Hold Bajaj Finance; target of Rs 2750: KRChoksey

KRChoksey`s research report on Bajaj Finance

“Bajaj Finance posted PAT of Rs 197 crs up by 18% Y-o-Y, marginally below our estimate. NII grew strongly 27% Y-o-Y to Rs 626 crs as it continues to be supported by strong AUM growth of 41% Y-o-Y. Incremental spreads slumped by 353 bps sequentially to 9.1% as the there was pressure seen in LAP/home loan margins. Other operating income degrew by 29% Y-o-Y. Cost to income ratio increased by 25 bps Q-o-Q to 46%. Provisions for loan losses rose 53% Y-o-Y mainly on account accelerating provisioning in infra loans stress. Maintaining its trend, AUM grew strongly by 41% Y-o-Y & 4% Q-o-Q led by consumer finance book (up 3% q/q) and healthy business loans (up 16% q/q). Off balance sheet book stood at Rs 1,253 crs (4.5% of total AUM). Net NPA remained grew to 0.48% mainly due to one infra account slipping into NPA (Rs 50 crs), while PCR of 67%. The company has decided to wind down its Construction Equipment business due to continued subdued ROE forecasts. The company raised tier II capital Rs 423 crs during the quarter.""Net interest income showed healthy growth of 27% Y-o-Y (9% lower than our estimate) aided by 40% growth in AUM. Seasonality in disbursements, spreads contracted by 156 bps Q-o-Q primarily attributable to margin pressure seen in the LAP/home loans segment and subdued growth two/three wheeler segments, although the management remains somewhat positive on spreads in Q3FY15 on the back of festival season. Stable money market rates & banks’ lending rate and resumption of borrowings from banks to market have resulted into fairly stable cost of funds. The management remains positive on consumer durables, lifestyle and 2-wheelers to be the key drivers of margins, however keep a cautious outlook in H2FY15. The company expects 30-35% AUM growth supported by consumer finance and SME business segments in FY15.""Bajaj finance has been delivering healthy operating performance with steady asset quality in last three and half years. We believe Bajaj Finance is well placed within the NBFCs space on the back of strong business mix of consumer and small business finance, superior spreads, strong capital position and preserving asset quality well throughout the down cycle. We expect Bajaj Finance continue to deliver 3% plus RoA and 20% plus RoE on sustainable basis in medium term. The stock has seen sharp rally (53.5% Vs. 17.0% in last three months) leaves limited upside from the current levels. At Rs 2,741 the stock trades 2.4x FY16 price to book and 12.6x FY16 earnings, unfavorable risk-reward. Hence, we recommend “HOLD” rating on the stock with target price of Rs 2,750,” says KRChoksey research report.

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