bajaj finance - initiating coverage 30-09-14

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Financial SummaryY/E March (Rs mn) F13 F14 F15e F16e F17eNet interest income 17,309 22,156 28,046 34,101 43,053NIM (%) 11.8 11.1 10.5 9.8 9.5 Operating profit 10,534 13,490 17,171 21,130 27,386PAT 5,913 7,190 9,187 11,258 14,671EPS (Rs.) 119.4 144.5 184.7 226.3 294.9 ABV (Rs.) 670.0 788.8 946.3 1,141.0 1,399.6 P/E (x) 22.2 18.4 14.4 11.7 9.0 P/ABV (x) 4.0 3.4 2.8 2.3 1.9 Dividend yield (%) 0.6 0.6 0.7 0.8 0.9 RoE (%) 22.0 19.6 20.9 21.2 22.7 RoAA (%) 3.8 3.4 3.2 2.9 2.9 Source: Company, SSLe

Diversified financier; affluent franchise Bajaj Finance Ltd. (BAF) incorporated as a captive financier for Bajaj vehicles has transformed into a well diversified NBFC catering to 11 different business lines. We expect the company’s spotlight on affluent segments, sub-10 percent borrowing profile, well diversified AUM and resilient asset quality makes it suitable to be a prime pick amongst NBFCs. BAF’s focus on SME and consumer business is now a natural concomitant diversification. We therefore expect its earnings to grow at a CAGR of 27% over F14-F17e. With a F17e P/ABV of just 1.9x for RoAA’s of ~3.0% we see a strong upside. We initiate coverage with a BUY and a TP of Rs3,220 (2.3x F17e ABV).

Affluent segment financing model: BAF has successfully transformed from a 2- wheeler financier to a well diversified lifestyle financier. BAF is now the largest consumer electronics financier in India focusing on affluent customers and is one of the few organized player in the sector with a market share of ~15%. Company has a unique proposition in consumer durables that effectively competes with credit cards.

Borrowing profile amongst the lowest at 9.6%: Funding arrangements of BAF is well funneled with sources among banks, debentures, CPs and fixed deposits. Company has among the best credit ratings leading to cost of borrowings to be as low as 9.6% for F14. We expect the same to continue ahead supporting its healthy NIMs.

Diversified AUM maximises earnings and growth profile: BAF focuses on three verticals, viz., consumer, commercial and SME, with 11 business lines distributed among them compared to the single product focus in most other NBFCs who identify themselves either with CV finance, gold finance or auto finance. BAF’s business focus is on increasing volume with profitability. Home loans, LAP and commercial lending are the big ticket business lines whereas 2/3-wheeler, consumer durables, lifestyle finance and personal loans are the profit maximizers for BAF.

Asset quality to stay resilient: Strong loan origination, underwriting and collection processes have imparted a stable asset quality. Focus on affluent segments, enhanced usage of credit bureau, product rationalization and strong risk management framework have ensured better than average asset quality inspite of its exposure in riskier segments. Though GNPAs are expected to increase by 10-15 bps in the next couple of years, we do not expect any significant deterioration going ahead.

Strong upside; BUY: With slower growth in 2/3-wheeler segment and winding-up of its two commercial segments, we expect BAF’s advances to grow at a CAGR growth of 30% over F14-F17e unlike 54% CAGR over F10-F14. Strong NIMs and lower credit cost are set to drive BAF’s earnings by 27% CAGR over F14-F17e. At CMP of Rs2,654, BAF trades at 1.9x F17e ABV (average peer valuation ~1.5x). Higher return ratios and much better asset quality warrant higher valuations for BAF. We initiate coverage on the stock with a target price of Rs3,220 (2.3x F17e ABV).

Key Risk: Prolonged economic slowdown could impact advances and earnings.

Bajaj Finance Ltd BAF IN; BJFN.BO September 30, 2014Banking | India

Ankit Ladhani +91 22 4227 3380 [email protected] Ravikant Bhat +91 22 4227 3349 [email protected] Divyanshi Dayanand +91 22 4227 3385 [email protected] Amrita Rungta +91 22 4227 3459 [email protected]

Initiating Coverage BUY

Current price (29 Sep) RsTarget price RsUpside/(downside) % 21

Market dataMkt capitalisation Rs bn 133.1Average daily vol '000 38.852-week H/L Rs 2720 / 1141Shares O/S mn 50.1Free float mn 19.2Promotor holding % 61.6Foreign holding % 12.2Face value Rs 10.0

Price performance (%)1m 3m 6m 1yr

Nifty (abs) 0.1 6.0 18.9 36.4Stock (abs) 7.4 32.7 47.6 125.4Relative to Index 7.3 26.7 28.8 88.9

Performance

2,654 3,220

(20)

0

20

40

60

80

1000

1500

2000

2500

3000

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14

Bajaj Finance (LHS) Rel. to Bankex (RHS)

(%)(Rs)

Source: Bloomberg, SSLe

Bajaj Finance SBICAP Securities Ltd

[email protected] I [email protected] I [email protected] I [email protected] September 30, 2014 | 2

Industry Analysis

2-wheeler industry 2-wheeler industry has reported a comparatively better performance vis-a-vis the other auto segments recently. For F13 and F14 the annual growth has been 2% and 7% whereas for YTD F15, the growth has been strong at 19.3% YoY. However, the sharp improvement is also largely supported by exports which grew by 29.2% in YTD F15. Going ahead we expect 2-wheeler sector to grow at a CAGR of ~17% over FY14- F16e. We expect 2-wheeler growth to be driven by scooter segment growing at a CAGR of 25.5% over F14-F16e.

