CMP: INR1,054 TP: INR1,276 (+21%) Buy

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1 BSE SENSEX S&P CNX 27,850 8,633 Bloomberg BAF IN Equity Shares (m) M.Cap.(INR b)/(usd b) 564.4/ Week Range (INR) 1180 / 560 1, 6, 12 Rel. Per (%) 21/-3/66 Avg Val, (INR m) 1297 Free float (%) 41.9 Financials & Valuations (INR b) Y/E March E 2018E NII PPP PAT EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoA on AUM (%) RoE (%) Payout (%) Valuations P/E (x) P/BV (x) Div. Yield (%) January QFY17 Results Update Sector: Financials Bajaj Finance CMP: INR1,054 TP: INR1,276 (+21%) Buy Profit beat led by strong AUM growth; Maintain Buy Bajaj Finance s (BAF) 3QFY17 PAT increased 36% YoY to INR5.6b (26% above estimate), led by robust AUM growth of 33% YoY (est. of +27%) and better-than-expected margins performance. Marginal improvement in costs and asset quality also offered support. Despite demonetization, AUM continued its robust growth trajectory (+33% YoY, +10% QoQ) to reach INR576b. Growth continues to be impressive in consumer durables and personal loan segments. Surprisingly, 2W/3W loan book also grew 36% YoY, with BAF increasing its financing penetration within Bajaj Auto sales to 45% from 32% earlier. Consumer durables loan book grew 5% YoY due to demonetization as well as intentional scale-back in this segment as mentioned by management earlier. Mortgage book grew by a sluggish 9% YoY, in line with management guidance. We, however, expect growth in this segment to pick up from FY18 as the base effect plays out. Personal cross-sell loans grew 59% YoY to INR56b. It was the eighth consecutive quarter of 50%+ AUM growth in this segment. Rural loan book also grew 100%+ YoY, but on a small base (4% of AUM). Asset quality remained healthy, with GNPLs at 1.47% v/s 1.58% in 2QFY17 and 1.29% (0dpd) in 3QFY16. The impact of demonetization on the GNPL ratio, if any, will be seen in 4QFY17. Valuation and view: BAF a dominant player in the consumer durables financing segment continues to reap the benefits of healthy consumer demand, increasing its market share in consumer as well as other businesses. At the same time, it is proactive in detecting early warning signals with regard to asset quality. While yields are likely to remain under pressure due to lower share of CD financing, BAF continues to diversify its liability mix bank borrowings account for 37% of total borrowings. The stock trades at 6.4x/5.2x FY17E/18E BV. We raise FY17E- 19E EPS by 5-7%, and increase TP to INR1,276. Buy. Quarterly Performance (INR Million) Y/E March FY16 FY17 FY16 FY17E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4Q Income from operations,716,921 19,717 18,212 21,659 21,802 25,271 23,900 69,566 92,633 Other Operating Income ,205 1,668 1,749 1,707 3,477 6,329 Operating Income 16,462 16,799 20,614 19,168 22,864 23,470 27,020 25,607 73,043 98,961 YoY Growth (%) Interest expenses 6,771 6,947 7,493 8,058 8,833 9,562 9,802 10,716 29,269 38,913 Net Income 9,692 9,853 13,121 11,110 14,031 13,909 17,218 14,891 43,775 60,048 YoY Growth (%) Other income ,001 Total Income 9,788 10,059 13,203 11,516 14,178 14,098 17,489,285 44,566 61,049 Operating Expenses 4,531 4,411 5,490 5,061 5,865 6,144 7,192 6,785 19,492 25,986 Operating Profit 5,257 5,648 7,714 6,455 8,312 7,954 10,297 8,500 24,283 34,063 YoY Growth (%) Provisions and Cont. 1,033 1,368 1,462 1,565 1,797 1,691 1,797 1,824 5,429 7,109 Profit before Tax 4,224 4,280 6,252 4,890 6,5 6,263 8,500 6,676 18,854 26,954 Tax Provisions 1,468 1,486 2,167 1,740 2,275 2,185 2,944 2,296 6,861 9,700 Net Profit 2,756 2,794 4,085 3,0 4,240 4,078 5,557 4,380 12,785 18,254 YoY Growth (%) Loan Growth (%) Borrowings Growth (%) Cost to Income Ratio (%) Tax Rate (%) E: MOSL Estimates Sunesh Khanna (Sunesh.Khanna@MotilalOswal.com); Piran Engineer (Piran.Engineer@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly Performance v/s Estimates (INR m) Y/E March 3QFY17E 3QFY17A Var (%) Comments Income from operations 23,001 25, Other Operating Income 1,668 1,749 5 Operating Income 24,669 27, YoY Growth (%) Interest expenses 9,896 9,802-1 Net Income 14,773 17, Better than expected AUM growth led to NII beat YoY Growth (%) Other income Total Income,023 17,489 Operating Expenses 6,400 7, Cost Income came in better than expectations Operating Profit 8,623 10, YoY Growth (%) Provisions and Cont. 1,900 1,797-5 Profit before Tax 6,723 8, Tax Provisions 2,319 2, Net Profit 4,404 5, Strong NII growth and lower opex led to PAT beat YoY Growth (%) Loan Growth (%) Borrowings Growth (%) Cost to Income Ratio (%) Tax Rate (%) E: MOSL Estimates AUM growth to remain robust despite demonetization Despite the impact of demonetization, AUM continued its robust growth trajectory (+33% YoY, +10% QoQ) to reach INR576b. Growth continues to be robust in consumer durables and personal loan segments. Surprisingly, the 2W/3W loan book also grew 36% YoY. As BAF increased its financing penetration withing bajaj auto sales to 45% from 32% earlier. The consumer durables loan book grew 5% YoY, which is a function of the impact of demonetization as well as an intentional scale-back in this segment as mentioned by management earlier. The mortgage book grew a sluggish 9% YoY, as guided by management. We expect this segment to witness pick-up in growth from FY18 onwards as the base effect plays out. Personal cross-sell loans grew 59% to INR56b. This is the eight consecutive quarter of 50%+ AUM growth in this segment. The rural loan book also grew 100%+ YoY, but this is on a small base (4% of AUM). Margins decline slightly; Asset quality stable Calculated margins declined 40bp YoY (up 160bp QoQ) to 12.5% Interestingly, BAF has been reducing the share of bank borrowings. It declined from 47% to 37% YoY. Asset quality remained healthy with GNPLs at 1.47% v/s 1.58% in 2QFY17 and 1.29% (0dpd) in 3QFY16. The impact of demonetization on GNPL ratio, if any, will be seen in 4QFY17. PCR remains at a healthy 73%. 30 January

