September 10, 2015 Bajaj Finance (BAJAF)content.icicidirect.com/mailimages/IDirect_BajajFinance_IC.pdf · September 10, 2015 Initiating Coverage ... financing business ... of two-wheelers

September 10, 2015

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Unique product offering commands premium! Bajaj Finance (BFL), is one of the leading asset finance NBFCs. The USP of BFL is its stronghold in the consumer durable (CD) & lifestyle product financing business (~15% of the AUM) wherein it does not have any major competition (BFL’s share is ~16%). These segments are under penetrated and growing in size, thus providing a lucrative opportunity for growth. In FY15, BFL served ~40 lakh clients in these segments. Further, it has a diversified loan portfolio. Post induction of the new management in FY07, BFL transformed itself from merely financing a few products to a wide range of products divided into three broad categories viz. consumer finance (40% of loans), SME (54%) & commercial & rural category (6%). Such diversity has given BFL an edge in terms of AUM growth (44% CAGR to | 32410 crore in FY11-15) and asset quality (GNPA ratio steady in 1.2-1.5% range in the past three years) despite a weak economic environment. PAT has increased at 38% CAGR in FY11-15 to | 897 crore. Over FY15-17E, we expect PAT traction to remain strong at 27% CAGR to | 1456 crore. Expect AUM traction at 27% CAGR over FY15-17E led by consumer finance Strong AUM traction of 44% CAGR over FY11-15 to | 32410 crore was mainly driven by the SME category increasing 51% CAGR followed by the CF category, which rose at 41% CAGR. Within SME, it was the LAP (25% of overall AUM) portfolio that saw high traction of 38% CAGR over FY11-15 while CD financing within CF book saw 47% CAGR. Going ahead, we expect AUM growth at 27% CAGR to | 52686 in FY15-17E, led by CF segment (31% CAGR) that will be driven by CD financing business. Enhanced competition and growing risks in the LAP segment may keep traction in the SME segment lower at 24.8% CAGR (refer exhibit 20). Steady asset quality, strong margins reflect strength of model BFL’s GNPA ratio at 1.5% (| 471 crore) as on FY15, is better than some of its peers wherein the ratio is above 2.5%. The asset quality has improved sharply over the last five to six years. The GNPA ratio was at 16.6%, 7.6% during FY09, FY10, respectively. Owing to its strong underwriting processes, focus on affluent & mass affluent clients, NPA is expected to remain acceptable. Further, such healthy asset quality & higher yields in CF space enable BFL to earn one of the highest margins among its peers of ~10% as on FY15. We assume this will largely be sustained, going ahead. Rich valuations to sustain on strong visibility in earnings Strong performance in a weak economic scenario (healthy return ratios - RoA at ~3%, RoE at ~20% GNPA at 1.5%) led to higher investor interest in BFL & P/ABV multiple expanding from 1x to 3x since September 2013. We believe its niche positioning in CD financing coupled with diversified nature of its book that helps de-risk the portfolio hold key. BFL’s premium valuations are expected to sustain on better earnings visibility. We initiate coverage with BUY rating & a TP of | 5600 valuing at 3.6x FY17E ABV. Exhibit 1: Key Financials Financial Performance FY13 FY14 FY15 FY16E FY17ENII (| crore) 1717 2216 2872 3671 4721PPP (| crore) 1053 1350 1741 2248 2953PAT (| crore) 591 719 897 1144 1456EPS(|) 130 144 180 221 273 P/E 38.8 34.9 28.0 22.8 18.4P/ABV 7.5 6.4 5.4 3.7 3.3RoA 3.8 3.4 3.1 3.0 3.0RoE 21.9 19.5 20.4 19.0 18.5

Source: Company, ICICIdirect.com Research

Bajaj Finance (BAJAF)| 5049

Rating Matrix

Rating : BuyTarget : | 5600Target Period : 12 monthsPotential Upside : 11%

YoY Growth (%) YoY Growth FY14 FY15 FY16E FY17ENII 29.1 29.6 27.8 28.6 PPP 28.2 29.0 29.1 31.3 PAT 21.6 24.9 27.5 27.3 EPS 11.3 24.6 23.1 23.4

Valuation Summary FY14 FY15 FY16E FY17E

P/E 34.9 28.0 22.8 18.4Target P/E 38.8 31.1 25.3 20.5P/ABV 6.4 5.4 3.7 3.3Target P/ABV 7.1 6.0 4.1 3.6RoE 19.5 20.4 19.0 18.5RoA 3.4 3.1 3.0 3.0

Stock Data Particulars

Bloomberg/ Reuters Code BAF IN/ BJFN.BO

Sensex 25,401

Average Volumes 56,096

Market Capitalisation (| crore) 27,030

52 week H/L (|) 5718 /2460

Equity capital 53.3

Face value | 10

DII Holding (%) 5.8

FII Holding (%) 18.1

Comparative return matrix (%) Return % 1M 3M 6M 12MBajaj Finance -8.3 20.6 20.6 110.4Shriram Transport -5.6 5.5 -30.1 -10.9MMFS -0.3 1.1 -3.0 -11.1Shriram City Union -10.7 -1.2 -20.3 -2.3

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Bajaj Finance Nifty (L.H.S)

Research Analyst Kajal Gandhi [email protected]

Vasant Lohiya [email protected] Vishal Narnolia [email protected]

Page 2 ICICI Securities Ltd | Retail Equity Research

Company background Bajaj Finance (BFL) is one of the leading non banking financial companies (NBFC) in India and is part of the illustrious Bajaj group. The company was incorporated in 1987 essentially as the captive financier to Bajaj Auto’s vehicles. In 1995, it came out with an initial public offering (IPO). Initially, BFL was promoted by the erstwhile Bajaj Auto and Bajaj Auto Holdings. However, as per the scheme of de-merger of erstwhile Bajaj Auto in 2007, the shareholding of Bajaj Auto in the company has been vested with Bajaj Finserv, which is the financial services arm of the Bajaj Group. As outlined above, BFL started as the captive financier to two and three wheelers manufactured by Bajaj Auto. However, since then, the company entered various other lending segments and became one of the significant players in the retail asset-financing industry. BFL’s diversified product suite now comprises >10 product lines divided broadly into four categories like consumer, SME, commercial and rural. The company is the largest financier of two-wheelers and consumer durables in India. The company has an AUM of ~| 32410 crore as on FY15 and witnessed strong growth at 35% CAGR in the past three years. The liability mix is mainly skewed towards banks, followed by NCD/CPs and fixed deposits. BFL has a stable and deep management structure with 100 management team members having experience with leading multi national companies and transnational companies. The company’s reach and distribution channels are strong with a presence in 160 locations in urban areas and 50 branches in rural areas. Further, for various product lines, BFL has tie-ups with all major manufacturers and dealers in consumer durables, lifestyle financing, digital products etc.

