Stock Pitch

Max Lipscomb

September 14, 2014

2

Table of Contents

I. Top-Down Sourcing & Investment Thesis

II. Company Overview

III. Valuation

IV. Conclusion

I. Top-Down Sourcing & Investment Thesis

4

The Equity World Has Become Expensive… 5Yr Performance as of Sept 14, 2014

Source: Bloomberg

S&P 500

HSI

DAX Nikkei 225

FTSE

India has historically maintained 6-7% annual growth rates through the 1990’s and early 2000’s

2008 financial crisis led to credit crunch and subsequent “stagflationary” period

Struggled with high inflation, slow growth, and deteriorating corporate finances

Narendra Modi was elected Prime Minister in May 2014 on platform of business-friendly reform

Projected 15% CAGR in corporate profits over next 10 years

5

… India Represents a Pocket of Opportunity and Growth

Source: 1. World Bank, Morgan Stanley Research 2. UN Population Database Estimates 3. World Bank, CIEC Growth

INDIA AS A GROWTH ECONOMY PROJECTED GDP GROWTH (USD) (1)

2012 2025E

$1.8 Trillion

$5.0 Trillion

Economic growth to average 6.75% over the next 5yrs

ADDITIONS TO WORKING AGE POPULATION (2015-2025E) (2)

-6%

-2%

-1%

1%

3%

5%

10%

24%

25%

42%

Europe

China

Japan

US

Rest of AXJ^

Indonesia

LATAM

ROW

India

Africa

India Accounts for 25% of the world’s global working age population growth in the next 10 years

TREND IN YOUTH LITERACY (15-24yrs) (3)

54% 62%

76% 81%

90% 95%

1981 1991 2001 2006 2011 2016E

Demographics combined with an increasingly skilled working population help accelerate GDP growth

51%

184% 179% 177% 152%

134% 125% 116% 101%

69%

0%

50%

100%

150%

200%

6

Within India, Financial Sector is Promising…

Source: 1. Morgan Stanley Research, as of June 2014 2. World Bank, as of CY2012 3. KKR Investment Research, as of December 31, 2010

THE THESIS FOR FINANCIAL OUTPERFORMANCE GROWING REVENUE POOL FOR FINANCIAL SECTOR (Bn ₹) (1)

392 1,517

3,239

6,385 8,223

17,648

0

5,000

10,000

15,000

20,000

25,000

0 1 2 3 4 5 6 71999 2019E 2003 2007 2011 2014E

16.5% CAGR

DOMESTIC CREDIT TO PRIVATE SECTOR (% OF GDP) (2) % RELIANCE ON PRIVATE INVESTMENT HAS GROWN (3)

26 49 42 51 42

30 25

20

22 15

14 17

20 34

54

29 43 35 40

47 36

1950 1960 1970 1980 1990 2000 2010

Public Corporate Household Valuables

Will result increased dependence on and growth of private banks vs. SOE’s

75% private

India has an underdeveloped financial system, even when compared with emerging markets rivals

GDP acceleration and moderated inflation will help drive increased willingness to lend

Widening gap between GDP growth and nominal interest rates will provide incentive for borrowers to lever up

The combination of these two factors should lead to significant credit expansion over the next decade

Morgan Stanley’s Macro Team projects 20% CAGR for financial-sector profits through 2019

GDP Growth: 6.4% annually through 2019

Inflation: Down to 6.4% in 2019 from 9.5% in 2014

7

... And HDFC Bank (NYSE: HDB) Is Well Positioned As of Sept 14, 2014

Recommendation: Buy Current Price: $49.30 Price Target: $59.01

HDFC Bank’s long history of successful growth strategy execution, premium brand value, and a potential

macroeconomic turnaround give its U.S. ADR an attractive long-term risk/return profile despite the potential for short-

to-medium-term volatility.

