Bajaj Finserv Ltd

Bajaj Finserv Limited (‘Bajaj Finserv’ or ‘the Company’) is thefinancial services arm of the Bajaj group. It is also the holding company under whichvarious financial services businesses reside, which are:

• Lending

Under Bajaj Finance Limited (BFL), earlier Bajaj Auto Finance, a company listed onthe Bombay Stock Exchange and the National Stock Exchange

• Protection

Life Insurance, under the Bajaj Allianz Life Insurance Company (BALIC)

General Insurance, under the Bajaj Allianz General Insurance Company (BAGIC)

• Financial Advisory and Wealth Management

Bajaj Financial Solutions Limited (Bajaj Finsol), which offers financial productsand advises clients on financial and wealth management. The business was launched inFY2011

In addition, Bajaj Finserv has wind-farm assets, incorporating 138 windmills inMaharashtra with an installed capacity of 65.2 MW.

Before describing the performance of each of the businesses, it is useful to give abrief overview of the Indian economy. The rest of this chapter gives details on each ofthese businesses and their rationale.

FY2012 has been a very difficult year for the Indian economy. After 8.6% GDP growth inFY2011, growth has fallen steadily in the first three quarters of FY2012 to 6.1% inOctober-December 2011. It seems that the country will achieve a growth rate of 6.5% to7.0% in FY2012 - far less than 8.6% of the previous year. Added to this are the variouspolitical uncertainties; high interest rates that have been marginally addressed by therecent reduction of 50 basis point; declining and uncertain inflows of foreign direct andportfolio investments; growing fiscal deficit; widening current account deficit and aweakening rupee; difficult investment climate; and rising inflation.

All these make for difficult times for businesses in financial services sectorintermediation. Let us now move on to the key businesses of Bajaj Finserv.

Bajaj Finance Limited (BFL)

With assets under management of over Rs. 13,100 crore, BFL is one of the leading,diversified NBFCs in the country. It delivered excellent results in FY2012.

• Total income: up 54% to Rs. 2,172 crore

• Profit before tax: up 63% to Rs. 602 crore

• Profit after tax: up 64% to Rs. 406 crore

• Deployment: up 67% to Rs. 15,797 crore

• Assets under management: up 73% to Rs. 13,107 crore

• Receivables under financing: up 69% to Rs. 12,283 crore

• Loan losses and provisions: down 25% to Rs. 154 crore

• Capital adequacy as on 31 March 2012: 17.5% — well above the RBI norms

• Capital infusion: Rs. 305 crore and preferential share warrant money of Rs. 21crore

BFL continues to focus in the three broad verticals, namely consumer finance, SMEfinance and commercial lending. The quality of its loan book continued to improve. Itfurther strengthened provisioning standards, and is among the most prudent in the NBFCspace, with net non-performing assets at 0.12% in FY2012. By remaining focused only oncustomer segments that it understands well, BFL expects to maintain its high asset qualityin the coming years.

With continuing rise in the cost of borrowings during FY2012, Bajaj Finance focused onstrengthening its asset-liability framework by raising longer tenor borrowings. As on 31March 2012, the Company’s total borrowings stood at Rs. 10,226 crore.

Deployment snapshot

Table 1 gives the deployment mix for FY2012 compared to FY2011, while Chart A plotsBFL’s loan deployment over the last five years.

Table 1: BFL’s deployment mix

(Rs. In Crore)

Receivables under finance

Table 2 gives the data on BFL’s receivables under finance.

Table 2: BFL’s Receivables under finance

( Rs. In Crore)

Two and Three-Wheeler

In FY2012, BFL emerged as one of the largest two-wheeler financier in India. Despite anincrease in competitive activity throughout the year, it financed over 650,000 newcustomers. It operates at 571 Bajaj Auto dealerships and over 1,700 of sub-dealers acrossthe country.

Over 45% of the customers acquired during the year were under the Direct CashCollection model. BFL has created this model with the rural and semi-urban customer inmind. It allows customers with low banking habits to obtain a loan from Bajaj Finance byusing a cash repayment mode, as opposed to payment via cheques or the ECS method. Thismodel has been employed for over three years, and has become a unique proposition for manyof our customers.

