Bajaj Finserv - Retail Finance Outperforms, Life Insurance Key Monitorable; Result Update Q3FY15 :: Edelweiss, report

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Bajaj Finserv`s Q3FY15 PAT (consolidated) came in at INR3.5bn (up 23.6% YoY), largely propelled by retail finance and further supported by general insurance. Profitability of life insurance continued to be under pressure. However, the critical metric of persistency is witnessing signs of improvement. Additionally, increasing probability of improving operating performance in life insurance (with regulatory overhang settling down), we expect Bajaj Allianz Life Insurance`s (BALIC) business to stabilise. Bajaj Finance (BFL) and Bajaj Allianz General Insurance (BAGIC) would be key earnings drivers.

BALIC: New business premium (NBP) continued to dip (down 16% YoY) owing to pending product approvals and loss of a prominent bancassurance partner. However, vindicating management`s focus on improving persistency, renewal premium (RP) logged positive growth (up 23% YoY) for second consecutive quarter, leading to 4% YoY improvement in gross written premium (GWP). Persistency ratio (13<sup>th</sup> month) improved to 63% (versus 55.8% same time last year), though company`s ability to sustain the same will be a key monitorable.

BFL: Was key earnings driver for the quarter, reporting PAT of INR2.6bn (up 33% YoY) led by healthy operating performance (function of higher growth and improving NIMs). Plans are afoot to add new differentiated product lines, which along with market share gains will help BFL sustain higher growth and superior NIMs. We expect this to feed into healthy earnings CAGR of 30% over FY14-17 and sustain healthy return ratios-RoA/RoE of 3.7%/24% in FY17E.

BAGIC: Profitability perked up to INR1.43bn (up 50% YoY) despite providing INR570mn (additional INR600mn was provided in Q2FY15) for claims due to the J&K floods and Orissa cyclone, mainly owing to strong investment income. The combined ratio stood higher at 99% from 96% in previous quarter - however, adjusted for these externalities it would have been lower. We expect BAGIC to be key earnings driver and generate RoE of 25% plus by FY16.

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https://www.edelweiss.in/research/Bajaj-Finserv--Retail-Finance-Outperforms,-Life-Insurance-Key-Monitorable;-Result-Update-Q3FY15/28038.html