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Bajaj Finserv (BJFIN)
Banks/Financial Institutions
NBFC business drives earnings. Bajaj Finserv reported 10% growth in earnings largely
driven by better-than-expected performance in the NBFC business—Bajaj Finance
reported 57% growth in PAT on the back of 74% growth in loan assets. We await
operational details on life and general insurance businesses to revisit our estimates;
retain ADD with price target of Rs650. Retain positive stance on Bajaj Finance.
Core consolidated earnings grow by 10%
Bajaj Finserv reported PAT of Rs1.7 bn for 3QFY11, up 59% yoy. 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, the adjusted PAT is Rs3.4 bn (up 10% yoy).
While the contribution of the life insurance business remains highest, 57% growth in profits of the
NBFC business has largely driven its consolidated earnings. Life insurance business reported 5%
decline in earnings to Rs2.8 bn largely due to lower income in policyholders account (down 15%
yoy) even as surplus in shareholders account increased to Rs630 mn from Rs390 mn.
Net earnings from the general insurance business increased by 71% to Rs600 mn on the back of
higher underwriting profits even as the motor pool losses increased considerably.
Life insurance business subdued
Bajaj Life. Operational trends remain subdued. Bajaj Life Insurance reported 12% decline in
non-single new business premium on the back of 41% decline reported in 1HFY11. Notably,
the new IRDA regime was implemented from 3QFY11 and 3QFY12 was the first quarter in
which the base effect of low business activity played out. We expect business traction to be
better in 4QFY12E as the activity in the sector gains traction towards the end of the year. We
will revisit our estimates after getting complete details from the management.
The share of traditional business was high at 65% (stable qoq). Conservation ratio (renewal
premium of 3QFY12/ (new and renewal) premium of 3QFY11) declined to 52% from 54% in
2QFY12 and 60% in 1QFY12. Assets under management declined to Rs350 bn from Rs369 bn
in September 2011 likely indicating higher surrender or decline in market value of investments.
Bajaj General. Underwriting profits increase. Bajaj General Insurance reported 71% growth in
profits on the back of underwriting profit of Rs60 mn in 3QFY12 (as compared to loss of Rs80
mn in 3QFY11) and interest/capital gains of Rs960 mn (up 57% yoy). Combined ratio was lower
at 99% as compared to 102% in 3QFY11.
IRDA has proposed the ultimate loss ratios in the motor pool account for the past four years.
If this is effected from March 2012, Bajaj General will have to make additional provisions of
Rs3.3 bn, i.e. about 30% of its networth. IRDA will relax solvency requirements for next four
years, in case this is implemented in March 2012.
BAJAJ FINANCE (RS676, NOT COVERED): BUSINESS REMAINS STRONG
Bajaj Finance reported 57% growth in PAT to Rs1.2 bn on the back of 74% growth in loan
assets under management. Loan book increased 18% qoq on the back of high growth in
mortgages/loans against property (LAP), auto loans and consumer durables. High growth in
consumer durables (in which the company books upfront income) has driven high growth in
net operational income as well. We raise estimates to factor somewhat higher loan growth
even as we revise estimates for provisions and operating expenses. Bajaj Finance (not
covered) trades attractively at 6.7XPER and 1.25XPBR FY2013E for about 20% RoE and 20%
EPS CAGR between FY2011 and FY2014E.
Retail business in sweet spot
Strong quarter for consumer business. Bajaj Finance has reported 68% growth in
disbursements, thereby driving 74% growth in loan assets under management. Notable,
in its growth, is the consumer finance business (disbursements up 50% yoy) and
mortgages (disbursements up 94% yoy). The company books upfront subvention income
in this business, thereby driving net operational income in the periods of high growth.
Nevertheless, the tenure of these products is about 8 months (duration of 4 months) and
hence the company does not expect any significant risk due to this accounting. Bajaj
Finance is the largest organized consumer finance company and has about 10%
penetration in consumer goods.
Mortgages grow rapidly, slow growth on construction equipment business. Bajaj Finance
reported 94% growth in mortgage disbursements. Small business loans continue to
deliver steady traction. Disbursements to construction equipment finance business were
flat yoy as the company decided to go slow in the segment on the back of favorable risk
reward ratios in other businesses.
NIM declines, higher consumer finance business supports operational income
Bajaj Finance’s NIM (excluding fees and upfront charges; as per KS calculations) declined to
9.2% in 3QFY12 from 9.6% in 2QFY12 and 11.5% in 3QFY11 due to higher borrowings
cost. Higher fees and upfront charges improved net operational income. The company has
about 55% borrowings at variable rates while 45% carry a fixed rate. Thus, the impact of
increase or decrease in interest rates in the system is relatively less severe for Bajaj Finance.
Operating expenses ratio stable
Despite the shifts in business mix, Bajaj Finance’s cost to income ratio has been stable at
about 46% for the past three quarters. Large disbursements in 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. However,
increase in large ticket mortgages has likely supported the operating cost ratio.
Asset quality on track
Bajaj Finance reported gross NPLs of 1.28% and net NPLs of 0.25% down from 1.6% and
0.3% in 2QFY12 respectively. Clearly, asset quality performance is currently at its best.
