Motilal Oswal Financial Services

24 May 2016

4QFY16 Results Update | Sector:

Financials

Bajaj Finance

Buy

BSE SENSEX

25,305

Bloomberg

Equity Shares (m)

M.Cap.(INRb)/(USDb)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val, INRm

Free float (%)

S&P CNX

7,749

BAF IN

53.3

407.3 /6.0

7,852 / 4,125

11/39/79

437

42.7

CMP: INR 7,623 TP: INR8,450 (+11%)



Financials & Valuations (INR b)

Y/E March

2016 2017E 2018E



NII

40.3

51.8

65.4

PPP

25.1

32.7

41.4

PAT

12.8

16.5

20.4

EPS (INR)

239

308

381



EPS Gr. (%)

BV/Share (INR)

1,371 1,631 1,956

RoA on AUM (%)

3.3

3.1

3.0

RoE (%)

21.1

20.6

21.2

Payout (%)

14.0

Valuations

P/E (x)

31.9

24.7

20.0

P/BV (x)

5.6

4.7

3.9



Div. Yield (%)

0.3

0.5

0.6

Bajaj Finance’s (BAF) PAT for 4QFY16 stood at INR4.15b, up 36.4% YoY (7%

below our estimate). The opex and provision were lower than our estimates,

while net income also fell short of our estimate by 5% due to a decline of 20bp

YoY in margin, resulting in the lower than estimated PAT.

AUM growth for the quarter was impressive (+36% YoY, 2% QoQ) and reached

INR442b, on the back of continued traction in the consumer business, up by a

strong 44% YoY, and a growth of 56% YoY in the commercial business.

However, the SME segment grew at lower rate of 20% YoY, largely due to a

muted growth in the LAP book.

BAF’s asset quality remained healthy with GNPLs (15dpd) at 1.23%, up 28bp

YoY and 6bp QoQ, while at 90dpd, GNPLs are 1.43% and NNPA are at

40bp. During the quarter, BAF made an accelerated provision of INR444m

towards a standard infra. Exposure, resulting in PCR increasing to 77%.

Other highlights:

1) Given the cautious outlook for the LAP segment, BAF has

stopped sourcing LAP and home loans via distributors and is only giving loans

to its existing credit tested customers 2) The company has tied up with Flipkart

for online financing of products in select categories 3) With 5.5m cards in force,

BAF is now the second largest card issuer in the industry 4) The company is

among the largest new loan acquirers in India 5) The 2W and 3W businesses

are growing on the back of growth in Bajaj Auto’s business 6) BAF has forayed

into Life care financing (for dental and eye surgery).

Valuation and view:

BAF continues to reap the benefits of healthy consumer

demand and is now a dominant player in the consumer durable financing

segment. The company continues to increase its market share in the consumer

business, though a higher share of its incremental growth could be driven by

the low-yield mortgage business, which could exert pressure on its margins.

We are largely maintaining our FY17/18 PAT estimates. The stock currently

trades at 4.7x/3.9x FY17/18E BV. We value the stock at INR8,450 based on the

RI model, implying a PBV of 4.3x FY18E. Maintain

Buy.

Sunesh Khanna

(Sunesh.Khanna@MotilalOswal.com); +91 22 3982 5521

Alpesh Mehta

(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5521

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Bajaj Finance

Exhibit 1:

Quarterly

Performance v/s Estimates (INR m)

Y/E March

Income from operations

Other Operating Income

Operating Income

YoY Growth (%)

Interest expenses

Net Income

YoY Growth (%)

Other income

Total Income

Operating Expenses

Operating Profit

YoY Growth (%)

Provisions and Cont.

