Accumulate Bajaj Finance; target of Rs 2404: KRChoksey

“Bajaj Finance posted PAT of Rs211 crore up by 20.3% Y-o-Y, slightly above our estimate. NII grew strongly 23.2% Y-o-Y to Rs680 crore as it continues to be supported by strong AUM growth of 40.1% Y-o-Y. Incremental spreads increased by 116bps sequentially to 10.7% as the high yielding consumer book picked up pace. Other operating income grew robustly by 42.3% Y-o-Y supported by penal interest, distribution fees and commission on general insurance. Cost to income ratio declined by 320bps Q-o-Q to 46.1%. Provisions for loan losses rose 29.8% Y-o-Y mainly on account accelerating provisioning in infra loans stress. The company has assigned loans amounting to Rs375 crore on bilateral bases during the quarter. Maintaining its trend, AUM grew strongly by 40.1% Y-o-Y & 12.0% Q-o-Q on the back of a robust consumer finance book (up 15.1% q/q) and healthy LAP & business loans (up 11.7% q/q). Off balance sheet book stood at Rs1301 crore (4.8% of total AUM). Net NPA remained flat at 0.27% with 76% PCR. The company has decided to wind down its Construction Equipment business due to continued subdued ROE forecasts.”

“Net interest income depicted a healthy growth of 23.2% Y-o-Y supported by relatively stable spread along with a robust AUM growth of 40.1% y-o-y. Asset yields improved by 116bps Q-o-Q primarily attributable to higher incremental mix from consumer finance as SME sustained a health growth momentum. Steady money market rates, stable banks’ lending rate and resumption of borrowings from banks to market have resulted into stable cost of funds. The management also highlighted that stable pricing, 20% unit growth and increasing average size tick helped to show strong consumer electronic finance loan book growth. The company expects 20% -22% AUM growth supported by consumer finance and SME business segments in FY15. Assets under management grew 40.1% Y-o-Y driven by consumer finance (34.1% Y-o-Y) and SME finance (53.2% Y-o-Y). Two / three wheelers finance witnessed a slack in the second consecutive quarter due to a slowdown in commercial vehicle industry. Consumer durable finance was the star performer recording its highest ever increase in a single quarter mainly on the back of digital products, geo expansion and higher penetration of air conditioner sales. SME finance book growth is driven largely by strong growth in LAP (up 58.2% Y-o-Y stands at 42.8% of loan book) and rise in small business loans (up 56.4% Y-o-Y stands at 8.7% of loan book). We expect loan book to grow 25.8% CAGR from FY14-FY16 supported by higher market share in consumer finance business and healthy growth in small business finance segment.”

“Bajaj finance has been delivering healthy operating performance with steady asset quality in last three years. We believe Bajaj Finance is well placed within the NBFCs space on the back of strong business mix of consumer and small business finance, superior spreads, strong capital position and preserving asset quality well throughout the down cycle. We expect Bajaj Finance continue to deliver 3% plus RoA and 20% plus RoE on sustainable basis in medium term. At Rs2191 the stock trades 1.9x FY16 price to book and 10.4x FY16 earnings, closer to fair business valuation. Hence, we recommend “ACCUMULATE” rating on the stock with target price of Rs2404 (potential upside 10%),” says KRChoksey research report.

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