Exhibit 1: 2-wheeler sales growth improves

-15.0%

0.0%

15.0%

30.0%

45.0%

60.0%

F07 F08 F09 F10 F11 F12 F13 F14 YTDF15

Total Domestic Exports Source: SIAM, SSLe

Consumer durables financing Led by the economic slowdown, consumer durables segment is currently witnessing an overall slowdown. The consumer durables have witnessed a slowdown for more than the past 2 years. Consumer durables growth under IIP, slowed down from 14% in F11 to 2.6% and 2% in F12 and F13. This was followed by a decline of 12.2% in F14. For YTD F15 as well, the consumer durables segment has witnessed a decline of 12.5%.

Despite a slowdown witnessed in the consumer durables segment, BAF has been able to increase its loan portfolio. An expected revival in economy is set to lead to an improvement in the consumer durable segment although the transmittance of the effect may follow with some lag. As the consumer durables segment growth bottoms out and then increases gradually, we expect an expanded business opportunity for BAF to kick in.

Exhibit 2: IIP- Consumer durables- GDP

(16)

(2)

12

26

40

F7 F8 F9 F10 F11 F12 F13 F14 YTDF15

(%)

IIP Consumer Durables GDP Source: Bloomberg, SSLe

2 wheeler, better performance vis-à-vis other auto segment. Strong growth being witnessed in F15. CAGR growth of 25.5% expected over F14-16e.

Consumer Durables have witnessed a decline in F14 as well as YTD F15. Inspite of the same, BAF

has witnessed sharp increase in durables.



Home loan financing With the real estate prices shooting up in the urban cities real estate markets have witnessed a slowdown recently. This has led to a slowdown in financing of home loans. Also with the banks aggressively expanding in the home loan segment, the market has become highly competitive. Yet low cost housing space in the tier II and tier III cities has witnessed a tremendous growth. The yield on advances in urban regions in the home loan portfolio is close to 10.5-11% which is close to the base rate of banks. However, in the Tier II and Tier III cities, NBFCs are able to garner business at higher rates that are close to 11.5%. With the new RBI guidelines for regulatory forbearance, wherein banks are not required to maintain CRR and SLR deposits for home loans below Rs5.0mn (metro)/ Rs4.0mn (non- metro), the competition for NBFCs is expected to intensify. Going ahead, the yields are unlikely to improve in the housing finance segment. Housing loan segment has witnessed an 18% growth in F14.

Exhibit 3: Housing loan growth for SCBs accelerates

3,009

3,591 3,971

4,567

5,408 5,680

8%

19%

11%

15%

18%17%

0%

6%

12%

18%

24%

0

1,500

3,000

4,500

6,000

F10 F11 F12 F13 F14 4MF15

(Rs

bn)

Credit (LHS) Growth (RHS) Source: RBI, SSLe

Loan against property Loans against property (LAP) are generally disbursed in favour of SME customers. Tenure of the loans is in the range of 3-5 years and the yields are 150-250bps higher the home loans rates. Loan to Value (LTV) for LAP loans are in the range of 55-60%. Going ahead an improvement in the economy will lead to a concomitant revival in the growth for SME. BAF has sharply expanded the LAP portfolio and the same is expected to drive growth going ahead.

Real estate in metro witnessing a slowdown due to high prices whereas the business in tier II and tier III

cities remain strong. Competition in home loans expected to increase from banks.



Investment Thesis

Well diversified portfolio mix

The company’s business focus is on increasing volume along with profitability. Hence, the portfolio is diversified between scale-building loans as well as high-yielding advances. Home loans, LAP and commercial lending are the weightier constituents whereas 2-wheeler/ 3-wheeler, consumer durables, lifestyle finance and personal loans which are characterized by higher yields are the profit maximizers. This keeps the lending book sufficiently bulked-up for growth even as higher yields lend support the overall profitability of the company. Bajaj Finance offers its loans under three different business segments viz., consumer, SME and commercial businesses. A fourth segment that has been recently introduced, rural financing, is set to join their ranks. BAF currently has 13 different products under these segments and though it is discontinuing construction equipment and infrastructure financing segment, it is still one of the most diversified NBFC. SME book forms the largest AUM share at 53.4% followed by consumer finance at 38.8% and commercial lending at 7.6%.

Exhibit 4: AUM break-up (F14)

Consumer Finance38.8%

SME53.4%

Commercial lending7.6%

Rural lending0.2%

Source: Company, SSLe

Exhibit 5: Break-up of AUM (F14)


BAF has a well diversified portfolio mix. Key focus

remains in the SME and consumer finance segment.



