(Photo: PTI)

9.21 am: Sensex was up 89.85 points at 25,291.75. In the 30-share index, Tata Motors and HDFC were trading 2.40 per cent and 1.55 per cent higher at Rs 330.60 and 1159.75, respectively.

Domestic equity markets opened on a positive note on Monday. The BSE Sensex and NSE Nifty opened 101.08 points and 30.08 points higher at 25,302.98 and 7,685.85, respectively.

Shares of realty, power and oil & gas were trading in red in the early trade.

The BSE Sensex and NSE Nifty lost 562.88 points and 167.95 points at 25,201.90 and 7655.05, respectively, on Friday.

Global Markets

New York: US stock indexes dropped more than 1 per cent on Friday after a mixed August jobs report did little to quell investor uncertainty about whether the Federal

London: Britain’s top share index fell sharply on Friday, following the release of US jobs data that suggested to some that a Federal Reserve interest rate hike in September is still a possibility.

Tokyo: Japanese stocks bounced from seven-month lows on Monday in choppy trade, helped by gains in the Chinese market after regulators sought to calm sentiment.

Hong Kong: The Hang Seng Index was down 0.12 per cent.

(With inputs from agencies)

The BSE Sensex and NSE Nifty are likely to open in red tracking SGX Nifty and mixed Asian markets. (PTI)

The BSE Sensex and NSE Nifty are likely to open in red on Monday tracking SGX Nifty and mixed Asian markets.

At 8.20 am (IST), Nikkei and Hang Seng were down 0.36 per cent and 0.47 per cent at 17,727.90 and 20,742.90 while Shanghai Composite Index was up 0.20 per cent at 3,164.86.

Asian stocks weakened on Monday, taking early cues from Wall Street’s slide after the August jobs report failed to give a clear view on the Federal Reserve’s interest rate hike, while participants also nervously awaited the restart of Chinese financial markets following the long weekend. Dow Jones Industrial Average slid 1.66 per cent on Friday.

China major stock indices rose in early trading on Monday following remarks by regulators to calm the market. The China Securities Regulatory Commission said in a post on its official microblog late on Sunday that markets were more stable and risks associated with high levels of leverage have eased following a period of high volatility.

Back home, the BSE Sensex and NSE Nifty lost 562.88 points and 167.95 points at 25,201.90 and 7655.05, respectively, on Friday.

(With inputs from agencies)

We initiate coverage on Bajaj Finance Ltd (BFL) with a Hold rating. We value BFL using a two-stage residual income model. Assumptions for the model: income CAGR (compound annual growth rate) of 20%, dividend payout of 15%, cost of equity at 13.9%, terminal growth rate at 5% (nominal growth rate for developed countries). This gives us a target price of R5,500 which results in a target P/BV (price-to-book value) of 3.3x FY17e P/B.

Earnings are highly sensitive to credit costs: There is not much of an impact on earnings even when interest rates decline by 50 basis points, as BFL will benefit from lower funding costs. However, for a 25 bps increase in credit costs, earnings decline by about 5%. We believe the current valuations for BFL at 3.1x FY17e P/B and 18x FY17e P/E (price-to-earnings) are fairly priced, given the likely RoE (return on equity) of 19% and earnings growth of 28%.

Hence, near-term upsides could be capped.

We forecast an AUM (asset under management) CAGR of 28% over FY15-18e, driving an earnings CAGR of 29%. Asset yields are likely to trend lower as the asset mix shifts in favour of lower-yielding secured assets; some of this could be offset by lower funding costs – but overall NIM (net interest margin) is likely to trend lower. We expect cost ratios to decline at a gradual pace as BFL originates more of its business via internal sourcing and reduces its reliance on third-party origination. Overall, we expect average RoA (return on assets) of 3.1% and average RoE of 19% over FY15-18e.

Diversified product mix to drive growth: BFL has been steadily diversifying its product offerings across customer segments. It has leadership positioning among segments like consumer durables, lifestyle products, and two/three-wheeler financing. This has helped it deliver a robust AUM CAGR of 44% over FY11-15. It currently offers 33 products across five verticals—Consumer Lending; SME Lending; Commercial Lending; Rural Lending; and Fee Based Products and Fixed Deposits.

As at 30 June 2015, Consumer Lending AUM was R149.4 billion (up39.2% y-o-y), which represented 42% of total AUM. BFL’s consumer AUM is just 1.2% of banking system retail loans. However, within this, BFL is fairly large in consumer durables. It is relatively small in home loans and this could be a big growth driver. As of now, BFL does not offer car loans.

BFL is the largest two-wheeler lender in India. It finances only Bajaj Auto two-wheelers. It operates from more than 3,000 Bajaj Auto outlets. It is the second largest three-wheeler financier.

