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  1. Jefferies puts ‘Buy’ rating on Bajaj Finance, says valuations on premium

Jefferies puts ‘Buy’ rating on Bajaj Finance, says valuations on premium

Q1 PAT grew 42% y-o-y to Rs 6 billion, 5% beat vs. our estimate, as stronger loan growth and better NIM offset higher costs and provisions. Asset quality was stable.

By: | New Delhi | Published: July 21, 2017 3:17 AM
Bajaj Finance, GST Consumer disbursal (26% y-o-y) was strong led by seasonally strong consumer sales during summer and pre buying ahead of GST.

Q1 PAT grew 42% y-o-y to Rs 6 billion, 5% beat vs. our estimate, as stronger loan growth and better NIM offset higher costs and provisions. Asset quality was stable. We believe strong loan growth, coupled with lower funding cost, operating leverage gains and stable credit costs should drive 38% EPS CAGR over FY17-19E. Valuations are at a premium, but these premium multiples may sustain given solid growth and lack of any visible de-rating triggers. Buy.

Consumer disbursal (26% y-o-y) was strong led by seasonally strong consumer sales during summer and pre buying ahead of GST. Mortgage (LAP) AUM growth was muted at 5.8% y-o-y. BAF was more cautious in business loan (BL) disbursal, -3% y-o-y, due to early signs of portfolio quality issues.

BAF’s disbursal growth in Q1 was driven by new customers, rather than repeat customers. Costs are higher, but BAF could leverage these customers to cross sell other products driving op. leverage gains. We forecast loan to grow at 37% CAGR over FY17 -19E.

NIMs were 11.7% (48bps YoY) ahead of our 11.3% est. Yields were slightly better helped by higher subvention income. Funding cost dipped 7bps q-o-q (-84bps y-o-y). Cost to income was 42%, 140bps y-o-y, higher vs. Our est. as BAF is investing in geographic expansion to drive growth. Credit cost rose 25bps

y-o-y, -25bps q-o-q, as BAF provided Rs 420 million toward demonetization impact, flagged in Q4 and sell down of legacy infra asset. Underlying credit costs remain stable, but BAF expects to take Rs 400 million of provisions in next two quarters.

Q1 GNPA was 1.7% on 90dpd basis, but on a 120dpd basis, GNPA fell 24bps q-o-q to 1.44%. Portfolio quality was stable across most segments. 2W portfolio remains under stress but stable q-o-q, but there were initial signs of stress in BL portfolio. While this is an enabling resolution, assuming potential equity issuance of Rs 45 billion at CMP (8.8x FY17 BV) we estimate EPS could increase by 4%; FY18E BV could rise by 31% (Rs 282/share) and RoE could be lower by ~460 bps.

We lift our FY18-19E EPS by 2-6% factoring higher NIM, higher cost to income and higher provision in FY18. Our Residual Income valuation increases to Rs 1,790 (Rs 1,600) due to higher estimates and also as we rollover our valuation to Sept 18 ( June 18).

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