Bajaj Finance (BAJAF)

Transcription

1 Initiating Coverage Rating Matrix Rating : Buy Target : 56 Target Period : 12 months Potential Upside : 11% YoY Growth YoY Growth FY14 FY15 FY16E FY17E NII PPP PAT EPS Valuation Summary FY14 FY15 FY16E FY17E P/E Target P/E P/ABV Target P/ABV RoE RoA Stock Data Particulars Bloomberg/ Reuters Code BAF IN/ BJFN.BO Sensex 25,41 Average Volumes 56,96 Market Capitalisation ( crore) 27,3 52 week H/L ( ) 5718 /246 Equity capital 53.3 Face value 1 DII Holding 5.8 FII Holding 18.1 Comparative return matrix Return % 1M 3M 6M 12M Bajaj Finance Shriram Transport MMFS Shriram City Union Price chart 9,5 9, 8,5 8, 7,5 7, Aug-14 Nov-14 Bajaj Finance Feb-15 Research Analyst Kajal Gandhi kajal.gandhi@icicisecurites.com Vasant Lohiya vasant.lohiya@icicisecurites.com Vishal Narnolia vishal.narnolia@icicisecurites.com May-15 Aug-15 Nifty (L.H.S) 6, 5, 4, 3, 2, 1, September 1, 215 Unique product offering commands premium! Bajaj Finance (BFL), is one of the leading asset finance NBFCs. The USP of BFL is its stronghold in the consumer durable (CD) & lifestyle product financing business (~15% of the AUM) wherein it does not have any major competition (BFL s share is ~16%). These segments are under penetrated and growing in size, thus providing a lucrative opportunity for growth. In FY15, BFL served ~4 lakh clients in these segments. Further, it has a diversified loan portfolio. Post induction of the new management in FY7, BFL transformed itself from merely financing a few products to a wide range of products divided into three broad categories viz. consumer finance (4% of loans), SME (54%) & commercial & rural category (6%). Such diversity has given BFL an edge in terms of AUM growth (44% CAGR to 3241 crore in FY11-15) and asset quality (GNPA ratio steady in % range in the past three years) despite a weak economic environment. PAT has increased at 38% CAGR in FY11-15 to 897 crore. Over FY15-17E, we expect PAT traction to remain strong at 27% CAGR to 1456 crore. Expect AUM traction at 27% CAGR over FY15-17E led by consumer finance Strong AUM traction of 44% CAGR over FY11-15 to 3241 crore was mainly driven by the SME category increasing 51% CAGR followed by the CF category, which rose at 41% CAGR. Within SME, it was the LAP (25% of overall AUM) portfolio that saw high traction of 38% CAGR over FY11-15 while CD financing within CF book saw 47% CAGR. Going ahead, we expect AUM growth at 27% CAGR to in FY15-17E, led by CF segment (31% CAGR) that will be driven by CD financing business. Enhanced competition and growing risks in the LAP segment may keep traction in the SME segment lower at 24.8% CAGR (refer exhibit 2). Steady asset quality, strong margins reflect strength of model BFL s GNPA ratio at 1.5% ( 471 crore) as on FY15, is better than some of its peers wherein the ratio is above 2.5%. The asset quality has improved sharply over the last five to six years. The GNPA ratio was at 16.6%, 7.6% during FY9, FY1, respectively. Owing to its strong underwriting processes, focus on affluent & mass affluent clients, NPA is expected to remain acceptable. Further, such healthy asset quality & higher yields in CF space enable BFL to earn one of the highest margins among its peers of ~1% as on FY15. We assume this will largely be sustained, going ahead. Rich valuations to sustain on strong visibility in earnings Strong performance in a weak economic scenario (healthy return ratios - RoA at ~3%, RoE at ~2% GNPA at 1.5%) led to higher investor interest in BFL & P/ABV multiple expanding from 1x to 3x since September 213. We believe its niche positioning in CD financing coupled with diversified nature of its book that helps de-risk the portfolio hold key. BFL s premium valuations are expected to sustain on better earnings visibility. We initiate coverage with BUY rating & a TP of 56 valuing at 3.6x FY17E ABV. Exhibit 1: Key Financials Financial Performance FY13 FY14 FY15 FY16E FY17E NII ( crore) PPP ( crore) PAT ( crore) EPS( ) P/E P/ABV RoA RoE Bajaj Finance (BAJAF) 549

