Bharat Financial Inclusion
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- Clarissa Jennings
- 5 years ago
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1 3QFY18 Result Update Bharat Financial Inclusion Reuters: BHAF.NS; Bloomberg: BHAFIN IN 31 January 2018 Customer Acquisition Accelerates Meaningfully Bharat Financial Inclusion (BFIL) reported its 3QFY18 results with the key strategic pointers being that: (1) Customer acquisition accelerated to an all-time high of 0.86mn in 3QFY18; (2) Lower competitive intensity was witnessed on the ground (please see conference-call highlights). Per se, on the results front, BFIL posted NII growth of 30% YoY to Rs2,967mn, PPOP growth of 17% YoY to Rs1,712 and PAT growth of 14% YoY to Rs1,626mn. We have marginally modified our legacy estimates for FY18/FY19 and retained Buy rating on BFIL, increasing our target price to Rs1,244 (from Rs1,131 earlier), valuing the stock at 3.6x FY20E P/BV. All-time high customer addition underlines organic growth trend: AUM grew 34% YoY to Rs114.7bn on the back of strong customer addition of 0.86mn during 3QFY18, up 95% YoY. The yield on portfolio inched up from 18.6% in 2QFY18 to 18.7% in 3QFY18. Income from investments fell 39% YoY, but we expect this impact to be transient. Share of income generating loans (IGL) during the quarter was higher at 64%, but does not imply any strategic shift away from mid-term loans (MTL), whose share was 22%. On-book share of IGL and MTL stood at 50% and 32%, respectively. Sequential decline in incremental cost of borrowings aided margin: While debt capital market interest rates adjusted higher during 3QFY18, incremental cost of borrowing for BFIL fell from 8.9% in 2QFY18 to 8.5% in 3QFY18. This was on account of the total funding mix still having a high share (69%) of term loans, which are long-term instruments and may still be repricing lower compared with legacy rates a few years ago. Dependence on short-term instruments such as CP remains low at 3% of total funding. Share NCDs was also small at 2% while the share of assignment, securitisation and managed loans together constituted 26% of total funding. NIM on the portfolio expanded from 10.3% in 2QFY18 to 10.7% in 3QFY18. Asset quality continues to improve on sequential basis: GNPA ratio eased from 5.2% in 2QFY18 to 4.6% in 3QFY18. There were also write-offs amounting to Rs177mn during the quarter. Collection efficiency on the new book created post 1 st January 2017 remains pristine at 99.8% and this portion now forms 89% of the outstanding book. Some recovery on legacy bad loans is expected. PAT guidance of Rs4.35bn for FY18 still stands. Valuation and outlook: We have revised upward our legacy NII estimates by 5.2%/8.6% for FY18/FY19, our PPOP estimates by 8.2%/14.5% and our PAT estimates by 17.5%/4.3%, respectively. We have rolled forward our valuation of BFIL based on FY20E financials, valuing the stock at 3.6x FY20E P/BV and increasing our target price to Rs1,244 (from Rs1,131 earlier). BUY Sector: Banking CMP: Rs1,025 Target Price: Rs1,244 Upside: 21% Shivaji Thapliyal Research Analyst shivaji.thapliyal@nirmalbang.com Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 142.4/ Wk H / L (Rs) 1,068/651 Daily Vol. (3M NSE Avg.) 744,580 Price Performance (%) 1 M 6 M 1 Yr Bharat Financial Inclusion Nifty Index Source: Bloomberg Y/E March (Rsmn) 3QFY18 3QFY17 2QFY18 YoY (%) QoQ (%) Interest income 4,750 3,932 4, Interest expenses 1,783 1,643 1, Net interest income 2,967 2,289 2, NIM (%) bps 40bps Loan origination fees Other income Operating income 3,655 2,906 3, Staff costs 1,472 1,061 1, Other operating expenses Total operating expenses 1,942 1,440 1, Cost to-income (%) bps 459bps Cost-to-AUM (%) bps 72bps Operating profit 1,712 1,466 1, Provisions (82.8) Credit costs (%) bps (167bps) PBT 1,626 1,428 1, Tax Effective tax rate (%) PAT 1,626 1,428 1, EPS (Rs) BV (Rs) AUM 114,660 85, , Source: Company, Nirmal Bang Research