3 Conference call highlights Business Updates Business volumes have returned to normal, but values have not yet returned to run-rate. Consumer durables Will continue to scale-back in this business over the next 3 months. Post March 2017, should report strong growth. Paused disbursements of LAP with ticket size of INR25m or more post 8 th November. Such loans comprise 30% of their LAP book. Share of consumer finance might increase in the next 1-2 quarters, but should decline structurally. Management targets 35-37% share of consumer finance over the medium-to-long term. Demonetization Impact Repayments in LAP accounts were stronger than usual as borrowers deposited cash into their accounts and paid off their loans. 2W Volume demand, which dropped significantly in November and December, has returned to normalcy in January. However, financing penetration increased in Nov & Dec and thus compensated for drop in volume demand. The company continues to monitor the self-employed portfolios closely, with regards collection efficiency, to determine if it s a temporary or a permanent problem. Asset Quality The company did not use the RBI relaxation on NPA recognition. Sold INR920m worth of mortgage and business loans NPLs on cash basis, thus improving asset quality number. No impact on P&L. Others Target C/I ratio of 40-41% going forward. Capital adequacy improved due to warrant money raised from the parent company. Launched co-branded credit card with RBL Bank. Will be given to existing wellperforming EMI customers. Over INR5b (out of INR12b) worth of LAP was disbursed in October. INR14-b disbursement run-rate expected going forward. Mix of fixed/floating rate assets: 50/50 HFC subsidiary will go live in February 65-68% of consumer finance borrowers are salaried while ~40% of overall borrowers are salaried Valuation and view Diversified and de-risked portfolio A key strength of business model: BAF has also ensured that it has a diverse set of growth drivers in the portfolio versus peers. A diverse portfolio comprising of profit maximizes and scale builders helps reduce cyclicality in growth and assets quality. It s expertise lies in detecting early warning signals of stress in particular segments and adjusting the portfolio accordingly. 30 January