Consumer Durable Financing

Present in top 79 cities of the country, BFL is now the largest consumer durablesfinancier in India. Consumer durable financing deployment grew by 58% to Rs. 3,576 crorein FY2012. It helped finance 10% of all consumer electronics sold in the year. BFLacquired more than 1.45 million new customers, and is currently present in over 2,500points of sale across the country.

Salaried Loans

To diversify its offering in the consumer finance business, the company launchedpersonal loan offering for salaried employees in the current year. The business targetsaffluent salaried employees above a threshold salary range employed with leadingcompanies. The company deployed Rs. 207 crore in this vertical during FY2012.

Personal Loan Cross Sell

This business is present in 81 cities of India. It targets customers with goodrepayment history of their two-wheeler and/or consumer durables loans to cross sell apersonal loan. While maintaining focus on the balance between business growth and therisk-reward equation, deployments under this category grew by 53% to Rs. 586 crore.

Co-Branded Credit Card

BFL has entered into a strategic partnership with Standard Chartered Bank and launcheda co-branded ‘Platinum’ and ‘World Card’ for existing customers with agood repayment track record. Given its strength in retail customer acquisition, thisbusiness should have the potential to generate a sizeable fee income in the future.

Mortgage

This business is present in 31 cities of India. It targets affluent and high net worthsmall business and self-employed customers, and offers loans against the mortgage ofretail, residential and commercial premises. Loan Against Property deployments in FY2012grew by 57% to Rs. 2,259 crore; Home Loan deployments grew 213% to Rs. 726 crore. In Q3 ofFY2012, BFL launched a new product variant for its SME customers. Called the‘Flexisaver’, this product offers customers the flexibility to ‘draw whenthey want’ and ‘pay when they want’ without any extra charges — thefirst of its kind in this space.

Business Loans

This business is present in 31 cities across India. Deployments grew by 36% to Rs. 899crore in FY2012. BFL’s strategy of focusing on carefully chosen affluent smallbusiness customers has been extended to include unsecured loans to doctors and salariedclients.

Construction Equipment Finance

This business is present in 23 cities in India, and focuses on financing small,mid-sized and large strategic contractors for their construction equipment financingneeds. It is an asset backed financing business collateralised by construction equipmentassets. In FY2012, BFL deployed Rs. 891 crore.

Vendor Finance

The business is now three years old and has been growing steadily. It focuses on shortand medium term lending needs of vendors of large auto manufacturers. BFL deployed Rs.2,480 crore in this business in FY2012 — comprising short-term loans of Rs. 2,161crore and medium term deployment of Rs. 319 crore.

Infrastructure Finance

BFL commenced this business in the previous year. Despite a high interest rate scenarioand uncertainty in government policy in key areas, infrastructure is a core need of thecountry. Bajaj Finance has been selective in lending in this sector, and offers ProjectFinance, Corporate Finance and Mezzanine Debt to infrastructure companies/projects. Itdisbursed Rs. 975 crore during FY2012, and ended with a receivable book of Rs. 733 crore.

Financial performance

Table 3 gives BFL’s financial performance for FY2012 vis--vis the previous year,and Chart B plots profit after tax over the last five years.

Table 3: BFL’s Financial performance

( Rs. In Crore)

Risk Management and Portfolio Quality

As an NBFC, Bajaj Finance is exposed to credit risk, liquidity risk and interest raterisk. It has in place a strong risk management team and an effective credit operationsstructure. It has further strengthened its risk management by separating the functions ofChief Risk Officer and Chief Credit Officer to focus on portfolio management andunderwriting. Sustained efforts to strengthen the risk framework and portfolio qualityhave yielded significant results over the last few years. BFL ended the year with a netNPA of 0.12%, which is among the lowest in the industry.

BFL’s assets-liability committee (ALCO), set-up in line with the guidelines issuedby the RBI, monitors asset-liability mismatches to ensure that there is no imbalance orexcessive concentration on either side of the balance sheet.

Business outlook

BFL expects to maintain its performance in FY2013 and hopes to grow at a rate fasterthan the growth of bank credit. The approach will be to continue the growth momentum whilebalancing risk. As before, it will be investing in strengthening risk managementpractices; and in maintaining its investment in technology and human resources toconsolidate its position as a leading NBFC in India.