Management has guided for net NPLs of 0.6% on a sustainable basis. However, the
management has highlighted that they have not seen any signs of concerns on asset quality
performance. In fact, the management is more comfortable with the recently underwritten
business as (1) the quality of customers (as indicated by CIBIL score) has improved over the
past few months and (2) instances of check bounce (early instances of stress) have reduced.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bajaj Finserv (BJFIN)
Banks/Financial Institutions
NBFC business drives earnings. Bajaj Finserv reported 10% growth in earnings largely
driven by better-than-expected performance in the NBFC business—Bajaj Finance
reported 57% growth in PAT on the back of 74% growth in loan assets. We await
operational details on life and general insurance businesses to revisit our estimates;
retain ADD with price target of Rs650. Retain positive stance on Bajaj Finance.
Core consolidated earnings grow by 10%
Bajaj Finserv reported PAT of Rs1.7 bn for 3QFY11, up 59% yoy. 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, the adjusted PAT is Rs3.4 bn (up 10% yoy).
While the contribution of the life insurance business remains highest, 57% growth in profits of the
NBFC business has largely driven its consolidated earnings. Life insurance business reported 5%
decline in earnings to Rs2.8 bn largely due to lower income in policyholders account (down 15%
yoy) even as surplus in shareholders account increased to Rs630 mn from Rs390 mn.
Net earnings from the general insurance business increased by 71% to Rs600 mn on the back of
higher underwriting profits even as the motor pool losses increased considerably.
Life insurance business subdued
Bajaj Life. Operational trends remain subdued. Bajaj Life Insurance reported 12% decline in
non-single new business premium on the back of 41% decline reported in 1HFY11. Notably,
the new IRDA regime was implemented from 3QFY11 and 3QFY12 was the first quarter in
which the base effect of low business activity played out. We expect business traction to be
better in 4QFY12E as the activity in the sector gains traction towards the end of the year. We
will revisit our estimates after getting complete details from the management.
The share of traditional business was high at 65% (stable qoq). Conservation ratio (renewal
premium of 3QFY12/ (new and renewal) premium of 3QFY11) declined to 52% from 54% in
2QFY12 and 60% in 1QFY12. Assets under management declined to Rs350 bn from Rs369 bn
in September 2011 likely indicating higher surrender or decline in market value of investments.
Bajaj General. Underwriting profits increase. Bajaj General Insurance reported 71% growth in
profits on the back of underwriting profit of Rs60 mn in 3QFY12 (as compared to loss of Rs80
mn in 3QFY11) and interest/capital gains of Rs960 mn (up 57% yoy). Combined ratio was lower
at 99% as compared to 102% in 3QFY11.
IRDA has proposed the ultimate loss ratios in the motor pool account for the past four years.
If this is effected from March 2012, Bajaj General will have to make additional provisions of
Rs3.3 bn, i.e. about 30% of its networth. IRDA will relax solvency requirements for next four
years, in case this is implemented in March 2012.
BAJAJ FINANCE (RS676, NOT COVERED): BUSINESS REMAINS STRONG
Bajaj Finance reported 57% growth in PAT to Rs1.2 bn on the back of 74% growth in loan
assets under management. Loan book increased 18% qoq on the back of high growth in
mortgages/loans against property (LAP), auto loans and consumer durables. High growth in
consumer durables (in which the company books upfront income) has driven high growth in
net operational income as well. We raise estimates to factor somewhat higher loan growth
even as we revise estimates for provisions and operating expenses. Bajaj Finance (not
covered) trades attractively at 6.7XPER and 1.25XPBR FY2013E for about 20% RoE and 20%
EPS CAGR between FY2011 and FY2014E.
Retail business in sweet spot
Strong quarter for consumer business. Bajaj Finance has reported 68% growth in
disbursements, thereby driving 74% growth in loan assets under management. Notable,
in its growth, is the consumer finance business (disbursements up 50% yoy) and
mortgages (disbursements up 94% yoy). The company books upfront subvention income
in this business, thereby driving net operational income in the periods of high growth.
Nevertheless, the tenure of these products is about 8 months (duration of 4 months) and
hence the company does not expect any significant risk due to this accounting. Bajaj
Finance is the largest organized consumer finance company and has about 10%
penetration in consumer goods.
Mortgages grow rapidly, slow growth on construction equipment business. Bajaj Finance
reported 94% growth in mortgage disbursements. Small business loans continue to
deliver steady traction. Disbursements to construction equipment finance business were
flat yoy as the company decided to go slow in the segment on the back of favorable risk
reward ratios in other businesses.
NIM declines, higher consumer finance business supports operational income
Bajaj Finance’s NIM (excluding fees and upfront charges; as per KS calculations) declined to
9.2% in 3QFY12 from 9.6% in 2QFY12 and 11.5% in 3QFY11 due to higher borrowings
cost. Higher fees and upfront charges improved net operational income. The company has
about 55% borrowings at variable rates while 45% carry a fixed rate. Thus, the impact of
increase or decrease in interest rates in the system is relatively less severe for Bajaj Finance.
Operating expenses ratio stable
Despite the shifts in business mix, Bajaj Finance’s cost to income ratio has been stable at
about 46% for the past three quarters. Large disbursements in 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. However,
increase in large ticket mortgages has likely supported the operating cost ratio.
Asset quality on track
Bajaj Finance reported gross NPLs of 1.28% and net NPLs of 0.25% down from 1.6% and
0.3% in 2QFY12 respectively. Clearly, asset quality performance is currently at its best.
Management has guided for net NPLs of 0.6% on a sustainable basis. However, the
management has highlighted that they have not seen any signs of concerns on asset quality
performance. In fact, the management is more comfortable with the recently underwritten
business as (1) the quality of customers (as indicated by CIBIL score) has improved over the
past few months and (2) instances of check bounce (early instances of stress) have reduced.
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