Exhibit 6: Product portfolio

Source: Company

Exhibit 7: Product launch journey

Source: Company

Consumer finance business – focus on higher yielding business

Consumer finance forms 39% of the AUM book. BAF has focused on strengthening of the distribution network along with rationalization of the dealer network. It currently has a strong dealer network of more than 10,000 which supports its business in the 2/3-wheeler financing along with consumer durable segment.

Consumer durables to drive growth in the

consumer finance division. Higher yields expected to continue.



Exhibit 8: Break-up of consumer finance business (F14)

2W & 3W finance40.5%

Consumer durable finance

28.5%

Lifestyle finance2.0%

Personal loans29.0%


BAF is the largest 2-wheeler financier in the country focused on semi urban and rural markets. BAF contributes 28% of total Bajaj Auto’s domestic 2-wheeler sales. BAF continues to capitalize on Bajaj Auto’s distribution network to build its 2/3-wheeler loan book. BAF has access to more than 2,600 dealers.

The 2/3-wheeler book of the company has reported a slowdown in growth for F14 led by a slowdown in domestic sales of 2-wheelers. Though a growth is being witnessed in 2 wheeler industry, BAF expects the growth for its book to remain muted. Currently 2/3-wheeler forms 14.9% of the total AUM. We expect the same to decline to 10% by Mar’16.

Exhibit 9: 2-wheeler/ 3-wheeler loan growth

27,2

70

34,8

83

35,9

30

37,3

67

40,7

30

46,8

40 39.6%

27.9%

3.0%4.0%

9.0%

15.0%

0%

11%

21%

32%

42%

0

12,000

24,000

36,000

48,000

F12 F13 F14 F15e F16e F17e

2W &

3W

AU

M (R

s m

n)

2W & 3W finance (LHS) Growth (%) (RHS) Source: Company, SSLe

2/3-wheeler book to continue to remain under

pressure. Market share expected to decline



BAF is the largest consumer electronics financier in India focusing on affluent customers and is one of the few organized players in the sector with a market share of ~15%. Company has a unique proposition in consumer durables. It finances only high value items such as mobiles, LCDs/LEDs, refrigerators and air-conditioners and effectively competes with credit cards. Key competitiveness with credit card comes from the turnaround time for loans and interest cost benefits for the consumer. After investing in considerable resources, company has reduced the turnaround time for loans to ~15 minutes. Faster turnaround time is backed by large in-house database and data availability from CIBIL. BAF provides an EMI (Existing Membership Identification) card to all its consumer durable customers that enables them to avail quick credit on future purchases.

Consumer durable loans are available at 0% interest for a period of eight months but the company charges 1-1.5% processing fee. Down payment of ~30% has to be made and the balance is financed by BAF. The main source of income for BAF comes from the spread earned from manufacturer of 5-12%. Demand for consumer durables remains robust especially for LED TVs and mobiles.

BAF’s latest initiative of rolling forth a rural financing segment is now financing consumer durable loans even in tier II and tier III towns. Currently the consumer durables lending is in 15 of the top tier I cities. BAF is expanding into the tier II and tier III towns and expects huge business opportunities in the market.

Exhibit 10: Consumer durables AUM growth

12,8

20

17,5

76

25,3

10

35,5

00

47,6

86

63,9

40

43.6%

37.1%

44.0%

40.3%

34.3%

34.1%

30%

35%

40%

45%

50%

0

17,000

34,000

51,000

68,000

F12 F13 F14 F15e F16e F17e

Con

sum

er D

urab

les A

UM

(Rs

mn)

Consumer durables (LHS) Growth (%) (RHS) Source: Company, SSLe

Lifestyle financing is a recently started line of business set along the success parameters that BAF encountered in the consumer durable business. The loans are for home improvement and furniture, modular kitchens, digital lifestyle products etc. BAF is operating through 1,700 dealer network and has tie-ups with lifestyle brands such as Home Town etc. The company is continuously identifying new product categories in the business to expand its product offerings in-line with its strategy that envisages large growth in lifestyle finance.

Personal loan portfolio has been reporting a strong growth over the past several years. Cross-selling of products along with personal loans to salaried individuals remain the two key focus areas under the personal loan segment. The AUM for personal loan grew by 70% CAGR over F11-F14.

Cross-selling opportunities reduce acquisition cost Number of customers for consumer durable business is large and they provide huge cross-selling opportunities for other lines of business. BAF acquires customers and cross-sells products to those who have a strong track record. Company has a database of ~6 mn customers and repeat business forms ~50% of the total. Loan processing is a lot faster in case of repeat customers and that coupled with lower acquisition costs for new customers supports the earnings growth.

Consumer electronics to drive the growth for consumer finance division. LED TVs and mobiles

to remain the key products. .

Lifestyle financing is focused on financing of home improvement and furniyure and modular

kitchen, digital lifestyle products etc.