2 Shareholding pattern (Q1FY16) Shareholding Pattern Holdings Promoters 57.6 Institutional investors 23.9 Others 18.5 Source: BSE, ICICIdirect.com Research Institutional holding trend Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 FII Source: BSE, ICICIdirect.com Research DII Company background Bajaj Finance (BFL) is one of the leading non banking financial companies (NBFC) in India and is part of the illustrious Bajaj group. The company was incorporated in 1987 essentially as the captive financier to Bajaj Auto s vehicles. In 1995, it came out with an initial public offering (IPO). Initially, BFL was promoted by the erstwhile Bajaj Auto and Bajaj Auto Holdings. However, as per the scheme of de-merger of erstwhile Bajaj Auto in 27, the shareholding of Bajaj Auto in the company has been vested with Bajaj Finserv, which is the financial services arm of the Bajaj Group. As outlined above, BFL started as the captive financier to two and three wheelers manufactured by Bajaj Auto. However, since then, the company entered various other lending segments and became one of the significant players in the retail asset-financing industry. BFL s diversified product suite now comprises >1 product lines divided broadly into four categories like consumer, SME, commercial and rural. The company is the largest financier of two-wheelers and consumer durables in India. The company has an AUM of ~ 3241 crore as on FY15 and witnessed strong growth at 35% CAGR in the past three years. The liability mix is mainly skewed towards banks, followed by NCD/CPs and fixed deposits. BFL has a stable and deep management structure with 1 management team members having experience with leading multi national companies and transnational companies. The company s reach and distribution channels are strong with a presence in 16 locations in urban areas and 5 branches in rural areas. Further, for various product lines, BFL has tie-ups with all major manufacturers and dealers in consumer durables, lifestyle financing, digital products etc. Exhibit 2: Key management personnel Name & Designation Experience & Qualifications Rajeev Jain (Managing Director) Has more than 2 years of experience in the consumer & small business segment lending industry. He has been with the company for eight years. He has worked towards steering the organisation on to a path of fast-paced growth and defined an ambitious trajectory of building a diversified lending institution. He has earlier worked with AIG, GE Money and American Express Rakesh Bhatt (COO) Rakesh Bhatt has an overall experience of 2+ years in the finance & technology industry. He is responsible for leading a large portfolio of critical functions at the firm namely technology, operations, customer experience and quality. He has held leadership positions at GE Money, Reliance Industries, AIG and 3i Infotech Rajesh Viswanathan (CFO) Rajesh Viswanathan is responsible for the finance and treasury functions. He joined BFL from Bajaj Allianz Life Insurance where he was the CFO for eight years. He has varied experience having worked previously with KPMG in the Middle East in their Bahrain assurance practice. Prior to that, he was with DSP Merrill Lynch and Mahindra & Mahindra in India. He is a chartered accountant and a cost accountant and has a bachelors degree in commerce from Mumbai University Pankaj Thadani (Chief Compliance Officer) Pankaj Thadani joined Bajaj Finserv lending in 26, bringing with him a rich experience of 28 years in financing, financial accounting, cost accounting, tax and systems. He has helped give direction and enabled the company to grow from a single business company to a diversified NBFC. He is a mathematics graduate and a chartered accountant Devang Mody (President Consumer Business) Devang Mody is responsible for the consumer business vertical that includes consumer durables and lifestyle finance, cross sell, credit cards and salaried personal loans. He joined from AIG where he was Vice President - Business Development and CRM for the consumer finance business in India. Before AIG, he spent over eight years in GE Money. He is a chartered accountant Page 2

3 Exhibit 3: Group structure Bajaj Holding Investment Limited Bajaj Auto Limited (49.24% stake) Bajaj Finserv Limited (58.35% stake) Bajaj Allianz Life Insurance Company (74% stake) Bajaj General Insurance Company (74% stake) Bajaj Financial Solutions (1% stake) Wealth Management Bajaj Finance Limited (57.3% stake) Page 3

4 Exhibit 4: BFL s product profile Exhibit 5: Geographic presence Business Line FY15 Urban 161 Of which Consumer Lending branches 161 Of which SME Lending branches 119 Rural 232 Of which Rural branches 5 Of which Rural ASSC* 182 ; ASSC - Authorised Sales and Service Centres Exhibit 6: Distribution Product Line FY15 Consumer durable product stores 7,+ Lifestyle product stores 1,15+ Digital product stores 2,65+ 2W 3W Dealer/ASCs(3)/Sub-dealers 3,+ SME Direct sales agents 7+ Rural consumer durable product stores 1,5+ Exhibit 7: Number of new loans disbursed in FY15 Select Product Lines FY15 Consumer durable 3579 Lifestyle finance 8 Digital finance 293 2W & 3W 56 PLCS 169 Salaried Loans 38 SME 31 Rural finance 131 Page 4

5 Investment Rationale Bajaj Finance is an asset finance NBFC. The lending book can be broadly diversified into four categories viz. consumer finance, SME finance, commercial finance and rural finance. This book is funded through diversified resources like bank loans, bond or debentures, commercial papers, fixed deposits and funds raised via QIPs. The key strength or highlight of BFL s business model is its consumer finance (CF) business and in that, particularly, the consumer durable (CD) financing & lifestyle product financing business. The edge in the consumer financing business acts as a competitive advantage and has allowed BFL to command a valuation premium compared to other NBFCs However, the key strength or highlight of BFL s business model is its consumer finance (CF) business and in that, particularly, the consumer durable (CD) financing & lifestyle product financing business. These businesses provide uniqueness to BFL as other financing business like SME and commercial lending are covered by other NBFCs and banks. The edge in the consumer financing business acts as a competitive advantage and has allowed BFL to command a valuation premium compared to other NBFCs (see exhibit 2). Stronghold in CD financing & lifestyle product finance business. In the four broad categories, CF book as on FY15 was at crore, comprising 4.5% of total AUM of 3241 crore. Within the CF book, CD financing and lifestyle product financing book were at 4163 crore and 498 crore, respectively. Apart from these, the CF book includes two & three wheeler finance, personal loans and home loans to salaried individuals. Exhibit 8: Break-up of consumer finance (CF) book AUM ( Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17E 2W & 3W finance Consumer durable finance Lifestyle finance Digital Product - NA Non Digital Product - NA Personal loans Personal loans Cross Sell NA NA Salaried Personal Loans NA NA Home Loans (Salaried) Total CF AUM 3,357 9,328 13,127 14,937 17,424 22,497 Exhibit 9: Detailed profile of products offered under consumer finance (CF) category Particulars Auto Financing Consumer Durable Lifestyle Financing Personal Loans Year started Digital - Mobiles, Laptops etc & Non Digital - Furnitiure, Home Furnishing PL to existing customers Product profile 2-3 wheeler TV, AC, LED etc Target Segment Mass clients Mass Affluent Mass Affluent Existing Clients Ticket size ( Lacs) 2W -.45 lacs.28 lacs.35 lacs 5 lacs 3W lacs Loan to Value ratio 2W - 65 to 7% 65 to 75% Unsecured 3W - 75 to 8% Duration/tenure 2-3 years 9 months ~12 months 3-36 months Distribution network/presence 3+ via Bajaj Auto dealers, Sub dealers, Authorised service centres 7+ product stores 38+ product stores Yields range 22-25% 24-26% 25-26% 16-18% Proportion of Total AUM as on FY Amount (FY15- crore) 3,324 4, ,33 Page 5