Protection

Bajaj Allianz Life Insurance Company Limited (BALIC)

The Life Insurance market

September 2010 saw major regulatory changes in the life insurance industry, which weretouched upon in the Company’s previous year’s annual report. FY2012 was the yearwhen the impact of these changes became fully visible. It also had two distinct halves:(i) H1, or April–September 2011, when new business premiums were severely impacted,especially compared to same period of the previous fiscal year; and (ii) H2 of FY2012,when the industry marginally recovered vis--vis the same period last year.

During FY2012, the life insurance industry witnessed negative new business growth. The24 life insurers mobilised first year premium of Rs. 114,233 crore in FY2012, which was9.2% less than what it was in the previous year. The market share of LIC increased from68.7% in FY2011 to 71.4% in FY2012. Symmetrically, that of the private sector fell from31.3% to 28.6%.

Tables 4 and 5 show the growth across segments in the first and second half of FY2012.Table 6 shows the growth for the full fiscal year.

Table 4: Growth in new business premiums, H1 FY2012 (Apr 2011 – Sep 2011)

Table 5: Growth in new business premiums, H2 FY2012 (Oct 2011 – Mar 2012)

Table 6: Growth in new business premiums, FY2012

It needs stating that the regulatory changes of September 2010 have led to a shift inthe business mix in FY2012 in favour of traditional life products compared to unit-linkedofferings. Across the industry, there has also been a much greater focus on profit driverslike persistency of policies, improving agent productivity and cost rationalisation.

Performance of BALIC

BALIC’s gross written premiums (GWP) for FY2012 was Rs. 7,484 crore. This was 22%lower than Rs. 9,610 crore written during FY2011. Renewal premiums reduced by 22%, fromRs. 6,144 crore in FY2011 to Rs. 4,766 crore in FY2012. New business premiums for FY2012were Rs. 2,718 crore - or 22% lower than the Rs. 3,466 crore clocked in the previous year.

Within the private sector, BALIC’s market share of new business premiums was 8.3%for FY2012, and it ranked fourth in this category among private life insurers. It rankedsecond among the private life insurers based on the number of new policies issued: 1.05million new policies issued in FY2012 versus 1.54 million in the previous year.

Unit linked premiums accounted for 31% of BALIC’s new business premiums in FY2012- compared to 58% in the previous year. Traditional individual premiums comprised 44% ofoverall new business premiums in FY2012, compared to 30% in FY2011.

Chart C plots BALIC’s new business premiums and gross written premiums (GWP) overthe last five years. Chart D shows the difference in product mix over the same period,which is especially stark after IRDA’s regulatory changes of September 2010.

As can be seen from Chart D, ULIPs dominated BALIC’s business up to FY2011 -though reducing from as high as 99% of the product mix in FY2008 to 58% in FY2011. Theeffects of the IRDA announcements of September 2010 have profoundly changed the mix. ForFY2012, traditional life products dominated in no uncertain terms: 69% of the mix, withpar accounting for 42% of the total and non-par 27%. In contrast, the share of ULIPs hasfallen from 84% in FY2010 to 58% in FY2011 and then to 31% in FY2012. This has changedBALIC’s business and servicing model, with agency becoming more important than everbefore. It ought to be mentioned that what is true for BALIC is also true for most othermajor non-bank associated players in the industry.

Financial performance

BALIC’s financial performance in FY2011 and FY2012 is summarised in Table 7.

Table 7: Financial performance of BALIC

(Rs. In Crore)

* Annualised Premium Earning (APE) = 10% of single premium and 100% of first premium

** Shareholders’ profit for the year is Rs. 1,311 crore. This comprises thecurrent year’s shareholders’ profit of Rs. 242 crore, distribution of surplusfrom policyholders’ account to shareholders’ of Rs. 979 crore and Rs. 90 croreon account of release from ‘Reserve for Lapsed Unit Linked Policies that are Unlikelyto be Revived’.