Exhibit 2: Key management personnel Name & Designation Experience & Qualifications

Rajesh Viswanathan is responsible for the finance and treasury functions. He joined BFL from Bajaj Allianz Life Insurance where he was the CFO for eight years. He has varied experience having worked previously with KPMG in the Middle East in their Bahrain assurance practice. Prior to that, he was with DSPMerrill Lynch and Mahindra & Mahindra in India. He is a chartered accountant and a cost accountant and has a bachelors degree in commerce from MumbaiUniversity

Rajesh Viswanathan (CFO)

Rakesh Bhatt (COO)Rakesh Bhatt has an overall experience of 20+ years in the finance & technology industry. He is responsible for leading a large portfolio of critical functions at the firm namely technology, operations, customer experience and quality. He has held leadership positions at GE Money, Reliance Industries, AIG and 3i Infotech

Rajeev Jain (Managing Director)

Has more than 20 years of experience in the consumer & small business segment lending industry. He has been with the company for eight years. He has worked towards steering the organisation on to a path of fast-paced growth and defined an ambitious trajectory of building a diversified lending institution. He has earlier worked with AIG, GE Money and American Express

Devang Mody (President Consumer Business)

Devang Mody is responsible for the consumer business vertical that includes consumer durables and lifestyle finance, cross sell, credit cards and salaried personal loans. He joined from AIG where he was Vice President - Business Development and CRM for the consumer finance business in India. Before AIG, he spent over eight years in GE Money. He is a chartered accountant

Pankaj Thadani joined Bajaj Finserv lending in 2006, bringing with him a rich experience of 28 years in financing, financial accounting, cost accounting, tax and systems. He has helped give direction and enabled the company to grow from a single business company to a diversified NBFC. He is a mathematics graduate and a chartered accountant

Pankaj Thadani (Chief Compliance Officer)


Shareholding pattern (Q1FY16)

Shareholding Pattern Holdings (%)Promoters 57.6 Institutional investors 23.9 Others 18.5

Source: BSE, ICICIdirect.com Research

Institutional holding trend (%)

12.2 12.6 13.1 13.6

18.1

7.1 6.9 6.3 5.6 5.8

0

5

10

15

20

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

(%)

FII DII

Source: BSE, ICICIdirect.com Research


Exhibit 3: Group structure

Bajaj Holding Investment Limited

Bajaj Allianz Life Insurance Company

(74% stake)

Bajaj General Insurance Company (74% stake)

Bajaj Finance Limited (57.3% stake)

Bajaj Financial Solutions (100% stake)

Wealth Management

Bajaj Auto Limited (49.24% stake)

Bajaj Finserv Limited (58.35% stake)



Exhibit 4: BFL’s product profile


Exhibit 5: Geographic presence Business Line FY15

Urban 161

Of which Consumer Lending branches 161

Of which SME Lending branches 119

Rural 232

Of which Rural branches 50

Of which Rural ASSC* 182

Source: Company, ICICIdirect.com Research; ASSC - Authorised Sales and Service Centres

Exhibit 6: Distribution Product Line FY15

Consumer durable product stores 7,000+

Lifestyle product stores 1,150+

Digital product stores 2,650+

2W–3W Dealer/ASCs(3)/Sub-dealers 3,000+

SME – Direct sales agents 700+

Rural consumer durable product stores 1,500+


Exhibit 7: Number of new loans disbursed in FY15 Select Product Lines FY15

Consumer durable 3579000

Lifestyle finance 80000

Digital finance 293000

2W & 3W 560000

PLCS 169000

Salaried Loans 38000

SME 31000

Rural finance 131000 Source: Company, ICICIdirect.com Research


Investment Rationale Bajaj Finance is an “asset finance” NBFC. The lending book can be broadly diversified into four categories viz. consumer finance, SME finance, commercial finance and rural finance. This book is funded through diversified resources like bank loans, bond or debentures, commercial papers, fixed deposits and funds raised via QIPs. However, the key strength or highlight of BFL’s business model is its consumer finance (CF) business and in that, particularly, the consumer durable (CD) financing & lifestyle product financing business. These businesses provide uniqueness to BFL as other financing business like SME and commercial lending are covered by other NBFCs and banks. The edge in the consumer financing business acts as a competitive advantage and has allowed BFL to command a valuation premium compared to other NBFCs (see exhibit 20). Stronghold in CD financing & lifestyle product finance business…. In the four broad categories, CF book as on FY15 was at | 13127 crore, comprising 40.5% of total AUM of | 32410 crore. Within the CF book, CD financing and lifestyle product financing book were at | 4163 crore and | 498 crore, respectively. Apart from these, the CF book includes two & three wheeler finance, personal loans and home loans to salaried individuals. Exhibit 8: Break-up of consumer finance (CF) book AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17E2W & 3W finance 1953 3593 3324 3315 3526 4215Consumer durable finance 893 2531 4163 5147 6430 8640Lifestyle finance - 174 498 565 871 1264 Digital Product - NA 312 354 549 797 Non Digital Product - NA 186 211 322 468Personal loans 511 2577 4303 4972 5517 7007 Personal loans Cross Sell NA NA 2412 2741 3145 3994 Salaried Personal Loans NA NA 1891 2231 2373 3013Home Loans (Salaried) - 453 839 938 1079 1370Total CF AUM 3,357 9,328 13,127 14,937 17,424 22,497


Exhibit 9: Detailed profile of products offered under consumer finance (CF) category

Particulars Auto Financing Consumer Durable Lifestyle Financing Personal LoansYear started 1987 1995 2012 2012

Product profile 2 -3 wheeler TV, AC, LED etc

Digital - Mobiles, Laptops etc & Non Digital - Furnitiure,

Home Furnishing PL to existing

customers Target Segment Mass clients Mass Affluent Mass Affluent Existing ClientsTicket size (| Lacs) 2W - 0.45 lacs 0.28 lacs 0.35 lacs 5 lacs

3W - 1-1.5 lacsLoan to Value ratio (%) 2W - 65 to 70% 65 to 75% Unsecured

3W - 75 to 80%Duration/tenure 2-3 years 9 months ~12 months 30-36 months

Distribution network/presence

3000+ via Bajaj Auto dealers, Sub dealers, Authorised service centres

7000+ product stores

3800+ product stores

Yields range 22-25% 24-26% 25-26% 16-18% Proportion of Total AUM as on FY15 10.3 12.8 1.5 13.3 Amount (FY15- | crore) 3,324 4,163 498 4,303


The key strength or highlight of BFL’s business model is its

consumer finance (CF) business and in that, particularly,

the consumer durable (CD) financing & lifestyle product

financing business.