6 The new clients acquired each year in the CD financing business have increased at 39% CAGR from 971 in FY11 to 3623 new customers in FY15. In the past five years, BFL has witnessed strong accretion in new customer acquisition as can be seen in the exhibit below. The new clients acquired each year in the CD financing business have increased at 39% CAGR from 971 in FY11 to 3623 new customers in FY15. Even lifestyle product finance (that includes digital products financing i.e. mobile phones, laptops, etc and non-digital i.e. furniture, watches etc) started in FY13 saw a robust increase from 36 customers served in FY13 to 373 in FY15. Exhibit 1: Number of new loans disbursed each year Business Line FY11 FY12 FY13 FY14 FY15 Q1FY16 Consumer Durable Finance Life style Finance (Digital + Non digital) Personal Loans W Rural Finance SME/commercial Total Currently, BFL is among the largest new client acquirers in India. This increase is owing to BFL s large distribution network and reach. It is present in more than 114 cities with 7+ point of sales or distribution franchise in consumer durable finance. Further, it has 38+ dealer network in lifestyle products (265+ in digital financing and 115+ in non digital financing). Exhibit 11: Distribution franchise Business Line FY1 FY11 FY12 FY13 FY14 FY15 Q1FY16 Sales Finance or Consumer electronics Dealer 2,+ 2,5+ 2, Life style Fianance/ Non Digital Digital Product stores W Dealer/ASCs 1,275+ 1, Small/SME Businesses Rural Consumer durable product stores BFL capitalised strongly on its % financing product, which enabled it to enjoy widespread popularity in the CD financing space among customers. Almost the entire CD financing and lifestyle product financing business is through % financing. Under this scheme, the sale proposition is that the customer will not have to pay any interest. The customer pays ~3% as down payment and the balance amount in EMI of seven to eight months. BFL gets 1-1.5% processing fees and ~6-8% of the product value as subvention from manufacturers. Further, the company offers EMI (Existing membership card) cards to its existing customers. This card enables the holder to purchase consumer durables & lifestyle products, by availing a loan from BFL without any documents thus providing quick & hassle-free finance. Customers simply have to Swipe & Sign to buy using an EMI card. As of Q1FY16, about 3.5 million EMI cards have been offered. Almost the entire CD financing and lifestyle product financing business is through % financing...leads BFL to command valuation premium over peers BFL s stronghold in the CD financing business is on the back of its large reach, formidable relationships with dealers and manufacturers, strong brand, expertise of several years and database of such large customers. These factors act as entry barriers in the CD financing business and give BFL a competitive advantage. Further, we believe the competition will remain low as banks are largely focused on housing finance or auto financing within retail loans while other NBFCs are in niche areas like auto finance, housing finance, gold finance or infrastructure finance. In the past few years, a major reason for BFL to command a higher valuation multiple vs. its peers is owing to its edge in the CF business and within that, particularly in the consumer durable & life style financing business. Going ahead, we expect BFL to maintain this premium owing to its leadership position in the under penetrated CD financing and lifestyle financing business with no major competitors. Page 6

7 Housing & Consumer durables is expected to jump 4 fold to US $ 752 billion from 21 levels as per BCG CII report Sizeable financing market in consumer category products to offer great opportunity As per BCG-CII report, the overall consumption expenditure of India is likely to increase 3.6 times to US $ 3.6 trillion by 22 from US $ 991 billion in 21 (see Exhibit below). In that, Housing & Consumer durables is expected to jump 4 fold to US $ 752 billion from 21 levels. In 2-21 decade also we observe that this segment quadrupled. The proportion of Housing & Consumer durables in overall consumption expenditure increased to 18.8% in 21 from 15.7% in 2. This is expected to further rise to 21% by 22. Exhibit 12: Housing & consumer durables is expected to increase 4.x by 22 (in $ billion) E Food x x 895 Housing & Consumer durables 47 4.x x 752 Transport & Communication x x 664 Education & Leisure x x 296 Apparel x x 225 Health x x 183 Others x x 57 Total x x 3585 Source: BCG CII Report, ICICIdirect.com Research We have tried to gauge the market size in terms of sales of some of the major products financed by Bajaj Finance. The market size of major consumer durable products like TV, washing machines, refrigerator and ACs is ~ 51 crore as on FY15. This segment has increased at 13% CAGR in past five years. Over FY15-2, it is expected to increase at 16% CAGR to 16 crore. This is on the back of expected revival in the economy, increased disposable income, easy access to credit, increase in electrification of rural areas, higher investments by major global companies in India etc. Further, consumer electronics (that includes DVD players, home theatre systems, MP3 players, audio equipment, digital cameras, etc) that has a market size of ~ 6 crore is estimated to reach 176 crore as per a report by Ernst & Young FICCI. In India, smart phone sales have increased strongly in the past few years. In FY13, ~4.4 crore smart phones were sold. This number is estimated to be ~11-12 crores in FY15. BY FY2, ~18 crore smart phones are expected to be sold annually. BFL is one of the largest financiers of Samsung s smart phones that has ~23% market share. Further, BFL also finances Apple s smart phones, which recorded sales of more than 1 million smart phones last year. The furniture market in India, which is highly unorganised (~9% of the market) is currently at ~ 7 crore. With expenditure on Housing estimated to rise four fold as observed in the above exhibit, the furniture market is estimated to increase to ~ 27 crore by FY2. The total market size of the segments discussed above such as consumer durables, consumer electronics, smart phones and furniture is estimated at about 3 crore and is expected to increase to around ~ 7 crore by FY2. Further, the company has indicated that in the CF space it is also working on a new product segment that is expected to have a financing market size of ~ 125 crore. Entering the e-commerce financing market can be an added advantage over time. Page 7

