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Bajaj Finance Ltd BUY
Primed for a new phase
Bajaj Finance (BFL) is a play on the consumer and smallbusiness lending opportunities in India. Positioned initially as
a consumer finance company, BFL expanded its scope to
include opportunities in small businesses as well. BFL’s
competitive advantage includes strong parentage, favourable
funding position, and an experienced senior management
team. High asset growth, improving efficiency and a renewed
focus on asset quality would drive 70% CAGR in earnings
during FY10-13ii. Strong and sustainable earnings growth,
rising ROE and an inexpensive valuation (P/B of 1.6x on
FY12ii) makes BFL an attractive play, in our view.
Niche player in financial services: Consumer finance and smallbusiness
loans continue to be undertapped segments, largely
because access to finance has been a constraint. This is evidenced
by the declining share of bank financing to these segments over
time, while aggregate loans of banks continue to grow at a rapid clip.
We believe BFL is well-positioned to capitalise on this opportunity,
with an established distribution network, strong parentage, and an
experienced management. We forecast a CAGR of 47% and 70% in
BFL’s loans and earnings, respectively, driven by the market
opportunity and BFL’s well-established position in its key businesses.
Higher economies of scale in lending, a key re-rating factor
for BFL over the medium term: The key challenge that nonbanking
finance companies (NBFC) such as BFL face is achieving
higher economies of scale in their businesses, while keeping
operating costs and credit quality under check. We believe this would
be a key factor for a re-rating in BFL’s valuation over the medium
term. New product introduction and focus on improving process
efficiencies would keep operating cost under check, while an increase
in secured assets’ share of loans should keep credit quality robust.
Robust growth outlook and ROE uplift to drive valuations:
Strong volume growth, improved efficiency and decline in risk profile
of assets would drive earnings performance. Increasing leverage and
higher ROA would drive ROE uplift further through FY13. Strong and
sustainable earnings growth, rising ROE and inexpensive valuation
makes BFL an attractive play in the financial-services space.
Key risks include unfavourable lending environment, rapid increase
in interest rates, a less-than-proven track record in new business
segments and increase in risk weights.
Asset quality risk from an unfavourable lending environment remains
a prominent concern. The management, though less proven in the
current set-up, brings a wealth of experience in the chosen business
segments from various multinational organisations. This should help
mitigate risk.
Rapid increase in interest rates and hence its adverse impact on NIM
would likely continue to be a concern, in our view. We are factoring
in a moderation in NIMs owing to rise in rates, but a sharp rise could
lead to greater-than-anticipated impact on NIMs and loan growth.
An increase in risk weight on loans could be a key risk if the Reserve
Bank of India (RBI) sees rapid credit growth in the entire system.
Increase in risk weight could constrain BFL’s growth rate, but could
be mitigated through capital augmentation. Higher capitalisation
would likely depress RoE, but this would be partly offset by an
increase in RoA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Finance Ltd BUY
Primed for a new phase
Bajaj Finance (BFL) is a play on the consumer and smallbusiness lending opportunities in India. Positioned initially as
a consumer finance company, BFL expanded its scope to
include opportunities in small businesses as well. BFL’s
competitive advantage includes strong parentage, favourable
funding position, and an experienced senior management
team. High asset growth, improving efficiency and a renewed
focus on asset quality would drive 70% CAGR in earnings
during FY10-13ii. Strong and sustainable earnings growth,
rising ROE and an inexpensive valuation (P/B of 1.6x on
FY12ii) makes BFL an attractive play, in our view.
Niche player in financial services: Consumer finance and smallbusiness
loans continue to be undertapped segments, largely
because access to finance has been a constraint. This is evidenced
by the declining share of bank financing to these segments over
time, while aggregate loans of banks continue to grow at a rapid clip.
We believe BFL is well-positioned to capitalise on this opportunity,
with an established distribution network, strong parentage, and an
experienced management. We forecast a CAGR of 47% and 70% in
BFL’s loans and earnings, respectively, driven by the market
opportunity and BFL’s well-established position in its key businesses.
for BFL over the medium term: The key challenge that nonbanking
finance companies (NBFC) such as BFL face is achieving
higher economies of scale in their businesses, while keeping
operating costs and credit quality under check. We believe this would
be a key factor for a re-rating in BFL’s valuation over the medium
term. New product introduction and focus on improving process
efficiencies would keep operating cost under check, while an increase
in secured assets’ share of loans should keep credit quality robust.
Robust growth outlook and ROE uplift to drive valuations:
Strong volume growth, improved efficiency and decline in risk profile
of assets would drive earnings performance. Increasing leverage and
higher ROA would drive ROE uplift further through FY13. Strong and
sustainable earnings growth, rising ROE and inexpensive valuation
makes BFL an attractive play in the financial-services space.
Key risks include unfavourable lending environment, rapid increase
in interest rates, a less-than-proven track record in new business
segments and increase in risk weights.
Asset quality risk from an unfavourable lending environment remains
a prominent concern. The management, though less proven in the
current set-up, brings a wealth of experience in the chosen business
segments from various multinational organisations. This should help
mitigate risk.
Rapid increase in interest rates and hence its adverse impact on NIM
would likely continue to be a concern, in our view. We are factoring
in a moderation in NIMs owing to rise in rates, but a sharp rise could
lead to greater-than-anticipated impact on NIMs and loan growth.
An increase in risk weight on loans could be a key risk if the Reserve
Bank of India (RBI) sees rapid credit growth in the entire system.
Increase in risk weight could constrain BFL’s growth rate, but could
be mitigated through capital augmentation. Higher capitalisation
would likely depress RoE, but this would be partly offset by an
increase in RoA.
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