Add Bajaj FinServ Ltd For Target Rs. 2,200 By Emkay Global Financial Services Ltd
BJFIN reported a healthy Q1FY26, with a satisfactory performance across the lending (BAF) business; however, the general insurance business was a mixed bag. The life insurance segment delivered a strong margin. BAF reported a satisfactory quarter in terms of AUM growth, customer acquisition, operating efficiencies, and preprovisioning profit; however, credit cost remained elevated. BAGIC saw an elevated CoR at 103.6%, on higher expense ratio, whereas claims ratio saw YoY improvement; BAGIC delivered a healthy PAT, aided by robust investment income. The life insurance business saw a strong VNB margin at 11.1% (+4.2ppt YoY), led by strategic initiatives and a higher focus on protection products driving a strong 39% VNB growth; however, APE declined ~13% YoY. To reflect the Q1 developments, we have tweaked our FY26-28E estimates which led to ~1-2% change in PAT over FY26-28E. We maintain ADD, with a revised Jun-26E TP of Rs2,200 (Rs2,100 earlier).
General insurance witnesses elevated CoR; Life delivers a strong margin
BJFIN’s performance in Q1FY26 was reasonable, with the lending business (BAF) reporting a satisfactory performance driven by healthy AUM, PPOP, and PAT growth; however, asset quality saw a marginal decline. The general insurance business’s performance was a mixed bag, with modest ~8% GWP growth and an elevated combined ratio at 103.6%, driven by higher expense ratio; claims ratio, though, saw improvement. PAT growth was healthy, driven by robust investment income on the back of higher capital gains realized. The Life insurance business delivered a strong VNB margin at 11.1% (+4.2ppt YoY), driven by a profit-focused strategy and a higher contribution of protection, leading to ~39% VNB growth; however, APE declined YoY.
Focus remains on a profitable growth strategy
The general insurance industry continues to grapple with challenges, with a slowdown in the motor segment, increased competition, and the impact of the 1/n regulation; BAGIC, however, has maintained its focus on growing profitably. While the company has prioritized underwriting lower-claims ratio segments, it has seen higher expense ratios, owing to increased distributor payouts to acquire high-quality business. With the implementation of the surrender regulations, BALIC has turned around its strategy to focus on profitability with significant changes in the product construct, which includes higher tenure products, rider attachments, and increasing the minimum ticket size across products. While the strategic shift has resulted in a decline in APE, increased VNB margins have resulted in strong VNB growth.
Minor tweaks in consolidated PAT; reiterate ADD
To reflect Q1 developments of improved margins for BAF, higher CoR, investment income for BAGIC, and improved VNB margins for BALIC, we tweak our FY26-28E consolidated PAT by ~1- 2%. Given the strong franchise strength across the lending and insurance businesses, we reiterate ADD with a revised Jun-26E TP of Rs2,200 (from Rs2,100).
Earnings Conference Call Highlights
BAGIC
* The company endeavors to maintain the CoR close to ~100%. The management mentioned that despite market conditions, there has to be discipline in underwriting.
* Tender prices in the Crop segment were not favorable; hence, the company did not grow the crop segment during the quarter.
* The management stated that with its focus on profit, there will be higher acquisition costs for good quality business.
* Commissions have increased on account of business in the preferred segment. Further, the company has underwritten new business (compulsory 3Y/5Y business) in the Motor TP segment.
* CoR at 103.6% was elevated, driven by 1/n regulation change. Higher acquisition costs resulted in higher CoR on account of business in preferred segments. PAT grew 15%, attributable to better investment performance.
BALIC
* After the implementation of the new surrender regulations, the company has focused on profitability-driven growth. VNB growth was substantial in the recent quarter.
* Agency saw a 5Y CAGR of 25%. The company took a pause in the Agency channel during the quarter. The Agency channel has done a lot of heavy lifting, which has shown great results.
* The significant shift in Agency channel is owing to the focus on Term Plans.
* The management expects the Agency channel to witness slow growth in the next quarter as well, after which it is expected to pick up.
* The product mix has seen increased contribution from Protection.
* The product construct changed significantly which resulted in improved margins. Further, the company has also worked on cost-optimisation, which has resulted in higher margins.
* The rider attachment is healthy, and is currently 17% attachment across businesses.
* The company has increased the average premium to Rs30-35k, depending on the channels selling the Term Plans. Agency and Institutional channels are selling term products. There is ~9% increase in the ticket size.
* The management stated that the company is looking toward establishing a channel specifically focused on term plans.
* The management expects APE growth to revive during H2FY26.
* The management expects all the lines of Group Protection to pick up, with the uptake in credit disbursals.
* 30% of Agency customers are Term Plan customers. The management will maintain the pricing and quality of the protection b
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