8 Two wheeler, three wheeler financing business captive financing model BFL has been present in two wheeler financing since its inception in the early 199s. This business has a captive financing model wherein BFL finances two-wheelers produced by its group company Bajaj Auto. Until FY8, two-wheeler financing comprised the bulk (~66%) of the overall AUM, which has now dipped to 1.3% ( 3324 crore as on FY15) of AUM. This is due to enhanced focus on the CD finance book, de-risking of the book by diversifying to SME & commercial financing and also due to increased asset quality stress seen in the two-wheeler book and 15% CAGR decline in two-wheeler sale volumes of Bajaj Auto over FY Currently, the company finances 3% of Bajaj Auto s domestic two-wheeler sales through 3+ dealers and authorised service centres. Though there has been a decline in the two-wheeler financing proportion in BFL s overall AUM, the company is the still the largest two-wheeler lender in India focused on the semi-urban & rural markets. BFL has a market share of 18% in the two-wheeler financing space. Currently, the company finances 3% of Bajaj Auto s domestic two-wheeler sales through 3+ dealers and authorised service centres. BFL also finances about 15% of Bajaj Auto s three-wheeler sales. This business is currently operating in 16 states covering 216 key dealers of Bajaj Auto. Exhibit 13: Slowing traction in two-wheeler finance book during FY14 & FY15 Two Wheeler Finance FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 Q1FY16 Number of new loans disbursed Amount Disbursed ( crore) NA 3149 NA NA AUM ( crore) NA ; NA = Not available Going ahead, we expect two-wheeler volumes financed by BFL to increase as domestic sale volumes of Bajaj Auto are expected to increase at 13% CAGR over FY15-17E to units. This will also lead to an improvement in absolute AUM to 4215 crore by FY17E. However, the proportion in overall AUM may continue to dip to 8% from 1.3% of AUM as on FY15. The large number of customers acquired through the CD financing business (~4 lakh new customers in FY15) allows BFL to cross-sell various other products to customers with a healthy credit history. Cross-sales of products to existing large customer base The large number of customers acquired through the CD financing business (~4 lakh new customers in FY15) allows BFL to cross-sell various other products to customers with a healthy credit history. These products include personal loans, life/general insurance, etc. Total personal loans as on FY15 were at 433 crore (14% of AUM), which were largely to existing customers. Further, home loans to salaried individuals are also covered in CF financing. It had a book of 839 crore as on FY15 and comprised 2.6% of total AUM. During Q1FY16, 633 crore of personal loans were disbursed while 116 crore worth of life insurance and 67 crore worth of general insurance policies were sold through cross sales. We expect the share of the CF division in total AUM mix to increase to 42.7% ( crore) by FY17E from 4.5% as on FY15. It will be mainly led by CD financing & lifestyle financing segment, which is expected to witness strong AUM CAGR of 44% and 59%, respectively in FY15-17E (refer exhibit 2). We expect such an increase on the back of a rise in sales of consumer durable, increased finance penetration and jump in the share of BFL in the overall financing market from 18% currently to ~23% by FY17E. Page 8

9 LAP comprises the highest part in SME financing as well as in the overall AUM at 25.4% as on FY15 SME financing Mortgage heavy book; traction to moderate; share to decline but continue to remain highest in overall AUM BFL s SME category is the largest of the four broad categories and comprises ~53% of the total AUM. It stood at crore as on FY15. It includes small business loans, loan against property (LAP), home loans to self employed & loan against securities (LAS). LAP comprises the highest part in SME financing as well as in the overall AUM at 25.4% as on FY15. LAP is followed by small business loans (9.8%), home loans (9.5% of overall loans) and LAS (4.5%). Exhibit 14: Break-up of SME book AUM ( Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17E Loans Business Loans NA NA Professional Loans NA NA Loan against property Home loans (Self Employed) Loan against securities SME cross sell Total SME AUM 3,299 12,85 17,198 18,158 21,323 26,791 In the SME segment, the focus is on high net worth SMEs with average annual sales of 25 crore with established financials and a proven borrowing track record. In it, BFL offers a range of working capital and growth capital products. Further, BFL offers a full range of mortgage products like LAP, lease rental discounting & home loans to SME and self employed professionals. Exhibit 15: Detailed profile of products offered under SME financing category Particulars Small Business Loans LAP Home Loans Loan against securities SME Cross sell Year started Target Segment SME clients Affluent - i.e HNIs and Ultra HNIs Self employed Affluent - i.e HNIs and Ultra HNIs SME Clients Ticket size 1 lacs to 3 lacs 1 crore to 5 crore 75 lacs to 2 crore 1 to 2 crore ~ 5 lacs Loan to Value ratio Unsecured 4-6% 5-7% 4-5% Duration/tenure 2-3 years 15-2 years 15-2 years 1 year Yields range 18-2% 11.5 to 13% % % 1.3-2% Proportion of AUM as on FY Amount (FY15 - crore) 3,84 8,232 3,71 1,578 1,233 Since FY11, the LAP book has witnessed robust growth of 38% CAGR to 8232 crore. Since FY11, the LAP book has witnessed robust growth of 38% CAGR to 8232 crore. Though yields in the mortgage business are much lower than other products, at the profitability level it is not much dilutive with RoEs at 16-17%. Of late, traction in the LAP portfolio has slowed (proportion dipped to 23.7% as on Q1FY16 from 28.7% in FY14) owing to enhanced competitive pressures and higher commission payouts. This led RoEs of the LAP business to fall below the comfortable range of 16-17%. The company indicated that it is developing a direct to customer model, which will help reduce commission payouts and lead to an improvement in product profitability. However, owing to enhanced competition in the business from other NBFCs and banks, going ahead, we expect the LAP portfolio traction to moderate (2% CAGR till FY17E) and its proportion to shrink to 22.7% of AUM as on FY17E. Small business loans have also witnessed strong traction of 43% CAGR since FY11 to 384 crore. The share in overall AUM has increased continuously and is at 9.5% as on FY15. As per the management, healthy traction in this segment should continue, going ahead, as profitability of this business is improving. Small business loans include professional loans that amount to 623 crore of 384 crore. These loans are largely to doctors. Page 9

