Buy Bajaj Finance For 23% Return: Goldman Sachs

Bajaj Finance, over the last 3 months, is up a fantastic 25%, outperforming the broader index by 16%. However, despite this run up, Goldman Sachs has said that there is further upside with a target price of 1,275, implying a return of 23%.

Goldman Sachs expects Bajaj Finance to rerate on the following factors:

(1) Solid growth profile:

Disbursement/ Advances growth of 28%/45% (FY12-15E) with PAT CAGR of 31% on expanding market share in the consumer financing segment and scaling up of products like loan against property.

(2) Stable book:

Shift towards a more stable/secure asset mix reducing the riskiness of the book; and

(3) Healthy returns:

Lower than historical levels but still relatively healthy ROA of around 3% and ROE of 25% over FY13E-FY15E.

Catalyst

Goldman Sachs argues that the catalyst for Bajaj Finance to shoot up are:

(1) Strong demand (new and replacement) for consumer durables (23% of disbursements) and increasing value proposition for manufacturers to use the finance option to stimulate premium product sales will continue to drive growth and market share gains;

(2) Scaling up of LAP to 30% of disbursements by FY15E (FY12: 19%) will provide a second leg up for growth;

(3) Lower NPL accretion on stable asset quality trends vs. our expectation of a cyclical uptick (GNPA at 2.5% by FY15E vs. 1.1% now) could be a positive surprise;

(4) Margins are expected to decline 60bps in FY13E, from high levels of 9.6% in FY12 as declining yields due to competition and increasing proportion of secured book are assumed. However if wholesale rates (down c. 160bps FTD) continue their decline, this could provide upside risk to the margin estimates.

Valuation

Though Bajaj Finance is up 25% over the past 3 months (vs. index +9%) and currently trades at 1.7X 12-fwd P/B, 7.7X-fwd P/E, above historical valuations, there is still upside. Goldman Sachs has valued Bajaj Finance at 2.1X target P/B, derived using its 3-stage DDM (CAMELOT).

Key risks

The key risks to Bajaj Finance are the following:

(1) Frequent capital raisings to fund growth;

(2) Asset quality issues from their infrastructure book; and

(3) Tighter than expected liquidity.

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