4 Cross Sell expert: A well-diversified credit portfolio, focus on cross selling, customer acquisition, and systematic expansion in delivery channels both physical and virtual, selective distribution of products through these channels are likely to sustain robust growth in AUM. These, along with its small market share are likely to help sustain ~30% CAGR in AUM over next 3 years. Market share gains through customer acquisition and new product launches: BAF is the largest consumer durables and lifestyle financier in the country and has been continuously gaining market share in these businesses. Continuous market share gain and strong distribution has created entry barriers for competitors. One of the key strengths that BAF has built over time is a quick turnaround time unmatched by most other retail financiers. Thus, other than purchases on credit cards of banks, there are very few other competitors that BAF sees in the consumer durables business, which enables it with pricing power. Well managed asset quality and & tested management capabilities: Despite lower growth and pressure on asset quality witnessed for peer group; BAF continues to clock healthy growth and has one of the best asset quality among the peer group. Management has not only demonstrated its ability to gain market share in segments, but has been alert to potential asset quality risks as well. It has withdrawn from certain segments like construction equipment, 3W financing and slowed down on LAP in a timely manner. Timely investment in automation and technology: BAF has been proactive in making timely investments in technology and automation which over a period of time will help reducing operating cost and reduce delivery cost. We value BAF based on residual income model assuming, Rf=7.0%, β=1.2, risk premium of 5% and terminal growth rate of 4.5%. We expect net profit to grow at CAGR of 35% over FY16-19E and RoEs to cross 25% by FY19E. The stock is trading at 6.4x/5.2x FY17/18E BV. We increase our FY17-19 EPS estimates by 5-6% our target price to INR1,276. Maintain Buy. Exhibit 2: We increase estimates to factor in stronger AUM growth over FY17-19 INR B Old Est. New Est. % Change FY17 FY18 FY19 FY17 FY18 FY19 FY17 FY18 FY19 NII Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans , Borrowings Credit Cost RoA RoE January

5 Exhibit 3: Quarterly Snapshot FY FY16 FY17 Variation (%) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q QoQ YoY Profit and Loss (INR m) Total Income 12,436 12,322 14,766 14,294 16,462 16,799 20,614 19,168 22,864 23,470 27, Income from operations 11,801 11,703 14,164 13,532,716,921 19,717 18,212 21,659 21,802 25, Other Operating Income ,205 1,668 1, Interest Expenses 4,996 5,445 5,924 6,118 6,771 6,947 7,493 8,058 8,833 9,562 9, Net Income 7,440 6,878 8,842 8,176 9,692 9,853 13,121 11,110 14,031 13,909 17, Other Income Operating Expenses 3,428 3,186 3,921 3,749 4,531 4,411 5,490 5,061 5,865 6,144 7, Employee 1,078 1,059 1,198 1,172 1,446 1,498 1,705 1,647 2,018 2,130 2, Others 2,350 2,127 2,723 2,577 3,085 2,913 3,784 3,414 3,847 4,014 4, Operating Profits 4,035 3,788 5,009 4,583 5,257 5,648 7,714 6,455 8,312 7,954 10, Provisions ,079 1,138 1,033 1,368 1,462 1,565 1,797 1,691 1, PBT 3,206 2,987 3,931 3,446 4,224 4,280 6,252 4,890 6,5 6,263 8, Taxes 1,092 1,016 1,347 1,136 1,468 1,486 2,167 1,740 2,275 2,185 2, Reported PAT 2,114 1,972 2,584 2,310 2,756 2,794 4,085 3,0 4,240 4,078 5, Asset Quality GNPA (INR m) 2,898 3,772 4,429 4,711 5,762 6,098 5,387 5,328 7,045 7,897 7, NNPA (INR m) 692 1,284 1,447 1,404 1,875 1,680 1,086 1,213 1,965 2,149 2, GNPAs(%) NNPAs(%) PCR (%) Ratios (%) Cost to Income Tax Rate CAR Tier I RoA (not annualised) RoE (not annualised) Key Details (INR m) AUM 269, , , , , , , , , , , On book Loans 256, , , , , ,0 417, , , , , Off book Loans 13,010 12,530 12,940 12,110 14,620 14,490 16,920 9,146 16,850 23,510 33, AUM Mix (%) Consumer Finance SME Business Commercial Rural Source: Company, MOSL 30 January