SME financing – Mortgages to support growth in scale SME business forms ~55% of the total AUM. BAF focuses on SMEs with average annual sales of Rs250mn with established financials & demonstrated borrowing track record. SME loans comprises of small business loans, LAP, home loans and loan against securities.

Exhibit 11: Break-up of SME loans (F14)

Business loans15.3%

LAP51.9%

Home loans21.1%

LAS6.3%

SME cross sell5.4%


LAP is one of the key growth drivers for SME business in the recent past. The LAP portfolio has grown at 51% CAGR over F10-F14. LAP portfolio stands at Rs69bn in F14 and forms 28.7% of total AUM. LAP book has witnessed a sharp growth aided by increasing distribution and addition of new sales channels that introduce cross-selling opportunities. Distribution points have more than doubled since 2012.

BAF undertook a value added initiative by tying up with Jones Lang Lasalle (JLL) for its mortgage customers. It provided property search services via its tie-up. This facilitates BAF's affluent customers to locate and acquire suitable property thereby giving end-to-end solution.

BAF has added a new channel of home loans to salaried individuals to boost its mortgage business. On the back of steady increase in real estate prices mortgage book is likely to show a strong growth going ahead. Home loan book stands at 12% of AUM as on F14.

Business loans are primarily working capital loans and have a ticket size of Rs1.8mn with an average maturity of close to 3 years. Small business loans forms ~8.5% of the total AUM and 7.6% of deployments for F15. In the LAS segment, company provides working capital and growth capital to high net worth SMEs with established financials against marketable securities.

Exhibit 12: SME book growth

50,0

10

84,7

49

133,

030

186,

589 25

0,63

8

336,

071

66.0% 69.5% 57.0%

40.3%34.3% 34.1%

0%

20%

40%

60%

80%

0

90,000

180,000

270,000

360,000

F12 F13 F14 F15e F16e F17e

SME

Loan

s o/

s (R

s m

n)

SME Loans o/s(LHS) Growth (%) (RHS) Source: Company, SSLe

Focus on SME sector to continue. Growth in mortgage and LAP segment to drive SME growth.

LAP continues to gain focus. Will support balance sheet growth.



Commercial advances to continue to decline Commercial advances which forms 7.6% of AUM and 10.8% of deployments (construction equipment, infrastructure and other commercial lending), have been declining for the past couple of years. Disbursals as well as advances for this segment have declined in F13 and F14 and are unlikely to revive. BAF has been cautious in the construction equipment business due to under utilization of assets as well as infrastructure segment due to policy paralysis. BAF has decided to discontinue with the infrastructure lending and construction equipment portfolios. Going ahead, as these two portfolios decline, the share of total commercial lending book as a percentage of AUM will decline.

Exhibit 13: Commercial book disbursements - revival witnessed only in the past two quarters

7,7408,110

7,310 6,950 7,0706,250 6,420

8,0808,850

0

2,500

5,000

7,500

10,000

1QF13 2QF13 3QF13 4QF13 1QF14 2QF14 3QF14 4QF14 1QF15

Dis

burs

emen

ts in

the

Com

mer

cial

Se

gmen

t (R

s m

n)

Source: Company, SSLe Exhibit 14: Share in AUM declines (Const Equip + Comm Lending + Infra Fin)

12.6%

18.7%

11.3%

7.6%

5.7%4.4% 4.0%

0.0%

5.0%

10.0%

15.0%

20.0%

F11 F12 F13 F14 F15e F16e F17e

Shar

e of

Com

mer

cial

Boo

k in

AUM

Source: Company, SSLe Growth rate to decline but to remain healthy BAF is focusing on the growth in the consumer and SME business and continues to focus on secured loans. Though the construction equipment and infrastructure book is likely to run- off in the next 2-3 years, overall advances growth is expected to remain higher. Advances have reported a strong growth rate of 54% over F10-F14. As the advances growth slows down in the 2/3-wheeler segment along with BAF winding-up its two commercial segments, we expect the advances to grow at a CAGR growth of 30% over F14-F17e.

Commercial advances portfolio to decline. BAF is

moving out of the infrastructure lending and construction equipment business.



Exhibit 15: Advances growth to ease

125,

174

169,

323

231,

318

304,

160

391,

614

515,

116

68.3%

35.3% 36.6%31.5%

28.8%

31.5%

0%

20%

40%

60%

80%

0

140,000

280,000

420,000

560,000

F12 F13 F14 F15e F16e F17e

(Rs

mn)

Advances (LHS) Growth (RHS) Source: Company, SSLe

Exhibit 16: Change in portfolio


Exhibit 17: Target customer base

Source: Company



Diversified borrowings profile; cost of borrowings amongst the lowest Funding profile of BAF is diversified among banks, debentures, CPs and fixed deposits. Bank borrowings form the major portion of funding (58% in F14) followed by 28% from debentures, 13% from CPs and balance from the recently raised FDs. BAF enjoys some of the highest ratings by Crisil and ICRA which has led to the borrowing cost of BAF being at lower levels. BAF enjoys rating of “CRISIL A1+” from CRISIL and “(ICRA) A1+” from ICRA for its short term debt programme of Rs35bn and Rs20bn respectively. The long term NCDs have been assigned “CRISIL AA+/Stable” rating by CRISIL and “[ICRA] AA+(Stable)” by ICRA of Rs33.5bn and Rs30bn respectively. The Company has also been assigned “CRISIL AA+/Stable” rating by CRISIL and “[ICRA] AA+(Stable)” by ICRA for Rs7bn lower tier–II bond programme. The fixed deposit scheme has been rated FAAA/Stable by CRISIL and MAAA/Stable by ICRA.