Rural push will strengthen the retail banking franchise

Stable asset quality given higher retail loan rates and lower credit costs

Macroeconomic drivers should lead to positive surprise in net income numbers

CATALYSTS

RISKS

Non-Performing Loans could see increase above current levels

Transparency/corruption risk from investing in foreign market with less SEC oversight

Excitement over Modi and reform potential could be irrational exuberance

II. Company Overview

Aditya Puri – “Managing Director” (CEO)

Formerly CEO of Citibank, Malaysia

Led HDFC to 80 Quarters of 20% Growth

30 years of banking experience

C.M. Vasudev – Chairman

Formerly Indian Secretary of Finance

South-Asian Region Rep. to World Bank

Director of State Bank of India & ICICI

9

Company Background

HDFC is the fifth-largest private bank in India by assets,

largest by market capitalization:

Primary businesses: wholesale banking (corporate

banking and loans), retail banking (credit cards,

deposit and savings accounts), treasury services

Founded: 1994 in Mumbai, India

Quick Facts

Historical >15% Return on Common Equity for past

5 years

TTM 21.6% Return on Equity

Most valuable brand in India in 2014

Trades at a premium to rivals due to well-articulated

growth strategy and successful execution

2014 Operating Margin: 48.2% (closest competitor

ICICI Bank posted a 32.6% margin)

2014 Revenue: $US 4.5Bn

2014 Net Income: $US 1.5Bn

2014 YTD Share Price Appreciation: 43.5%

Source: Annual Report and Investor Presentation

OVERVIEW “RURAL PUSH” FOR NEW CUSTOMER GROWTH

31%

9% 32%

28%

Semi-Urban Rural

Mar ‘11 Mar ‘14

34%

22%

23%

21%

Metro Urban

55% of branches now in non-urban locations where 60% of the Indian population resides

SEASONED & PROVEN MANAGEMENT TEAM

10

HDFC has Consistently Performed…

Source: 1. HDFC Annual Report, 2014

NET INCOME (MM ₹) Dividends Per Share (₹)

666 871 1,141 1,590

2,245 2,949

3,926

5,167

6,726

8,478

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Earnings Per Share (₹)

4.6 5.6 7.3

9.2 10.6 13.5

17.0

22.1

28.5

35.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.9 1.1 1.4 1.7 2.0 2.4

3.3

4.3

5.5

6.9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Q1 2015 HIGHLIGHTS

Core operating profit up by 22.9% to ₹ 38.2 Bn

Deposits up by 22.7% to ₹ 3,721 Bn

Net profit up by 21.1% to ₹ 22.3 Bn

Slight drop in net profit growth due to higher than

expected credit costs, muted revenue growth

JP Morgan Equity Research: “We would treat it as a

one-off”

11

… With a Strong Focus on Return on Common Equity

Source: 1. Bloomberg as of Sept. 14, 2014

HISTORICAL RETURN ON EQUITY (%) (1)

17.7

16.9

16.4

16.9

18.9

20.6

21.6

2008 2009 2010 2011 2012 2013 2014

12

Asset Quality Remains High Amidst Economic Turmoil

Source: 1. Investor Presentation – July 22, 2014 Note:

Net Non Performing Assets (NPA) = Gross NPA less specific loan loss provisions

Amongst the best portfolio quality (wholesale & retail) in the industry

Strong credit culture, policies, processes

Specific provision cover at 73% of NPAs, total coverage ratio over 100%

Restructured loans at 0.2% of the Bank's gross advances as on March 31, 2014

Floating provisions at ₹ 18.4Bn as on March 31, 2014

NPA rate lower than 10 year average even in current challenging environment

Important Note: Stressed loans sits at ~10% of Advances as of Q1 2015

HEALTHY ASSET QUALITY

1.02% 0.97% 0.98%

0.18% 0.20% 0.27%

2012 2013 2014

Gross NPA % Net NPA %

NON PERFORMING ASSETS (%) TO TOTAL AMOUNT LOANED MAINTAINING HEALTHY MARGINS

4.43%

4.47%

4.37%

2012 2013 2014

Net Interest Margin

13

Value Proposition – “Healthy Growth, Low Risk”

Source: 1. Investor Presentation – July 22, 2014

Growing economy / banking industry, gaining market share

Nationwide network, with expanding semi urban and rural

footprint

Wide Product range and multiple customer segments

Healthy balance sheet and revenue growth

Leading player across multiple products

Branch sales process, data mining & CRM - geared for

cross-sell

Disciplined margin and capital management with a focus on

ROA/ROE

Strong risk management, focus on asset quality

Leveraging organic and inorganic growth opportunities

Proven ability to generate shareholder value

III. Valuation

15

Income Statement Projection (Millions ₹, except per share amounts)

Loosely Based On: 1. JP Morgan Equity Research – Q1 2015 Report. Title: “1Q15 results: rare earnings miss, little cause to worry”

Drivers:

