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 +91-22-6273 8068 Shreesh Chandra Research Associate shreesh.chandra@nirmalbang.com +91-22-6273 8028 Key Data Current Shares O/S (mn) 139.0 Mkt Cap (Rsbn/US$bn) 142.4/2.2 52 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 2.4 21.3 39.2 Nifty Index 4.4 9.1 28.4 Source: Bloomberg Y/E March (Rsmn) 3QFY18 3QFY17 2QFY18 YoY (%) QoQ (%) Interest income 4,750 3,932 4,450 20.8 6.7 Interest expenses 1,783 1,643 1,760 8.5 1.3 Net interest income 2,967 2,289 2,690 29.6 10.3 NIM (%) 10.7 10.1 10.3 60bps 40bps Loan origination fees 370 334 320 10.8 15.6 Other income 317 283 285 12.1 11.3 Operating income 3,655 2,906 3,295 25.8 10.9 Staff costs 1,472 1,061 1,180 38.7 24.7 Other operating expenses 471 379 420 24.2 12.1 Total operating expenses 1,942 1,440 1,600 34.9 21.4 Cost to-income (%) 53.1 49.6 48.6 360bps 459bps Cost-to-AUM (%) 7.0 6.6 6.3 49bps 72bps Operating profit 1,712 1,466 1,695 16.8 1.0 Provisions 86 38 500 126.4 (82.8) Credit costs (%) 0.3 0.2 2.0 14bps (167bps) PBT 1,626 1,428 1,195 13.9 - Tax - - - - - -Effective tax rate (%) - - - - - PAT 1,626 1,428 1,195 13.9 - EPS (Rs) 11.7 10.4 8.7 13.0 - BV (Rs) 193.8 191.9 182.2 1.0 6.4 AUM 114,660 85,310 105,970 34.4 8.2 Source: Company, Nirmal Bang Research
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 30-45 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
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) 23.8 21.0 36.7 54.6 78.4 BV (Rs) 108.6 177.3 214.0 268.7 347.1 P/E (x) 43.1 48.8 27.9 18.8 13.1 P/BV (x) 9.4 5.8 4.8 3.8 3.0 Gross NPAs (%) 0.1 5.8 4.2 3.8 3.5 Net NPAs (%) 0.0 2.6 0.2 0.1 0.1 RoA (%) 5.1 3.3 4.1 4.5 4.8 RoE (%) 24.9 15.1 18.7 22.6 25.5 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 2,690 30 10 2,986 (1) Pre-provision profit 1,712 1,466 1,695 17 1 1,877 (9) PAT 1,626 1,428 1,195 14 36 1,463 11 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 15,225 5.2 8.6 NIM (%) 10.0 10.1 9.7 9.8 34bps 21bps Operating profit (Rsmn) 7,964 11,362 7,358 9,924 8.2 14.5 Profit after tax (Rsmn) 5,062 7,540 4,307 7,227 17.5 4.3 EPS (Rs) 36.7 54.6 31.2 52.4 17.5 4.3 ABV (Rs) 220.3 267.5 216.8 259.9 1.6 2.9 Source: Company, Nirmal Bang Research Exhibit 4: One-year forward P/BV (%) 12 10 8 6 4 2 - Source: Company, Nirmal Bang Research P/BVPS Mean +1 SD -1 SD 3 Bharat Financial Inclusion
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 562 848 1,031 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 99,458 139,810 190,709 Other liabilities & provisions 6,411 8,458 11,689 15,689 20,274 Total liabilities 71,537 104,176 140,676 192,569 258,871 Fixed assets 164 221 331 497 745 Investments 2 2 2 2 2 Loans 50,215 74,271 107,693 156,155 218,617 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 71,537 104,176 140,676 192,569 258,871 AUM 77,325 94,011 137,303 194,648 268,658 Source: Company, Nirmal Bang Research Exhibit 6: Key ratios Growth (%) Net interest income 59.6 35.6 39.9 37.0 36.6 Operating profit 112.4 27.7 44.2 42.7 43.3 Profit after tax 61.4 (4.4) 74.7 49.0 43.5 Business (%) Advances growth 69.7 47.9 45.0 45.0 40.0 Gross loan growth (incl. securitisation) 83.3 21.6 46.0 41.8 38.0 Spread (%) Yield on BS loans 23.9 19.7 18.6 17.9 17.4 Cost of borrowings 11.5 10.2 9.7 9.4 9.2 Spread 12.4 9.6 8.9 8.5 8.2 Spread (incl. income on securitisation) 15.1 12.3 11.5 10.8 10.3 NIM 11.3 10.1 10.0 10.1 10.1 Operational efficiency (%) Cost-to-income 48.3 50.0 46.8 43.8 40.6 Cost-to-assets 6.8 6.3 5.7 5.3 4.9 Cost-to-AUM 6.8 6.5 6.1 5.3 4.8 Productivity (Rsmn) Gross portfolio per branch 58.1 67.2 85.9 108.3 134.5 Profit per branch 2.3 2.1 3.2 4.2 5.4 Gross portfolio per employee 6.4 6.4 8.2 10.4 12.9 Profit per employee 0.3 0.2 0.3 0.4 0.5 CRAR (%) Tier I 23.1 33.0 25.8 22.5 20.8 Tier II - 0.5 - - - Total 23.1 33.5 25.8 22.5 20.8 Asset quality (%) Gross NPAs 0.1 5.8 4.2 3.8 3.5 Gross NPAs (excl. AP) 0.1 5.8 4.2 3.8 3.5 Net NPAs 0.0 2.6 0.2 0.1 0.1 Provision coverage 53.7 56.7 95.2 97.4 97.1 Credit costs 1.0 5.8 3.2 2.0 1.4 Credit Cost (% of AUM) 0.6 4.2 2.5 1.6 1.1 Return ratios (%) RoE 24.9 15.1 18.7 22.6 25.5 RoA 5.1 3.3 4.1 4.5 4.8 Per share (%) EPS 23.8 21.0 36.7 54.6 78.4 BV 108.6 177.3 214.0 268.7 347.1 ABV 108.5 163.9 212.4 267.5 345.5 ABV (Including DTA) 144.1 184.3 220.3 267.5 345.5 Valuation (x) P/E 43.1 48.8 27.9 18.8 13.1 P/BV 9.4 5.8 4.8 3.8 3.0 P/ABV 9.4 6.3 4.8 3.8 3.0 P/ABV (after considering DTA) 7.1 5.6 4.7 3.8 3.0 Source: Company, Nirmal Bang Research 4 Bharat Financial Inclusion
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 455 600 7 July 2015 Buy 510 600 23 July 2015 Buy 537 650 20 October 2015 Buy 450 650 29 January 2016 Buy 533 700 5 May 2016 Buy 596 750 26 July 2016 Buy 864 1,050 3 November 2016 Buy 818 1,140 27 January 2017 Buy 743 1,070 3 May 2017 Buy 783 985 27 July 2017 Buy 789 985 30 October 2017 Buy 971 1,131 31 January 2018 Buy 1,025 1,244 Rating track graph 1000 900 800 700 600 500 400 300 Not Covered Covered 5 Bharat Financial Inclusion
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