Bajaj Finance Ltd – BUY: Strong asset growth driving profit growth; says IIFL

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Bajaj Finance Ltd – BUY: Strong asset growth driving profit growth
Bajaj Finance’s (BFL) net profit grew 143% YoY to Rs528m, ahead of our estimates. NII was up 37%
YoY, driven by a robust loan book growth of 67%. PAT growth was further aided by declining loan loss
provisions. We are upgrading our FY11-13ii PAT estimates by 10-28% to factor in higher asset growth.
We expect BFL to register a 45% loan book CAGR and 67% EPS CAGR over FY10-13ii. The stock
currently trades at 2.2x FY11ii book. We retain BUY with a target price of Rs1,050.
Rapid asset growth driving profits: BFL’s loan book grew by 67% YoY, driven by a robust 112% YoY growth
in disbursements. Loan against property (LAP) continued to drive disbursements growth, increasing 160% YoY.
Expectedly, rapid change in mix in favour of secured lending and higher funding cost, due to rising wholesale
funds, drove NII lower at 37%. Loan loss provisions (LLP) grew 5%, driving net profit growth by 143%. BFL
undertook accelerated provisioning on its legacy loans, which moderated net NPA levels.
Sustained growth momentum in loans and earnings: We expect loan growth to sustain the strong
momentum, driven by existing product lines as well as introduction of newer products. Revenue growth
would moderate, as funding cost rises in 2HFY11, reflecting higher market interest rates. However, LLP
would moderate, further driving strong net profit growth in 2HFY11 as well. We believe earnings growth
would get a fillip from securitisation of assets, as the company would likely drive asset growth while
optimising capital requirement using securitisation.
We retain BUY, raise target price to Rs1,050: We upgrade our FY11ii EPS by 28% and FY12ii and FY13ii
EPS by 21% and 10%, respectively, to factor in higher growth. We expect RoE to rise to 23% by FY12ii, as
provision charges fall. We expect BFL to register a 45% CAGR in loans and 67% CAGR in EPS over FY10-13ii,
as it continues to tap into the underpenetrated small business and consumer durables segments, while
benefiting from economies of scale. We retain BUY and raise our target price to Rs1,050.