Profit before Tax

Tax Provisions

Net Profit

YoY Growth (%)

Loan Growth (%)

Borrowings Growth (%)

Cost to Income Ratio (%)

Tax Rate (%)

4QFY16E

19,108

1,014

20,122

40.8

8,409

11,713

43.3

416

12,129

5,344

6,785

48.0

1,757

5,028

1,625

3,403

47.3

42.0

45.6

32.3

4QFY16A

18,212

957

19,168

34.1

8,058

11,110

35.9

406

11,516

5,061

6,455

40.9

1,565

4,890

1,740

3,150

36.4

37.0

43.9

35.6

Var (%)

-5

-6

-5

-4

-5

Comments

Calc. margins on AUM down 20bp YoY to 10.3%

-5

-11

-3

-7

Cost Income at 43.9%

GNPLs improve 6bp QoQ

Tax rate at 34.5%

Marginally lower NII perf. Led to PAT miss

E: MOSL Estimates

AUM growth remains healthy at +36%



4Q is seasonally a weak quarter for BAF, despite that the company managed to

clock +36% AUM growth. While high temperatures across the country helped

with higher AC and refrigerator sales, 2 wheeler and 3 wheeler financing also

grew at +24% YoY led by improved performance in Bajaj Auto’s domestic sales.

BAF has 31%/14% financing penetration of 2 wheeler and 3 wheeler in Bajaj

auto’s total domestic sales. Moreover widening products category, new

distribution channels and focus on cross selling to existing customer are

boosting incremental growth.

AUM growth remained robust (up 36% YoY & 2% QoQ) at INR442b, driven by a

strong +44% YoY growth in consumer segment (Consumer electronics &

personal loans) and 56% YoY increase in commercial segment however the SME

segment grew at lower rate of 20%, largely led by muted growth in LAP book.

Given the growing competitive intensity in the mortgage space and substantially

higher commissions charged by distributors, BAF would sell mortgage products

only to its existing clientele, who have better credit scores and proven history of

repayment. BAF intends to control its costs and asset quality via this move. The

management continues to target AUM growth of 25-30% for next 3 years.

In line with RBI requirements, the company has moved its NPA recognition

policy to 150dpd from 180dpd. Thus the YoY numbers are not comparable.

Asset quality remained healthy with GNPLs (15dpd) at 1.23% improved 6bp

QoQ & 28bp YoY, at 90dpd GNPLs are1.43% and NNPA are at 40bps. During the

quarter BAF made an accelerated provision of INR 444m towards a standard

infra. exposure resulting PCR increase to 77%.

NIMs during the quarter declined 20bp YoY to 10.3%; marginal decline was led

by some loan mx shift towards relatively lower yielding products.

NIM decline 20bp YoY to 10.3%; Asset quality improves; PCR at 77%



24 May 2016

Bajaj Finance

Conference call highlights

Growth guidance



Growth guidance of 25% loan book growth

Expect INR900-1000cr disbursement via direct mortgage book every quarter

from 2QFY17

2W and 3W business growing on back of growth in Bajaj Auto business growth.

Life care business:

Entered Life care financing (for dental and eye surgery).

Tenure of 9-10 months. Doing stem cell financing for the last 2 years around

1000 cases per year stem cell. This has evolved into life care financing in newer

areas.

Lifecare business expected split 3-5 years down the line: 25% from dental, 25-

30% from hair treatment and others from rest.

Started Urban gold loans,

targets to spread the business in 300 cities

EMI Card:

Card in force is 5.5m; cards approved but not issued at 6.5m. Retail

EMI market size at 150,000cr. Would expand to 15 cities by July and 25 cities in

FY17. 5000 touch points.

Mortgage business:

A few LRD accounts to HNI clients (10-12% of mortgage

business) is via distributor, rest of the business would now be direct to

customers.

Mortgage is in hyper-competitive state; 70% of the NPA comes from northern

market (Delhi and surrounding). North India would now form 15-17% of the

total mortgage book down from ~25%.

LAP:

Currently 40% of the book outstanding is sourced via direct channel. Rest is

via distributor.

Introduced pre-payment penalty for LAP from this quarter in order to prevent

customers from switching.

Business loans:

Roadmap is to target own customers (Currently 45% are own

customers). As DSA charges 3% sourcing fees and company is able to charge

only 2% from the customers.

Additional provisions of INR440m during the quarter for the infra account in

steel and power space (currently standard account). (Infra book now at <0.5% of

the total book). Pool of accelerated provision: FY15: 75cr; FY16: 150cr. (infra and

mortgage acc provisions). At 90dpd GNPA 1.43% and NNPA at 40bps

Public fixed deposits

now form 6% of total borrowing

Fixed deposit and corporate liabilities to form 22-25% of total borrowing in 3-5

years.

