Bajaj Finance has fared well in the consumer vertical during November 2016, gaining market share and improving collections. The company has seen some stress in the two-wheeler segment and will continue to go slow on LAP. We agree with Bajaj’s management that trends in November would change, for better or worse, over the next few months and hence we are not yet revising our estimates and target price. Reduce with target price of Rs 2,950.
Consumer business remains strong
Consumer durable finance moderates: During November 2016, Bajaj Finance has reported 10% volume growth in the consumer durable segment, even as most distributors highlighted that volumes were down 20-30%. The company reported 34% disbursements growth in 2QFY17 and had consciously reduced by 18%, as a part of its strategy to tweak up its lending norms. As such, the net impact of demonetisation appears to be low at about 6%.
Other consumer segments strong: Other segments of consumer business such as digital products (mobile phones) continue to report sharp 84% growth (down from 151% in October 2016) and lifestyle finance at 28% (down from 57% in October 2016).
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Loan growth forecast may moderate a bit: Bajaj’s business momentum has clearly slowed down but broadly remains strong. However, being a short-term business, this may lead to a downgrade in our 34% loan growth estimates for FY2017e.
Collections remain strong: Bajaj’s focus on tightening lending norms in this segment from October 2016 has led to improvement in collections; current month collections in consumer durables inched up marginally to 98.13% in November 2016 from 96.81% October 2016 and 97.72% in September 2016. With most customers from the salaried segment, this segment is likely to remain least-affected.
Retain Reduce; TP R2,950
We find downside risks to our FY2017e estimates for Bajaj Finance. We await more clarity on the impact of demonetisation on Bajaj Finserv and other Non Banking Financial Companies stocks under coverage. We are retaining our SoTP-based target price of R2,950. In our SoTP, we value Bajaj Finance at 4X book, life insurance business at 1X EV juxtaposed to 10-12% RoEV and general insurance business at 3X book for 20-25% RoE; we assume 74% stake of Bajaj Finserv in the insurance businesses.
—Kotak Institutional
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