Buy Bajaj Finance ; target of Rs 2600: ICICI Direct

ICICI Direct's research report on Bajaj Finance

PAT grew at a strong pace of 54% YoY to Rs 924 crore. This was led by NII increase of 41% YoY to Rs 2689 crore & lower YoY increase in operating expenses. Cost-to-income ratio stood at 36% vs. 41% seen last year. Headline asset quality increased slightly QoQ but was under control. GNPA ratio stood at 1.49% a rise of 10 bps QoQ and NNPA ratio rose by 9 bps to 0.53%. The provision coverage ratio dipped to 65% from 69%QoQ. Total slippages for the quarter were Rs 483 crore vs. Rs 379 crore in Q1FY19. The company indicated that it has ~Rs 225 crore of exposure to IL&FS which is adequately secured against property. The consolidated AUM including housing witnessed growth of 38% YoY to Rs 100217 crore which was higher than estimate. It was largely led housing finance which rose by 47% QoQ to Rs 10712 crore. Standalone AUM growth was a bit lower at 24% YoY to Rs 89876 crore. Consumer finance grew by 39% YoY to Rs 38797 crore. Customer franchise rose by 31% to 30.05 million from 22.99 million as of Q2FY18. New loans acquired in Q2 was up 63% to 5.26 million.

Outlook

A strong performance in a volatile economic scenario (healthy return ratios - RoA at >3.5%%, RoE at ~20% GNPA at <2%) maintained investor interest even at higher P/ABV multiple with strong growth momentum at 33% CAGR in AUM, PAT CAGR of 34% in FY19-21E to Rs 6546 crore. BFL’s premium valuations may sustain as it is well placed compared to peers in terms of liquidity & exposure to IL&FS. We revise our TP to Rs 2600 from Rs 3050 earlier, valuing the stock at ~23 FY21E EPS (5.2x FY21E ABV) for a RoE of ~22.5% & RoAs of ~3.6%. Retain BUY.