The edge in the consumer financing business acts as a

competitive advantage and has allowed BFL to command a

valuation premium compared to other NBFCs


In the past five years, BFL has witnessed strong accretion in new customer acquisition as can be seen in the exhibit below. The new clients acquired each year in the CD financing business have increased at 39% CAGR from 971000 in FY11 to 3623000 new customers in FY15. Even lifestyle product finance (that includes digital products financing i.e. mobile phones, laptops, etc and non-digital i.e. furniture, watches etc) started in FY13 saw a robust increase from 36000 customers served in FY13 to 373000 in FY15. Exhibit 10: Number of new loans disbursed each year Business Line FY11 FY12 FY13 FY14 FY15 Q1FY16Consumer Durable Finance 971000 1466000 1909000 2452000 3623000 1298000Life style Finance (Digital + Non digital) - - 36000 108000 373000 124000Personal Loans 67000 89000 116000 137000 207000 680002W 522000 654000 736000 651000 560000 141000Rural Finance - - - 22000 131000 79000SME/commercial 9000 12000 11000 20000 31000 10000Total 1569000 2221000 2808000 3390000 4925000 1720000


Currently, BFL is among the largest new client acquirers in India. This increase is owing to BFL’s large distribution network and reach. It is present in more than 114 cities with 7000+ point of sales or distribution franchise in consumer durable finance. Further, it has 3800+ dealer network in lifestyle products (2650+ in digital financing and 1150+ in non digital financing). Exhibit 11: Distribution franchise Business Line FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16Sales Finance or Consumer electronics –Dealer 2,000+ 2,500+ 2,800+ 3500+ 4900+ 7000+ 7900+Life style Fianance/ Non Digital - - - 1150+ 1300+Digital Product stores - - - 850+ 1600+ 2650+ 2900+2W–Dealer/ASCs 1,275+ 1,500+ 2200+ 2600+ 2600+ 3000+ 3000+Small/SME Businesses 225+ 250+ 250+ 400+ 700+ 700+ 700+Rural Consumer durable product stores - - - - - 1500+ 1800+


BFL capitalised strongly on its “0% financing” product, which enabled it to enjoy widespread popularity in the CD financing space among customers. Almost the entire CD financing and lifestyle product financing business is through “0% financing”. Under this scheme, the sale proposition is that the customer will not have to pay any interest. The customer pays ~30% as down payment and the balance amount in EMI of seven to eight months. BFL gets 1-1.5% processing fees and ~6-8% of the product value as subvention from manufacturers. Further, the company offers EMI (Existing membership card) cards to its existing customers. This card enables the holder to purchase consumer durables & lifestyle products, by availing a loan from BFL without any documents thus providing quick & hassle-free finance. Customers simply have to Swipe & Sign to buy using an EMI card. As of Q1FY16, about 3.5 million EMI cards have been offered.

…..leads BFL to command valuation premium over peers BFL’s stronghold in the CD financing business is on the back of its large reach, formidable relationships with dealers and manufacturers, strong brand, expertise of several years and database of such large customers. These factors act as entry barriers in the CD financing business and give BFL a competitive advantage. Further, we believe the competition will remain low as banks are largely focused on housing finance or auto financing within retail loans while other NBFCs are in niche areas like auto finance, housing finance, gold finance or infrastructure finance. In the past few years, a major reason for BFL to command a higher valuation multiple vs. its peers is owing to its edge in the CF business and within that, particularly in the consumer durable & life style financing business. Going ahead, we expect BFL to maintain this premium owing to its leadership position in the under penetrated CD financing and lifestyle financing business with no major competitors.

The new clients acquired each year in the CD financing

business have increased at 39% CAGR from 971000 in

FY11 to 3623000 new customers in FY15.

Almost the entire CD financing and lifestyle product

financing business is through “0% financing”.


Sizeable financing market in consumer category products to offer great opportunity As per BCG-CII report, the overall consumption expenditure of India is likely to increase 3.6 times to US $ 3.6 trillion by 2020 from US $ 991 billion in 2010 (see Exhibit below). In that, Housing & Consumer durables is expected to jump 4 fold to US $ 752 billion from 2010 levels. In 2000-2010 decade also we observe that this segment quadrupled. The proportion of Housing & Consumer durables in overall consumption expenditure increased to 18.8% in 2010 from 15.7% in 2000. This is expected to further rise to 21% by 2020. Exhibit 12: Housing & consumer durables is expected to increase 4.0x by 2020

(in $ billion) 2000 2010 2020E

Food 135 328 895

Housing & Consumer durables 47 186 752

Transport & Communication 43 168 664

Education & Leisure 17 71 296

Apparel 18 59 225

Health 14 49 183

Others 25 129 570

Total 299 990 3585

2.4x

4.0x

3.9x

4.2x

3.3x

3.5x

5.2x

3.3x

2.7x

4.0x

3.9x

4.2x

3.8x

3.8x

4.4x

3.6x Source: BCG – CII Report, ICICIdirect.com Research

We have tried to gauge the market size in terms of sales of some of the major products financed by Bajaj Finance. The market size of major consumer durable products like TV, washing machines, refrigerator and ACs is ~| 51000 crore as on FY15. This segment has increased at 13% CAGR in past five years. Over FY15-20, it is expected to increase at 16% CAGR to | 106000 crore. This is on the back of expected revival in the economy, increased disposable income, easy access to credit, increase in electrification of rural areas, higher investments by major global companies in India etc. Further, consumer electronics (that includes DVD players, home theatre systems, MP3 players, audio equipment, digital cameras, etc) that has a market size of ~| 60000 crore is estimated to reach | 176000 crore as per a report by Ernst & Young – FICCI. In India, smart phone sales have increased strongly in the past few years. In FY13, ~4.4 crore smart phones were sold. This number is estimated to be ~11-12 crores in FY15. BY FY20, ~18 crore smart phones are expected to be sold annually. BFL is one of the largest financiers of Samsung’s smart phones that has ~23% market share. Further, BFL also finances Apple’s smart phones, which recorded sales of more than 1 million smart phones last year. The furniture market in India, which is highly unorganised (~90% of the market) is currently at ~| 70000 crore. With expenditure on Housing estimated to rise four fold as observed in the above exhibit, the furniture market is estimated to increase to ~| 270000 crore by FY20. The total market size of the segments discussed above such as consumer durables, consumer electronics, smart phones and furniture is estimated at about | 300000 crore and is expected to increase to around ~ | 700000 crore by FY20. Further, the company has indicated that in the CF space it is also working on a new product segment that is expected to have a financing market size of ~| 125000 crore. Entering the e-commerce financing market can be an added advantage over time.

Housing & Consumer durables is expected to jump 4 fold to

US $ 752 billion from 2010 levels as per BCG – CII report


Two wheeler, three wheeler financing business – captive financing model BFL has been present in two wheeler financing since its inception in the early 1990s. This business has a captive financing model wherein BFL finances two-wheelers produced by its group company Bajaj Auto. Until FY08, two-wheeler financing comprised the bulk (~66%) of the overall AUM, which has now dipped to 10.3% (| 3324 crore as on FY15) of AUM. This is due to enhanced focus on the CD finance book, de-risking of the book by diversifying to SME & commercial financing and also due to increased asset quality stress seen in the two-wheeler book and 15% CAGR decline in two-wheeler sale volumes of Bajaj Auto over FY13-15. Though there has been a decline in the two-wheeler financing proportion in BFL’s overall AUM, the company is the still the largest two-wheeler lender in India focused on the semi-urban & rural markets. BFL has a market share of 18% in the two-wheeler financing space. Currently, the company finances 30% of Bajaj Auto’s domestic two-wheeler sales through 3000+ dealers and authorised service centres. BFL also finances about 15% of Bajaj Auto’s three-wheeler sales. This business is currently operating in 16 states covering 216 key dealers of Bajaj Auto. Exhibit 13: Slowing traction in two-wheeler finance book during FY14 & FY15 Two Wheeler Finance FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16Number of new loans disbursed 397000 239000 442000 522000 655000 736000 652000 560000 141000Amount Disbursed (| crore) 1484 783 1364 2034 2671 NA 3149 NA NAAUM (| crore) 1647 1175 1393 1953 2725 NA 3593 3324 3315

