20 July 2018
1QFY19 Results Update | Sector: Financials - NBFC
Bajaj Finance
Downgrade to Neutral
BSE SENSEX
36,351
S&P CNX
10,957
CMP: INR2,517
TP: INR2,500 (-1%)
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Strong core business; Ind-AS transition impacts networth by ~5%
Bajaj Finance (BAF) reported PAT of INR8.36b under Ind-AS accounting
(INR10.2b
(+69% YoY) under IGAAP v/s our estimate of INR8.7b).
The
quarter was marked by continued new client addition (+33% YoY),
improving spreads YoY and stable asset quality.
AUM grew 35% YoY to
INR933b in the quarter. Adjusted for short-term IPO financing in the
base quarter, AUM was up 39% YoY.
Ind-AS impact:
(a) FY17 networth declined ~6%, mostly due to
amortization of up-fronted income (net basis INR7.97b, pretax) and hit
due to adoption of ECL (INR2.7b pretax). (b) On a comparative basis, FY18
PAT was 7% lower under Ind-AS v/s I-GAAP, again largely due to
amortization of fee and subvention income.
While there has been
change in PAT due to fee income amortization, cash flow/economic
value generated out of business remains the same.
Since a higher share of fee income/subvention income related businesses
is written in 1Q and 3Q of the year, Ind-AS impact due to amortization is
likely to be higher in these quarters. In FY18, the amortization-related
impact for the full year (INR1.97b) was largely equal to that in 1Q
(INR1.86b), and we expect a similar trend in FY19 too.
1QFY19 PAT was
INR10.2b as per I-GAAP and INR8.36b as per Ind-AS (EIR impact of
INR2.2b).
Other highlights:
(a) GNPA % improved 30bp YoY to 1.4%. b) Standard
assets provisioning on balance sheet improved to 90bp v/s 40bp earlier
due to Ind-AS implementation and higher provisioning requirement in
stage 2 loans (30-90dpd). c) Total provisions on the balance sheet stand
at 1.9% of AUM v/s GNPA % of 1.4%.
Estimate change:
We cut reported BV by ~3% for FY20 (to account for
impact of amortization of fees and ECL). However, our FY19/20 PAT
estimates are largely unchanged as the impact of amortization of fees is
compensated by a better-than-expected core business performance.
Valuation view:
Since our coverage initiation in August 2013, BAF stock
has delivered 23x (compounded at CAGR of 87%) returns. During this
period, loan book and profits have grown approx 5x, and RoE has
remained strong at 20%. Valuations have got significantly re-rated from
P/B of 1x to P/B of 6x and PE of ~30x. This multiple expansion is a result
of a high quality franchisee and consistent strong growth delivered. The
growth prospects remain strong as BAF adds new lines of businesses,
even though profitability may have some variance. We think that at P/B
of 6x FY20 and PE of 30x, valuations have become premium. At our target
price of INR2,500, there is no upside – hence we downgrade to
Neutral.
Risk to our rating change essentially remains from continued multiple
expansion.
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
BAF IN
575
1455 / 21.1
2536 / 1514
10/46/49
2244
44.9
2020E
133.2
93.2
47.7
82.9
32.2
398
3.6
23.0
10.0
30.4
6.3
0.3
Financials & Valuations (INR b)
Y/E March
2018 2019E
NII
PPP
PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoA on AUM (%)
RoE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
Div. Yield (%)
58.0
9.4
0.1
40.1
7.8
0.2
72.3
48.8
25.0
43.4
35.9
269
3.3
20.4
10.1
100.0
69.7
36.1
62.7
44.5
325
3.5
21.1
10.0
Research Analyst: Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
| Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 3980 4393
Nitin Aggarwal
(Nitin.Aggarwal@MotilalOswal.com); +91 22 3982 5540
| Shubhranshu Mishra
(Shubhranshu.Mishra@MotilalOswal.com); +91 22 3982 5558
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.