Motilal Oswal recommended Neutral rating on Bajaj Finance with a target price of Rs 3000 in its research report dated July 07, 2020.
Motilal Oswal 's research report on Bajaj Finance
Bajaj Finance's (BAF) FY20 Annual Report highlights the year as a mixed bag. The company witnessed strong loan growth performance, improved granularity of deposits and its growth, and expanded RoA led by strong fee income growth. On the other hand, asset quality weakened slightly with high net slippages (excl. lumpy accounts) ratio (+30bp YoY to 2.07%) and increase in write-offs (+70bp YoY to 1.7%). GNPL / PCR remained stable at 1.6%/60% YoY. BAF delivered healthy NII/PPoP/PAT growth of 39%/46%/32% in the year. Credit cost increased from 1.6% to 3.1% due to Covid-19 related provisions (2.5% ex-COVID related provisions) and write-offs of some large accounts. On the business front, BAF saw sharp moderation in new customer addition of +6% YoY to 8.7m, which is concerning. Overall, number of loans distributed declined from 50% YoY levels over the past three fiscals to 17% YoY in FY20. Customer base growth slowed down from 30% YoY levels earlier to 24% in FY20. Cross-selling for new origination increased from 65% in FY19 to ~70% in FY20. BAF has done well on two fronts - deposits and fee income. Deposit growth was in line with prior years at 60%+. Importantly, granular public deposit base grew 90%+ YoY with near doubling of depositors to 362k. Fee income grew 54% YoY to INR26b, driven by all categories, especially distribution income. Fees to assets improved to 2.0% from 1.7% in FY19 and 1.1% in FY18, driving RoA expansion. In line with current macros and the evolving pandemic situation, we expect share of rural business (9% of AUM) to rise sharply in FY21. A high share of BAF's business comes from metro cities; post the initial pent-up demand, we are yet to see signs of growth sustaining. Improvement in the moratorium rate from 27% in April to 16% in June is a key positive - though we await details on bounce rate.
In our recent note, we have upgraded EPS estimates by ~15% for FY21/FY22E driven by lower credit costs and better growth expectation. We maintain a Neutral rating with a revised TP of INR3,000 (4.2x FY22E BV).
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