For FY2012, BALIC posted a shareholders’ profit of Rs. 1,311 crore, versus Rs.1,057 crore in FY2011. Of this, Bajaj Finserv’s share stood at Rs. 970 crore inFY2012, compared to Rs. 782 crore in FY2011. Accumulated profits as on 31 March 2012 wereRs. 2,350 crore (compared to Rs. 1,039 crore as on 31 March 2011); and theshareholders’ net worth was Rs. 3,561 crore (versus Rs. 2,249 crore as on 31 March2011).

As can be seen from the Table 7, despite difficulties posed by the IRDA’s ordersof September 2010, the Company’s strategy to pursue profitable growth with returns toall stakeholders is continuing to pay dividends. In FY2013, BALIC will focus on improvingemployee productivity, policy persistency, operational processes and customer servicelevels - and also look at ways of further increasing the share of agency channel, whichcontributed to around 43% of company’s new business premiums in FY2012.

Chart E plots BALIC’s post-tax shareholders’ profit, which have continued togrow despite difficult times.

Investments

As on 31 March 2012, BALIC’s assets under management (AUM) stood at Rs. 39,417crore, which included unit-linked funds of Rs. 29,984 crore. Chart F gives the data forthe last five years.

Unit-linked funds have decreased by 8.8% compared to 31 March 2011. However, thesefunds have performed well versus comparator funds, and have generated returns which are inline with the benchmark. Given in Table 8 below is performance of BALIC’s majorfunds, which account for almost three-fourths of the Company’s total unit-linked AUM,versus the benchmark for the last two financial years.

Table 8: Returns from BALIC’s Unit-Linked Funds

The traditional portfolios are carefully managed, keeping in mind the regulatory assetallocation requirements. Yield on non-unit linked instruments invested in FY2012 was 8.7%,versus 8.2% in the previous year.

Capital and Capital Adequacy

BALIC’s equity base (including share premium) was Rs. 1,211 crore, with no freshinfusions in FY2012. The company’s solvency ratio was 516% as on 31 March 2012,versus the minimum regulatory requirement of 150%.

Challenges

The major challenges for BALIC in near future are:

• Improving persistency of policies

• Developing a robust product mix of traditional, unit linked and group products

• Increasing productivity among the agency force

• Ensuring that intermediaries, especially individual agents look at insurance asa career, and not a temporary income-earning opportunity

Bajaj Allianz General Insurance Company Limited (BAGIC)

The General Insurance market

Since the entry of the private sector in general insurance from year 2000, the industryhas grown from 4 public sector entities to 25 companies - 4 in the public, 15 in theprivate sector, 4 specialised health insurance companies, plus the Agricultural InsuranceCorporation and the Export Credit and Guarantee Corporation. Besides, approvals forcommencement of business are being awaited by two more general insurance companies and twomore specialised health care companies.

Gross Written Premiums (GWP) of the industry, excluding the specialised insurers, havegrown from Rs. 12,390 crore in FY2002 to Rs. 43,000 crore in FY2011, and have crossed Rs.53,040 crore in FY2012 - with a CAGR of around 15.7%.

However, penetration as a percentage of GDP and the per capita spend on generalinsurance remain significantly lower than comparable emerging countries, let aside thedeveloped nations. If India’s real GDP grows at a CAGR of somewhere between 7% and 8%over the next decade, as is hoped by all, spends on general insurance are bound toincrease. The potential is vast, but insurers need to figure out ways to tap thisprofitably.

The general insurance industry posted a growth of 23.3% for FY2012. All companiesposted positive growth and most recorded double digit growth. The industry and BAGICgrowth rates are shown in Table 9 below.

Table 9: Gross Direct Premium Written in India

( Rs. In Crore)

Source: IRDA website and the IRDA Handbook of Insurance Statistics, 2008-09.Excludes specialised insurers.

The Indian Motor Third Party Insurance Pool (IMTPIP or the Motor Pool) is anarrangement where all general insurers ceded the premium with respect to third party risksof commercial vehicles and related losses to the Motor Pool — which were thenredistributed back to all the general insurers in proportion to their market share. SinceFY2011, the industry was affected adversely on account of increasing provisioning requiredfor Motor Pool losses.