10 Going ahead, we expect the proportion of small business loans to rise to 1.7% by FY17E from 9.5% as on FY15. Under LAS, BFL offers loans to promoters and HNIs to enable them to meet their working capital and other business purpose needs. Securities in this case could be equity shares, bonds and mutual funds. During Q1FY16, the company indicated that it is ready to execute its strategy wherein it will partner with leading brokerages/banks with the objective of leveraging the funding opportunity to their HNI & ultra HNI customer base. A dedicated SME relationship management channel has also been created to provide a wide range of cross-sales of products to BFL s SME franchise. We expect the share of the SME category in the total loan mix to dip to 5.9% by FY17E from 53.1% in FY15 mainly led by shrinkage in the LAP portfolio (refer exhibit 2). Commercial financing traction dependent on underlying economic trend In the commercial category, it provides finance in the construction equipment (CE) and infrastructure space. Apart from these, BFL also offers wholesale lending products covering short, medium and long term needs of auto component vendors in India. The proportion of the overall commercial segment has reduced from 18% of total AUM in FY12 to 5.4% in FY15 owing to a run down in the book related to CE and infra financing. These segments witnessed asset quality pressures. Hence, BFL reduced its exposure as can be seen in the below exhibit. Exhibit 16: Break-up of commercial lending category AUM ( Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17E Construction equip. finance Vendor Financing Infrastructure lending Total Commercial AUM 915 1,833 1,752 1,94 2,12 2,345 The proportion of the commercial segment has reduced from 18% in FY12 to 5.4% in FY15 owing to a run down of the book in the construction equipment and infra financing due to stress in these segments Exhibit 17: Detailed profile of products offered under commercial category Particulars Vendor Financing CE Financing Infra Lending Year started 2,9 2,1 2,1 Target Segment Bajaj Auto's vendors Strategic & Retail Affluent Ticket size NA 1. crore to 3 crore NA Loan to Value ratio NA 7 to 8% 7 to 8% Duration/tenure NA 3 years 1-15 years Yields range NA 1.5% % 12-14% Proportion of AUM as on FY Amount (FY15 - crore) 1, The company has indicated its intention to increase the proportion of the commercial segment in the overall AUM to ~1% over the next four or five years, mainly via CE financing and infrastructure lending. However, it will depend on the how the economic scenario pans out and mainly on the revival in the infrastructure space. Currently, the infrastructure space is in doldrums owing to stalled projects and flow of lower fresh investments due to which this space is not lucrative for further lending by banks and other financial institutions. Over FY15-17E, we expect the commercial category share to fall further to 4.5% of the total AUM as we believe any significant improvement in the infrastructure financing space will take time. Page 1

11 In rural areas, BFL is currently present in CD financing, asset backed financing, gold loans, personal loans, etc. Owing to its small size, the segment has witnessed sharp traction with the loan book increasing to 333 crore in FY15 from 5 crore in FY14 Going ahead, we expect overall advances traction for BFL at 27% CAGR in FY15-17E to 5718 crore driven by the CF segment Rural financing to maintain strong growth on lower base, increasing reach In the rural eco system, BFL is a highly diversified lender. The company is currently present in CD financing, asset backed financing, gold loans, personal loans, etc. BFL functions through a hub & spoke model. The company operates its rural business in Maharashtra, Gujarat and Karnataka. BFL is expected to open branches in rural areas of Madhya Pradesh in Q2FY16 followed by Tamil Nadu. The company has a presence across 232 towns and villages and a retail presence in 18+ stores. Exhibit 18: Rural proportion to rise, going ahead, but still stay a small part of the AUM AUM ( Crore) FY14 FY15 Q1FY16 FY16E FY17E Rural financing % of Total AUM As business commenced recently i.e. in FY13, the book size is small and witnessed sharp traction. AUM increased to 333 crore in FY15 from 5 crore in FY14. Recently, the company also launched its MSME lending business in rural areas. We expect the rural portfolio to continue to witness sharp traction, going ahead. We have factored in that its share will rise to 2% of total AUM at 154 crore as on FY17E. Overall book expected to grow at 27% CAGR over FY15-17E BFL has a diversified loan portfolio. Further, the company has a leadership position in under penetrated & growing segments like CD financing, lifestyle product financing, two-wheeler financing, LAP, etc. which accounts for ~5% of its portfolio. These factors have allowed BFL to clock strong AUM CAGR of 44% over FY11-15 to 3241 crore. This has been despite a weak economic environment in the past few years. The traction in AUM in the past four years has been led by the SME category, which increased at 51% CAGR to crore as on FY15 followed by the CF category, which rose at 41% CAGR to 1322 crore. The LAP portfolio in the SME category, which accounts for highest proportion in overall AUM at 25.4%, grew at 38% CAGR in FY11-15 to 8232 crore. CD financing in the CF book has seen 47% CAGR to 4163 crore as on FY15. Of the total AUM, BFL places about 4-5% for securitisation for better assetliability management. As on FY15, of the total AUM of 3241 crore, about 1211 crore was the off book or securitised amount. The balance crore is actual advances outstanding in the balance sheet as on FY15. Going ahead, we expect overall advances traction at 27% CAGR in FY15-17E to 5718 crore driven by CF segment. Exhibit 19: Credit (AUM securitised amount) growth to stay healthy at 27% CAGR in next two years ( crore) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Loan Loan Growth (RHS) Page 11