Interest cost:

9.45% for FY16. On FDs 9-9.1% plus SLR costs

Analytics:

Not working with consultants. In-house team to build business cases

and run the analytics. Software development is outsourced.

CIBIL rated customers are 100m in the system. BAF has currently only has 8.5m

as of now.

Cost to income ratio: on yearly basis the cost has declined. More of an yearly

direction and less quarterly. Target ~40% by FY18.

Businesses



Provisioning



Borrowing:



Others:



24 May 2016

Bajaj Finance

Valuation and view



BAF is trading at 3.9x FY18 P/B i.e. +100% premium to cross cycle valuation. In

our view premium to peers can be justified on various counts.

Diversified and de-risked portfolio – A key strength of business model:

BAF has

also ensured that it has a diverse set of growth drivers in the portfolio versus

peers.

A diverse portfolio comprising of profit maximizes and scale builders

helps reduce cyclicality in growth and assets quality.

Cross Sell expert:

A well-diversified credit portfolio, focus on cross selling,

customer acquisition, and systematic expansion in delivery channels both

physical and virtual, selective distribution of products through these channels

are likely to sustain robust growth in AUM. These, along with its small market

share are likely to help sustain 30% CAGR in AUM over next 3 years.

Market share gains:

BAF is the largest consumer durables and lifestyle financier

in the country and has been continuously gaining market share in these

businesses. Continuous market share gain and strong distribution has created

entry barriers for competitors. One of the key strengths that BAF has built over

time is a quick turnaround time unmatched by most other retail financiers. Thus,

other than purchases on credit cards of banks, there are very few other

competitors that BAF sees in the consumer durables business, which enables it

with pricing power.

Well managed asset quality and & tested management capabilities:

Despite

lower growth and pressure on asset quality witnessed for peer group; BAF

continues to clock healthy growth and has one of the best asset quality among

the peer group. Management has not only demonstrated its ability to gain

market share in segments, but has been alert to potential asset quality risks as

well. It has withdrawn from certain segments like construction equipment, 3W

financing and slowed down on LAP in a timely manner.

Timely investment in automation and technology:

BAF has been proactive in

making timely investments in technology and automation which over a period of

time will help reducing operating cost and reduce delivery cost.

BAF continues to increase its market share in consumer business, as it has

almost monopoly in some of the business like lifestyle financing; however higher

share of incremental growth will be driven by low yielding mortgage business

which will exert some pressure on yields, however superior blended margins,

focused fee income strategy and low credit cost will keep core profitability

strong.

We value BAF based on residual income model assuming earnings CAGR of 17%

by FY35E, Rf=7.75%,

β=0.8, risk premium of 5% and terminal

growth rate of 5%.

We expect net profit to grow at CAGR of 30% over FY16-18E and RoEs to touch

+21% by FY18E. The stock is currently trading at 4.7x/3.9x FY17/18E BV. We

value the stock at a target price of INR8,450 (implying 4.3x FY18E BV).

Buy

24 May 2016

Bajaj Finance

Exhibit 2:

Quarterly Snapshot

FY14

FY15

FY16

Variation (%)

4Q QoQ YoY

-7

-8

-15

392 160

-8

-3

-10

-16

-22

-20

-23

-2

-15

Profit and Loss (INR m)

Total Income

9,283 9,617 10,703 10,711 12,436 12,322 14,766 14,294 16,462 16,799 20,614 19,168

Income from operations 8,837 8,742 10,274 10,032 11,801 11,703 14,164 13,532 15,716 15,921 19,717 18,212