6 Story in charts Exhibit 4: Nos. of loan disb. grew at healthy 35% YoY Exhibit 5: AUM growth continues to remain strong Loans Disbursed (Nos '000) Growth (%) AUM (INR b) AUM Gr. (%) (9) 762 1,252 1,110 1,531 1,162 1,719 1,393 2,139 1,583 2,541 2,177 2, QFY14 4QFY14 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 1QFY14 2QFY14 3QFY14 4QFY14 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Exhibit 6: Pullback in LAP over the past few quarters Consumer SME Commercial Rural Exhibit 7: Cost/income ratio on a downward trajectory Cost income (%) QFY14 4QFY14 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY14 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Exhibit 8: NPL performance is best among peers Exhibit 9: Well capitalized 0.5 GNPA (%) NNPA (%) CAR (%) Tier 1 (%) QFY14 4QFY14 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 1QFY 2QFY 3QFY 4QFY 1QFY16 2QFY16 3QFY QFY16 1QFY17 2QFY17 3QFY17 30 January

7 Exhibit 10: Financials: Valuation metrics 66Rating CMP Mcap EPS (INR) P/E (x) BV (INR) P/BV (x) RoA (%) RoE (%) (INR) (USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 ICICIBC* Buy HDFCB Buy 1, AXSB Neutral KMB* Buy YES Buy 1, IIB Buy 1, IDFC Bk Neutral FB Buy DCBB Neutral JKBK Neutral SIB Buy Private Aggregate SBIN (cons)* Buy PNB Buy BOI Neutral BOB Buy CBK Neutral UNBK Buy OBC Neutral INBK Buy ANDB Buy Public Aggregate Banks Aggregate HDFC* Buy 1, LICHF Buy IHFL Buy GRHF Neutral REPCO Buy DEWH Buy Housing Finance RECL Neutral POWF Neutral Infra Finance SHTF Buy MMFS Buy BAF Buy 1, MUTH Buy SKSM Buy Asset Finance NBFC Aggregate Financials *Multiples adj. for value of key ventures/investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries 30 January