Source: Company, ICICIdirect.com Research; NA = Not available

Going ahead, we expect two-wheeler volumes financed by BFL to increase as domestic sale volumes of Bajaj Auto are expected to increase at 13% CAGR over FY15-17E to 2255296 units. This will also lead to an improvement in absolute AUM to | 4215 crore by FY17E. However, the proportion in overall AUM may continue to dip to 8% from 10.3% of AUM as on FY15. Cross-sales of products to existing large customer base The large number of customers acquired through the CD financing business (~40 lakh new customers in FY15) allows BFL to cross-sell various other products to customers with a healthy credit history. These products include personal loans, life/general insurance, etc. Total personal loans as on FY15 were at | 4303 crore (14% of AUM), which were largely to existing customers. Further, home loans to salaried individuals are also covered in CF financing. It had a book of | 839 crore as on FY15 and comprised 2.6% of total AUM. During Q1FY16, | 633 crore of personal loans were disbursed while | 116 crore worth of life insurance and | 67 crore worth of general insurance policies were sold through cross sales. We expect the share of the CF division in total AUM mix to increase to 42.7% (| 22497 crore) by FY17E from 40.5% as on FY15. It will be mainly led by CD financing & lifestyle financing segment, which is expected to witness strong AUM CAGR of 44% and 59%, respectively in FY15-17E (refer exhibit 20). We expect such an increase on the back of a rise in sales of consumer durable, increased finance penetration and jump in the share of BFL in the overall financing market from 18% currently to ~23% by FY17E.

Currently, the company finances 30% of Bajaj Auto’s

domestic two-wheeler sales through 3000+ dealers and

authorised service centres.

The large number of customers acquired through the CD

financing business (~40 lakh new customers in FY15)

allows BFL to cross-sell various other products to

customers with a healthy credit history.


SME financing – Mortgage heavy book; traction to moderate; share to decline but continue to remain highest in overall AUM BFL’s SME category is the largest of the four broad categories and comprises ~53% of the total AUM. It stood at | 17198 crore as on FY15. It includes small business loans, loan against property (LAP), home loans to self employed & loan against securities (LAS). LAP comprises the highest part in SME financing as well as in the overall AUM at 25.4% as on FY15. LAP is followed by small business loans (9.8%), home loans (9.5% of overall loans) and LAS (4.5%). Exhibit 14: Break-up of SME book AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17ELoans 727 2033 3084 3795 4356 5637 Business Loans NA NA 2461 3058 3572 4623 Professional Loans NA NA 623 737 784 1015Loan against property 2251 6907 8232 8424 9583 11933Home loans (Self Employed) 0 2351 3071 3063 3858 4847Loan against securities 321 841 1578 1516 1950 2397SME cross sell 0 718 1233 1360 1576 1976Total SME AUM 3,299 12,850 17,198 18,158 21,323 26,791


In the SME segment, the focus is on high net worth SMEs with average annual sales of | 25 crore with established financials and a proven borrowing track record. In it, BFL offers a range of working capital and growth capital products. Further, BFL offers a full range of mortgage products like LAP, lease rental discounting & home loans to SME and self employed professionals.

Exhibit 15: Detailed profile of products offered under SME financing category Particulars Small Business Loans LAP Home Loans Loan against securities SME Cross sellYear started 2009 2009 2010 2009 2012

Target Segment SME clients Affluent - i.e HNIs and Ultra

HNIs Self employed Affluent - i.e HNIs and Ultra HNIs SME Clients Ticket size |10 lacs to 30 lacs | 1 crore to | 5 crore | 75 lacs to | 2 crore | 1 to | 2 crore ~ | 50 lacs Loan to Value ratio (%) Unsecured 40-60% 50-70% 40-50%Duration/tenure 2-3 years 15-20 years 15-20 years 1 year Yields range 18-20% 11.5 to 13% 10.3-12% 12-13.8% 10.3-20%Proportion of AUM as on FY15 9.8 25.3 9.5 4.5 3.6 Amount (FY15 - | crore) 3,084 8,232 3,071 1,578 1,233


Since FY11, the LAP book has witnessed robust growth of 38% CAGR to | 8232 crore. Though yields in the mortgage business are much lower than other products, at the profitability level it is not much dilutive with RoEs at 16-17%. Of late, traction in the LAP portfolio has slowed (proportion dipped to 23.7% as on Q1FY16 from 28.7% in FY14) owing to enhanced competitive pressures and higher commission payouts. This led RoEs of the LAP business to fall below the comfortable range of 16-17%. The company indicated that it is developing a ‘direct to customer model’, which will help reduce commission payouts and lead to an improvement in product profitability. However, owing to enhanced competition in the business from other NBFCs and banks, going ahead, we expect the LAP portfolio traction to moderate (20% CAGR till FY17E) and its proportion to shrink to 22.7% of AUM as on FY17E.

Small business loans have also witnessed strong traction of 43% CAGR since FY11 to | 3084 crore. The share in overall AUM has increased continuously and is at 9.5% as on FY15. As per the management, healthy traction in this segment should continue, going ahead, as profitability of this business is improving. Small business loans include professional loans that amount to | 623 crore of | 3084 crore. These loans are largely to doctors.

LAP comprises the highest part in SME financing as well

as in the overall AUM at 25.4% as on FY15

Since FY11, the LAP book has witnessed robust growth of

38% CAGR to | 8232 crore.


Going ahead, we expect the proportion of small business loans to rise to 10.7% by FY17E from 9.5% as on FY15. Under LAS, BFL offers loans to promoters and HNIs to enable them to meet their working capital and other business purpose needs. Securities in this case could be equity shares, bonds and mutual funds. During Q1FY16, the company indicated that it is ready to execute its strategy wherein it will partner with leading brokerages/banks with the objective of leveraging the funding opportunity to their HNI & ultra HNI customer base. A dedicated SME relationship management channel has also been created to provide a wide range of cross-sales of products to BFL’s SME franchise. We expect the share of the SME category in the total loan mix to dip to 50.9% by FY17E from 53.1% in FY15 mainly led by shrinkage in the LAP portfolio (refer exhibit 20). Commercial financing – traction dependent on underlying economic trend In the commercial category, it provides finance in the construction equipment (CE) and infrastructure space. Apart from these, BFL also offers wholesale lending products covering short, medium and long term needs of auto component vendors in India. The proportion of the overall commercial segment has reduced from 18% of total AUM in FY12 to 5.4% in FY15 owing to a run down in the book related to CE and infra financing. These segments witnessed asset quality pressures. Hence, BFL reduced its exposure as can be seen in the below exhibit. Exhibit 16: Break-up of commercial lending category AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17EConstruction equip. finance 591 448 188 134 145 132Vendor Financing 324 862 1146 1333 1452 1765Infrastructure lending 0 523 418 473 415 448Total Commercial AUM 915 1,833 1,752 1,940 2,012 2,345


Exhibit 17: Detailed profile of products offered under commercial category Particulars Vendor Financing CE Financing Infra LendingYear started 2,009 2,010 2,010 Target Segment Bajaj Auto's vendors Strategic & Retail AffluentTicket size NA | 1.0 crore to | 3 crore NALoan to Value ratio (%) NA 70 to 80% 70 to 80%Duration/tenure NA 3 years 1-15 yearsYields range NA 10.5% - 12.5% 12-14%Proportion of AUM as on FY15 (%) 3.5 0.6 1.3 Amount (FY15 - | crore) 1,146 188 418


The company has indicated its intention to increase the proportion of the commercial segment in the overall AUM to ~10% over the next four or five years, mainly via CE financing and infrastructure lending. However, it will depend on the how the economic scenario pans out and mainly on the revival in the infrastructure space. Currently, the infrastructure space is in doldrums owing to stalled projects and flow of lower fresh investments due to which this space is not lucrative for further lending by banks and other financial institutions. Over FY15-17E, we expect the commercial category share to fall further to 4.5% of the total AUM as we believe any significant improvement in the infrastructure financing space will take time.