Other Operating Income

446

875

429

679

635

620

601

762

746

878

897

957

Interest Expenses

3,314 3,821 4,097 4,501 4,996 5,445 5,924 6,118 6,771 6,947 7,493 8,058

Net Income

5,969 5,796 6,607 6,211 7,440 6,878 8,842 8,176 9,692 9,853 13,121 11,110

Other Income

116

239

156

206

406

Operating Expenses

2,703 2,769 2,979 3,061 3,428 3,186 3,921 3,749 4,531 4,411 5,490 5,061

Employee

779

808

892

929 1,078 1,059 1,198 1,172 1,446 1,498 1,705 1,647

Others

1,923 1,960 2,088 2,132 2,350 2,127 2,723 2,577 3,085 2,913 3,784 3,414

Operating Profits

3,307 3,050 3,743 3,389 4,035 3,788 5,009 4,583 5,257 5,648 7,714 6,455

Provisions

639

523

795

622

829

800 1,079 1,138 1,033 1,368 1,462 1,565

PBT

2,669 2,527 2,948 2,768 3,206 2,987 3,931 3,446 4,224 4,280 6,252 4,890

Taxes

911

857 1,007

947 1,092 1,016 1,347 1,136 1,468 1,486 2,167 1,740

Reported PAT

1,757 1,670 1,941 1,821 2,114 1,972 2,584 2,310 2,756 2,794 4,085 3,150

Asset Quality

GNPA (INR m)

2,110 2,164 2,475 2,711 2,898 3,772 4,429 4,711 5,762 6,098 5,387 5,259

NNPA (INR m)

463

494

495

643

692 1,284 1,447 1,404 1,875 1,680 1,086 1,197

GNPAs (%)

1.1

1.2

1.1

1.4

1.5

1.7

1.3

1.2

NNPAs (%)

0.3

0.2

0.3

0.5

0.6

0.5

0.3

PCR (%)

Ratios (%)

Cost to Income

47.6

44.3

47.5

45.9

45.7

43.9

46.3

43.9

41.6

43.9

Tax Rate

34.1

33.9

34.2

34.1

34.3

34.8

34.7

35.6

CAR

21.5

20.9

19.5

19.1

19.3

18.7

20.7

20.5

19.5

Tier I

18.1

17.7

16.5

16.1

15.2

15.1

14.7

14.2

17.4

17.3

16.1

RoA (not annualised)

0.9

0.8

0.9

0.7

0.9

0.7

0.9

0.8

RoE (not annualised)

5.1

4.6

5.2

4.6

5.1

4.6

5.6

4.8

4.9

4.2

5.8

4.3

Key Details (INR m)

AUM

192,290 198,290 224,610 240,610 269,430 280,040 308,220 324,100 355,570 379,640 434,520 442,290

On book Loans

185,060 189,820 215,260 229,710 256,420 267,510 295,280 311,990 340,950 365,150 417,600 427,560

Off book Loans

7,230 8,470 9,350 10,900 13,010 12,530 12,940 12,110 14,620 14,490 16,920 14,730

AUM Mix (%)

Consumer Finance

SME Business

Commercial

Rural

-20

-26

-13

-10

Source: Company, MOSL

24 May 2016

Bajaj Finance

Story in charts

Exhibit 3:

Nos. of loan disb. grew at healthy 36% YoY

Loans Disbursed (Nos '000)

(9)

AUM Gr. (%)

Exhibit 4:

AUM growth continues to remain strong

AUM (INR b)

AUM Gr. (%)

192 198 225 241 269 280 308 324 356 380 435 442

Source: MOSL, Company

Exhibit 5:

AUM Mix: SME now accounts for 42%

Consumer Finance

SME Business

6 10

Commercial

Exhibit 6:

Cross sell driving opex down

Cost income (%)

47.6

45.0

44.3

47.5

45.9 45.7

45.0

46.3

43.9

41.6

43.9

Source: MOSL, Company

Exhibit 7:

NPL performance remain best among peers

GNPA (%)

NNPA (%)

0.55

0.48 0.49 0.45

0.46

0.26 0.28

Exhibit 8:

Well capitalized

CAR (%)

Tier 1 (%)

0.28 0.27

0.25 0.26 0.23

18.1 17.7

17.4 17.3216.0616.06

16.5 16.1 15.2 15.1

14.7 14.15

1.14 1.14 1.15 1.18 1.13 1.41 1.5 1.51 1.69 1.67 1.29 1.23

21.5 20.9 19.5 19.13 18 19.3 18.7 17.9720.7220.4919.54 19.5

Source: MOSL, Company

24 May 2016

Bajaj Finance

Financials and valuations

Income Statement

Y/E MARCH

Interest Income

Interest Expended

Net Interest Income

Change (%)

Other Operating Income

Other Income

Net Income

Change (%)