As regards the bank loan ratings, CRISIL has assigned “CRISIL AA+/Stable” rating for BAF’s cash credit/ working capital demand loan amounting to Rs20.5bn and long term bank facilities amounting to Rs124.5bn and “CRISIL A1+” rating for the short term bank facilities amounting to Rs15.3bn.

However going ahead, BAF expects to raise additional funding from retail FDs and expects its share to increase its share to ~15% in the next 3 years.

Being such a highly rated company, cost of borrowings for BAF stood at 9.6% for F14. We expect the funding cost to continue to be at lower levels and as the interest rates are expected to come down going ahead, the advances which are at fixed interest rates will support the NIMs.

Exhibit 18: Break-up of borrowings (F14)

Banks57.6%

Debentures28.2%

Commercial Paper13.1%

Fixed Deposits

1.1% Source: Company, SSLe NIMs likely to decline by ~80-100 bps BAF has traditionally maintained higher margins led by a strong exposure to high-yielding segments and funding at competitive rates led by strong credit rating. NII witnessed a CAGR growth of 37% over F10-F14 led by a CAGR advances growth of 54% over the period. However company has shifted focus to lower-yielding but secured advances over the past couple of years leading to a dip in NIMs. Company has witnessed a decline in its margins. We expect this trend to continue as the home loans and LAP share of business increases leading to a further dip in margins going ahead. We expect NIMs to contract by 100-150bps over the next couple of years.

Higher NIMs provide strong earnings visibility. Though likely to decline, still remains comfortable

BAF has some of the highest ratings from credit agencies. Borrowings cost at sub- 10%.



Exhibit 19: NIMs to contract

15.6%

13.1%11.8%

11.1% 10.5%9.8% 9.5%

0.0%

4.0%

8.0%

12.0%

16.0%

F11 F12 F13 F14 F15e F16e F17e


Improved product penetration via restructuring, operating efficiencies and increasing ticket size to improve cost-to-income ratio BAF has extensively expanded its network in the past several years. It has built its presence across consumer retailing chains for strengthening its consumer durables business. Company had made investment in technology to streamline its loan processing platform. Though this had led to an increase in its cost-to-income ratio previously, company is since then reaping the benefits of the same. Meanwhile, as BAF is expanding into segments with larger ticket sizes like LAP and home loans, an improvement in the cost-to-income ratio is foreseen.

We expect cost-to-income ratio to improve from 46% in F14 to 43% in F17e.

Exhibit 20: Cost-to-income ratio to improve

44.5%

46.9%

44.7%

46.0%

44.9%44.6%

43.3%

40.0%

42.0%

44.0%

46.0%

48.0%

F11 F12 F13 F14 F15e F16e F17e


Aggressive expansion in network along with growth in large ticket size loans like LAP and home loans

will support reduction in ticket size



Asset quality to stay resilient on the back of diversification and better risk management; credit cost to remain stable Despite operating in high risk segments, BAF has been able to maintain its asset quality on the back of its strong loan origination, underwriting and collection processes. Focus on affluent segments, enhanced usage of credit bureau, product rationalization and strong risk management framework have ensured better than average asset quality warding-off costs from its exposure to riskier segments. BAF has witnessed a marked improvement in asset quality over the years. GNPA and NNPA currently stand at 1.1% and 0.3% (1QF15) whereas the PCR stands at 76%. Despite a persistent slowdown in economy, asset quality of BAF has remained pretty stable. However, backed by a tenacious improvement in economy for F15e, we expect a marginal rise in GNPA and NNPA going ahead. GNPA and NNPA are expected to increase to 1.3% and 0.3% in FY17e.

BAF’s strong credit appraisal policy has led to an improvement in its overall credit cost from 8.1% in F10 to 1.3% in F14. However, we expect credit cost to remain stable going ahead.

Exhibit 21: Asset quality 2.9%

1.2% 1.1% 1.2% 1.3% 1.3% 1.3%

0.8%

0.1% 0.2% 0.3% 0.3% 0.3% 0.3%

0.0%

0.7%

1.5%

2.3%

3.0%

F11 F12 F13 F14 F15e F16e F17e

GNPA NNPA Source: Company, SSLe

Exhibit 22: Credit cost

3.7%

1.8%

1.2% 1.3% 1.3% 1.3% 1.3%

0.0%

1.0%

2.0%

3.0%

4.0%

F11 F12 F13 F14 F15e F16e F17e


Capital raising likely CAR for BAF currently stands at 18% with a tier I capital of 15.2%. Company had last raised equity capital of Rs7.5bn in Jan-13 via rights issue. Based on our advances growth estimates, BAF’s CAR is likely to remain above the RBI guideline of 15% in FY16e. However, company is planning to raise tier I capital in 1QFY16e to maintain headroom for advances growth.

