10.0% 0.5

Promoter pledging $ 5 10.0% 0.5

Net NPA to Advances 3 10.0% 0.3

Capital Adequacy Ratio 8 5.0% 0.4

Final Rating# 75 5.2

*Excluding extraordinary gains.

For qualitative factors, denoted by $ sign, lower the risk, higher the rating
For any risk parameter if the score is below or equal to 4 it indicates high risk. The risk score of these parameters is highlighted in red color.
For risk parameters where the score is above 4 riskiness is low. The risk score of such parameters is highlighted in grey.

Updates On Yes Bank: Why Is the Stock Worthy of Investment?

Add: Alert | Portfolio
Important to point out that this is not the first
Market Data time that Yes Bank has seen a sharp Consider
correction in valuations because of NPA and Buying the
Price On Reco. Date (Rs) 183 (BSE)
corporate governance issues. Here is what I stock of Yes
CMP - BSE / NSE (Rs) 184 / 184 had written to subscribers, in a report on Yes Bank at
Change Since Reco.  0.5% Bank in 2013: current price
52-week High/Low (Rs) 404 / 199
or lower.
NSE Symbol YESBANK As the going got tough post 2009, Yes Bank's
BSE Code 532648
growth rate did moderate, as was expected. But it was not until May 2013
that its valuations cracked. Concerns over NPAs, profitability and a spate
No. Of Shares 2305.7 m
of negative news together took a toll on the stock price and valuations of
Face value 2.0
the bank. The fundamentals, on a relative basis, continue to look relatively
FY18 DPS 2.7
sound. But episodes like bad lending (in the form of exposure to Deccan
Dividend Yld (FY18 at current 1.5%
prices)
Chronicle) and corporate governance issues have got investors skeptical.

Free Float 80.0%

Market Cap (Rs m) 421,943

Premium Search

Rs 100 Invested Is Now Worth

View Updated Chart

Yes Bank does not have a high restructured assets portfolio currently.
However, it does remain exposed to the risk of delinquencies. Again, a high
Stock Price Performance

7
 proportion of treasury income does make the bank vulnerable to volatility
in short term interest rates. To add to that, the standoff between the
  Yes Bank Index* promoters of the bank (Rana Kapoor and family of late Mr Ashok Kapur)
Over 1 Year -37.2% 15.4% has brought some corporate governance issues to the fore.
Over 3 Years 15.5% 10.5%

Over 5 Years 30.5% 13.4%

Exactly five years later, the bank seems to have witnessed a déjà-vu kind
of situation.
* BSE Sensex

Yes Bank continues to have the competencies to rid itself of the NPA
Shareholding (%, June-18) problems, put better risk controls in place and win back investor
confidence.

Promoters 20.0 My 2013 recommendation on Yes Bank had helped subscribers gain
Banks, MFs and FIs 25.0 almost 100% on the stock within eight months.
Foreign Portfolio Investors 42.5

Indian public 10.5

This time, the potential gains could nearly be as big if not as rapid.

Others 2.0
We have arrived at a target price of Rs 370 for Yes Bank from FY21
Total 100.0
perspective.

Therefore, the stock can be expected to fetch compounded annual returns

(CAGR) of about 30% from the current levels over next two to three years,
apart from dividend yield of 1.3%.

Given that this is a typical 'be greedy when others are fearful' scenario for
value investors, we would recommend that subscribers consider buying
the stock of Yes Bank at current levels.

According to us, in a scenario of ideal allocation of funds, bluechip stocks

could be considered to comprise at least 60% of one's total equity
portfolio. Further, we believe that a single bluechip stock should ideally
not form more than 5-6% of the total portfolio. However, please note that
this allocation will vary from person to person. For something that works
best for you, we recommend you talk to your investment advisor.

Valuation Rationale
At the current price, the stock of Yes Bank is valued at 1.1 times our
estimated FY21 adjusted book value.

Keeping in mind, the long-term growth, profitability and asset quality

prospects, we value the bank at about 2.25 times adjusted book value
(book value adjusted for net NPAs). This gives a target price of Rs 370 for
Yes Bank from FY21 perspective.