Operating Expenses

Operating Income

Change (%)

Provisions and W/Offs

PBT

Tax

Tax Rate (%)

PAT

Change (%)

Proposed Dividend

Balance Sheet

Y/E MARCH

Capital

Reserves & Surplus

Net Worth

Borrowings

Change (%)

Other liabilities & provisions

Total Liabilities

Investments

Change (%)

Advances

Change (%)

Net Fixed Assets

Other assets

Total Assets

2011

12,838

3,710

9,128

50.1

1,085

138

10,351

44.9

4,606

5,745

45.5

2,046

3,699

1,229

33.2

2,470

176.2

366

2012

19,963

7,462

12,501

36.9

1,668

14,257

37.7

6,691

7,566

31.7

1,544

6,022

1,958

32.5

4,064

64.6

496

2013

29,248

12,057

17,191

37.5

1,689

177

19,057

33.7

8,523

10,534

39.2

1,818

8,716

2,803

32.2

5,913

45.5

747

2014

37,896

15,732

22,163

28.9

2,429

419

25,011

31.2

11,511

13,500

28.2

2,588

10,912

3,722

34.1

7,190

21.6

802

2015

51,200

22,483

28,717

29.6

2,618

364

31,699

26.7

14,284

17,415

29.0

3,846

13,569

4,591

33.8

8,979

24.9

903

2016

69,566

29,269

40,297

40.3

3,477

792

44,566

40.6

19,492

25,074

44.0

5,429

19,646

6,861

34.9

12,785

42.4

1,339

2017E

90,993

39,213

51,780

28.5

3,835

901

56,516

26.8

23,832

32,684

30.3

7,491

25,193

8,692

34.5

16,501

29.1

2,063

(INR Million)

2018E

116,164

50,728

65,435

26.4

4,180

951

70,567

24.9

29,148

41,419

26.7

10,283

31,136

10,742

34.5

20,394

23.6

2,549

(INR Million)

2018E

536

104,210

104,745

635,717

29.3

16,299

756,761

12,285

8.0

722,405

28.0

2,890

19,181

756,761

2011

366

13,215

13,581

67,086

107.9

4,552

85,219

-98.1

72,718

80.4

1,026

11,419

85,219

2012

413

19,923

20,336

102,264

52.4

6,667

129,267

-2.3

122,831

68.9

1,388

4,993

129,267

2013

495

33,173

33,668

133,490

30.5

11,051

178,209

-4.0

167,440

36.3

1,762

8,957

178,211

2014

498

39,411

39,909

197,496

47.9

8,776

246,180

282

436.3

229,710

37.2

2,199

13,990

246,180

2015

502

47,497

47,999

266,908

35.1

13,206

328,112

3,323

1,077.9

311,995

35.8

2,492

10,303

328,112

2016

534

72,711

73,245

370,250

38.7

13,470

456,965

10,341

211.2

427,560

37.0

2,870

16,194

456,965

2017E

536

86,799

87,334

491,574

32.8

14,817

593,725

11,375

10.0

564,379

32.0

2,880

15,091

593,725

24 May 2016

Bajaj Finance

Financials and valuations

Ratios

Y/E MARCH

Spreads Analysis (%)

Yield on Advances

Cost of borrowings

Interest Spread

Net Interest Margin

Profitability Ratios (%)

RoE

RoA

RoA on AUM

Int. Expended/Int.Earned

Secur. Inc./Net Income

Efficiency Ratios (%)

Op. Exps./Net Income

Empl. Cost/Op. Exps.

Asset-Liability Profile (%)

Loans/Borrowings Ratio

Net NPAs to Adv.