Asset quality stable inspite of economic slowdown. Expected to remain largely stable

CAR to remain adequate for funding growth but management to raise capital to maintain

comfort.



Exhibit 23: CAR break-up

16.8

%

15.0

% 18.7

%

16.1

%

14.5

%

13.5

%

12.2

%

3.2%

2.5%

3.3%

3.0%

1.8%

1.6%

1.4%

0.0%

6.0%

12.0%

18.0%

24.0%

F11 F12 F13 F14 F15e F16e F17e

Tier I Tier II Source: Company, SSLe

Superior return ratios to continue BAF has delivered strong earnings growth supported by improved credit profile, strong NIMs and best in class asset quality along with lower credit costs. RoAA have seen some sharp improvement from 1% in F09 to 3.4% in F14. We believe that with a unique business model, focus on high-yielding and secured segments along with focus on newer markets and products will be the key positives for the company.

We expect BAF to continue to outpace the sector growth and sustain its superior return ratios. We estimate the company to deliver 27% CAGR in net earnings over F14-F17e, driven by 30% CAGR loan growth over the period. RoAA are expected to maintain at their current levels going ahead.

Exhibit 24: RoAA

3.8 3.8 3.8

3.43.2

2.9 2.9

0.0

1.2

2.4

3.6

4.8

F11 F12 F13 F14 F15e F16e F17e

(%)


Superior RoAA and RoE to continue. Strong loan growth, higher NIMs and stable asset quality to

support return ratios



Well entrenched business model; healthy return ratios BAF has successfully transformed from a 2-wheeler financing company to a well diversified NBFC. BAF has set its focus on expansion of its loan book along with healthy profitability. Company is focusing on a strong balance sheet via loans in home loan and the LAP segment whereas the consumer durables and SME financing will help maintain the overall profitability. Strong operating performance; healthy advances growth; lower borrowing cost and healthy asset quality are the key highlights of the company. Strong NIMs, lower credit cost and healthy return ratios are expected to drive the earnings growth of BAF by 27% CAGR over F14-17e, driven by 30% CAGR loan growth over the period.

The stock has in the past year seen its valuations expand from nearly 1.5x (1-yr forward) to 2.5x as the company accelerated its business plans after raising adequate capital. At CMP of Rs2,654, the F17e P/ABV of just 1.9x for RoAA’s of ~3.0% we see a strong upside. Peers trade an average of 1.5x F17e. We initiate coverage on the stock with a BUY and a target price of Rs3,220 (2.3x F17e ABV)

Valuation

Exhibit 25: 1-yr forward P/ABV bands

0

800

1,600

2,400

3,200

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Aug-

08

Feb-

09

Aug-

09

Feb-

10

Aug-

10

Feb-

11

Aug-

11

Feb-

12

Aug-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

(Rs)

Price 0.8x 1.5x 2.0x 2.5x 3.0x Source: Bloomberg, SSLe Exhibit 26: Key assumptions Y/E Mar (Rs mn) F15e F16e F17eBalance Sheet AssumptionsCredit Growth (%YoY) 31.5 28.8 31.5Borrowings Growth (%YoY) 38.6 34.1 35.2

Asset Quality AssumptionsNet Slippage Ratio (%) 0.5 0.5 0.4Credit Cost (%) 1.3 1.3 1.3Provisioning Cover (%) 76.0 76.0 76.0Source: SSLe

Exhibit 27: Peer comparison1QF15 AUM Borrowings CAR RoE RoA GNPA NNPA P/BV (F17e)Bajaj Finance 269,430 212,100 18.0 20.4 3.6 1.1 0.3 1.9Mahindra Finance 342,707 250,975 18.1 12.0 1.9 6.2 3.0 1.9

Magma Fincorp 182,950 111,280 17.1 10.6 1.3 3.2 2.4 1.1

Shriram Transport 543,582 364,400 22.9 17.4 2.5 3.7 0.8 1.6

L&T Finance 407,650 362,760 16.7 11.3 2.1 3.6 2.7 1.5Source: Bloomberg, Company, SSLe

Healthy return ratios. 27% CAGR growth in earnings led by 30% growth in advances.

Three year average multiple (P/ABV) for BAF is 1.6x



Key risks

Prolonged economic slowdown: A prolonged economic slowdown is a key risk and could impact advances growth and earnings of BAF. Further, it may result in deterioration of asset quality and could adversely affect its profitability.

Increased competition: Any significant increase in competition, mainly in consumer durables and two/three-wheeler space, could impact adversely as company may have to compromise practices to protect its business.

Sharp surge in credit losses: Although we have been conservative in our credit cost assumptions, higher-than-expected delinquencies due to unseasoned loan book (construction equipment, LAP and infrastructure finance) remain a risk to our estimates.