More On Yes Bank

All Recommendation Reports | Latest Update | Latest Stock Quote

Financials At A Glance

Interest Income 164,250 202,686 291,617 300,491 366,125

Interest Expense 106,265 125,294 192,466 213,949 269,822

Net Interest Income 57,985 77,392 99,150 86,542 96,303

Other Income 42,178 52,932 58,225 66,958 77,002

8
 Other Expense 41,686 52,735 63,167 62,463 70,955

Provisions & Cont. 7,942 15,542 10,371 12,450 14,976

Tax 17,136 19,713 26,828 25,148 27,960

Profit after Tax 33,399 42,332 57,010 53,439 59,415

Net profit margin (%) 20.3% 20.9% 19.5% 17.8% 16.2%

Net Fixed Assets 3,954 4,350 4,785 5,263 5,789

Balance With RBI 57,150 80,295 76,820 92,226 110,934

Bal with banks & money at 14,287 20,074 19,205 23,056 27,734
call

Loans and advances 1,322,630 2,035,340 1,728,456 2,075,075 2,496,026

Investments 925,841 1,424,738 1,209,919 1,452,552 1,747,218

Other assets 137,315 178,509 232,062 301,680 392,185

Total Assets 2,461,177 3,743,306 3,271,247 3,949,852 4,779,885

           

Networth 220,540 257,580 307,418 352,846 404,209

Borrowings 1,428,740 2,007,380 1,920,507 2,305,638 2,773,362

Deposits 357,185 501,845 480,127 576,410 693,340

Other Liabilities & provisions 454,712 976,501 563,196 714,959 908,974

Total liabilities 2,461,177 3,743,306 3,271,247 3,949,852 4,779,885

Valuations

Net interest income (Rs m) 57,985 77,392 99,150 86,542 96,303

PAT (Rs m) 33,399 42,332 57,010 53,439 59,415

No. of shares (m) 456.5 2,305.7 2,317.2 2,328.8 2,340.5

EPS (Rs) 417.4 529.0 712.4 667.8 742.5

Price to earnings (x) 12.8 10.1 7.5 8.0 7.2

Price to adj book value (x) 2.1 1.8 1.5 1.3 1.1

June 2018 Quarter Result Updates of StockSelect Open Positions

Power Finance Corp. (PFC) reported 22% YoY growth in net profit for the June 2018 quarter. This was primarily due
to lower credit costs even as net interest margins (NIMs) remained under pressure. Net interest margins (NIMs)
for the June 2018 quarter stood at 3.3%.

PFC posted a loan book growth at 12.7% YoY, with the loan book growing to Rs 2,800 billion. Government loans
make up 82% of the loan book, with private loans comprising of 18%.

PFC's net NPAs stood at 4.5%, down from 7.39% in the previous quarter due to application of Ind-AS.

Rural Electric Corporation (REC) reported 37% YoY increase in net profits for the quarter ended June 2018. This
was due to increase in provisioning.

NIMs for 1QFY19 came in at lower at 3.7% compared to 4.4% in 1QFY18. The overall loan book grew by 16% YoY
for the quarter.

REC witnessed a slowdown in sanctions and disbursements in the quarter and they declined YoY by 44% and 35%
respectively. Both sanctions and disbursements were hit due to a 70% decline in sanctions to the under-pressure
power generation sector, along with a 13% slowdown in sanctions for the transmission and distribution segment.

9
Performance Review
On a month on month basis, the BSE Sensex fell by around 6.5% as fears of a contagion in emerging economies
worldwide took shape. The crisis brewing in emerging markets, the Rupee's devaluation, rising oil prices along with
emerging fears of a liquidity crunch in the financial sector has led to a rout in the broader markets.

The trigger of sharp market correction over the past week was the sale of Non-Convertible Debentures (NCDs) of
DHFL at a high yield by DSP Mutual Fund. The result was widespread panic in financial stocks. NBFCs have seen
robust growth in recent years. But the recent liquidity crisis at IL&FS has raised concerns over how long this
growth will continue.