12 Exhibit 2: AUM break-up CAGR AUM ( Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17E 2W & 3W finance 1,953 3,593 3,324 3,526 4, Consumer durable finance 893 2,531 4,163 6,43 8, Lifestyle finance , Digital Product Non digital product Personal loans 511 2,577 4,33 5,517 7, Personal loans Cross Sell 2,412 3,145 3,994 Salaried Personal Loans 1,891 2,373 3,13 Home Loans (Salaried) ,79 1, Consumer Finance category 3,357 9,328 13,127 17,424 22, Loans 727 2,33 3,84 4,356 5, Business Loans 2,461 3,572 4,623 Professional Loans ,15 Loan against property 2,251 6,97 8,232 9,583 11, Home loans (Self Employed) 2,351 3,71 3,858 4, Loan against securities ,578 1,95 2, SME cross sell 718 1,233 1,576 1, SME category 3,299 12,85 17,198 21,323 26, Construction equip. finance (24.9) (16.3) Vendor Financing ,146 1,452 1, Infrastructure lending Commercial category 915 1,833 1,752 2,12 2, Rural lending , Total 7,571 24,61 32,41 41,485 52, CAGR AUM ( Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17E Consumer Finance 3,357 9,328 13,127 17,424 22, SME Business 3,299 12,85 17,198 21,323 26, Commercial 915 1,833 1,752 2,12 2, Rural , Total AUM 7,571 24,61 32,41 41,485 52, AUM (Mix %) FY11 FY14 FY15 FY16E FY17E Consumer Finance SME Business Commercial Rural Total AUM Page 12

13 Borrowings are well diversified with bank s proportion highest at 54% followed by NCDs at 37%, CPs/FDs at 9% Well diversified funding; strong parentage & credit rating enable lower CoF The borrowings of BFL as on FY15 stood at 2669 crore. The borrowings are well diversified with banks proportion being the highest at 54% followed by NCDs at 37% and CPs/FDs at 9%. Owing to strong parentage and credit rating (consistently holding AA+/stable and LAA+ stable rating from Crisil and Icra over the last seven years, with a positive outlook. Further, the fixed deposit scheme has been rated FAAA/Stable by Crisil and MAAA/Stable by Icra) the company is able to raise funds at competitive rates from various sources as reflected in CoF being better than peers as seen in below exhibit. Exhibit 21: BFL manages to keep CoF lower than peers Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport Finance Shriram City Union CoF (FY15) Further, at regular intervals, the company was able to raise funds via QIP, which also helps in reducing its cost of borrowings. Recently, BFL raised ~ 18 crore via allotment of warrants to promoters and equity to QIBs. Going ahead, the mix of borrowings is expected to change depending on market rates. However, we believe bank borrowings will continue to dominate. Exhibit 22: Trend in borrowings ( crore) 45, 4, 35, 3, 25, 2, 15, 1, 5, 42, ,465 26, , ,133 1, FY12 FY13 FY14 FY15 FY16E FY17E Borrowings Growth (RHS) Page 13

14 Exhibit 23: Resource mix expected to be tilted towards banking FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NCDs/Tier II debt Banks Deposits/CPs The margins of BFL are one of the highest among its peers. Its margins during FY15 were at 1.3%. Such high margins were on the back of its strong blended yields of 18.9% and competitive CoF, which helps the company to earn overall spread of 9.2% Margins one of the highest; to moderate a bit, going ahead The margins of Bajaj Finance are one of the highest among its peers. Its margins during FY15 were at 1.3%. Such high margins were on the back of strong blended yields of 18.9% and competitive CoF, which helps the company to earn overall spread of 9.2%. Yields in the consumer financing category are high as outlined in the above exhibit. In the past few years, margins witnessed a slide owing to a change in loan mix towards lower yielding segments as BFL s strategy was to go for scale and secured products like in the SME category (like LAP), which impacted the yield, to some extent, but also helped maintain steady asset quality. LAP portfolio where yields are ~13% increased at 38% CAGR over FY Exhibit 24: BFL earns highest margins among peers in FY Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport Finance NIM (FY15) With banks reducing their base rates and owing to the recent fund raising, the company could benefit, going ahead, on the CoF front. However, it would be arrested by an increase in exposure towards relatively lower yielding assets like SME. We expect margins to moderate a bit around 3 bps and stay at ~ 1% in FY16E, which is still healthy compared to peers. Page 14

15 Exhibit 25: Margins to stay at strong levels FY11 FY12 FY13 FY14 FY15 FY16E FY17E NIM YoA CoD Page 15

16 BFL s asset quality has improved sharply over the last five or six years. The GNPA ratio was at 16.6%, 7.6% during FY9, FY1, respectively. As on FY15, the GNPA ratio was at 1.5% Asset quality remains at acceptable levels; expect to stay steady Bajaj Finance s gross NPA ratio at 1.5% ( 484 crore) as on FY15 is relatively better than some of its peers and also considering the weak economic environment of the past two or three years. The asset quality has improved sharply over the last five or six years. GNPA ratio was at 16.6%, 7.6% during FY9, FY1, respectively. This was owing to high stress witnessed in the two-wheeler financing and computer financing business then. Post such a setback in asset quality, BFL focused on improving its risk management process and framework. This included product rationalisation like exiting the computer financing business, focusing on safer products like LAP and mortgages during the weak economy of FY11-14, increased use of Cibil scores, focusing on repeat customers with good repayment pattern and on affluent & mass affluent customers. These efforts yielded large gains with improvement in asset quality as the absolute GNPA declined from 416 crore in FY9 to 148 crore by FY12 before increasing to 484 crore by FY15. However, the loan book size is much larger now than in FY9 (>13x of FY9 loan book). Exhibit 26: Asset quality witnesses sharp improvement; expect to stay at acceptable levels going ahead (crore) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E GNPA NNPA GNPA NNPA Exhibit 27: BFL in better position in terms of asset quality compared to peers Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport Finance Shriram City Union GNPA (FY15) Page 16