The proportion of the commercial segment has reduced

from 18% in FY12 to 5.4% in FY15 owing to a run down of

the book in the construction equipment and infra financing

due to stress in these segments


Rural financing to maintain strong growth on lower base, increasing reach In the rural eco system, BFL is a highly diversified lender. The company is currently present in CD financing, asset backed financing, gold loans, personal loans, etc. BFL functions through a hub & spoke model. The company operates its rural business in Maharashtra, Gujarat and Karnataka. BFL is expected to open branches in rural areas of Madhya Pradesh in Q2FY16 followed by Tamil Nadu. The company has a presence across 232 towns and villages and a retail presence in 1800+ stores. Exhibit 18: Rural proportion to rise, going ahead, but still stay a small part of the AUM AUM (| Crore) FY14 FY15 Q1FY16 FY16E FY17ERural financing 50 333 522 726 1054% of Total AUM 0.21 1.03 1.47 1.75 2.00


As business commenced recently i.e. in FY13, the book size is small and witnessed sharp traction. AUM increased to | 333 crore in FY15 from | 50 crore in FY14. Recently, the company also launched its MSME lending business in rural areas. We expect the rural portfolio to continue to witness sharp traction, going ahead. We have factored in that its share will rise to 2% of total AUM at | 1054 crore as on FY17E. Overall book expected to grow at 27% CAGR over FY15-17E BFL has a diversified loan portfolio. Further, the company has a leadership position in under penetrated & growing segments like CD financing, lifestyle product financing, two-wheeler financing, LAP, etc. which accounts for ~50% of its portfolio. These factors have allowed BFL to clock strong AUM CAGR of 44% over FY11-15 to | 32410 crore. This has been despite a weak economic environment in the past few years.

The traction in AUM in the past four years has been led by the SME category, which increased at 51% CAGR to | 17136 crore as on FY15 followed by the CF category, which rose at 41% CAGR to | 13202 crore. The LAP portfolio in the SME category, which accounts for highest proportion in overall AUM at 25.4%, grew at 38% CAGR in FY11-15 to | 8232 crore. CD financing in the CF book has seen 47% CAGR to | 4163 crore as on FY15.

Of the total AUM, BFL places about 4-5% for securitisation for better asset-liability management. As on FY15, of the total AUM of | 32410 crore, about | 1211 crore was the off book or securitised amount. The balance | 31199 crore is actual advances outstanding in the balance sheet as on FY15. Going ahead, we expect overall advances traction at 27% CAGR in FY15-17E to | 50718 crore driven by CF segment. Exhibit 19: Credit (AUM – securitised amount) growth to stay healthy at 27% CAGR in next two years

2893 2370 40327272

1228316744

22971

31199

39935

50718

70.180.4

68.9

36.3 37.2 35.828.0 27.0

-18.1

0

10000

20000

30000

40000

50000

60000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

-40

-20

0

20

40

60

80

100

(%)

Loan Loan Growth (RHS)


In rural areas, BFL is currently present in CD financing,

asset backed financing, gold loans, personal loans, etc.

Owing to its small size, the segment has witnessed sharp

traction with the loan book increasing to | 333 crore in

FY15 from | 50 crore in FY14

Going ahead, we expect overall advances traction for BFL

at 27% CAGR in FY15-17E to | 50718 crore driven by the

CF segment


Exhibit 20: AUM break-up

AUM (| Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17E2W & 3W finance 1,953 3,593 3,324 3,526 4,215 14.2 12.6 Consumer durable finance 893 2,531 4,163 6,430 8,640 46.9 44.1 Lifestyle finance 174 498 871 1,264 59.3 Digital Product 312 549 797 Non digital product 186 322 468 Personal loans 511 2,577 4,303 5,517 7,007 70.4 27.6 Personal loans Cross Sell 2,412 3,145 3,994 Salaried Personal Loans 1,891 2,373 3,013 Home Loans (Salaried) 453 839 1,079 1,370 27.8 Consumer Finance category 3,357 9,328 13,127 17,424 22,497 40.6 30.9

Loans 727 2,033 3,084 4,356 5,637 43.5 35.2 Business Loans 2,461 3,572 4,623 Professional Loans 623 784 1,015 Loan against property 2,251 6,907 8,232 9,583 11,933 38.3 20.4 Home loans (Self Employed) 2,351 3,071 3,858 4,847 25.6 Loan against securities 321 841 1,578 1,950 2,397 48.9 23.3 SME cross sell 718 1,233 1,576 1,976 26.6 SME category 3,299 12,850 17,198 21,323 26,791 51.1 24.8

Construction equip. finance 591 448 188 145 132 (24.9) (16.3) Vendor Financing 324 862 1,146 1,452 1,765 37.1 24.1 Infrastructure lending 523 418 415 448 3.5 Commercial category 915 1,833 1,752 2,012 2,345 17.6 15.7

Rural lending 50 333 726 1,054 77.9

Total 7,571 24,061 32,410 41,485 52,686 43.8 27.5

AUM (| Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17EConsumer Finance 3,357 9,328 13,127 17,424 22,497 40.6 30.9 SME Business 3,299 12,850 17,198 21,323 26,791 51.1 24.8 Commercial 915 1,833 1,752 2,012 2,345 17.6 15.7 Rural - 50 333 726 1,054 77.9 Total AUM 7,571 24,061 32,410 41,485 52,686 43.8 27.5

AUM (Mix %) FY11 FY14 FY15 FY16E FY17EConsumer Finance 44.3 38.8 40.5 42.0 42.7SME Business 43.6 53.4 53.1 51.4 50.9Commercial 12.1 7.6 5.4 4.9 4.5Rural - 0.2 1.0 1.8 2.0Total AUM 100 100 100 100 100

CAGR

CAGR



Well diversified funding; strong parentage & credit rating enable lower CoF The borrowings of BFL as on FY15 stood at | 26690 crore. The borrowings are well diversified with banks proportion being the highest at 54% followed by NCDs at 37% and CPs/FDs at 9%. Owing to strong parentage and credit rating (consistently holding AA+/stable and LAA+ stable rating from Crisil and Icra over the last seven years, with a positive outlook. Further, the fixed deposit scheme has been rated FAAA/Stable by Crisil and MAAA/Stable by Icra) the company is able to raise funds at competitive rates from various sources as reflected in CoF being better than peers as seen in below exhibit. Exhibit 21: BFL manages to keep CoF lower than peers

8.1

10.49.4

10.5 11

0

2

4

6

8

10

12

Bajaj Finance Chola Mandalam Mahindra Finance Shriam TransportFinance

Shriram City Union

(%)