Majority of the correction was seen in banking and financial stocks. The same was seen in the open positions of
banking and financial sector stocks in StockSelect service.

In fact, as we highlighted in a special report at the beginning of the month, markets like this one can throw up
mouthwatering safe stocks at never before seen valuations. This month's recommendation is just an example of
such opportunities.

So, be prepared to load up on some great stocks. Keep a close eye on the top stocks to buy as well as the buy at
lower recommendations. And be sure to make the most of this opportunity to create permanent wealth.

In this month's performance review, there are changes in the views on some fundamentally strong stocks that
were already part of Open position. We have discussed about them below.

Over the last month, the stocks of Bharat Electronics and Sun Pharma corrected sharply. In response we sent out
a special note to subscribers indicating what course of action they could consider taking.

Here are excerpts:

Bharat Electronics

The correction in Bharat Electronics' stock has come on the back of the Ministry of Defence's sudden decision to cap
the margins on the defence projects, awarded on nomination basis, from 12.5% to 7.5%.

So, it seems the company's profitability from new projects will not be in line with what it has achieved in the past. And
that could be a structural negative in our view.

We have reviewed our estimates for the stock taking into account the possibility of lower margin FY20 and
FY21.

Our revised FY21 target price for the stock of Bharat Electronics stands at Rs 160. From the current price this
offers a CAGR of 14%, apart from dividend yield of around 2%.

We recommend that subscribers consider holding on the stock or buying more of it at current price if their
exposure to the stock does not already exceed 5-6% of the portfolio.

Sun Pharma

Sun Pharma received Form 483 with six observations for its Halol facility by the US FDA. The facility was inspected
recently in August 2018.

We believe that the USFDA uncertainties hovering over Sun Pharma will continue to temper the profitability of the
company in the near term. However, the management has shown resilience and commitment to resolve these issues.

We reiterate our view that subscribers should consider holding on to the stock.

10
 You can read more here.

Increased prices of domestic and international coal in recent years have intensified risks in the power
generation sector. Combined with rising railway freight charges for coal transportation over the distance of more
than 500 km, this has inflated the variable generation cost for many coal-fired power plants. Shares of Power
Finance Corp. Ltd (PFC) and Rural Electrification Corp (REC) have been hammered ever since the Power Ministry
asked the companies to restrain lending to loss-making distribution companies (discoms). The lending restraint
is expected to add to the growth challenges as about 80% of the electricity discoms' debt remains concentrated
within states whose aggregate technical and commercial losses are higher than 15%. Furthermore, there are
speculations that a government proposal to sell its 65% stake in PFC to REC could put the companies' high
dividend payouts at risk. We, however, believe that given the importance of the power generation sector to the
economy and banks' inability to lend for long term power projects, the importance of PFC and REC's role will
hardly be diluted over the long term. No doubt there will be pressure of growth and profitability in the near term.
But with limited downside risks in valuations (assuming not all the power assets will have to be written off), we
believe subscribers could continue to hold on to the stocks. We therefore, change the view on REC to Hold and
will review our estimates once there are further updates on the proposed merger with PFC.

Meanwhile, Cochin Shipyard has announced that a meeting of its board of directors will be held on 8th October
2018, to consider the proposal for a buyback. This stock, is currently trading near its 52-week low, and 8% below
the IPO price of Rs 432 (listed in August 2017). We will send a special update to subscribers once more details on
the same are made available. We retain our buy view on the stock.

