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Bajaj Finserv (BJFIN)
Banks/Financial Institutions
Strong earnings across businesses. Bajaj Finserv reported 129% growth in earnings
(57% after adding back share in policyholder’s surplus) on the back of better-thanexpected
performance across life, general and finance businesses. We await operational
details on life and general insurance businesses to revisit our estimates. Strong traction
in retail lending has driven 66% earnings growth in Bajaj Finance despite a contraction
in NIM. Retain ADD with a price target of Rs650.
Strong performance across business lines
Bajaj Finserv reported PAT of Rs1.6 bn for 2QFY11. The consolidated earnings do not include its
share in the surplus of Bajaj Allianz Life Insurance’s policyholder’s accounts. Adding the
proportionate share (74%) for Bajaj Finserv, adjusted PAT is Rs3.4 bn (up 57% yoy). Earnings
across businesses have driven consolidated PAT growth though the contribution of life insurance
business remains the highest. Within the life insurance business, shareholders’ and policyholders’
surpluses contributed almost equally to the growth in adjusted PAT. This was followed by almost
equal contribution from Bajaj Finance and Bajaj General Insurance.
Strong traction at Bajaj Finance, need more clarity on operational highlights of other businesses
Bajaj Life: Operational trends remain subdued. Bajaj Life Insurance reported a 38% decline in
new business premium on the back of 37% decline reported in 1QFY11. Its business traction will
likely pick up in 2HFY12E as the activity in the sector gains traction towards the end of the year.
Lower base effect of previous year will also play out in 2HFY12E. The share of traditional business
was high at 65% (about 60% in 1QFY12). The conservation ratio (renewal premium of 2QFY12/
(new and renewal) premium of 2QFY11 declined to 54% from 60% in 1QFY12. Assets under
management declined to Rs369 bn from Rs390 bn in March 2011, likely indicating higher
surrender or decline in market value of investments.
Bajaj General: Underwriting turns profitable, higher interest drives earnings. Bajaj General
Insurance reported 83% growth in profits largely on the back of significantly higher interest
income/ capital gains- we need more clarity on this item. The company made a modest
underwriting profit (Rs30 mn) as compared to losses reported in previous quarters.
Bajaj Finance (Rs678, Not rated)
Bajaj Finance reported 66% growth in PAT to Rs874 mn on the back of 74% growth in loan
assets under management. High growth in mortgages/loans against property (LAP) and auto
loans has largely driven growth in 2QFY12 in addition to the ongoing traction in
construction equipment and small business loans. We find upside risk to our estimates, if the
current trends continue. We will, however, await the trends in consumer finance business till
the end of the festive season. Bajaj Finance (Not Rated) trades attractively at 7XPER and
1.26XPBR FY2013E for 18-20% RoE and 17% EPS CAGR between FY2011 and FY2014E.
Retail business in sweet spot
High growth in consumer durables. Bajaj Finance has reported 58% growth in
disbursements, thereby driving 74% growth in loan assets under management. Notable in
its growth is the consumer finance business (disbursements up 88% yoy). In the earnings call,
management highlighted that strong growth in imported white goods (not captured in
macro economic industry growth data) comprise about 50% of its business. Bajaj Finance is
the largest organized consumer finance company and has about 10-12% penetration in
consumer goods.
Special finance scheme drives growth in auto finance. The auto finance business has
reported about 38% growth during the quarter. We believe that the recent ‘0% interest
scheme’ of Bajaj Auto for Discover and Boxer 150cc has likely supported growth for Bajaj
Finance. As per the scheme, Bajaj Finance offers 0% finance for 10 months on upfront
payment of 60% of price with processing fees of Rs 3,000). Bajaj Auto compensates Bajaj
Finance for the subvention on these schemes.
Mortgages and small business growth steadily, business loans may take a breather.
Small business loans continue to deliver steady traction; disbursements in mortgages
declined qoq though loans under management increased due to a high tenure of loans in
this segment.
Sharp NIM decline due to higher borrowings cost and shift in business mix
Bajaj Finance’s NIM (as per KS calculations) declined sharply to 11.9% in 2QFY12 from
16.6% in 2QFY11 and 13.2% in 1QFY12. A reduction in the share of high yielding
businesses (auto finance and consumer loans) to 34% of total loans (from 40% in 2QFY11)
pulled down NIM. An increase in borrowings cost by about 2-2.5% has affected NIM.
Disbursements in consumer loans have picked-up in the recent quarters, but the share of
other businesses in outstanding book has increased due to higher tenure of the latter.
Operating expenses ratio stable– reason not clear
Despite the shift in business mix, Bajaj Finance’s cost to income ratio has been stable at
about 46%. We are not very clear about the reasons for the stable cost-to-income ratio even
as the share of low yield (high ticket and low opex) products has increased in the
outstanding portfolio. The management has highlighted that large disbursements in the
consumer finance business has pushed operating expenses – the operating cost ratio in
consumer finance business is high (about 70%) in the initial month due to upfront
distribution expenses. A likely moderation in consumer finance business will improve
operating cost ratio.