17 The credit cost (i.e. provisions as percentage of loans) also declined from 8.1% of advances in FY1 to 1.2% by FY13 and 1.4% levels as on FY15. Exhibit 28: Trend in credit cost The credit cost (i.e. provisions as percentage of loans) also declined from 8.1% of advances in FY1 to 1.2% by FY13 and 1.4% levels as on FY15. FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Credit cost Concerns were raised about the company s entry into the CE financing and infra financing when BFL entered these spaces in FY9 as the company lacked experience in these business. During the downturn, the company did face certain NPL issues in this exposure along with falling RoEs in the segment. Post this realisation, BFL consciously started reducing its exposure to both these segments that fared well on the asset quality front. The commercial category proportion has reduced to 5.4% in FY15 from 18.5% in FY12. Going ahead, we expect the GNPA ratio to increase a bit in FY15-17E to 1.8% by FY17E. However, these levels are still acceptable and better than peers. Page 17

18 We expect the current capital to be sufficient to meet the growth requirements for the next two or three years Well capitalised to clock strong growth, going ahead BFL is in a comfortable position on the capital front especially after the recent capital raising of ~ 18 crore. In June 215, the company allotted warrants to the promoter i.e. Bajaj Finserv at 4412/share amounting to 48 crore. Further, BFL raised 14 crore via allotment of equity shares to QIBs at 4275/share. The total capital adequacy ratio as on Q1FY16 is 2.7 with Tier I ratio at 17.4% (up from 14.2% as on FY15 owing to recent capital raising). We expect the current capital to be sufficient to meet growth requirements for the next two or three years. Exhibit 29: Comfortable on capital adequacy front FY11 FY12 FY13 FY14 FY15 Q1FY16 Tier I Tier II Exhibit 3: Capital raising history Date Mode of capital raising Price per share ( ) Amount raised ( crore) January 26 Preferential allotment January 26 Preferential allotment November 26 Right Issue in ratio of 6: March 27 Conversion of Warrants July 27 Conversion of Warrants March 212 Conversion of Warrants January 213 Right Issue in ratio of 3: June 215 Issued to QIBs June 215 Preferential allotment Source: Company, Capitaline, ICICIdirect.com Research Page 18

19 Financials NII growth to moderate from past trends but still remain sturdy BFL s NII has witnessed robust traction in the past on the back of strong margins and loan growth. In the past five years, the NII CAGR has been 36% while in the past three years it has been maintained above >3% at 32% to 2872 crore as on FY15. The margins, on an average, have been above 1% over the past three to five years. Strong traction on the advances front of 51% CAGR in the past five years and 36% CAGR in the past three years has helped maintain NII traction despite decline in margins. In the past five years, the NII CAGR has been 36% while in the past three years it has been maintained above >3% at 32% to 2872 crore as on FY15 Going ahead, as we factor in a slight moderation in margins and a drop in the pace of loan growth, NII traction is accordingly expected to decline to 28% CAGR over FY15-17E. However, despite moderation it is still better off compared to the expected NII growth of its peers owing to the strength of its business model and steady asset quality expected ahead. Exhibit 31: Healthy credit growth + strong margins to support healthy NII traction ahead ( crore) FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E NII NII growth Operational efficiency to kick in, going ahead BFL s cost-to-income ratio in the past six years has been steady at 45% while opex as a percentage of average assets has witnessed an improvement as seen in the exhibit below. This is owing to higher growth in assets vs. income growth. As asset generation happened more rapidly, BFL had to continuously resort to large investments to streamline operations, upgrade technology for maintaining large database of customers, their behavioural pattern and on other analytics in consumer durables, lifestyle financing and the SME business. The cost-to-income ratio has been steady for BFL in the past few years. We expect BFL to witness some operating leverage, going ahead Further, the staff cost increases largely in tandem with the rising book size. However, we believe that, to a large extent, fixed costs have been incurred and BFL should see some operating leverage, going ahead. We expect cost to income ratio to decline to 42.5% by FY17E from 45% currently while opex to assets should decline from 5% to 4.6% over next two years. Page 19

20 Exhibit 32: Operating efficiency to improve, going ahead FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Cost to Income ratio Cost to assets ratio (RHS) Expect strong traction in profitability, healthy return ratios to stay On the back of strong traction in NII growth, steady cost to income ratio and declining credit costs, BFL was able to clock strong PAT CAGR of 59% in FY1-15 and a CAGR of 3% over the past three year to 898 crore in FY15. Accordingly, return ratios improved sharply in FY1-12 (RoE increased to 24% from 8% while RoA improved to 3.8% from 2.3% in FY1). However, post FY12, due to a decline in margins owing to a change in the loan mix, RoA declined to 3.1% by FY15. Accordingly, RoE dipped to 2% in FY15. We expect PAT growth to remain strong at 27% CAGR over FY15-17E to 1456 crore with return ratios expected to stay healthy We expect PAT growth to remain strong at 27% CAGR over FY15-17E to 1456 crore with return ratios staying healthy. RoEs are expected to dip from current levels owing to ~ 18 crore fund raised via QIP in FY16. Any major improvement in the economic scenario would be an upside risk to our estimates. Exhibit 33: Profitability to be maintained at benign levels ( crore) 1,6 1,4 1,2 1, , , FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E PAT Growth (RHS) Page 2

