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Consumer Finance key to growth
BFL is a play on rising consumer spending in India, which is expected
to grow multifold on rising disposable income. It has metamorphosed
itself from Bajaj Auto's finance arm to a diverisfied NBFC, where its
loan book from Bajaj Auto is expected to reduce from current levels
of ~30% to 23% by FY12. The company has expanded its presence
primarily from two-wheeler financing to consumer durables,SME loans
and other Secured loans.It has plans also to foray into infrastructure
financing. Diversification into other secured assets business will likely
enhance quality of loan book.
Earnings Visibility
High yield consumer durable financing business and secured loans
business is expected to show CAGR of 42% and 100% respectively
during FY10-FY12E.Total disbursal and loan book will exhibit CAGR
of ~50% during the same period,which provides reasonable visibilty to
BFL's earnings.
High credit rating
BFL credit rating of FAAA/Stable from CRISIL is the highest in whole
industry. This helps the firm to reduce its borrowing costs. Balance
sheet of BFL is well capitalised and tenure for the majority of
borrowings is more than 2 years, which will help contain cost of funding
in case of rising short term rates.
Valuation and View
We believe BFL is the best bet in the NBFC space in the wake of high
disbursal growth, foray into new business areas, improving asset quality
and resulting RoE expansion. The stock is currently trading at 13x/11x
of FY11E/FY12E earnings and 2x/1.7x of FY11E/FY12E adjusted
book value, which is at around 25-40% discount to valuations of industry
leaders. However, our earnings estimates are fairly conservative as
compared to consensus view by ~ 20% in FY12E.Favourable interest
rate scenario and business mix improvement provide upside risk to our
estimates. Therefore, we recommend BUY with 12 months target
price of `918(2.3x P/ABV FY12E, 34% upside).
CONCERNS:
Interest rate risk
BFL's average duration of its borrowings remain healthy at more than 2 years.However,
spike in short term interest rates may increase BFL's cost of funds on incremental borrowings
required to grow its loan portfolio, which can temper margins in the short term.
General economic conditions - Strong linkage to NBFC business
NBFC business is strongly linked to general economic condition and any kind of distress
on the same will have undesirable consequences on the business prospects of the company.
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