Dalal Street Investments

Bajaj Finance – Gaining Investor Interest as Banks Under Pressure

September 5, 2012

Bajaj Finance (earlier called Bajaj Auto Finance) started operations 25 years ago as a captive unit of Bajaj Auto, a promoter-owned two-wheeler manufacturer with 20% market share in the domestic two wheeler market (as of FY12). In August 2007, post a demerger from Bajaj Auto, Bajaj Finserv became the parent company of Bajaj Finance.

The company has focused on improving profitability consolidating the distribution franchise – rationalizing locations as well as dealer network, Realigning and diversifying products and customer segments; and Reducing risks by strengthening processes and systems and hiring / investing in key personnel.

Strong growth in disbursement and advances of 28% and 45% (FY12-15E) on the back of expanding market share in the consumer financing segment (23% of FY12 disbursements, market share of 12%) and scaling up of products like loan against property (LAP) to move to 30% of disbursements by FY15E.

Bajaj Finance’s current valuations are at 13%-20% discount to retail NBFC peers despite offering sector leading earnings growth and above average returns both on ROA/ROEs. Despite the mix change, we forecast a cyclical uptick in NPLs to 2.5% in FY15E (from 1.1% in 1QFY13) from historical low levels implying credit costs will remain higher (1.5%-1.7%) vs. previous levels.

Bajaj Finance has rerated from 0.9X PBR to 1.7X PBR on improving profitability, high growth and reducing risk. Analysts expect advances growth to drive PAT of 31% FY12-FY15E. The company is expected to Report an EPS of Rs 127 for FY 13 and Rs 160 for FY 2014.

Bajaj Finance Stock Recommendation / Target Price
Bajaj Finance is backed by a very sound promoter and a strong brand name. Valuations of the company are also attractive at the CMP of Rs 1,050, though the stock has already risen by 25% in the last 3 months without any significant correction. Existing invetsors can continue to HOLD and Fresh exposure can be taken around Rs 1,000 Levels for an easy target of Rs 1,260.


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