Dear Friends,
We are recommending Buy on our Actionable Ideas "Bajaj Finance" as per following:-
CMP: Rs 2083 Target: Rs 2450 (17% Upside)
Key Points:
Bajaj Finance – Q2 FY19 Result Update: Strong performance
· Operating performance enthuses: Bajaj Finance (BFL) has posted healthy operating performance with the net interest income (NII; calc) growing by 37.6% YoY to Rs2617 crore even as the non-interest income jumped ~3x to Rs48 crore. Opex to NII came in strong, aided by the continued focus on expanding of the company's fee revenue pool along with better opex management. As a result of the same, the Opex to Income ratio (C/I) for the quarter declined to 34.8% from 40.6% y-o-y. Operating expenses being kept under control, resulted in pre-provisioning profit was up by 52.7% YoY and Net profit for the quarter was up by 55% YoY to Rs920 crore. BFL has consistently maintained strong credit rating which helps it maintain attractive CoF, thereby maintaining healthy NIMs even in an adverse rate environment. The company has been diversifying its borrowing mix to bolster its margins, and we believe depost accretion will also be important is this regard.
· Healthy business growth, asset quality deteriorates slightly: BFL saw healthy traction in loans growth, with AUM growth of 38% to Rs 100217. Growth was led by the consumer B2C (up 44% yoy), mortgage lending business (up 32% yoy) and commercial lending business (up 38% yoy) segments. Notably, BFL continued to see strong customer traction, as it booked 5.26 million new loans during the quarter, taking its total customer franchise to 30.05 million, up 31% y-o-y. This will be positive for sustaining growth as well as generating cross-sell opportunities for BFL. The existing mortgages portfolio of BFL (both core housing and LAP) will continue to run down gradually on its book, while all incremental sourcing and disbursements will happen in Bajaj Housing Finance Limited (BHFL), which has expanded its Assets under management (AUM) growing to Rs 10712 crore owing to a low base. During the quarter Bajaj Finance witnessed slight deterioration in its asset quality as GNPA ratio increased by 10 BPS on a sequential basis to 1.49% while net NPA ratio increased by 9 BPS to 0.53%. Notably, BFL has Rs 225 crores of fund based exposure to a large financial conglomerate (currently rated D), which is presently standard on BFL's books. BFL has so far provided 10% of this exposure. The exposure however, is backed by escrows on the rental income of the collateral property (which is finished) and we believe that the overhang of the above exposure is largely factored in by the market.
· Outlook: BFL appears well set on a strong and sustainable growth path, after the worry from external/exogenous factors recede. Despite a nascent rural financing book, positives such as an attractive repeat customer base in the core consumer book, a large SME customer base, a rapidly deepening asset offering profile and strong pricing power help BFL maintain its growth and margins. While currently, the management has guided its cautious stance on segments like SME etc, we believe that on a longer term, the company looks well placed to clock 35+% AUM growth. The ability of BFL to create new product categories, leveraging its large customer base and proactive risk management track-record are key positives to support valuations.
· Valuation: Currently, BFL is trading at valuations that prima facie appear to be rich. However, considering strong positives such as a strong growth outlook, pricing power, impressive operating metrics and strong return ratios maintained over time (and likely to improve as asset-heavy business shifted to BHFL) in its favour, we believe the company will likely sustain its premium valuation. We maintain our Buy rating on the stock with a revised price target (PT) of Rs. 2450.
Regards,
sharmila
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