CAR

Tier 1

Valution

Book Value (INR)

Price-BV (x)

Adjusted BV (INR)

Price-ABV (x)

EPS (INR)

EPS Growth (%)

Price-Earnings (x)

OPS (INR)

OPS Growth (%)

Price-OP (x)

Dividend per Share (INR)

Dividend Yield (%)

E: MOSt Estimates

2011

22.7

7.5

15.2

15.0

2012

20.4

8.8

11.6

12.2

2013

20.2

10.2

9.9

11.7

2014

19.1

9.5

9.6

10.8

2015

18.9

9.7

9.2

10.4

2016E

18.0

9.2

8.8

10.8

2017E

17.8

9.1

8.7

10.3

2018E

17.6

9.0

8.6

10.1

19.7

3.8

28.9

10.5

24.0

3.8

37.4

11.7

21.9

3.8

41.2

8.9

19.5

3.4

41.5

9.7

20.4

3.1

3.2

43.9

8.3

21.1

3.3

42.1

7.8

20.6

3.1

3.2

43.1

6.8

21.2

3.0

43.7

5.9

44.5

31.4

46.9

28.4

44.7

28.8

46.0

29.6

45.1

31.6

43.7

32.3

42.2

33.0

41.3

33.8

108.4

0.8

20.0

16.8

120.1

0.1

17.5

15.0

125.4

0.2

22.0

18.7

116.3

0.3

21.0

18.0

116.9

0.5

18.0

14.2

115.5

0.3

19.5

16.1

114.8

0.4

18.3

15.5

113.6

0.5

17.5

15.0

371

20.6

365.2

20.9

67.4

176.0

113.1

156.8

45.3

48.6

10.0

0.1

487

15.7

486.0

15.7

98.4

45.9

77.5

183.1

16.8

41.6

12.0

0.2

680

11.2

677.4

11.3

119.4

21.3

63.9

212.6

16.1

35.9

15.1

0.2

802

9.5

798

9.6

144.5

21.1

52.7

271.4

27.6

28.1

16.1

0.2

957

8.0

947

8.0

179.0

23.9

42.6

347.3

28.0

22.0

18.0

0.2

1,371

5.6

1,371

5.6

239.3

33.7

31.9

469.3

35.2

16.2

25.1

0.3

1,631

4.7

1,631

4.7

308.1

28.8

24.7

610.3

30.0

12.5

38.5

0.5

1,956

3.9

1,956

3.9

380.8

23.6

20.0

773.5

26.7

9.9

47.6

0.6

24 May 2016

Bajaj Finance

Corporate profile: Bajaj Finance

Company description

Bajaj Finance is a subsidiary of Bajaj Finserv, which

holds 61% into the company. The company has

transformed itself from a captive auto financier

offering two wheeler loans for Bajaj Auto to a one

of the most successful well diversified retail NBFC.

The company operates in over ten business

segments across consumer, SME and commercial

businesses and is market leader in consumer

durable and two wheeler financing (18% market

share), lifestyle financing and is a large player in

loan against property segment (15% market share).

Exhibit 13: Shareholding pattern (%)

Mar-16

Promoter

DII

FII

Others

57.4

6.1

18.9

17.6

Dec-15

57.6

6.7

17.8

17.9

Mar-15

61.6

5.6

13.6

19.2

Exhibit 12: Sensex rebased

Exhibit 14: Top holders

Holder Name

Maharashtra Scooters Ltd

Government of Singapore

Acacia Partners LP

Pinebridge Investments Asia Limited A/c

HDFC Trustee Company Ltd A/c HDFC

% Holding

3.5

2.8

1.1

Note: FII Includes depository receipts

Exhibit 15:

Top management

Name

Rahul Bajaj

Nanoo Pamnani

Sanjiv Bajaj

Rajeev Jain

Designation

Chairman

Vice Chairman

Managing Director

Exhibit 16: Directors

Name

Rahul Bajaj

Nanoo Pamnani*

Sanjiv Bajaj

Rajeev Jain

D S Mehta*

Dipak Poddar*

Gita Piramal*

*Independent

Name

Omkar Goswami*

Ranjan Sanghi*

D J Balaji Rao*

Rajendra Lakhotia*

Rajiv Bajaj

Madhur Bajaj

Exhibit 17: Auditors

Name

Dalal & Shah

Type

Statutory

Exhibit 18: MOSL forecast v/s consensus

EPS

(INR)

FY16

FY17

FY18

MOSL

forecast

239.3

308.1

380.8

Consensus

forecast

236.9

303.7

386.1

Variation

(%)

1.0

1.4

-1.4

24 May 2016

BAJAJ FINANCE REPORT GALLERY

BAF

SECTOR UPDATES

Bajaj Finance

NOTES

24 May 2016

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BAJAJ FINANCE

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