Buy Bajaj Finance; target Rs 1520: Motilal Oswal

Motilal Oswal's research report on Bajaj Finance (BAF)

• Bajaj Finance (BAF) has transformed from a captive two-wheeler financier to a diversified lender (Consumer, SME, Commercial), and is now building scale with profitability.
• Well-entrenched business model comprises businesses that are either profit maximizers (generate RoA of over 5 percent) or scale builders (generate RoA of over 2.5 percent).
• Diversification of product portfolio de-risks growth/earnings profile and mitigates the risk arising from a particular segment or any adverse regulatory clampdown.
• In the last three years, BAF has outpaced its peer group in growth and earnings; we expect the strong business momentum to continue.
• Improvement in risk management has led to historic low GNPA/NNPA at 1.1 percent/0.2 percent, despite a challenging macro environment and operations in high-risk segments.

"BAF has successfully transformed from a captive two-wheeler financer to a diversified non-banking finance company (NBFC). It has fine-tuned its lending model and redrawn its target segment, with a focus on affluent customers, high value products and distribution network. Its business lines are complementary, balancing risk. Its well-entrenched business model comprises businesses that are either profit maximizers or scale builders. Profit maximizing businesses include consumer durable loans, two-wheeler loans, personal/small business loans and loans against shares, which generate RoA of over 5 percent. Scale building loans include mortgage loans, loans against property, construction equipment and infrastructure finance, which are of larger ticket size and generate RoA of 2- 2.5 percent."

"Strong core operating performance and faster-than-expected turnaround in operations demonstrate the management's superior execution skills. Superior margins, focused fee income strategy and control over cost ratio will keep core operating profitability strong. Strong loan growth momentum coupled with stable asset quality and low credit costs would drive BAF's earnings at 21 percent CAGR over FY14- 16. We expect RoA/RoE to remain strong at over 3.4 percent/21 percent during FY14-16. We initiate coverage with a Buy rating and target price of INR1,520 (1.6x FY15E BV of INR949)," says Motilal Oswal research report.

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