Dear Friends,
We are recommending Buy on our Actionable Ideas "Bajaj Finance" as per following:-
CMP: Rs 2512 Target: Rs 2950 (17% Upside)
Key Points:
Bajaj Finance – Q3 FY19 Result Update: Calibrated performance
· Steady Operating performance: Bajaj Finance (BFL) has posted healthy operating performance with the net interest income (NII; calc) growing by 41.6% YoY to Rs3085 crore even as the non-interest income was at Rs 8.3 crore, up 2x YOY. 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, Calc.) for the quarter declined to 34.4% from 38.4% y-o-y and 35.4% in Q2 FY19.Operating expenses being kept under control resulted in pre-provisioning profit (PPOP, Calc) rising by 51.2% YoY to Rs 2032 crores. However, the jump of 61% YOY in Provisions to Rs 447 crores, which was higher than expected, resulted in the Net profit for the quarter being up by 47.8% YoY to Rs1022 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 also been diversifying its borrowing mix to bolster its margins, and we believe deposit accretion is important step in this direction.
· Healthy but calibrated business growth, prudent ALM management: BFL saw healthy traction in loans growth, with AUM growth of 41% to Rs 109,930 crores. Despite tough liquidity environment, the Company has added receivables of Rs 9,867 crore in Q3 FY19 a highest ever quarterly increase in loan receivables. Growth was led mainly by the segments of SME business (13% of overall book, up 39% yoy), mortgage lending business (28% of overall book, up 28% yoy) and Consumer B2C business (19% of the book, up 47% yoy). During the quarter, the management adopted a cautious outlook and chose to grow the book in a calibrated manner, slowing down in areas where its risk-return didn't meet its parameters. Notably, BFL continued to see strong customer traction, as it booked 2.5 million new loans during the quarter, taking its total customer franchise to 32.57 million, up 31% y-o-y. This will be positive for sustaining growth as well as generating cross-sell opportunities for BFL. Notably, BFL continued to manage its ALM well and is well covered on ALM to manage any impact of liquidity hardening and higher interest rates on its P&L over short to medium term period.
· Asset quality deteriorates slightly: During the quarter Bajaj Finance witnessed slight deterioration in its asset quality as GNPA ratio increased by 6BPS on a sequential basis to 1.55% (from 1.49% in Q2 FY19) while NNPA ratio increased by 9BPS to 0.63% (was 0.53% in Q2 FY19).
· Outlook: BFL appears well set on a strong and sustainable growth path, Despite a nascent rural financing book, positives such as an attractive repeat customer base in sthe 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. 2950.
Regards,
F1,Achyuta,111,bharathidasan salai,
Cantonment
Trichy-620001
Tel:04314000706
Ph:8144517351
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