Buy Bajaj Finance; target of Rs 2500: JM Financial

JM Financial's research report on Bajaj Finance

Bajaj Finance (BAF) reported 2QFY19 net profit of INR 9.24bn (up 55% YoY ) as per IndAS. As per IGAAP, net profit was up 83% YoY at INR 10.2bn. Key highlights: i) AUM growth remained strong at 38% YoY driven by all the segments. As per company, consumer demand remained strong, however given the current environment, company would be slightly cautious for quarter or so in the lumpy exposure in SME, LAS and commercial lending. ii) Customer acquisition remained healthy, with the company acquiring 1.8 million new customers (up 34% YoY) in 2QFY19. iii) Margins increased 33bps YoY to 11.1% on a 47bps YoY decline in funding costs. iv) Asset quality trends improved, with the gross NPL ratio improving 22bps YoY to 1.49% YoY with coverage ratio at 65%. v) Company has maintained strong ALM across cycles with positive ALM gap of 65% (upto 12m) as of Sep’18. Further BAF continue to maintain 4-6% of borrowing in cash and cash equivalents. In the current situation, we believe strong promoter backed NBFCs will get disproportionate share of funding going forward. Moreover, competition from new, small and PE backed NBFCs will come down massively further helping these strong promoter backed NBFCs.

Outlook

BAF remains well-positioned to deliver sustainable profitable growth going forward. We value BAF at 6.0x Mar’20 BV (implied PE 30x), implying a Mar’19 TP of INR 2,500. Maintain BUY.