Jefferies cuts Bajaj Finance to ‘Hold’, ups target to Rs 10,600

By: | Published: July 29, 2016 6:32 AM

Q1 profit grew 47% year-on-year (y-o-y) to `420 crore (10% beat) as stronger NII growth and operating leverage gains, offset higher credit costs. We raise our FY17-18E EPS by 5-6%.

Q1 profit grew 47% year-on-year (y-o-y) to `420 crore (10% beat) as stronger NII growth and operating leverage gains, offset higher credit costs. We raise our FY17-18E EPS by 5-6%. We believe strong loan growth, better cost efficiency should drive 38% EPS CAGR and over 20% ROE at BAF over FY16-18E. However, post strong rally (+43% 3M), BAF is now trading at 4.8x FY18E BV and 22x P/E. We believe upside is capped and downgrade the stock to ‘hold’ from ‘buy’.

Loans grew 41% y-o-y led by strong growth in consumer segment (47% y-o-y). Consumer durable loans grew 32% (y-o-y) led by strong AC disbursal during summer. Growth in loans against property (LAP), self employed mortgage loans was muted at 3-7% y-o-y due to BAF’s strategy to shift away from intermediaries. Rural and commercial finance segments reported strong growth, but off a low base. We expect BAF’s loans to grow at 34%CAGR over FY16-18E.

We estimate borrowing cost fell 64bps y-o-y in Q1. This should fall further due to lower bond yields. We expect NIMs to expand 19bps y-o-y in FY17E. We raise our FY17-18E EPS by 5-6% factoring in stronger loan growth, higher NIMs, and higher credit costs. We also rollover our valuation to Dec 17E (Sept 17E earlier). Our RI valuation based PT rises to `10,600 (`8800) implying only 7% upside potential.

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