Buy Bajaj Finance; target of Rs 5585: KRChoksey

KRChoksey's report on report on Bajaj Finance

With another strong quarter and granular growth across business segments, Bajaj Finance reported a PAT of Rs 2794 mn up 41.7% Y-o-Y, above estimates. While the disbursements grew 51% YoY; the AUMs for the quarter at Rs 379.6 bn grew 35.6% Y-o-Y (as against our expectation of 33% growth) and 6.8% Q-o-Q. Healthy AUM can be largely attributed to the stupendous growth in rural finance; albeit on a lower base (393% Y-o-Y growth) and consumer finance portfolio (41.8% Y-o-Y) followed by healthy AUM expansion of SME (29.3% Y-o-Y) and commercial finance (25.5% Y-o-Y). The sturdy business growth translated into healthy earnings; and the NII grew 43% Y-o-Y and flat Q-o-Q at Rs 8974 mn and even healthier operating profit growth at Rs 5648 mn (49% YoY growth). NIMs expanded to 9.8%, up 65 bps Y-o-Y which was largely supported by healthy yields at 17.3% (v/s our expectation of 17.13%), up 29 bps YoY and the recent capital raise (June 2015). Sequentially, asset quality has witnessed healthy improvement with GNPAs declining to 1.67% and NNPAs at 0.46%.

Valuation & Recommendation: By virtue of differentiated and profitable business model Bajaj Finance has been delivering healthy operating performance with steady asset quality. The company’s strong foothold in consumer finance followed by diversified product suite, cross-sell expertise, efficient risk management and healthy return ratios reinforce our confidence in its sustainable earnings trajectory. We expect Bajaj Finance continue to deliver 3% RoA and 20% RoE over next two years. While the aggressive unsecured loan portfolio expansion and steep valuations prompt us to be cautiously optimistic, we believe the stock can be accumulated at dips. Hence, we maintain “ACCUMULATE” rating on the stock and tweak our target price to Rs 5585, valuing the company at 3.4x P/ABV FY17E (earlier Rs 5450) in order to incorporate the resolute business growth. At Rs 5,306 the stock trades 3.2x FY17 price to book and 17.7x FY17 earnings.

For all recommendations, click hereDisclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Read More