1. Bharat Financial Inclusion rated ‘Overweight’ by Morgan Stanley

Bharat Financial Inclusion rated ‘Overweight’ by Morgan Stanley

Stock could come under pressure in near term but is expected to outperform over a one-year period

By: | Updated: May 8, 2017 3:28 AM
BHAFIN has guided for AUM growth of 50% in FY18 and PBT of Rs 4.35 bn. (Reuters)

BHAFIN’s Fy18 guidance — which management mentioned could be conservative — is 35-40% below Bloomberg consensus and our estimate. We cut our FY18 EPS estimate meaningfully, but relative impact on FY19 underlying earnings is much lower. We will revisit based on quarterly progress. Maintain Overweight.

BHAFIN has guided for AUM growth of 50% in FY18 and PBT of Rs 4.35 bn. On the call, management mentioned that it has assumed provisions of Rs 2.5 bn, implying PPOP of Rs 6.85 bn. Management mentioned estimating average AUM growth to be 25% y-o-y and so the PPOP growth estimate effectively assumes no operating leverage. Management highlighted that both its PPOP and provisioning estimates are likely conservative, to be revisited in the course of the year.

In light of guidance, we are lowering our estimates – FY18 PBT by 30%, FY19 PBT by 6%

Our FY18e PAT drops 29%; FY19e PAT rises 2.5% owing to underutilisation of tax credit in FY18 (because of lower profits). Below we summarise changes in assumptions in key drivers and P&L line items.

AUM and revenues: We have moderated AUM growth assumptions to 55% in FY18 (from 68%) and 60% in FY19 (from 62%) vs. management guidance of 50%. This is also partially driven by the higher starting point of AUM in FY17 (4% above our estimate). Our average AUM growth assumption for FY18 is 32% vs. management guidance of 25%. Our revenue forecasts fall 8% for FY18 and 3% for FY19.

PPOP: We have raised operating costs 4% for both FY18e and FY19e given hiring plans. Our PPOP forecasts drop 17% for FY18 and 6% for FY19. Our FY18e PPOP growth is 37%.

Provisioning: Management highlighted that it has assumed specific provisions of Rs 2.1 bn, which are likely Rs 0.7 bn higher. We have raised specific provision assumptions to Rs 1.7 bn from Rs 1.2 bn. Price target cut 6%: This is explained mainly by 6% lower FY19e BVPS.

Why we have an OW rating despite significant earnings estimate cut

The stock could come under pressure in the near term — but we expect outperformance over a one-year period as normalcy returns and growth picks up. BHAFIN has a robust model and has reported significantly better asset quality trends than the industry following demonetisation. We believe it is better positioned, being a rural franchise (relatively less crowded) with a weekly collection model. In the aftermath of demonetisation, BHAFIN is emerging operationally stronger with migration to 75% of disbursements through cashless mode in quick time and pilot launch to enable cashless connections.

We believe asset quality indicators are improving and the worst of the impact of demonetisation appears likely behind. We believe that in the coming quarters, investor focus will shift to growth as write-offs are through. Among NBFCs affected by demonetisation, we expect BHAFIN to return to growth the fastest and to report the highest AUM and BVPS growth.

Valuation at 3.6x one-year forward book value vis-à-vis the five-year mean of 3.2x is not cheap but financials stocks overall are expensively valued, and we expect BVPS CAGR at BHAFIN to be among the highest.

Our price target implies 3.0xF19e BV, and our absolute upside to target price of 9% compares to the weighted average downside of 9% for our financials coverage.

Price target discussion: We use the base case scenario value from a residual income method to value the business. We use a cost of equity of 13.1%, assuming a beta of 1.15, a risk-free rate of 6.75% and a market risk premium of 5.5%. We value the business over three phases — a five-year high-growth period, a 10-year maturity period, and a terminal period. We assume a terminal growth rate of 6%. We have cut our base case scenario value (and hence, our price target) 6%, to Rs 860 from Rs 915. This is driven by higher provisioning costs in Q4FY17e and Q1FY18e.


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