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Published on 24/10/2019 11:28:25 AM | Source: Yes Securities Ltd

Reduce Bajaj Finance For The Target Rs. 3,700 - Yes Securities

Robust Execution

Growth execution remains strong; AUM growth at 38% yoy

Bajaj Finance’s growth execution remained strong (38% yoy AUM growth) in Q2 FY20 amid a challenging macro. Underpinning this resilient growth performance are franchise strengths of being diversified, agile, well-penetrated and having a sticky/penetrable customer base. Key business highlights of the quarter include

a) 23% yoy growth in new loan bookings,

b) existing customer forming 70% of new loans bookings (tightening of credit standards across most sales finance businesses),

c) 29% growth in both overall customer base and the cross-sell franchise and

d) sustained significant increase in distribution footprint (prominent in rural areas and for consumer financing products).

Asset growth was robust in most business segments except in consumer B2B (sales finance), securities lending and commercial lending.

 

Cost of funds coming off, cost growth accelerates and asset quality stable

NIM remained elevated supported by 11bps reduction in funding cost from 8.49% in Q1 FY20 to 8.38%. Retreat in funding cost was attributable to strong ALM management, robust liquidity position (~Rs80bn of free cash and liquid investments) and incremental borrowings being sourced at much lower cost. During the quarter, BAF entered into facility agreement with various banks to avail ECB loans up to US$575mn in one or more tranches. On the back of investments made towards developing multiple channels for mobilization, deposits grew by robust 60% yoy.

Absolute slippages in Q2 FY20 were higher by 63% yoy, and the annualized delinquency ratio stood at 2.4%. On sequential basis, headline NPLs and credit cost was stable. Products such as 2W & 3W financing, digital product financing, lifestyle finance, personal loans cross-sell and rural lending B2B witnessed elevated PAR 30 %. In response to these emerging trends and the macro slowdown, management had tightened underwriting standards in digital product financing, SME and B2C business in certain geographies and auto finance business.

 

Growth can moderate further; valuation is lofty even after factoring the planned capital raise

In the medium-to-longer term, we expect Bajaj Finance’s AUM growth to gravitate towards 30% yoy considering a large asset base and sustained deceleration in few products. The flexibility in cost structure and rising digitalization in loan origination and collection will help the company in delivering a tight cost/income ratio. Despite assuming an elevated credit cost in FY20 and FY21, we estimate Bajaj Finance to report 45% earnings CAGR over the next two years and an average RoA and RoE of 4.5% and 24% respectively. We factor a capital raising of Rs80bn @ Rs3600/share within the current year. Valuation is lofty at 6x FY21 P/ABV.

 

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