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Finance and life insurance businesses put up strong performance

In 4QFY22, Bajaj FinServ (BJFIN) reported consol PAT of INR 13.5bn, up 7% QoQ / 38% YoY, with the finance arm, BAF, contributing 95% of the same as the insurance businesses were impacted by higher new business strain and claims. General insurance business, BAGIC, generated a PAT of INR2.5bn in 4QFY22, down 18% QoQ / down 9% YoY, impacted by i) crop claims, ii) higher claims severity of non COVID health claims and iii) lower capital gains. COR increased 170bps YoY to 98.3% in 4QFY22 driven by 450bps YoY jump in loss ratio to 68.8%. Life insurance business, BALIC, reported PAT of INR0.5bn in 4QFY22, down ~80% YoY impacted by higher new business strain. The life insurer generated NBV of INR6.2bn for FY22, an increase of 72% YoY with margins improving 190bps YoY to 14.2%. This was driven by a) higher banca sourcing – mix of individual rated premium jumped to 56% in 4QFY22 vs 47% last year, ii) balanced product mix – share of individual rated premium from traditional products increased to 64% in 4Q vs 56% last year, and iii) 200-800bps YoY improvement in retail persistency across all buckets. Lending business, BAF, reported a strong performance with PAT of INR24.2bn in 4QFY22, up 14% QoQ / 80% YoY, aided by lower credit costs. The strong AUM growth, up 9% QoQ / 29% YoY, in 4QFY22 was led by commercial (40% QoQ / 91% YoY). Asset quality continued the improving trend as GS3 ratio sequentially declined to 1.6% (vs 1.7% in 3QFY22) while GS2 ratio fell to 2% (vs. 2.9% in 3QFY22). Going forward, we see multiple levers for BJFIN’s three businesses to deliver sustainable profitability alongside best-in-class risk metrics. We value BJFIN using SOTP arriving at a TP of INR17,000.

BAGIC– underwriting performance impacted by higher claims: In 4QFY22, the insurer recorded GWP growth of 18% YoY led by mass lines such as mass health and crop insurance. Ex-crop and mass health, GWP was up 6% YoY in 4QFY22. The product mix for 4Q shifted in favour of crop (+700bps YoY), group health (+100bps) and others (+250bps). Channel mix moved in favour of direct lines (share of GWP up 9pps YoY to 19%). For 4Q, the insurer reported loss ratio of 68.8%, up 450bps YoY driven by health lines (86.7% loss ratio vs 74.1% last year) and crop (73.7% loss ratio vs 1.8% last year). Ex-crop, loss ratio increased 110bps YoY to 68.6% for 4QFY22. COR increased 170bps YoY to 98.3% in 4QFY22. Investment income was down 7% YoY owing to lower capital gains. Overall, PAT was INR2.5bn in 4QFY22, down 18% QoQ / down 9% YoY. For FY22, the insurer delivered GWP growth of 9% YoY led by 70% growth in other lines and 21% growth in group health lines. The COR for FY22 came in at 99.6%, up 270bps YoY on the back of 450bps YoY jump in loss ratio. PAT growth for FY22 was weak at 1% YoY. In terms of solvency, it remains strong at 344%, down 100bps YoY. We are building in GWP CAGR of 15% over FY22-24E assuming opportunistic participation in crop/mass lines with earnings CAGR of 12% on the back of CORs around the 100% levels over FY23-24E

BALIC – strong new business performance: In 4QFY22, BALIC’s APE (IRDA) growth of 34% YoY outperformed both private peers (9%) and the industry (13%). On unweighted basis, the insurer reported 30% YoY growth in premiums vs 25% for the industry. Product wise, in 4QFY22, non-PAR savings recorded 2x YoY in individual rated premium followed by 14% YoY growth in PAR products. In terms of individual rated mix, share of non-PAR savings jumped 14% YoY to 42% in 4QFY22. Protection mix in the individual rated premium dropped 100bps YoY to 2% owing to demand hit from reinsurance rate hikes and stricter underwriting criteria. Channel wise, banca share of individual rated premium jumped to 56% in 4QFY22 from 47% last year. Further, share of Axis Bank increased 31% in 4QFY22 on the back of full geographic access. In terms, ticket sizes for non-PAR savings increased 55% YoY in 4QFY22 with overall regular premium sizes increasing 13% YoY. For FY22, BALIC reported APE growth of 48% YoY outperforming the industry’s 16% YoY APE growth. Product wise, individual rated premium from annuity increased 8x YoY in FY22 off a small base followed by 42% YoY growth in ULIPs while protection degrew by 25%. In FY22, the insurer generated net NBV of INR6.2bn, up 72% YoY driven by robust APE growth, improving persistency – for FY22, all buckets have seen 200-800bps YoY improvement, and better product/ distribution mix. Margins improved 190bps YoY to 14.2%. BALIC remained the best capitalised insurer with solvency at 581% as of Mar’22. We build in EV CAGR of 16% over FY22-24E with post overruns margins improving to 17% levels by FY24E.

Bajaj Finance – strong quarter: In 4QFY22, Bajaj Finance (BAF) delivered a PAT of INR 24.2bn (up, 14% QoQ / 80% YoY) aided by lower credit costs (as % of avg. loans: 153bps vs. 251bps QoQ / 346bps YoY). Opex continued to be at elevated levels (up, 1% QoQ / 30% YoY) and CIR was at c.35% (largely unchanged QoQ and YoY), given investments in teams and technology for business transformation. Other highlights of 4Q are: a) customer franchise inched-up to 57.6m (up 4% QoQ) with cross-sell franchise at 32.8m (up 5% QoQ), b) AUM growth was strong at 9% QoQ / 29% YoY, driven by Commercial (40% QoQ / 91% YoY), c) Margin (NII/AUM) was at 12.8% (down 95bps QoQ / up 25bps YoY) to 13.8%, partially impacted by large AUM base albeit CoF stabilised QoQ at 6.7%, d) NII expanded 2% QoQ / 26% YoY, and e) asset quality continued the improving trend as GS3 ratio sequentially declined to 1.6% (vs. 1.7% in 3QFY22), and GS2 ratio (incl. 0.4% of OTR) dropped to 2% (vs. 2.9% in 3QFY22).

Valuation and TP: We value Bajaj Finserv using SOTP. We assign INR 2,697 per share for life sub, INR 3,115 per share for general sub and INR 13,082 per share for Bajaj Finserv's c.53% stake in BAF. We factor a 10% holdco discount, which is in-line with the applied discount for HDFC. Using SOTP, we arrive at a TP of INR17,000 for BJFIN.

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