2 Key conference-call highlights BFIL registered highest-ever customer acquisition figure of 0.86mn in 3QFY18. Customer acquisition in January 2018 is even better than in 3QFY18 and the management expects an improvement in this runrate. The management remains conservative on loan ticket size increase and the focus continues to be rural geographies. ESOPs amounting to Rs170mn were distributed to senior and mid-level management personnel, which led to the rise in cost-to-income ratio for the quarter. PAT guidance of Rs4.35bn for FY18 still stands intact. On the merger front, CCI approval has been received and the RBI approval is expected in days. Mr. K.V. Rao, chief operating officer, has decided to resign from the company because of health reasons. The management had earlier provided guidance for branch addition at 200 per annum and this run rate will continue for the rest of the year and for FY19 as well. Of the 45%-50% AUM growth being budgeted, about 30% will come from customer addition. The rejection rate has dipped as BFIL reported this metric on unit-line basis and there is no change in the quality of the business. There will some recovery on the GNPA front, but management is unable to give guidance on the exact quantum. There have been good collections from Uttar Pradesh and some green shoots are visible in Maharashtra. Collection efficiency in Maharashtra stands at ~92%. 113 branches are in maintenance mode i.e. with focus only on recovery. Of this, about 60% of the branches are in Maharashtra followed by Karnataka and Uttar Pradesh in terms of contribution. Several MFIs are badly affected because of demonetisation and have slowed down on the growth front. Small finance banks are pre-occupied with their transition towards bank franchise. The management is witnessing lower competitive intensity for BFIL on the ground over the past six to nine months. The management does not envisage any significant departure from its JLG model towards individual lending after the merger with IndusInd Bank, although it is too early to make a final comment on this matter. However, as the transition to higher cashless collections is made, a database on customer behaviour will be created, which can then be mined for individual loan customers. Business correspondents will increasingly focus on cross-selling liability products to the BFIL client base. It has been witnessed that those customers who now have a recurring deposit (RD) have shown better repayment behaviour. Penetration of RD is set to rise going forward. While income generating loans (IGL) have grown faster during the quarter, there is no strategic shift away from mid-term loans (MTL) planned by the management. 2 Bharat Financial Inclusion
3 Aug-10 Dec-10 May-11 Sep-11 Feb-12 Jun-12 Oct-12 Mar-13 Jul-13 Dec-13 Apr-14 Sep-14 Jan-15 Jun-15 Oct-15 Feb-16 Jul-16 Nov-16 Apr-17 Aug-17 Jan-18 Exhibit 1: Financial summary Net Interest Income 6,358 8,623 12,063 16,531 22,581 Pre-provision profit 4,324 5,522 7,964 11,362 16,279 PAT 3,029 2,897 5,062 7,540 10,818 EPS (Rs) BV (Rs) P/E (x) P/BV (x) Gross NPAs (%) Net NPAs (%) RoA (%) RoE (%) Source: Company, Nirmal Bang Research Exhibit 2: Actual performance versus our estimates (Rsmn) 3QFY18 3QFY17 2QFY18 YoY (%) QoQ (%) 3QFY18E Devi. (%) Net interest income 2,967 2,289 