Motilal Oswal
Bajaj Finance (BAF) has transformed from a captive two-wheeler financier to a diversified lender, and is now building scale with profitability. Its well-entrenched business model comprises businesses that are either profit maximizers (generate RoA of over 5%) or scale builders (generate RoA of over 2.5%). It has fine-tuned its lending model and redrawn its target segment.
In the last three years, BAF has outpaced its peer group in growth and earnings; we expect the strong business momentum to continue. Margins for FY13 were 11.7%, way above the peer group. We estimate 100 basis points margin compression over the next three years due to a change in loan mix in favor of secured loans. However, margins will still be healthy at over 10.5%, higher than the peer group.
Improvement in risk management has led to historic low GNPA/NNPA at 1.1%/0.2%, despite a challenging macro environment.
Superior margins, focused fee income strategy and control over cost ratio will keep core operating profitability strong. Strong loan growth momentum coupled with stable asset quality and low credit costs would drive BAF?s earnings at 21% CAGR over FY14-16. We expect RoA/RoE to remain strong at over 3.4%/21% during FY14-16. We initiate coverage with a Buy rating and target price of R1,520 (1.6x FY15E BV of R949).