Initiate coverage on Bajaj Finserv with a ‘buy’ rating and a target price of R1,775. We value Bajaj Finserv using the SOTP methodology, with each business valued separately on FY17e. We value the general insurance business using the two-stage Gordon growth model. We value the life insurance business on appraisal value methodology – embedded value + structural value. The NBFC business (Bajaj Finance) is listed, and we value the business at its current market cap.
Bajaj Finserv provides exposure to the underpenetrated segments of general insurance, life insurance, and consumer & small business finance, which have multiyear growth potential.
Its general insurance business is among the leading players in India with strong underwriting, low combined ratio, and strong RoE.
The NBFC is growing at a fast clip, driven by a diversified asset mix and strong distribution franchise. Life insurance business is coming off a weak patch; we expect it to improve gradually. BJFIN has a track record of steady consolidated RoE of 18% and trades at an attractive valuation of 1.4x FY17E P/B.
General Insurance is among the best run non-life insurance companies in India. There is a clear focus on ensuring quality underwriting and profitability. For three years, BAGIC has been reporting a combined ratio of below 100% and strong RoE of 25-28%. However, Bajaj Life (BALIC) has struggled in recent years as it was coping with regulatory changes and the loss of a strong bancassurance partner.