CoF (FY15)


Further, at regular intervals, the company was able to raise funds via QIP, which also helps in reducing its cost of borrowings. Recently, BFL raised ~| 1800 crore via allotment of warrants to promoters and equity to QIBs. Going ahead, the mix of borrowings is expected to change depending on market rates. However, we believe bank borrowings will continue to dominate. Exhibit 22: Trend in borrowings

10,22613,133

19,750

26,691

33,465

42,121

52.6

28.4

50.4

25.4 25.935.1

05,000

10,00015,00020,000

25,00030,00035,000

40,00045,000

FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

0

10

20

30

40

50

60

(%)

Borrowings Growth (RHS)


Borrowings are well diversified with bank’s proportion

highest at 54% followed by NCDs at 37%, CPs/FDs at 9%


Exhibit 23: Resource mix expected to be tilted towards banking

64.4

38.9 33.4 39.128.2

37.1 37.6 38.2

35.6

53.2 57.6 52.957.6

53.8 53.7 53.3

0.0 7.9 9.0 8.1 14.1 9.0 8.7 8.5

0102030405060708090

100

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(%)

NCDs/Tier II debt Banks Deposits/CPs


Margins one of the highest; to moderate a bit, going ahead The margins of Bajaj Finance are one of the highest among its peers. Its margins during FY15 were at 10.3%. Such high margins were on the back of strong blended yields of 18.9% and competitive CoF, which helps the company to earn overall spread of 9.2%. Yields in the consumer financing category are high as outlined in the above exhibit. In the past few years, margins witnessed a slide owing to a change in loan mix towards lower yielding segments as BFL’s strategy was to go for scale and secured products like in the SME category (like LAP), which impacted the yield, to some extent, but also helped maintain steady asset quality. LAP portfolio where yields are ~13% increased at 38% CAGR over FY11-15. Exhibit 24: BFL earns highest margins among peers in FY15

10.3

7.1

8.7

6.7

0

2

4

6

8

10

12


(%)

NIM (FY15)


With banks reducing their base rates and owing to the recent fund raising, the company could benefit, going ahead, on the CoF front. However, it would be arrested by an increase in exposure towards relatively lower yielding assets like SME. We expect margins to moderate a bit around 30 bps and stay at ~ 10% in FY16E, which is still healthy compared to peers.

The margins of BFL are one of the highest among its peers.

Its margins during FY15 were at 10.3%. Such high margins

were on the back of its strong blended yields of 18.9% and

competitive CoF, which helps the company to earn overall

spread of 9.2%


Exhibit 25: Margins to stay at strong levels

14.6 12.2 11.6 10.8 10.3 10.0 10.1

22.720.4 20.1 19.1 18.9 18.3 18.2

7.58.8

10.3 9.6 9.7 9.5 9.4

0.0

5.0

10.0

15.0

20.0

25.0

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(%)

NIM YoA CoD



Asset quality remains at acceptable levels; expect to stay steady Bajaj Finance’s gross NPA ratio at 1.5% (| 484 crore) as on FY15 is relatively better than some of its peers and also considering the weak economic environment of the past two or three years. The asset quality has improved sharply over the last five or six years. GNPA ratio was at 16.6%, 7.6% during FY09, FY10, respectively. This was owing to high stress witnessed in the two-wheeler financing and computer financing business then. Post such a setback in asset quality, BFL focused on improving its risk management process and framework. This included product rationalisation like exiting the computer financing business, focusing on safer products like LAP and mortgages during the weak economy of FY11-14, increased use of Cibil scores, focusing on repeat customers with good repayment pattern and on affluent & mass affluent customers. These efforts yielded large gains with improvement in asset quality as the absolute GNPA declined from | 416 crore in FY09 to | 148 crore by FY12 before increasing to | 484 crore by FY15. However, the loan book size is much larger now than in FY09 (>13x of FY09 loan book). Exhibit 26: Asset quality witnesses sharp improvement; expect to stay at acceptable levels going ahead

253

416318

220148 189

280

484

668

908

181283

14360

16 33 66143

1892987.4

16.6

7.6

3.01.2 1.1 1.2 1.5 1.7 1.8

5.4

11.9

3.6

0.8 0.1 0.2 0.3 0.5 0.5 0.60100200300400500600700800900

1000


(cro

re)

02

468

101214

1618

(%)

GNPA NNPA GNPA (%) NNPA (%)


Exhibit 27: BFL in better position in terms of asset quality compared to peers

1.54

2.8

6.0

3.8

2.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


Shriram City Union

(%)

GNPA (FY15)


BFL’s asset quality has improved sharply over the last five

or six years. The GNPA ratio was at 16.6%, 7.6% during

FY09, FY10, respectively. As on FY15, the GNPA ratio was

at 1.5%


The credit cost (i.e. provisions as percentage of loans) also declined from 8.1% of advances in FY10 to 1.2% by FY13 and 1.4% levels as on FY15. Exhibit 28: Trend in credit cost

3.9

6.2

8.1

3.6

1.6 1.2 1.3 1.4 1.5 1.7

01

234

567

89


(%)

Credit cost (%)


Concerns were raised about the company’s entry into the CE financing and infra financing when BFL entered these spaces in FY09 as the company lacked experience in these business. During the downturn, the company did face certain NPL issues in this exposure along with falling RoEs in the segment. Post this realisation, BFL consciously started reducing its exposure to both these segments that fared well on the asset quality front. The commercial category proportion has reduced to 5.4% in FY15 from 18.5% in FY12. Going ahead, we expect the GNPA ratio to increase a bit in FY15-17E to 1.8% by FY17E. However, these levels are still acceptable and better than peers.

The credit cost (i.e. provisions as percentage of loans) also

declined from 8.1% of advances in FY10 to 1.2% by FY13

and 1.4% levels as on FY15.


Well capitalised to clock strong growth, going ahead BFL is in a comfortable position on the capital front especially after the recent capital raising of ~| 1800 crore. In June 2015, the company allotted warrants to the promoter i.e. Bajaj Finserv at | 4412/share amounting to | 408 crore. Further, BFL raised | 1400 crore via allotment of equity shares to QIBs at | 4275/share. The total capital adequacy ratio as on Q1FY16 is 20.7 with Tier I ratio at 17.4% (up from 14.2% as on FY15 owing to recent capital raising). We expect the current capital to be sufficient to meet growth requirements for the next two or three years. Exhibit 29: Comfortable on capital adequacy front

16.8 15.018.7

16.17 14.1517.41

3.22.5

3.32.97

3.82

3.31

0

5

10

15

20

25

FY11 FY12 FY13 FY14 FY15 Q1FY16

(%)

Tier I Tier II


Exhibit 30: Capital raising history

Date Mode of capital raising Price per share (|) Amount raised (| crore)January 2006 Preferential allotment 420 161January 2006 Preferential allotment 460 42November 2006 Right Issue in ratio of 6:10 325 410March 2007 Conversion of Warrants 410 72July 2007 Conversion of Warrants 410 51March 2012 Conversion of Warrants 650 305January 2013 Right Issue in ratio of 3:19 1100 744June 2015 Issued to QIBs 4275 1400June 2015 Preferential allotment 4412 408