Company background

Bajaj Finance Ltd (BAF), a Bajaj group company, was incorporated in 1987 and commenced operations as a captive financier for Bajaj Auto vehicles. Over the past few years, its business model has been broadened and reliance on Bajaj Auto has reduced, enabling it to emerge as diversified consumer finance NBFC. BAF forayed into the consumer finance business in late 2007, which coincided with the downtrend in overall economic environment. However, being a late entrant to the consumer business enabled BAF to survive the cyclical stress as many players exited the sector/segment. BAF has implemented several initiatives to restructure the cost base, tighten risk policies, increase usage of credit bureau and undertake branch rationalization.

Exhibit 28: Holding company structure

Source: Company



Key Management Personnel

Rahul Bajaj-Chairman He took charge of the erstwhile Bajaj Auto as the Chief Executive Officer in 1968. Post demerger of the company, he continues to act as the non-executive chairman. He is a Graduate in Economics (Honours) and Law and did his MBA from Harvard Business School.

In 1992 he was appointed a Member of the Prince of Wales International Business Leaders Forum by His Royal Highness and The Prince of Wales. He was awarded the ‘Padma Bhushan’ by the President of India in 2001.

Rajeev Jain-Chief Executive Officer He was earlier with American International Group as a Deputy CEO of its Consumer Finance business. Before that, he was with American Express where he spent more than eight years doing various roles across various products like credit cards, personal and business loans etc. At the time of leaving American Express, he was the Head of Personal and Small Business Lending in India. Rajeev is a Management graduate from T A Pai Management Institute, Manipal with a Bachelors Degree in Commerce.

Rajesh Viswanathan -Chief Financial Officer He joined BAF from Bajaj Allianz Life Insurance where he was the CFO for 8 years. He has varied experience having worked previously with KPMG in the Middle East in their Bahrain Assurance practice and prior to that in DSP Merrill Lynch and Mahindra and Mahindra. Rajesh holds the BCom degree from the Mumbai University and is a qualified CA and ICWA.



Quarterly Trends Exhibit 29: AUM Exhibit 30: Sectoral composition of AUM

144,

850

153,

700

168,

440

175,

170

192,

290

198,

290

224,

610

240,

610

269,

430

10.5

6.1

9.6

4.0

9.8

3.1

13.3

7.1

12.0

3.0

6.0

9.0

12.0

15.0

0

75,000

150,000

225,000

300,000

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

(%)

AUM

(Rs

mn)

AUM (LHS) Growth (%) (RHS)

39.1

%

38.8

%

40.9

%

40.7

%

41.6

%

40.9

%

39.7

%

38.8

%

39.8

%

44.6

%

45.4

%

45.9

%

47.9

%

48.7

%

50.0

%

51.9

%

53.4

%

53.3

%

16.3

%

15.8

%

13.1

%

11.3

%

9.7%

9.1%

8.4%

7.6%

6.6%

0%

25%

50%

75%

100%

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

Consumer Finance SME Business Commercial Rural Source: Company, SSLe

Exhibit 31: Deployments Exhibit 32: Sectoral composition of deployments

47,2

80

43,3

40

52,0

00

51,0

60

62,5

00 51

,990

75,3

20

70,4

20

92,6

60

12.4

(8.3

)

20.0

(1.8

)

22.4

(16.

8)

44.9

(6.5

)

31.6

(20)

0

20

40

60

0

25,000

50,000

75,000

100,000

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

(%)

Dep

loym

ents

(R

s m

n)

Deployments (LHS) Growth (%) (RHS)

51.3

%

48.7

%

56.7

%

46.3

%

54.6

%

51.0

%

50.7

%

45.1

%

54.5

%

32.3

%

32.6

%

29.3

%

40.1

%

34.1

%

37.0

%

40.8

%

42.9

%

35.4

%

16.4

%

18.7

%

14.1

%

13.6

%

11.3

%

12.0

%

8.5%

11.5

%

9.6%

0%

25%

50%

75%

100%

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

Consumer Finance SME Business Commercial Rural Source: Company, SSLe

Exhibit 33: PAT Exhibit 34: Customer acquisition

1,38

7

1,28

7

1,60

1

1,63

8

1,75

7

1,67

0

1,94

1

1,82

1

2,11

4

28.1

(7

.2)

24.4

2.3 7.

3 (5.0

)

16.2

(6.2

) 16.1

(10)

0

10

20

30

0

600

1,200

1,800

2,400

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

(%)

PAT

(Rs

mn)

PAT (LHS) Growth (%) (RHS)

7,52

0

6,01

0

8,33

0

6,22

0

9,69

0

6,90

0

9,62

0

7,68

0

12,5

20

49.8

(2

0.1) 38

.6

(25.

3)

55.8

(28.

8)

39.4

(20.

