BFL and BALIC income dip hit results; TP up toRs 7,200 given markedly higher CMP for BFL; upgraded to ‘Hold.’
Bajaj Finserv (BJFIN) reported softer Q1FY21 performance largely due to lower profitability in lending (BFL) and life insurance (BALIC) even as general insurance (BAGIC) beat profit estimate. Higher prudent provisions, muted business volumes and liquidity drag impacted BFL’s profitability. BALIC’s revenue traction remained weak; highlight being the better-than-expected persistency (albeit some decline seen in 13th month bucket) and lower opex. BAGIC benefited from improved underwriting profitability despite impact of floods.
In BFL, while overdone initial pessimism on unsecured consumer loans has normalised, pain from SME/B2B/commercial exposure could yet prove to be a relative blind spot for investors. Finally, sustainability of improvement at BALIC bears closer scrutiny given rise in rate-guaranteed product sales. Factoring in markedly higher CMP for BFL leads to revised SoTP of Rs 7,200 (from Rs 4,000). We upgrade stock to HOLD/SP from ‘REDUCE/SU’. With due valuation credit put paid to insurance subs, this stock at CMP is not an especially attractive conduit for owning BFL.
Bajaj Finance: Softer business momentum (essentially lockdown quarter), higher liquidity and upfront provisions impacted profitability. Moratorium percentage came off to 15.7% (from 27.0%). We caution against interpreting moratorium assets as the superset of future problems though. BFL reported high traction in flexi loans. Adjusting for moratorium accounts granted this facility, the number rises to 18.3%. In our view, consumer finance pain could be more back-ended than B2B/commercial/SME.
BAGIC: A 19% y-o-y dip in GWP shows growth was impacted; however, a lower combined ratio (even adjusting for cyclone impact) given lower commercial activity led to better underwriting profit. We estimate BAGIC to generate RoE of 20–22% in the near to medium term.
BALIC: NBP dipped >25% y-o-y, but 16% y-o-y growth in renewal restricted the fall in GWP to >7%. Qualitatively, the quarter was steady with persistency holding off at better-than-expected level and improved cost control.
Outlook: Improving at the margin
While we structurally like most pieces of the story (life insurance clearly the least though), uncertainties in the current environment and moderation of demand warrant valuation comfort. In BFL, while overdone initial pessimism on unsecured consumer loans has normalised, some uncertainty lingers.