Net Interest Income Growth Rate 19.0% 22.0% 22.6% 22.6% 22.6% 22.6%

Non-Interest Income Growth Rate 7.8% 13.7% 14.8% 14.8% 14.8% 14.8%

Operating Cost % of Sales 45.8% 42.5% 41.0% 40.4% 41.3% 41.3% 41.3%

Non-Operating Cost % of Op Profit 40.5% 40.7% 39.3% 38.3% 39.5% 39.5% 39.5%

EPS Growth Rate 22.2% 25.6% 23.9% 16.6% 20.7% 20.8%

DPS Growth Rate 20.0% 26.2% 24.5% 16.6% 20.7% 20.8%

Year:

0 1 2 3 4 5 6

2014 2015E 2016E 2017E 2018E 2019E 2020E

Net Interest Income 184,826 219,853 268,324 328,928 403,220 494,292 605,933

Total Non-Interest Income 78,059 84,116 95,671 109,855 126,142 144,843 166,318

Total Operating Revenues 262,885 303,969 363,995 438,783 529,362 639,135 772,251

(-) Operating Costs (120,422) (129,274) (149,409) (177,267) (218,759) (264,123) (319,134)

Operating Profit 142,463 174,695 214,586 261,516 310,602 375,012 453,117

(-) Non-Operating Costs (57,679) (71,080) (84,429) (100,246) (122,549) (147,962) (178,779)

Net Income 84,784 103,615 130,157 161,270 188,053 227,050 274,339

Fully Diluted Shares 2,399 2,399 2,399 2,399 2,399 2,399 2,399

EPS 35.34 43.19 54.25 67.22 78.39 94.64 114.36

DPS 7.00 8.40 10.60 13.20 15.39 18.58 22.45

Payout Ratio 19.8% 19.4% 19.5% 19.6% 19.6% 19.6% 19.6%

Projected Statement of Operations (1)

16

Valuation Difficulties As of September 14, 2014

Attempted Valuation Strategies

Comparable Companies Analysis

Only one comparable private bank of size – ICICI Bank. HDFC Trades at a ~3-turn forward earnings multiple

premium, which we believe is justified based on the competitive advantages it possesses over ICICI

Other comparables of size are state-owned, which trade at severe discounts due to anticipated dilution from

further state investment and lower loan quality

Dividend Discount Model

Standard dividend discount at constant growth does not account for supernormal near-term growth

Two-stage and three-stage Gordon Growth Models for dividends are outside of the scope of this pitch based on

available information

“Our Mar-15 PT for HDFCB of ₹ 1025 is based on 3 stage Gordon growth model implying 4x Mar 16E book. Our valuations factor in cost of equity at 15.0%, Normalized ROE of ~26% and terminal growth of 5%. JP Morgan Equity Research (1)

Selected Equity Research Valuation – JP Morgan

Source: 1. JP Morgan Equity Research dated July 22, 2014 – Q1 2015 Report.

Title: “1Q15 results: rare earnings miss, little cause to worry”

JPM Valuation Implies 19.7% Premium to Current Share

Price

$49.30 Current ADR Price / Share

x (1 + 0.197) Intrinsic Value

Premium

= $59.01 Target ADR

Price / Share

IV. Conclusion

18

The Bottom Line on HDFC Bank

POST-DILIGENCE OPINION

The fundamental thesis behind a purchase of HDFC Bank’s US ADR is “growth at a reasonable price”

We believe that shares are roughly fairly valued, trading at 19.8x and 16.1x forward 2015E and

2016E earnings respectively, while maintaining ~20% YoY dividend per share growth

Essentially, HDFC allows the Investment Club to access emerging markets returns while taking

minimal execution risk

MD Aditya Puri: “is affirmative that he will get back to 25 percent and even 30 percent growth when

the economy gets back to 6-7 percent growth, which he expects by FY16

Primary Risks:

Largest risk is that 20% YoY growth is simply not sustainable on an infinite time horizon

If growth falters prior to expectation, how will the market react?

State-owned banks have seen rises in Non Performing Asset (NPA) levels (i.e. loans that won’t be

paid back

If these increases spread to private banks, HDFC margins are at risk (gross NPA’s rose from 0.98%

to 1.1% in Q1 2015)

Excitement over Modi and reform potential could be irrational exuberance

Is the party over? – Stock price has appreciated 43% YTD

Was up 39% over same period in 2012, up another 30% since then (14% annual growth)