1. Jefferies maintains ‘Buy’ on Bajaj Finance, PT of Rs 1,600

Jefferies maintains ‘Buy’ on Bajaj Finance, PT of Rs 1,600

Q4 PAT grew 43% y-o-y to Rs 4.5 billion, 3% beat, as stronger NIM was offset by higher provisions. Impact of demonetisation on growth, asset quality has been lower than we expected.

By: | Published: May 20, 2017 4:32 AM
We raise our estimates and upgrade BAF to Buy as strong AUM growth should sustain given its strong franchise and diversified portfolio. (Website)

Q4 PAT grew 43% y-o-y to Rs 4.5 billion, 3% beat, as stronger NIM was offset by higher provisions. Impact of demonetisation on growth, asset quality has been lower than we expected. We raise our estimates and upgrade BAF to Buy as strong AUM growth should sustain given its strong franchise and diversified portfolio. This should drive 34% EPS CAGR over FY17-19E. Valuations are at a premium, but premium multiples could sustain given strong growth visibility. 2W/3W disbursal growth slowed to 16% y-o-y (33% Q3), but disbursal growth in consumer durables (46% y-o-y) and other categories were strong. LAP AUM growth was muted (4% y-o-y). Business has normalised in most segments but normalisation of growth in mortgage segment could take around two quarters as per management. Loan growth at BAF has remained strong despite demonetisation.

We believe dominance in consumer financing business, diversified product mix should drive 36% AUM growth over FY17-19E. NIMs were 10.6% ahead of our 9.6% estimate due to lower borrowing costs. Most of BAF’s bank borrowings are now linked to 6-12 month MCLR. Lower interest rates have reduced cost of funds by 50-60bps (37% of borrowing). Cost to income ratio was 42% (-190bps y-o-y), lower than our estimate. Credit cost rose 71bps q-o-q as BAF made accelerated provisioning of Rs 700 million for demonetisation. BAF plans to take another `400-500 m provision in next few quarters Q4 GNPA was 1.68% (Q3 1.47%) mainly due to slippages in 2W and SME portfolio. Overdue assets in 2W/3W book as declined q-o-q. SME asset quality has been impacted by demonetisation. BAF expects SME asset quality issues to normalise in next 2-3 quarters.

We raise our FY18-19E EPS estimate by 11-15% factoring better loan growth outlook and higher NIMs due to lower funding costs. We also lift our medium term growth outlook. We expect BAF to deliver 34% EPS CAGR andover 20% ROE over next two years. Valuations at 6.4x FY18E BV and 30x FY18E EPS is at a premium, but these premium multiples could sustain given strong growth visibility and lack of de-rating triggers. Our new PT of Rs 1,600 based on residual Income valuation implies 7.5x BV and 34x FY18E P/E. Key risks are slower loan growth, higher asset quality issues and higher funding costs.

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