2, ,986 (1) Pre-provision profit 1,712 1,466 1, ,877 (9) PAT 1,626 1,428 1, , Source: Company, Nirmal Bang Research Exhibit 3: Change in our estimates Revised estimate Earlier estimate % revision FY18E FY19E FY18E FY19E FY18E FY19E Net interest income (Rsmn) 12,063 16,531 11,470 15, NIM (%) bps 21bps Operating profit (Rsmn) 7,964 11,362 7,358 9, Profit after tax (Rsmn) 5,062 7,540 4,307 7, EPS (Rs) ABV (Rs) Source: Company, Nirmal Bang Research Exhibit 4: One-year forward P/BV (%) Source: Company, Nirmal Bang Research P/BVPS Mean +1 SD -1 SD 3 Bharat Financial Inclusion
4 Financials Exhibit 5: Income statement Interest income 9,539 12,281 16,950 23,588 32,568 Income on loan securitisation 1,103 1,719 2,369 3,065 3,984 Other interest ,031 1,134 1,248 Interest expenses 4,846 6,225 8,287 11,256 15,218 Net interest income 6,358 8,623 12,063 16,531 22,581 Loan origination fees 726 1,242 1,569 2,076 2,866 Other income 1,276 1,190 1,347 1,616 1,940 Net revenues 8,360 11,054 14,979 20,223 27,386 Operating expenses 4,036 5,533 7,015 8,861 11,107 -Employee expenses 2,924 4,062 5,073 6,531 8,311 -Other expenses 1,112 1,471 1,942 2,330 2,796 Operating profit 4,324 5,522 7,964 11,362 16,279 Provisions 386 3,594 2,903 2,672 2,593 PBT 3,938 1,928 5,062 8,690 13,686 Tax 909 (969) - 1,150 2,869 PAT 3,029 2,897 5,062 7,540 10,818 Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Share capital 1,273 1,380 1,380 1,380 1,380 Reserves & surplus 12,557 23,088 28,149 35,690 46,507 Net worth 13,830 24,467 29,529 37,069 47,887 Borrowings 51,296 71,251 99, , ,709 Other liabilities & provisions 6,411 8,458 11,689 15,689 20,274 Total liabilities 71, , , , ,871 Fixed assets Investments Loans 50,215 74, , , ,617 Cash 17,663 28,064 30,870 33,957 37,353 Other assets 3,493 1,618 1,780 1,958 2,153 Total assets 71, , , , ,871 AUM 77,325 94, , , ,658 Source: Company, Nirmal Bang Research Exhibit 6: Key ratios Growth (%) Net interest income Operating profit Profit after tax 61.4 (4.4) Business (%) Advances growth Gross loan growth (incl. securitisation) Spread (%) Yield on BS loans Cost of borrowings Spread Spread (incl. income on securitisation) NIM Operational efficiency (%) Cost-to-income Cost-to-assets Cost-to-AUM Productivity (Rsmn) Gross portfolio per branch Profit per branch Gross portfolio per employee Profit per employee CRAR (%) Tier I Tier II Total Asset quality (%) Gross NPAs Gross NPAs (excl. AP) Net NPAs Provision coverage Credit costs Credit Cost (% of AUM) Return ratios (%) RoE RoA Per share (%) EPS BV ABV ABV (Including DTA) Valuation (x) P/E P/BV P/ABV P/ABV (after considering DTA) Source: Company, Nirmal Bang Research 4 Bharat Financial Inclusion
5 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Rating track Date Rating Market price (Rs) Target price (Rs) 2 June 2015 Buy July 2015 Buy July 2015 Buy October 2015 Buy January 2016 Buy May 2016 Buy July 2016 Buy 864 1,050 3 November 2016 Buy 818 1, January 2017 Buy 743 1,070 3 May 2017 Buy July 2017 Buy October 2017 Buy 971 1, January 2018 Buy 1,025 1,244 Rating track graph Not Covered Covered 5 Bharat Financial Inclusion
6 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Shivaji Thapliyal, the research analyst and Shreesh Chandra, the research associate are the author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6 Bharat Financial Inclusion
7 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBEPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBEPL. Our reports are also available on our website Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Bharat Financial Inclusion
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