Asset quality improvements on track
Bajaj Finance reported gross NPLs of 1.6% and net NPLs of 0.3%. Clearly, asset quality
performance is currently at its best. As of September 2011, delinquencies in consumer
durable loans (on five-months-past due basis) were about 1.9%, these were 12% in case of
two wheeler loans (down from 18% in April 2010), 5% in personal loans (down from 12%
in April 2010) and 1.7% in small business loans. Mortgage and LAP reported almost 100%
collection efficiency.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Finserv (BJFIN)
Banks/Financial Institutions
Strong earnings across businesses. Bajaj Finserv reported 129% growth in earnings
(57% after adding back share in policyholder’s surplus) on the back of better-thanexpected
performance across life, general and finance businesses. We await operational
details on life and general insurance businesses to revisit our estimates. Strong traction
in retail lending has driven 66% earnings growth in Bajaj Finance despite a contraction
in NIM. Retain ADD with a price target of Rs650.
Strong performance across business lines
Bajaj Finserv reported PAT of Rs1.6 bn for 2QFY11. The consolidated earnings do not include its
share in the surplus of Bajaj Allianz Life Insurance’s policyholder’s accounts. Adding the
proportionate share (74%) for Bajaj Finserv, adjusted PAT is Rs3.4 bn (up 57% yoy). Earnings
across businesses have driven consolidated PAT growth though the contribution of life insurance
business remains the highest. Within the life insurance business, shareholders’ and policyholders’
surpluses contributed almost equally to the growth in adjusted PAT. This was followed by almost
equal contribution from Bajaj Finance and Bajaj General Insurance.
Strong traction at Bajaj Finance, need more clarity on operational highlights of other businesses
Bajaj Life: Operational trends remain subdued. Bajaj Life Insurance reported a 38% decline in
new business premium on the back of 37% decline reported in 1QFY11. Its business traction will
likely pick up in 2HFY12E as the activity in the sector gains traction towards the end of the year.
Lower base effect of previous year will also play out in 2HFY12E. The share of traditional business
was high at 65% (about 60% in 1QFY12). The conservation ratio (renewal premium of 2QFY12/
(new and renewal) premium of 2QFY11 declined to 54% from 60% in 1QFY12. Assets under
management declined to Rs369 bn from Rs390 bn in March 2011, likely indicating higher
surrender or decline in market value of investments.
Bajaj General: Underwriting turns profitable, higher interest drives earnings. Bajaj General
Insurance reported 83% growth in profits largely on the back of significantly higher interest
income/ capital gains- we need more clarity on this item. The company made a modest
underwriting profit (Rs30 mn) as compared to losses reported in previous quarters.
Bajaj Finance (Rs678, Not rated)
Bajaj Finance reported 66% growth in PAT to Rs874 mn on the back of 74% growth in loan
assets under management. High growth in mortgages/loans against property (LAP) and auto
loans has largely driven growth in 2QFY12 in addition to the ongoing traction in
construction equipment and small business loans. We find upside risk to our estimates, if the
current trends continue. We will, however, await the trends in consumer finance business till
the end of the festive season. Bajaj Finance (Not Rated) trades attractively at 7XPER and
1.26XPBR FY2013E for 18-20% RoE and 17% EPS CAGR between FY2011 and FY2014E.
Retail business in sweet spot
High growth in consumer durables. Bajaj Finance has reported 58% growth in
disbursements, thereby driving 74% growth in loan assets under management. Notable in
its growth is the consumer finance business (disbursements up 88% yoy). In the earnings call,
management highlighted that strong growth in imported white goods (not captured in
macro economic industry growth data) comprise about 50% of its business. Bajaj Finance is
the largest organized consumer finance company and has about 10-12% penetration in
consumer goods.
Special finance scheme drives growth in auto finance. The auto finance business has
reported about 38% growth during the quarter. We believe that the recent ‘0% interest
scheme’ of Bajaj Auto for Discover and Boxer 150cc has likely supported growth for Bajaj
Finance. As per the scheme, Bajaj Finance offers 0% finance for 10 months on upfront
payment of 60% of price with processing fees of Rs 3,000). Bajaj Auto compensates Bajaj
Finance for the subvention on these schemes.
Mortgages and small business growth steadily, business loans may take a breather.
Small business loans continue to deliver steady traction; disbursements in mortgages
declined qoq though loans under management increased due to a high tenure of loans in
this segment.
Sharp NIM decline due to higher borrowings cost and shift in business mix
Bajaj Finance’s NIM (as per KS calculations) declined sharply to 11.9% in 2QFY12 from
16.6% in 2QFY11 and 13.2% in 1QFY12. A reduction in the share of high yielding
businesses (auto finance and consumer loans) to 34% of total loans (from 40% in 2QFY11)
pulled down NIM. An increase in borrowings cost by about 2-2.5% has affected NIM.
Disbursements in consumer loans have picked-up in the recent quarters, but the share of
other businesses in outstanding book has increased due to higher tenure of the latter.
Operating expenses ratio stable– reason not clear
Despite the shift in business mix, Bajaj Finance’s cost to income ratio has been stable at
about 46%. We are not very clear about the reasons for the stable cost-to-income ratio even
as the share of low yield (high ticket and low opex) products has increased in the
outstanding portfolio. The management has highlighted that large disbursements in the
consumer finance business has pushed operating expenses – the operating cost ratio in
consumer finance business is high (about 70%) in the initial month due to upfront
distribution expenses. A likely moderation in consumer finance business will improve
operating cost ratio.
Asset quality improvements on track
Bajaj Finance reported gross NPLs of 1.6% and net NPLs of 0.3%. Clearly, asset quality
performance is currently at its best. As of September 2011, delinquencies in consumer
durable loans (on five-months-past due basis) were about 1.9%, these were 12% in case of
two wheeler loans (down from 18% in April 2010), 5% in personal loans (down from 12%
in April 2010) and 1.7% in small business loans. Mortgage and LAP reported almost 100%
collection efficiency.
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