BFL claims it is the largest consumer electronics lender. In FY13, BFL started financing lifestyle products (furniture, furnishings, fitness equipment, watches, etc.). These are among the fastest-growing segments. In FY15, BFL started financing digital products (mobile phones, laptops, etc) and has tied up with Samsung, Apple, Sony, etc. It is already a large player in consumer durable loans. As of Q1 FY16, BFL had consumer durable AUM of Rs 51 billion which was 51% of total consumer durable loans in the banking system of Rs 159 billion.

Personal loans could grow at a rapid pace. BFL offers personal loans to existing customers with timely repayment track records and to affluent salaried class.

NIM likely to trend lower, credit costs to be stable: By our estimates, yield on loans fell to 18.3% in FY15 from 20.6% in FY11 as the asset mix has changed in favour of secured assets. We believe this trend will continue due to the change in asset mix; but some of this could get offset by lower funding costs. Overall, we expect NIM to decline 20 basis points over FY15-18e.

BFL has a diversified borrowing mix across banks, bonds, short-term commercial paper and fixed deposits(FDs). This helps it to keep borrowing costs under check. It is looking to move away from bank loans as these are more expensive than bond borrowing. Bank loans are at 48% of total borrowing as of June 2015, from 58% in March 2014.

Share of FDs is gradually rising—at 4% of liabilities as of June 2015, from almost nil in March 2013. BFL plans to increase the share of FDs to 15% of liabilities over three-five years.

Access to credit scores from credit bureaus, internal scorecards, and strong underwriting has resulted in stable asset quality. BFL follows conservative lending practices, e.g., it stopped lending to construction equipment when the sector came under stress.

Earnings growth and RoE outlook positive: Due to the retail nature of its business, cost ratios are on the higher side.

BFL plans to use technology to reduce operating costs. BFL is looking to reduce its reliance on third-party direct selling agents (DSAs) for business sourcing, as origination costs are higher for DSAs compared to internal sourcing.

It stopped doing salaried home loans via DSA from April 2015. Most self-employed home loans are also direct. The current cost/income ratio for home loans is 40%. BFL aims to cut it to the mid-to-high teens (in line with larger housing financiers.) We expect NIM compression to be offset by lower cost ratios. This, combined with stable credit costs, should lead to average RoA of 3.1% and RoE of 19% over FY16e-18e. RoE declines in FY17 as we have assumed that the warrants issued to the promoters will get converted during FY17e.

In November 2012, capital markets regulator Securities and Exchange Board of India (Sebi) had allowed roll-over facility in SLB scheme. (Photo: PTI)

In a bid to increase participation in the stock lending and borrowing (SLB) market, leading stock exchange BSE will introduce the roll-over facility under this scheme from tomorrow.

SLB mechanism allows short sellers to borrow securities for making delivery. The rollover facility in the SLB session will be available for a three-month period (original contract plus two roll-over contracts).

Under the roll-over facility, lenders of securities would be allowed to extend an existing position. It means that lenders who are due to receive securities can now extend the period of lending.

Similarly, a borrower who has to return borrowed securities can extend the period of borrowing.

“… the roll-over facility in SLB segment will be launched with effect from September 7, 2015,” BSE said in a circular.

Besides, a mock trading session was conducted on Saturday to check the system performance.

Earlier in May, National Stock Exchange (NSE) had launched a roll-over facility in its SLB scheme.

Currently, the country’s SLB market is very shallow.

In November 2012, capital markets regulator Securities and Exchange Board of India (Sebi) had allowed roll-over facility in SLB scheme.

FPIs withdrew a net sum of Rs 3,825 crore from equities during September 1-4, according to depositories data, which include Friday’s provisional figures.(Reuters)

Foreign investors have pulled out nearly Rs 4,000 crore from the stock markets in the last four trading sessions amid weak GDP numbers and lacklustre global cues.

This comes on top of a record net outflow of Rs 17,428 crore from equities last month. This was the highest net outflow by foreign portfolio investors (FPIs) in a single month since 1997.

The segregated data prior to 1997 was not available.

FPIs withdrew a net sum of Rs 3,825 crore from equities during September 1-4, according to depositories data, which include Friday’s provisional figures.

Market experts attributed the huge outflows to sustained global risk-off trend along with concerns over economic slowdown in China.

Besides, China’s weak PMI and lower GDP growth in India dampened sentiments. Moreover, the stance of the US Fed continued to affect investor sentiment, they added.

However, analysts believe that the outflows are unlikely to continue for a long time.

The growth data showed the economy grew at 7 per cent in April-June, from 7.5 per cent in the preceding quarter.

Not just that, Nikkei India Manufacturing PMI stood at 52.3 in August, as against 52.7 in July, a sign that the sector grew at a slower pace.

Since the beginning of the year, FPIs have made a net investment of Rs 24,424 crore in equities and Rs 38,329 crore in debt markets.