Through its order dated 23 December 2011, the IRDA has dismantled the existing MotorPool from 31 March 2012. It has been replaced with a Declined Risk Pool for Act OnlyCommercial Vehicle Third Party (CVTP) insurance, which takes effect from 1 April 2012. Inanother order dated 3 January 2012, the IRDA has increased the Ultimate Loss Ratios (ULR)from 153% for all the pool years (FY2008 to FY2011) to 159% for FY2008, 188% for FY2009,200% for FY2010 and 213% for FY2011. Moreover, on account of the increase in the CVTPpremium rates in April 2011, IRDA has determined the ULR for the year FY2012 at 145%. Toabsorb this enhanced provisioning, solvency requirements have been also relaxed at areducing scale for next three financial years starting 31 March 2012.

The good news is that even after absorbing this enhanced provisioning, BAGIC has stillmaintained solvency ratio at 156% for the year ended 31 March 2012, which is above thenormal regulatory requirement of 150%, let aside the relaxed limit of 130%.

The decision of IRDA to index future annual increases is a much needed move which maywell have paved the way for reducing the mounting pool losses for the industry.

BAGIC’s business performance, FY2012

Under testing conditions, BAGIC has focused on profitability by:

• Strong underwriting with careful selection of risk, and underwriting businesseswhich meet its profitability hurdle rates

• Emphasising uniformly high quality customer services

• Strengthening marketing efforts in retail channels such as agency,bancassurance, broker and direct

• Strong control over expenses

The GWP for FY2012 (excluding premiums from the Motor Pool) grew by 14.9% to Rs. 3,338crore, from Rs. 2,905 crore in FY2011. The company’s market share was 6.3% (excludingspecialised insurers). Chart G gives the data on BAGIC’s GWP over the last fiveyears.

The net earned premium in FY2012 (excluding premiums from the Motor Pool) was Rs. 2,196crore, versus Rs. 1,931 crore in FY2011, or a growth of 13.7%. During the year, BAGIC sold5.9 million policies. It was 7.8% lower compared to 6.4 million in FY2011. The number ofclaims in FY2012 was 558,233 versus 560,213 in FY2011.

Business mix and channel performance

BAGIC’s focus continues to be on retail business, where it has strengths indistribution and claims handling. The business mix is given in Table 10.

Table 10: BAGIC’s Business mix

The channel-wise contribution to GWP is given in Table 11.

Table 11: Gross Written Premium from the different channels

Retail channels like agency and bancassurance continued to be the mainstay ofBAGIC’s channel mix, contributing to over 70% of the business. The company has one ofthe largest networks of independent partner banks including national banks, those withstrong regional presence, and cooperative and rural banks. For off-the-shelf retailproducts like motor and health, BAGIC has an effective online sales channel, which hasshown a 155% growth this year.

Financial performance

BAGIC’s financial performance in FY2011 and FY2012 is summarised in Table 12.

Table 12: Financial performance of BAGIC

( Rs. In Crore)

BAGIC recorded an underwriting profit (before considering share of losses from theMotor Pool) of Rs. 86 crore, compared to the previous year’s profit of Rs. 27 crore.After considering the share of losses from the Motor Pool, the Company’s underwritingloss was Rs. 178 crore in FY2012, versus a loss of Rs. 219 crore in FY2011.

The combined ratio, excluding losses from the Motor Pool, stood at 96.1% against 98.6%recorded in FY2011. Including Motor Pool losses, the combined ratio decreased from 110.2%in FY2011 to 107.2% in FY2012. In a market where combined ratios are in excess of 110%,this is a creditable achievement and exemplifies the Company’s underwriting and costmanagement skills.

Profit before tax after Motor Pool losses for FY2012 was Rs. 194 crore (previous yearRs. 62 crore). Profit after tax (PAT) for the year was Rs. 124 crore compared to Rs. 43crore in FY2011. Chart H plots the data on BAGIC’s PAT for the last five years.

Capital

The total capital including share premium stood at Rs. 277 crore as on 31 March 2012.No new capital was needed in FY2012 and BAGIC’s solvency margin was well above therequired ratio as per IRDA’s regulations.

