Buy Bajaj Finance Ltd For Target Rs.8650 - ICICI Direct
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Sustainable growth in AUM, PAT; valuation justified...
About the stock: Bajaj Finance, a strong NBFC with digital footprints made a strong comeback with AUM growth reaching ~28-30% YoY. Harnessing its large franchise base digitally offers huge opportunity. Housing forms 32% of the book.
* Bajaj Finance maintained strong operating metrics over various credit and rate cycles leading to >18% RoE and > 4% RoA leading to 2x
Q2FY23 Results: Confidence on growth sustainability to support valuations.
* NII growth at 31% YoY to | 7000 crore, marginal uptick in cost of funds
* GNPA, NNPA ratio declined to 1.17%, 0.44%, respectively, in Q2FY23
* PAT grew 88% YoY, 7% QoQ to | 2840 crore
* In Q2FY23, reported RoE at 23.57% and RoA at 5.4% (annualised)
What should investors do? The stock has given ~2x returns over the past two years. We believe since the fintech story is embedded in this business, valuations should stay at premium. We raise PAT estimates for FY23E & FY24E by 13% & 2.1%, respectively. No plans to convert to a bank on an immediate basis.
* We maintain BUY rating on the stock, offering compounding returns
Target Price and Valuation: Omnipresence strategy and organic momentum building up offers comfort on growth sustainability. Same holds key for premium valuations. We marginally revise target price to | 8650 from | 8500 keeping multiple same at 7.5x FY24E ABV.
Key triggers for future price performance:
* Adding 10-11 mn customers in a year. Digital transformation, client additions and ambitious targets on AUM growth (25-27% CAGR to | 3.8–4 lakh crore by FY25) to boost profitability
* Strong deposit base and plans to raise to 25% of overall liabilities and reach ~| 50000 crore by end FY23E
* Stable asset quality and controlled costs expected to continue
* RoE at >18-19% and RoA at >4% with guidance over 4.5%
Alternate Stock Idea: Besides Bajaj Finance, in our coverage we also like Axis Bank.
* Axis Bank is the third largest private sector bank in India with a balance sheet size of | 11.85 lakh crore as on September 2022
* We have a BUY rating with a target price of | 970
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