StockSelect Open positions as on 28th September 2018

ONGC 23-Jan-15 Buy 232 Under 181 -22% Hold -

Review

Axis Bank 25-Aug-15 Buy 502 704 616 23% Hold 14%

Power Finance 25-Aug-15 Buy 107 111 83 -22% Hold 34%

Corp

Sun Pharma 29-Oct-15 Buy 880 780 640 -27% Hold 22%

Glenmark Pharma 22-Dec-15 Buy 938 1,140 654 -30% Hold 74%

HDFC Bank 25-Feb-16 Buy 944 1,832 1,967 108% Hold -7%

HDFC 25-Feb-16 Buy 1,042 2,195 1,766 70% Hold 24%

Cipla 23-Mar-16 Buy 533 690 671 26% Hold 3%

Tata Motors 25-Jan-17 Buy 548 654 233 -57% Hold 180%

IDFC Bank 23-Feb-17 Buy 63 84 38 -39% Hold 120%

IDFC Ltd 23-Feb-17 Buy 53 62 42 -20% Hold 46%

Lupin Ltd 31-Mar-17 Buy 1,441 1,507 890 -38% Hold 69%

Infosys 26-May-17 Buy 498 786 718 44% Hold 10%

LIC Housing 29-Dec-17 Buy 565 773 433 -23% Buy 79%
Finance

Rural 22-Jan-18 Buy 156 205 103 -34% Hold 100%

Electrification
Corporation***

UPL Limited 28-Mar-18 Buy 728 1,059 696 -4% Hold 52%

Bharat Electronics 27-Apr-18 Buy 133 160 84 -37% Hold 90%

Ltd#

Mahanagar Gas 23-May-18 Buy 796 1,161 829 4% Buy 40%

Ltd

GE Shipping 4-Jul-18 But 269 371 280 4% Buy 32%

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 Cochin Shipyard 6-Jul-18 Buy 426 585 400 -6% Buy 46%

Hero MotoCorp 24-Jul-18 Buy 3,101 4,364 3,105 0% Buy 41%

Yes Bank 28-Sep-18 Buy 183 370 183 0% Buy 102%

** Calculated by dividing current price by recommended price

*** Change in view or target price.
# Change in view and target price. Please refer to the latest special update.
##Please note: Subscribers must note that stocks with the highest expected returns may not necessarily be fundamentally the safest ones to invest your money.
These stocks also need to be evaluated on various qualitative parameters like management quality, competitive advantage and stability in earnings and profit
margins. We strongly recommend subscribers to go through our latest updates on all stocks before making any investment decisions.

The Top Stocks to Consider Buying

As you are aware, the list of top stocks allows subscribers to choose a handful of Best buys from amongst our buy
recommendation. The 'must have' criteria for stocks to be eligible in the list of best buys are a high rating on the
ERM®. The additional level of filter will be their return potential over a period of three years. But as you
understand, the list will not be static but will evolve over time.

The valuations for most of the safest bluechips currently stand fairly expensive. The list for this month comprises
of Mahanagar Gas, LIC Housing Finance, Cochin Shipyard and Hero MotoCorp. Given its relatively lower
ERM® score, Yes Bank does not make it to the list of top stocks to buy.

As you can see in the Performance review, there are several other stocks on which we have recommended buy due
to attractive valuations. However, most do not make it to the list of top 5 as their ERM®  score do not meet the
stringent criteria for featuring in the list. As we had told you earlier, while we will aim to have 5 stocks in this list
every month, there could be exceptions once in a while.

Please do pay attention to our latest views on the stocks mentioned in this list every month. According to us, in a
scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at least 60% of one's total
equity portfolio. Further, we believe that a single bluechip stock should ideally not form more than 5-6% of the total
portfolio. However, please note that this allocation will vary from person to person. For something that works best
for you, we recommend you talk to your investment advisor.

Here is our list of Top Stocks To Consider Buying

LIC Housing Finance

Mahanagar Gas

Cochin Shipyard

Hero MotoCorp

Mailbag

Question 1: Are all the power finance and housing finance companies very attractive at current valuations? Should I buy
more of the stocks?

Answer: The IL&FS fiasco has brought to the limelight the risky practices of some entities in the financial sector
and the obscene valuations that some of these entities were enjoying because of their supposedly higher growth.
The instances of credit default and corporate governance risk has since then spooked the markets and taken a toll
on stocks across sectors. Not all banking, NBFC and housing finance stocks can be painted with the same brush.
There are certainly ones that have genuinely good business models and managements and are best placed to tide
over this crisis. Power finance companies will face problems due to the sectoral crisis that the power generation

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and distribution players are facing. But since they do not really face much competition from public and private
sector banks, they will continue to remain systemically important.