It is worth stating that BAGIC has the best utilisation of capital in the privatesector, as measured by the ratio of GWP to capital infused and GWP to shareholders’equity. The shareholders’ equity of BAGIC stood at Rs. 959 crore as on 31 March 2012,compared to Rs. 836 crore a year earlier.

Investments

The company’s cash and investments as on 31 March 2012 stood at Rs. 4,758 croreversus Rs. 3,975 crore in the previous year.

Challenges

The general insurance industry is in the throes of a crisis of profitability created bythe increasing provisioning required for Motor Pool business. Although the existing poolhas been dismantled, the Declined Risk Pool for Act Only Commercial Vehicle Third Party(CVTP) has now come into play. BAGIC would now be required to write approximately Rs. 100crore of stand-alone CVTP business in FY2013. Further, from FY2013, CVTP losses relatingto comprehensive Commercial Vehicle (CV) policies would have to be borne by the Companyitself. Adequate pricing of CV Comprehensive business is the need of the hour.

Bajaj Financial Solutions Limited (Bajaj Finsol) and Bajaj Financial Securities Limited(Bajaj Finsec)

Having received its Association of Mutual Funds in India (AMFI) registration in 2009,Bajaj Finsol applied to the IRDA in August 2010 for a corporate agency license todistribute insurance products of BALIC. IRDA approval was received in February 2011, andthe license is valid for three years.

After getting the license, the business was launched in Aurangabad, Chandigarh,Ludhiana and Pune in February 2011. For FY2012, a total of 929 clients were enrolled inthe four branches. These clients have paid up-front fees for availing the financialplanning services of the Company. The concept of paying fees for financial planningadvisory services has been well received; and management believes the model has thepotential for growth. Further, registration with Stock Holding Corporation of India Ltd.(SHCIL) to distribute GOI Bonds and Corporate Bonds was obtained in February 2012, furtherdiversifying the product mix on offer.

Bajaj Finsol and Bajaj Finsec had a staff strength of 41 and 9 as on 31 March 2012. Inaddition to offering fee-based personal financial planning services, Bajaj Finsol producesa monthly research publication called Valuedition, which has been well received byclients as well as the industry.

Wind Energy

Bajaj Finserv has 138 wind mills in Maharashtra with total installed capacity of 65.2MW. During FY2012 the project generated net wind energy of 950 lakh units of electricity,versus 837 lakh units in FY2011. The electricity generated in FY2012 was valued at Rs. 55crore, compared to Rs. 42 crore in FY2011. The wind energy generated was predominantlysold to Bajaj Auto Limited, to cater to power consumption requirements of itsestablishments at Akurdi, Chakan and Waluj. Surplus units were sold to third parties.

As part of the National Mission on Climate Change (NAPCC), out of the country’stotal electricity consumption, 15% should come from renewable sources by 2020. To achievethis goal the Central Electricity Regulatory Commission (CERC) alongwith the Forum ofRegulators created the Renewable Purchase Obligation (RPO).

Each distribution utility, large captive generator and open access consumer will haveto source at least 6% of its total power purchase in 2010, increasing by 1% every yeartill 2020. Those who do not have adequate power purchase agreements from renewable sourcesto meet their RPO requirements can buy RECs to meet their obligation. In this context, theconcept of REC assumes significance.

For Bajaj Finserv, all 138 windmills have been registered with National Load DespatchCentre (NLDC) through REC Registry and are eligible for Renewable Energy Certificates(REC). During FY2012, Bajaj Finserv generated an income of Rs. 29 crore through sale ofthese certificates.

Standalone

The standalone results of Bajaj Finserv Limited are given in Table 13 below.

Table 13: Standalone results of Bajaj Finserv

( Rs. In Crore)

Consolidated Financials

The consolidated results are given in Table 14. These include its subsidiaries,associates and joint ventures, in accordance with the accounting standards issued by TheInstitute of Chartered Accountants of India.

Segment Revenue

( Rs. In Crore)

Segment Results-profit/(loss) from each segment

Statements in this Management Discussion and Analysis describing the Company’sobjectives, projections, estimates and expectation may be ‘forward looking’within the meaning of applicable laws and regulations. Actual results might differmaterially from those expressed or implied.