8 Financials and valuations Income Statement (INR Million) Y/E MARCH E 2018E 2019E Interest Income 19,963 29,248 37,896 51,200 69,566 92, , ,997 Interest Expended 7,462 12,057,732 22,483 29,269 38,913 51,379 67,227 Net Interest Income 12,501 17,191 22,163 28,717 40,297 53,720 71,223 93,770 Change (%) Other Operating Income 1,668 1,689 2,429 2,618 3,477 6,329 7,911 9,493 Other Income ,001 1,201 1,441 Net Income 14,257 19,057 25,011 31,699 44,566 61,049 80, ,704 Change (%) Operating Expenses 6,691 8,523 11,511 14,284 19,492 25,986 33,6 42,984 Operating Income 7,566 10,534 13,500 17,4 25,074 35,064 46,719 61,720 Change (%) Provisions and W/Offs 1,544 1,818 2,588 3,846 5,429 7,109 10,244 13,202 PBT 6,022 8,716 10,912 13,569 19,646 27,955 36,474 48,517 Tax 1,958 2,803 3,722 4,591 6,861 9,700 12,584 16,739 Tax Rate (%) PAT 4,064 5,913 7,190 8,979 12,785 18,254 23,891 31,779 Change (%) Proposed Dividend ,282 2,986 3,972 Balance Sheet (INR Million) Y/E MARCH E 2018E 2019E Capital ,003 1,071 1,071 1,071 1,071 Reserves & Surplus 19,509 32,677 38,914 46,996 72,175 87, ,6 135,288 Net Worth 20,336 33,668 39,909 47,999 73,246 88, , ,359 Borrowings 102, , , , , , , ,993 Change (%) Other liabilities & provisions 6,667 11,051 8,776 13,206 6,903 9,665 12,564 16,333 Total Liabilities 129, , , , , , ,604 1,052,685 Investments ,323 10,341 11,375 12,512 13,763 Change (%) , Advances 122, , , , , , ,787 1,022,719 Change (%) Net Fixed Assets 1,388 1,762 2,199 2,492 2,870 2,880 2,890 2,900 Other assets 4,993 8,957 13,990 10,303 18,210 9,632 13,4 13,302 Total Assets 129, , , , , , ,604 1,052,685 E: MOSL Estimates 30 January

9 Financials and valuations Ratios Y/E MARCH E 2018E 2019E Spreads Analysis (%) Yield on Advances Cost of borrowings Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA RoA on AUM Int. Expended/Int.Earned Secur. Inc./Net Income Efficiency Ratios (%) Op. Exps./Net Income Empl. Cost/Op. Exps Asset-Liability Profile (%) Loans/Borrowings Ratio Net NPAs to Adv CAR Tier Valuation Book Value (INR) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) EPS Growth (%) Price-Earnings (x) OPS (INR) OPS Growth (%) Price-OP (x) Dividend per Share (INR) Dividend Yield (%) E: MOSL Estimates 30 January

10 Corporate profile: Bajaj Finance Company description Bajaj Finance is a subsidiary of Bajaj Finserv, which holds 57% into the company. The company has transformed itself from a captive auto financier offering two wheeler loans for Bajaj Auto to a one of the most successful well diversified retail NBFCs. The company operates in over ten business segments across consumer, SME and commercial businesses and is market leader in consumer durable and two wheeler financing (18% market share), lifestyle financing and is a large player in loan against property segment (% market share). Exhibit 10: Sensex rebased Exhibit 11: Shareholding pattern (%) Dec-16 Sep-16 Dec- Promoter DII FII Others Note: FII Includes depository receipts Exhibit 12: Top holders Holder Name % Holding Maharashtra Scooters Limited 3.5 Government Of Singapore 2.6 Smallcap World Fund, Inc 1.1 Exhibit 13: Top management Name Designation Exhibit 14: Directors Name Name Rahul Bajaj Chairman Rahul Bajaj Omkar Goswami* Nanoo Pamnani Sanjiv Bajaj Rajeev Jain Anant Damle Vice Chairman Vice Chairman Managing Director Company Secretary Nanoo Pamnani* Sanjiv Bajaj Rajeev Jain D S Mehta* Dipak Poddar* Gita Piramal* Ranjan Sanghi* D J Balaji Rao* Rajendra Lakhotia* Rajiv Bajaj Madhur Bajaj *Independent Exhibit : Auditors Name Dalal & Shah LLP Shyamprasad D Limaye Type Statutory Secretarial Audit Exhibit 16: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY January

11 BAF BAJAJ FINANCE REPORT GALLERY Our recent reports on Financial sector Our recent reports on other Financial companies

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