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Bajaj Finance Ltd.: A franchise to own - BUY

Bajaj Finance is the largest 2w financier in the country focused on semi urban and rural market with a market share of ~20%.

March 12, 2014 3:37 IST | India Infoline News Service
CMP Rs1,670, Target Rs2,003, Upside 19.9%

One of the most diversified, profitable and fastest growing NBFCs

Aided by product additions and network expansion, Bajaj Finance has witnessed robust asset CAGR of 48% over the past three years. Profitability too has been very impressive with average RoA delivery at ~3.8%. Given its diversified product offerings, Bajaj Finance would continue to materially outpace industry growth. Though the overall disbursement growth could moderate a bit due to de-emphasis on commercial lending and consolidation in consumer financing, the asset growth is estimated to remain sturdy driven by robust disbursement growth in SME financing and increasing duration of the overall loan book. We estimate FY13-16 AUM CAGR at 31%.

 

Shift in asset mix to moderate RoA but risk also 

Bajaj Finance’s above-average NIM profile is underpinned by large proportion of high-yield products in its portfolio and competitive cost of funding given a strong rating profile. NIM correction seen in recent quarters would continue with an accelerated shift in asset mix towards mortgages (SME financing). Though cost growth is likely to moderate, the contraction in margin would preclude any improvement in cost/income ratio.  Bajaj Finance’s asset quality has been stable over the past two years despite deterioration in the external environment. Despite transition to 90-day provisioning policy, credit cost has been contained at 1.1-1.6%. While business landscape is expected to remain soft in the near term, company’s asset quality is unlikely to surprise negatively. RoA would moderate due to shift in business mix towards low-beta products.

 

Initiate coverage with Buy rating; Top Pick in NBFC space 

Over the past four years, Bajaj Finance has traded in a narrow valuation band supported by its consistent performance on growth and profitability. With the company expected to deliver average 3.5% RoA over FY13-16, current valuation at 1.7x 1-yr fwd P/ABV appears extremely attractive. Apart from the risk-return trade-off and a surprise banking license win, we don’t see any exogenous factors impacting the profitability over the next couple of years. Bajaj Finance, hence, is our Top Pick in the NBFC space. Initiate coverage with 9-12 month price target of Rs2,003.


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Total operating income
19,057
25,658
31,861
39,472
Yoy growth (%)
33.7
34.6
24.2
23.9
Operating profit (pre-provisions)
10,534
14,237
17,470
21,627
Net profit
5,913
7,775
9,327
11,425
yoy growth (%)
45.5
31.5
20.0
22.5





EPS (Rs)
118.8
156.2
187.4
229.5
Adj. BVPS (Rs)
669.8
798.0
940.9
1,125.0
P/E (x)
14.1
10.7
8.9
7.3
P/Adj.BV (x)
2.5
2.1
1.8
1.5
ROE (%)
21.9
21.0
21.1
21.5
ROA (%)
3.8
3.8
3.5
3.3
CAR (%)
22.0
19.7
18.1
16.6
Source: Company, India Infoline Research


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