Source: Company, Capitaline, ICICIdirect.com Research

We expect the current capital to be sufficient to meet the

growth requirements for the next two or three years


Financials NII growth to moderate from past trends but still remain sturdy BFL’s NII has witnessed robust traction in the past on the back of strong margins and loan growth. In the past five years, the NII CAGR has been 36% while in the past three years it has been maintained above >30% at 32% to | 2872 crore as on FY15. The margins, on an average, have been above 10% over the past three to five years. Strong traction on the advances front of 51% CAGR in the past five years and 36% CAGR in the past three years has helped maintain NII traction despite decline in margins. Going ahead, as we factor in a slight moderation in margins and a drop in the pace of loan growth, NII traction is accordingly expected to decline to 28% CAGR over FY15-17E. However, despite moderation it is still better off compared to the expected NII growth of its peers owing to the strength of its business model and steady asset quality expected ahead. Exhibit 31: Healthy credit growth + strong margins to support healthy NII traction ahead

239 345608

9131250

17172216

2872

3671

4721

44.2

76.1

50.2

36.9 37.429.1 29.6 27.8 28.6

0500

100015002000250030003500400045005000


(| c

rore

)

0

10

20

30

40

50

60

70

80

(%)

NII NII growth


Operational efficiency to kick in, going ahead BFL’s cost-to-income ratio in the past six years has been steady at 45% while opex as a percentage of average assets has witnessed an improvement as seen in the exhibit below. This is owing to higher growth in assets vs. income growth. As asset generation happened more rapidly, BFL had to continuously resort to large investments to streamline operations, upgrade technology for maintaining large database of customers, their behavioural pattern and on other analytics in consumer durables, lifestyle financing and the SME business. Further, the staff cost increases largely in tandem with the rising book size. However, we believe that, to a large extent, fixed costs have been incurred and BFL should see some operating leverage, going ahead. We expect cost to income ratio to decline to 42.5% by FY17E from 45% currently while opex to assets should decline from 5% to 4.6% over next two years.

In the past five years, the NII CAGR has been 36% while in

the past three years it has been maintained above >30%

at 32% to | 2872 crore as on FY15

The cost-to-income ratio has been steady for BFL in the

past few years. We expect BFL to witness some operating

leverage, going ahead


Exhibit 32: Operating efficiency to improve, going ahead

58.150.7 44.7 44.5 47.0 44.7 46.0 45.1 44.1 42.5

5.2

6.4

8.4

7.06.2

5.5 5.45.0 4.7 4.6

0

10

20

30

40

50

60

70


(%)

01

234

567

89

(%)

Cost to Income ratio Cost to assets ratio (RHS)


Expect strong traction in profitability, healthy return ratios to stay On the back of strong traction in NII growth, steady cost to income ratio and declining credit costs, BFL was able to clock strong PAT CAGR of 59% in FY10-15 and a CAGR of 30% over the past three year to | 898 crore in FY15. Accordingly, return ratios improved sharply in FY10-12 (RoE increased to 24% from 8% while RoA improved to 3.8% from 2.3% in FY10). However, post FY12, due to a decline in margins owing to a change in the loan mix, RoA declined to 3.1% by FY15. Accordingly, RoE dipped to 20% in FY15. We expect PAT growth to remain strong at 27% CAGR over FY15-17E to | 1456 crore with return ratios staying healthy. RoEs are expected to dip from current levels owing to ~| 1800 crore fund raised via QIP in FY16. Any major improvement in the economic scenario would be an upside risk to our estimates. Exhibit 33: Profitability to be maintained at benign levels

33.9 89.4247.0

406.2

591.0718.5

897.4

1,143.7

1,456.3

64.7

163.5176.3

64.445.5

21.6 24.9 27.5 27.3

0

200

400

600

800

1,000

1,200

1,400

1,600

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

020406080100120140160180200

(%)

PAT Growth (RHS)


We expect PAT growth to remain strong at 27% CAGR

over FY15-17E to | 1456 crore with return ratios expected

to stay healthy


Exhibit 34: Healthy return ratios

8.0

19.724.0 21.9 19.5 20.4 19.0 18.5

2.0 3.20.61.0

2.3

3.8 3.8 3.83.4

3.1 3.0 3.0

0

5

10

15

20

25

30


(%)

0.00.5

1.01.52.0

2.53.03.5

4.04.5

(%)

RoE RoA (RHS)



Risk & concerns Fresh competition may impact edge in consumer financing business BFL’s key strength against its peers is in its stronghold in the CD financing business and lifestyle product financing business. As such, currently there are no major players in this business who can pose a challenge to BFL but there are no entry barriers too. With demand for corporate loans and SME loans expected to remain weak, other financial institutions like banks and NBFCs may look towards this under penetrated CD financing business. This may reduce BFL’s strong positioning or compel it to resort to risky ways of going about its business. This may lead to a reduction in the premium multiple it gets currently.

Higher concentration in certain segments Though BFL’s loan book is well diversified, certain products like LAP, home loans, CD financing and personal loans have a higher share of 25.4%, 12.1%, 13% and 13.3%, respectively. The mortgage related book accounts for ~40% of the AUM as on FY15. In case of LAP and home loans, the book has grown at a brisk pace in recent times and is not seasoned. Hence, any large decline in property price could lead to asset quality stress cropping up from this book. The unsecured loans i.e. the proportion of personal loans has also increased recently. This portfolio could pose a risk.

Lower-than-expected rise in Seventh Pay Commission Demand for consumer durables depends on various factors like state of the economy, employment opportunities etc. The Seventh Pay Commission report, which deals with pay scales of central bank employees, is expected to be announced on September 20, 2015. Any letdown can also impact demand for consumer durables and other lifestyle products. In turn, this could impact the advances growth of BFL and, consequently, its profitability.

Recent ‘marginal cost’ basis lending rate calculation may flow to NBFCs too Recently, RBI released draft guidelines for calculation of base rates by banks on a “marginal cost” basis vs. the “average cost” basis followed earlier. The same will be implemented from April 1, 2016 once the final guidelines are announced. These guidelines will impact bank’s margins as under marginal cost method once the deposit rates are revised lower the entire calculation of cost of funds need to be done on the basis of this new lower rate. This is despite the fact that most of the borrowings still are at the higher deposit rate. As has been witnessed in the past, the RBI has gradually subjected NBFCs to the same NPA provisioning guidelines as applicable to banks. Similar, instance can also happen in lending rate calculation for NBFCs which can have negative implications NBFC’s margins.


Valuation In the past two years, investors have taken keen interest in BFL as reflected in the 357% rise in its stock price since September, 2013. The stock performance has surpassed its peers. It is currently trading at 3.3x FY17E ABV for a RoA of 3% and RoE of 19%. The two year forward multiple increased from 1x to >3x currently post September 2013. We believe the reason for such strong interest is owing to its leadership position in the short duration, lower ticket sized, CD financing and lifestyle product financing business along with the diversified nature of its loan portfolio. This has allowed BFL to register strong AUM growth of 44% CAGR in the past four years to | 32410 crore as on FY15 with asset quality staying under control (GNPA ratio at 1.5%). PAT over FY11-15 period rose at a robust pace of 38% CAGR to | 897 crore as on FY15. Over FY15-17E, we expect PAT CAGR to moderate compared to the past but still stay healthy at 27% CAGR to | 1456 crore by FY17E driven by a steady operating performance, strong growth & margins and controlled asset quality & credit cost. We expect return ratios to stay healthy over the next two years with RoA of 3% and RoE of ~19%. We believe the opportunity size in the consumer and SME space remains lucrative and BFL is well placed to capture it. BFL is trading at premium valuations to its peers (see exhibit below) in the NBFC space due to better visibility in earnings. We initiate coverage on BFL with a BUY recommendation & a TP of | 5600 valuing at 3.6x FY17E ABV.