2)

63.0

(60)

(30)

0

30

60

90

0

3,500

7,000

10,500

14,000

1QF1

3

2QF1

3

3QF1

3

4QF1

3

1QF1

4

2QF1

4

3QF1

4

4QF1

4

1QF1

5

(%)

Cus

tom

er A

cqui

sitio

n ('0

00s)

Customer Acqusition (LHS) Growth (%) (RHS) Source: Company, SSLe



Financials

Income statement Ratio analysisY/E Mar (Rs mn) F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F13 F14 F15e F16e F17eInterest earned 29,366 37,889 51,002 65,147 84,684 Growth Ratios (%)Interest expended 12,057 15,732 22,957 31,046 41,632 Advances 35.3 36.6 31.5 28.8 31.5 Net interest income 17,309 22,156 28,046 34,101 43,053 Borrowings 28.4 50.4 38.6 34.1 35.2 Growth (%) 31.9 28.0 26.6 21.6 26.2

Other income 1,730 2,845 3,123 4,026 5,222 Earnings RatioFee based income Average yield on loans 19.9 18.9 19.0 18.7 18.7 Other misc. income Average cost of borrowings 10.3 9.6 9.7 9.7 9.6 Operating income 19,040 25,001 31,169 38,128 48,274 Spread 9.6 9.3 9.3 9.0 9.0 Growth (%) 33.5 31.3 24.7 22.3 26.6 NIM 11.8 11.1 10.5 9.8 9.5 Operating expenses 8,506 11,511 13,998 16,998 20,888 RoE 22.0 19.6 20.9 21.2 22.7 Staff expenses 2,452 3,408 4,476 5,763 7,580 RoAA 3.8 3.4 3.2 2.9 2.9 Other operating expenses 6,055 8,103 9,523 11,235 13,308

Pre-provision profits (PPP) 10,534 13,490 17,171 21,130 27,386 Operating ratios (%)Growth (%) 39.2 28.1 27.3 23.1 29.6 Op. exps / income 44.7 46.0 44.9 44.6 43.3 Non-tax provisions 1,818 2,578 3,251 4,072 5,158 Op. exps. / avg. assets 4.8 4.7 4.2 3.9 3.6 PBT 8,716 10,912 13,920 17,058 22,229Taxes 2,803 3,722 4,733 5,800 7,558 Asset quality, capital adequacy (%)Tax rate (%) 32.2 34.1 34.0 34.0 34.0 Gross NPA 1.1 1.2 1.3 1.3 1.3 Net profit 5,913 7,190 9,187 11,258 14,671 Net NPA 0.2 0.3 0.3 0.3 0.3

Growth (%) 45.5 21.6 27.8 22.5 30.3 PCR 82.4 76.0 76.0 76.0 76.0

CAR 22.0 19.1 16.3 15.1 13.6

Tier I 18.7 16.1 14.5 13.5 12.2 Balance sheet Tier II 3.3 3.0 1.8 1.6 1.4 Y/E Mar (Rs mn) F13 F14 F15e F16e F17eCapital 495 498 498 498 498 Per share data (Rs.)Reserves & surplus 33,024 39,411 47,519 57,536 70,779 Shares outstanding (mn.) 49.5 49.8 49.8 49.8 49.8 Networth 33,520 39,909 48,016 58,033 71,277 EPS 119.4 144.5 184.7 226.3 294.9 Borrowings 131,332 197,496 273,720 366,953 496,274 Book value 676.6 802.2 965.2 1,166.5 1,432.7 Current liabilities 13,211 8,776 9,945 13,072 17,425 Adjusted book value 670.0 788.8 946.3 1,141.0 1,399.6 Total liabilities 178,063 246,180 331,681 438,058 584,976 Dividend per share 15.1 16.1 18.5 21.3 24.5

Advances 169,323 231,318 304,160 391,614 515,116 Valuation ratios (x)Investments 53 282 282 282 282 P / E 22.2 18.4 14.4 11.7 9.0 Fixed assets 1,762 2,199 2,419 2,660 2,926 P / BV 3.9 3.3 2.7 2.3 1.9 Other assets 6,926 12,381 24,820 43,502 66,652 P / ABV 4.0 3.4 2.8 2.3 1.9 Total assets 178,063 246,180 331,681 438,058 584,976 Dividend yield (%) 0.6 0.6 0.7 0.8 0.9


RoAA decompositionY/E March (%) F13 F14 F15e F16e F17eInterest earned 19.11 17.86 17.65 16.93 16.56Interest expended 7.85 7.42 7.95 8.07 8.14Net interest income 11.26 10.45 9.71 8.86 8.42Other income 1.13 1.34 1.08 1.05 1.02Operating income 12.39 11.79 10.79 9.91 9.44Operating expenses 5.54 5.43 4.84 4.42 4.08Staff cost 1.60 1.61 1.55 1.50 1.48Other operating expense 3.94 3.82 3.30 2.92 2.60Pre-provision profits (PPP) 6.85 6.36 5.94 5.49 5.35Non-tax Provisions 1.18 1.22 1.13 1.06 1.01Profit before taxes 5.67 5.14 4.82 4.43 4.35Taxes 1.82 1.75 1.64 1.51 1.48Profit after taxes 3.85 3.39 3.18 2.93 2.87Source: Company, SSLe



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bajaj finance - initiating coverage 30-09-14

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