BAJAJ FINANCE has delivered a robust 25% AUM CAGR to Rs 2.5tn over FY18-FY23. Buy for target price of Rs 9105 (29% upside): BOB CAPS

Diverse, high-growth portfolio: BAF has delivered a robust 25% AUM CAGR to Rs 2.5tn over FY18-FY23, scaling up to 69mn customer accounts from 26mn. In line with guidance of 29-31% growth in FY24 and 25-27% long term, we forecast a 28% AUM CAGR to Rs 4tn over FY23-FY25, lifted by buoyancy across consumer loans (42% of AUM), mortgage (31%), SME (14%) and commercial lending (13%). Mortgages, having risen 28% on average over five quarters, will be a key factor to growth. BAF continues to enrich its slate, entering new car financing in Q1FY24 and aiming for microfinance in Q4FY24 and tractor financing the following year.

Best-in-class asset quality: For the past decade, BAF has contained GNPA between 1.1% and 1.8%, achieving sub-1% levels in FY23. Considering its seasoned management team and disciplined record, we expect comfortable GNPA at 1%/1.3% and NNPA at 0.4%/0.5% for FY24/FY25 despite the planned entry into higher risk segments. Credit cost too has held below peers at 1.5% on average for FY13-FY19, though the Covid years were outliers before the company returned to form in FY23. We conservatively bake in a creeping rise in cost to 1.6%/1.7% for FY24/FY25.

Return ratios buoyant despite slim margins: Barring the turbulent Covid period, the company has delivered a consistent step up in return ratios over the past 10 years. Accounting for a rising cost of funds in a high rate environment, we project a 40bps fall in NIM from 10.6% in FY23 to 10.2% in FY25. Even so, ROAE is forecast to rise from 23.5% to 24.8% over the same period as rapid business expansion and cost control likely improve operating leverage and lower C/I ratio from 35.1% to 33.1%.

Valuations have moderated; BUY: BAF’s veteran leadership team, diversified business model and effective execution should enable it to weather rising competition and fend off asset quality risks in proposed businesses such as microfinance. We, therefore, value the standalone business at 6.6x FY25E ABV – a 20% premium to the long-term average – for a value of Rs 8,619/sh. The addition of Rs 482/sh for housing arm BHFL (2x FY25E BV) and Rs 4/sh for securities subsidiary BFSL (15x FY25E EPS) yields an SOTP-based TP of Rs 9,105. We initiate coverage on BAF with a BUY rating for 29% upside from the current price.