We have reviewed our estimates on the stocks in the financial sector that are in open position and offered updates
in the Performance Review this month.

According to us, in a scenario of ideal allocation of funds, bluechip stocks could be considered to comprise at
least 60% of one's total equity portfolio. Further, we believe that a single bluechip stock should ideally not form
more than 5-6% of the total portfolio. However, please note that this allocation will vary from person to person. For
something that works best for you, we recommend you talk to your investment advisor.

Warm regards,

Tanushree Banerjee (Research Analyst)

Editor, Stock Select

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro
Equitymaster's oldest recommendation services. She is also the editor of
Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5
Minute WrapUp. Tanushree started her career at Equitymaster covering the banking
and financial sector stocks and scrutinising RBI policies. Over the last decade, she
developed Equitymaster's research processes that helped us pick out various
multibaggers, across all sectors. A firm believer of "safety first" when it comes to
investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel
Greenblatt.

Where StockSelect Fits In...

Stock markets tend to be very volatile. And putting too much money in a single stock
can be very risky. In our view, large cap/ blue-chip stocks are the safest of the lot.
Because of their large size, they may not grow as fast as small caps or mid caps. But
they are relatively more stable and resilient to negative macroeconomic developments.
This keeps them in good stead over the long term and makes them reliable wealth
creators.

According to us, large cap/ blue chip stocks should comprise at least 60% of one's
total equity portfolio. However, a single large cap/ blue-chip should not form more
than 5-6% of the total portfolio.. This allocation will of course vary from person to person. For something that works best for you,
we recommend you talk to your investment advisor.

Frequently Asked Questions

These are some of the Most Frequently Asked Questions on StockSelect. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that the bluechip stocks typically recommended in StockSelect, in general, have large market
capitalization and sufficient liquidity. As such, a spurt in the stock price, if any, post our recommendation, would
be marginal. If the stock price moves up sharply, we recommend subscribers to consider waiting till the initial
volatility settles down and the stock falls back in the 'buy' zone.

Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
Each of our product teams, be it StockSelect, Hidden Treasure, Smart Money Secrets or The India Letter, has its own
unique screen and checklist for selecting and recommending stocks. In rare cases, where there is a compelling
proposition to recommend a stock in more than one service simultaneously, there could be an overlap in stocks.

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There could be contrary views on the same stock in different services, only in rare cases, where the investing
tenure or the investing philosophy of the two products are very different.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock
price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.

Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

Definitions of Terms Used

Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
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 market price keeping in mind the objective of the recommendation service.

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INTRODUCTION:
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venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

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GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:

For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:

a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
b. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
c. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
d. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research
report.
e. Equitymaster's technical team/other research services have given a 'Hold' view on GE Shipping.

DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:

a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
b. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
c. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject
company in the past twelve months.
d. Equitymaster's Associate has received fees for services provided other than investment banking or merchant banking or brokerage services from Axis Bank Ltd in
the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.

GENERAL DISCLOSURES:

a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective
of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.

Feedback:

If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

MORE ON YES BANK MORE STOCKSELECT

Sorry! There are no related views on news for this Aavas Financiers IPO: Should You Bet on This
company Affordable Housing Finance Company?
(IPO)
Sep 25, 2018

Should you apply for the IPO of Aavas Financiers?

Garden Reach Shipbuilders and Engineers Ltd:

Is This PSU Shipbuilder Worth Betting On?
(IPO)

15
 Sep 24, 2018

Should you apply for the IPO of Garden Reach

Shipbuilders and Engineers Ltd?

Much Awaited RBI Action Finally Made this

Safe Stock a Buy
(StockSelect Special Report)
Sep 21, 2018

There has not been a better time to buy this stock

in the last four years.

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Betting On?
(IPO)
Sep 17, 2018

Should you subscribe to the IPO of IRCON

International Ltd?

Bharat Electronics and Sun Pharma: Any

Structural Negatives?
(StockSelect Special Report)
Sep 7, 2018

Will the Ministry of Defence and USFDA actions

hurt the long term prospects of the stocks?

More Views on News     Recommended Reading

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