Management Meet Note Rating matrix Rating : Unrated Target : NA Target Period : NA Potential Upside : NA Key Financials Crore FY12 FY13 FY14 FY15 NII 1,25 1,717 2,215 2,872 PPP 756 1,53 1,349 1,742 PAT 46 591 719 898 Valuation summary FY12 FY13 FY14 FY15 P/E 52.8 42.4 38.1 3.6 P/BV 11.2 8.1 6.9 5.7 RoA 3.8 3.8 3.4 3.1 RoE 24. 21.9 19.5 2.4 Stock data Particulars Amount Market Capitalisation 29576 Crore GNPA (FY15) 471 Crore NNPA (FY15) 14 Crore NIM (FY15) 1.3 52 week H/L 557/ 2 Equity Capital ( crore) 53.6 Face value 1 DII Holding 6. FII Holding 17.9 Price movement 1, 8, 6, 4, 2, Jul-14 Research analyst Oct-14 Bajaj Finance Jan-15 Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Apr-15 Jul-15 Nifty (L.H.S) 6, 5, 4, 3, 2, 1, July 2, 215 Bajaj Finance (BAJAF) 5498 Unique product offering commands premium! We recently met the management of Bajaj Finance (BFL) and got an insight into its business model and growth outlook. BFL is the lending arm of Bajaj Finserv (listed), being the financial services arm of the Bajaj group. The key feature of BFL is the well diversified nature of its asset book. It provides financing in more than 1 product profiles divided into four broad categories like consumer finance (CF), SME, commercial and rural. On the back of its diversified product portfolio, innovative schemes like existing membership cards (EMI card), strong customer acquisition strategy and diversified liability profile, BFL managed to clock strong credit growth of 44% CAGR over FY11-15 to 312 crore. In FY16E, BFL expects to acquire 5 lakh customers vs. ~47 lakh in FY15. Loan traction to stay healthy despite moderation from past levels BFL s AUM traction in the past three years has been strong at 35% CAGR to 3241 crore as on FY15. This was mainly driven by the SME category (53% of the total AUM), which increased at 44% CAGR followed by the CF category (41% of the AUM), which grew at 38%. Going ahead, the management guided the traction to be ~25%. Further, if the economy witnesses faster growth, actual traction could be higher with the target mix of consumer 35%, SME 45%, commercial 15% and rural 5% over three to five years. In the CF space, the company indicated that it is also working on another product that shall have an expected market size of ~ 125 crore, which is roughly the current financing market size of the products financed by BFL in the CF category. Asset quality, margins to stay stable BFL s gross NPA ratio at 1.5% ( 471 crore) as on FY15 is relatively better than some of its peers. The asset quality has improved sharply over the last five to six years. GNPA ratio was at 16.6% and 7.6% during FY9 and FY1, respectively. Owing to its strong underwriting processes, focus on affluent & mass affluent clients, NPA is expected to remain acceptable. Owing to such healthy asset quality & higher yields in CF space, BFL earns one of the highest margins among its peers of 1% as on FY15. Going ahead, slight moderation is expected in NIMs but shall stay above peers. Strong business model; well capitalised; rich valuations to continue BFL s unique business model, unlike the niche model of peers, allows it to strengthen growth & reduce stress on asset quality front. This is reflected in strong uptick witnessed in its business & profitability (38% CAGR to 897 crore in FY15) in past four years wherein the economic scenario was weak. This led to a sharp re-rating, especially post Q2FY14 wherein the forward multiple surged from 1x to >3x. We believe BFL s premium valuations will sustain owing to better earnings visibility vs. peers. Exhibit 1: Financial Performance Financial Performance NII ( crore) 913 125 1717 2215 2872 PPP ( crore) 574 756 153 1349 1742 PAT ( crore) 247 46 591 719 898 EPS( ) 67 14 13 144 18 P/E 81.5 52.8 42.4 38.1 3.6 P/ABV 15.5 11.3 8.2 7. 5.9 RoA 3.8 3.8 3.8 3.4 3.1 RoE 24. 21.9 19.5 2.4 21.2 ICICI Securities Ltd Retail Equity Research
Differentiated product profile The company s product offerings can be subdivided into four broad categories as follows: consumer includes two-and three-wheelers, consumer durable loans, lifestyle finance, personal loans; SME includes business loans, loans against property, home loans, loans against securities, SME cross sell; commercial includes construction equipment loans, infrastructure loans and loans to auto vendors while rural provides consumer durable financing, asset backed financing, gold loans, etc. Exhibit 2: Products under consumer finance category offer strongest yields Particulars 2-3 wheeler Consumer Durable Lifestyle Financing Personal Loans Year started 1,987. 1,995. 2,12. 2,12. Target Segment Mass clients Mass Affluent Mass Affluent Existing Clients Ticket size ( Lacs) 2W - ~45.3.4 5. 3W - 1-1.5 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, and Authorised service centres 7+ product stores 115+ product stores Yields range 22-25% 24-26% 25-26% 16-18% Financial Highlights Exhibit 3: Loan growth above industry ( crore) 35 3 25 2 15 1 5 31199 1 8.4 8 7.1 68.9 22971 6 1674436.3 37.2 35.8 4 12283 2 7272-18.1 2893 432 237-2 -4 FY8 FY9 FY1 Loan Loan Growth (RHS) Source: Exhibit 4: Loan book as on FY15 skewed towards SME, consumer finance Exhibit 5: BFL earns one of the best margins among various NBFCs SME Business 53% Commercial 5% Rural 1% Consumer Finance 41% 25 2 15 1 5 22.7 2.4 2.1 19.1 18.9 1.3 8.8 7.5 9.6 9.7 14.6 12.2 11.6 1.8 1.3 NIM YoA CoD ICICI Securities Ltd Retail Equity Research Page 2
Exhibit 6: Asset quality improves sharply 5 45 4 35 3 25 2 15 1 5 471 3. 28 22 189 1.5 148 1.2 14 1.1 1.2 6.8 66 16 33.5.1.2.3 GNPA NNPA GNPA NNPA Exhibit 7: PAT increases at robust pace of 38% CAGR since FY11 ( crore) 1, 9 8 7 6 5 4 3 2 1 897.8 176.3 718.6 591. 46.2 247. 64.4 45.5 21.6 25. 2. 18. 16. 14. 12. 1. 8. 6. 4. 2.. PAT Growth (RHS) Exhibit 8: Healthy return ratios 3 25 2 15 1 5 3.8 3.8 3.8 3.4 3.1 2.3 19.7 24. 21.9 19.5 2.4 8. FY1 4.5 4. 3.5 3. 2.5 2. 1.5 1..5. RoE RoA (RHS) ICICI Securities Ltd Retail Equity Research Page 3
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 ICICI Securities Ltd Retail Equity Research Page 4
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