Exhibit 35: Peer Comparison – Bajaj Finance commands premium multiples as it is well placed among peers

CMP (|) Mcap (| crore) AUM (| crore) GNPA (FY15 - %) FY16E FY17E FY16E FY17E FY16E FY17E P/ABV (FY17E) P/E (FY17E)Bajaj Finance 5049 27030 32410 1.5 3.0 3.0 19.0 18.5 1363.7 1550.2 3.3 18.5STFC 845 19179 59108 3.8 2.1 2.2 13.4 14.6 407.0 442.0 1.9 12.1MMFS 240 13662 36878 6.0 2.5 2.6 15.6 17.0 100.4 114.5 2.1 12.0SCUF 1770 11665 16717 2.7 3.3 3.2 14.9 16.0 675.0 760.0 2.3 14.9CIFC 609 8756 25452 2.8 2.1 2.2 17.4 17.8 203.0 235.0 2.6 13.5

RoA (%) RoE (%) ABV

Source: Company, Bloomberg, ICICIdirect.com Research; STFC = Shriram Transport Finance; MMFS = Mahindra Finance; SCUF = Shriram City Union Finance; CIFC = Cholamandalam Finance

Exhibit 36: Trend in P/ABV multiple

0

1000

2000

3000

4000

5000

6000

7000

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

(|)

Price (|) 4.5x 3.5x 2.5x 1.5x 0.5x


BFL has recently tied up with major e-commerce players. Any positive fallout of such a deal on growth could be an upside risk to our call. Further, higher-than-expected growth in the economy would lead to higher-than expected loan book growth and, consequently, lead to higher-than-expected traction in profitability. This, in turn, could lead to a further re-rating of the stock and, hence, remains an upside risk to our call.

We expect return ratios to stay steady over next two years

with RoA of 3% and RoE of ~19%. We believe the

opportunity size in consumer and SME space remains

buoyant and BFL is well placed to capture it.

Bajaj Finance can be truly described as a successful

transformation story in the past eight years. Post induction

of a new management in 2007, BFL got transformed from a

predominantly two & three wheeler finance company to a

financier of large spectrum of loans in the consumer, SME

and commercial categories with >10 product lines


Exhibit 37: Income Statement (| crore)(Year-end March) FY13 FY14 FY15 FY16E FY17EInterest Earned 2923.1 3789.6 5120.0 6513.4 8257.7Interest Expended 1205.7 1573.2 2248.3 2842.5 3536.3Net Interest Income 1717.4 2216.3 2871.7 3670.9 4721.4Growth (%) 37.4 29.1 29.6 27.8 28.6Non Interest Income 186.6 284.8 298.3 351.9 411.8Operating Income 1904.0 2501.1 3169.9 4022.8 5133.2Employee cost 245.2 340.8 450.7 572.4 715.5Other operating Exp. 605.8 810.8 978.2 1202.1 1464.9Operating Profit 1053.1 1349.5 1741.0 2248.3 2952.8Provisions 181.8 258.9 384.6 533.5 747.9PBT 871.3 1090.7 1356.4 1714.8 2204.9Taxes 280.3 372.2 459.1 571.0 748.6Net Profit 591.0 718.5 897.4 1,143.7 1,456.3 Growth (%) 45.5 21.6 24.9 27.5 27.3EPS (|) 129.8 144.4 179.9 221.5 273.4


Exhibit 38: Balance sheet (Year-end March) FY13 FY14 FY15 FY16E FY17ESources of FundsCapital 49.8 49.8 50.0 53.3 53.3Reserves and Surplus 3317.3 3941.1 4749.7 7171.7 8503.4Networth 3367.0 3990.9 4799.7 7225.0 8556.7Borrowings 13133.2 19749.6 26690.8 33464.9 42120.8Other Liabilities & Provisions 1320.9 877.5 1321.3 1889.4 2436.9Total 17,821.2 24,618.0 32,811.8 42,579.3 53,114.4

Application of FundsFixed Assets 587.7 763.3 894.0 920.8 948.4Investments 5.3 28.2 332.3 355.6 373.3Advances 16743.6 22971.0 31199.5 39935.3 50717.8Other Assets 68.2 78.7 165.8 174.1 181.1Cash 416.4 776.8 219.7 1193.6 893.7Total 17,821.1 24,618.0 32,811.2 42,579.3 53,114.4



Exhibit 39: Key ratios (Year-end March) FY13 FY14 FY15 FY16E FY17EValuationNo. of shares (crore) 5.0 5.0 5.0 5.3 5.3EPS (|) 129.8 144.4 179.9 221.5 273.4DPS (|) 15.0 15.9 18.0 19.0 20.0BV (|) 676.4 802.2 959.9 1399.2 1606.1ABV (|) 669.8 788.8 931.4 1363.7 1550.2P/E 38.8 34.9 28.0 22.8 18.4P/BV 7.5 6.3 5.3 3.6 3.1P/ABV 7.5 6.4 5.4 3.7 3.3Yields & Margins (%)Net Interest Margins 11.6 10.8 10.3 10.0 10.1Yield on assets 19.8 18.5 18.4 17.8 17.7Avg. cost on funds 8.4 7.8 8.1 7.9 7.7Yield on average advances 20.1 19.1 18.9 18.3 18.2Avg. Cost of Borrowings 10.3 9.6 9.7 9.5 9.4Quality and Efficiency (%)Cost to income ratio 44.7 46.0 45.1 44.1 42.5Cost to assets ratio 5.5 5.4 5.0 4.7 4.6GNPA 1.1 1.2 1.5 1.7 1.8NNPA 0.2 0.3 0.5 0.5 0.6ROE 21.9 19.5 20.4 19.0 18.5ROA 3.8 3.4 3.1 3.0 3.0


Exhibit 40: Growth ratios (Year-end March) FY13 FY14 FY15 FY16E FY17ETotal assets 37.9 38.1 33.3 29.8 24.7Advances 36.3 37.2 35.8 28.0 27.0Borrowings 28.4 50.4 35.1 25.4 25.9Net interest income 37.4 29.1 29.6 27.8 28.6Operating Income 33.5 31.4 26.7 26.9 27.6Operating expenses 27.1 35.3 24.1 24.2 22.9Operating profit 39.2 28.2 29.0 29.1 31.3Net profit 45.5 21.6 24.9 27.5 27.3Net worth 65.6 18.5 20.3 50.5 18.4EPS 24.5 11.3 24.6 23.1 23.4



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September 10, 2015 Bajaj Finance (BAJAF)content.icicidirect.com/mailimages/IDirect_BajajFinance_IC.pdf · September 10, 2015 Initiating Coverage ... financing business ... of two-wheelers