Bajaj Finserv: High-margin businesses drive Bajaj Finance's performance :: Kotak Sec,report

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High-margin businesses drive Bajaj Finance’s performance. Bajaj Finserv reported
adjusted quarterly profits of `3.95 bn (down 4% yoy); earnings were largely driven by
Bajaj Finance and Bajaj General Insurance. Bond market gains boosted Bajaj General’s
profits. High-margin businesses primarily led by innovative products and superior
execution lifted earnings for Bajaj Finance. Bajaj Life continued to report weak APE
growth although focus on persistency improved conservation ratio. Raise target price
to `1,410 (from `1,380), retain ADD.

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Superior NIMs drive earnings
Bajaj Finance reported 33% yoy growth in earnings to `2.6 bn, 9% ahead of estimates. The
superior performance was driven by expansion in margins due to its focus on unsecured and
high-yielding loans. High growth in these segments is primarily on account of market share
gains and not merely driven by higher industry growth; as such we expect superior NIMs to
sustain. We are raising our estimates by 2-4% to factor marginally higher NIM and loan growth.
Bond market gains drive general insurance business
Bajaj General Insurance reported 7% yoy growth in new premium to `9.6 bn. The profits from
the underlying business declined 30% qoq to `160 mn, compared to `230 mn in 2QFY15 and
`300 mn in 3QFY14. The combined ratio increased to 99% from 96% in 2QFY15 (101% in
3QFY14). PAT grew 51% yoy to `1.4 bn, driven by strong growth in investment income that
grew 27% yoy to `1.9 bn. Investment assets declined to `72 bn, compared to `75 bn in
2QFY15 and `64 bn in 1QFY15. The company reported 28% RoE in FY2014; we forecast 22-
24% medium-term RoE and 20% growth in earnings.
Life insurance – business momentum remains weak
Bajaj Life Insurance reported PAT of `1.75 bn in 3QFY15, down 41% yoy. New business
premium continued to decline, falling 16% yoy, likely driven by the exit of Standard Chartered
Bank. The share of Bajaj Finance in new business premium originated from Bajaj Life has
increased to 10% from ~7% earlier. Focus on higher persistency has led to increase in renewal
premium by 23% yoy (10% qoq) after several quarters of subdued growth. Consequently, the
conservation ratio improved to its highest, 85% from 78% in 1QFY15 and 71% in FY2014. The
ability of the company to sustain this conservation ratio remains crucial. Buoyant capital markets
have failed to lift growth at Bajaj Life as yet, likely due to high concentration of traditional
business (91% new business premium in FY2014).
Focus on high-margin businesses
Bajaj Finance has effectively utilized its existing customer base to cross-sell salaried personal
loans and delivered superior growth in the consumer loan segments; its market share in the
electronic consumer durables sold in India has increased by 400 bps yoy to 18%. Despite being
an early entrant in the LAP segment, the company is now going slow (disbursements were flat
yoy) due to severe competition. The company aspires to have a differentiated offering in the
home-loan segment to improve its profitability in this segment.

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily15012015bc.pdf