Bajaj Finance Ltd- Carving its own path…. BUY ::KRChoksey

We initiate Bajaj Finance with BUY rating and target price of Rs1314 (potential upside 17.8%). Unique business model, comprehensive product range, higher than industry growth outlook, decline in wholesale rates and sustainable return ratio are key investment arguments for the stock in our view. Higher-than-expected credit losses and tight liquidity condition are key risks to our recommendation.

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Unique Business model in NBFC sector: Bajaj finance has successfully transformed from captive two / three wheelers finance company to a well diversified non banking finance company. We do believe diversification of product portfolio also de-risks earning’s profile, as weakness in a particular business segment can be absorbed by other faster growing segments.
Strategy 2.0 to build scale with profitability: Bajaj Finance has formed differentiated 2.0 product line strategy which focuses on two levers – profit maximisers and scale builders. We believe strategy 2.0 create superior risk return trade off at aggregate portfolio level coupled with building scale through high ticket product & customer segments. Overall risk adjusted approach for building stronger balance sheet and in turn sustain superior return ratios are key qualitative differentiators in medium to long term for Bajaj Finance.
Loan book growth continues to outpace the banking & NBFC sector over FY12-15: Bajaj Finance witnessed strong growth in Loan book post the new management team induction and renewed strategic focus in lending business. The loan book grew 69.1% CAGR over FY09-FY12 significantly outpacing the banking sector (19.3%CAGR over FY09-FY12) and NBFC aggregates (39.3% CAGR over FY09-FY12). Loan book to grow 36.3% CAGR over FY12-FY15 supported by consumer finance & small business segments, continues to outpace banking & NBFC sector in our view.
Outlook & Recommendation: We believe unique business model, strategic focus on high growth business segments, continuous product development & innovative customer service and risk adjusted approach for product pricing are key value drivers for the stock. We expect Bajaj Finance continues to outpace industry growth and sustain superior return ratio for next three years. We expect Bajaj Finance to deliver 32.9% CAGR in net earnings over FY12-FY15 driven by 36.3% CAGR in loan book. We believe Bajaj Finance continue to deliver 3% plus RoA and 20% plus RoE on sustainable basis in medium term.
At Rs1,116 the stock trades 1.4x FY14 price to book and 7.3x FY14 earnings, further scope to re-rate on strong earning visibility and sustainable return ratio. We initiate Bajaj Finance with BUY rating and target price of Rs1,314 (potential upside 17.8%) with 12 month investment objective.