21 Exhibit 34: Healthy return ratios FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoE RoA (RHS) Page 21

22 Risk & concerns Fresh competition may impact edge in consumer financing business BFL s key strength against its peers is in its stronghold in the CD financing business and lifestyle product financing business. As such, currently there are no major players in this business who can pose a challenge to BFL but there are no entry barriers too. With demand for corporate loans and SME loans expected to remain weak, other financial institutions like banks and NBFCs may look towards this under penetrated CD financing business. This may reduce BFL s strong positioning or compel it to resort to risky ways of going about its business. This may lead to a reduction in the premium multiple it gets currently. Higher concentration in certain segments Though BFL s loan book is well diversified, certain products like LAP, home loans, CD financing and personal loans have a higher share of 25.4%, 12.1%, 13% and 13.3%, respectively. The mortgage related book accounts for ~4% of the AUM as on FY15. In case of LAP and home loans, the book has grown at a brisk pace in recent times and is not seasoned. Hence, any large decline in property price could lead to asset quality stress cropping up from this book. The unsecured loans i.e. the proportion of personal loans has also increased recently. This portfolio could pose a risk. Lower-than-expected rise in Seventh Pay Commission Demand for consumer durables depends on various factors like state of the economy, employment opportunities etc. The Seventh Pay Commission report, which deals with pay scales of central bank employees, is expected to be announced on September 2, 215. Any letdown can also impact demand for consumer durables and other lifestyle products. In turn, this could impact the advances growth of BFL and, consequently, its profitability. Recent marginal cost basis lending rate calculation may flow to NBFCs too Recently, RBI released draft guidelines for calculation of base rates by banks on a marginal cost basis vs. the average cost basis followed earlier. The same will be implemented from April 1, 216 once the final guidelines are announced. These guidelines will impact bank s margins as under marginal cost method once the deposit rates are revised lower the entire calculation of cost of funds need to be done on the basis of this new lower rate. This is despite the fact that most of the borrowings still are at the higher deposit rate. As has been witnessed in the past, the RBI has gradually subjected NBFCs to the same NPA provisioning guidelines as applicable to banks. Similar, instance can also happen in lending rate calculation for NBFCs which can have negative implications NBFC s margins. Page 22

23 We expect return ratios to stay steady over next two years with RoA of 3% and RoE of ~19%. We believe the opportunity size in consumer and SME space remains buoyant and BFL is well placed to capture it. Valuation In the past two years, investors have taken keen interest in BFL as reflected in the 357% rise in its stock price since September, 213. The stock performance has surpassed its peers. It is currently trading at 3.3x FY17E ABV for a RoA of 3% and RoE of 19%. The two year forward multiple increased from 1x to >3x currently post September 213. We believe the reason for such strong interest is owing to its leadership position in the short duration, lower ticket sized, CD financing and lifestyle product financing business along with the diversified nature of its loan portfolio. This has allowed BFL to register strong AUM growth of 44% CAGR in the past four years to 3241 crore as on FY15 with asset quality staying under control (GNPA ratio at 1.5%). PAT over FY11-15 period rose at a robust pace of 38% CAGR to 897 crore as on FY15. Over FY15-17E, we expect PAT CAGR to moderate compared to the past but still stay healthy at 27% CAGR to 1456 crore by FY17E driven by a steady operating performance, strong growth & margins and controlled asset quality & credit cost. We expect return ratios to stay healthy over the next two years with RoA of 3% and RoE of ~19%. We believe the opportunity size in the consumer and SME space remains lucrative and BFL is well placed to capture it. BFL is trading at premium valuations to its peers (see exhibit below) in the NBFC space due to better visibility in earnings. We initiate coverage on BFL with a BUY recommendation & a TP of 56 valuing at 3.6x FY17E ABV. Exhibit 35: Peer Comparison Bajaj Finance commands premium multiples as it is well placed among peers RoA RoE ABV CMP ( ) Mcap ( crore) AUM ( crore) GNPA (FY15 - %) FY16E FY17E FY16E FY17E FY16E FY17E P/ABV (FY17E) P/E (FY17E) Bajaj Finance STFC MMFS SCUF CIFC Source: Company, Bloomberg, ICICIdirect.com Research; STFC = Shriram Transport Finance; MMFS = Mahindra Finance; SCUF = Shriram City Union Finance; CIFC = Cholamandalam Finance Exhibit 36: Trend in P/ABV multiple 7 Bajaj Finance can be truly described as a successful transformation story in the past eight years. Post induction of a new management in 27, BFL got transformed from a predominantly two & three wheeler finance company to a financier of large spectrum of loans in the consumer, SME and commercial categories with >1 product lines Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 ( ) Price ( ) 4.5x 3.5x 2.5x 1.5x.5x BFL has recently tied up with major e-commerce players. Any positive fallout of such a deal on growth could be an upside risk to our call. Further, higher-than-expected growth in the economy would lead to higher-than expected loan book growth and, consequently, lead to higher-thanexpected traction in profitability. This, in turn, could lead to a further rerating of the stock and, hence, remains an upside risk to our call. Page 23

24 Exhibit 37: Income Statement ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Interest Earned Interest Expended Net Interest Income Growth Non Interest Income Operating Income Employee cost Other operating Exp Operating Profit Provisions PBT Taxes Net Profit , ,456.3 Growth EPS ( ) Exhibit 38: Balance sheet (Year-end March) FY13 FY14 FY15 FY16E FY17E Sources of Funds Capital Reserves and Surplus Networth Borrowings Other Liabilities & Provisions Total 17, , , , ,114.4 Application of Funds Fixed Assets Investments Advances Other Assets Cash Total 17, , , , ,114.4 Page 24

25 Exhibit 39: Key ratios (Year-end March) FY13 FY14 FY15 FY16E FY17E Valuation No. of shares (crore) EPS ( ) DPS ( ) BV ( ) ABV ( ) P/E P/BV P/ABV Yields & Margins Net Interest Margins Yield on assets Avg. cost on funds Yield on average advances Avg. Cost of Borrowings Quality and Efficiency Cost to income ratio Cost to assets ratio GNPA NNPA ROE ROA Exhibit 4: Growth ratios (Year-end March) FY13 FY14 FY15 FY16E FY17E Total assets Advances Borrowings Net interest income Operating Income Operating expenses Operating profit Net profit Net worth EPS Page 25

26 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 26