Bajaj Finance – BUY

Annual Report
Analysis
10 July 2019 Institutional Equities
Underlying trends remain strong Company update
BFL’s FY19 annual report highlights the strong CMP Rs3,603 Price performance (%)
trends in transaction volumes and customer 1M 3M 1Y
acquisition that underscore the on-going franchise 12-mth TP (Rs) 3,710 (3%)
Absolute (Rs) 2.7 19.8 53.5
expansion. BFL has significantly cut-back several Market cap (US$ m) 30,291 Absolute (US$) 3.9 21.0 53.7
expenses, while growth in other expense heads
Rel. to Sensex 4.9 20.3 45.7
has moderated as well, thereby driving cost ratios Bloomberg BAF IN
lower in FY19. A red-flag is the marginal increase Cagr (%) 3 yrs 5 yrs
in roll-forward rates, from Stage 1 assets to Sector Banking & Fin EPS 42.6 36.8
Stages 2 and 3 in FY19. Our base case estimates a
Shareholding pattern (%) Stock performance
slowdown in AUM Cagr over FY19-22ii to 35.5% (41% over
FY17-19) and in net profit to 33.9% (47.5% over FY17-19). Promoters 55.2
Pledged (as % of promoter share) 0.0
Despite such growth and profitability, the stock is unlikely to re-
rate any further and would compound steadily hereon. FII 20.7
DII 13.3
Strong pace of franchise expansion sustains. In FY19, transaction 52Wk High/Low (Rs) 3762/1912
volumes in consumer durables increased 28% YoY, EMI-card-facilitated Shares o/s (m) 580
transactions increased 70% YoY, retail spends increased 105% YoY and Daily volume (US$ m) 69.5
lifestyle finance transactions increased 53% YoY. BFL’s customer
Dividend yield FY20ii (%) 0.2
franchise increased 32% YoY to 34.5m, while new loans booked
Free float (%) 44.8
increased 53% YoY to Rs23.5m in FY19. New loans booked have slowed
in 1QFY20 while its customer franchise has increased to 36.9mn. Financial summary (Rs bn)
Y/e 31 Mar, Parent FY18A FY19A FY20ii FY21ii FY22ii
Strong cost control; marginal increase in roll-forward rates. BFL Pre prov. operating inc. (Rs bn) 48.7 76.8 105.4 143.1 191.8
has implemented strong cut-backs in travelling, branding, outsourcing, Pre-exceptional PAT (Rs bn) 25.0 39.9 54.9 72.1 95.9
back-office and information technology heads. This has driven the sharp Reported PAT (Rs bn) 25.0 39.9 54.9 72.1 95.9
drop in cost ratios in FY19 over FY18. As aforesaid, roll forward rates Pre-exceptional EPS (Rs) 43.4 69.3 95.2 124.9 166.3
(transfers to Stages 2/3 as a percentage of opening loans) have Growth (%) 29.3 59.6 37.5 31.2 33.2
increased to 4.24% in FY19 versus 3.36% in FY18. However, PCR on IIFL vs consensus (%) 5.2 3.6 7.4
both such secured and unsecured assets remains high.
PER (x) 83.0 52.0 37.8 28.8 21.7
Book value (Rs) 276 341 429 544 697
Maintain estimates; long term outlook remains sanguine. We
PB (x) 13.1 10.6 8.4 6.6 5.2
maintain our earnings estimates for BFL. The drag from the HFC (BHFL)
is likely to lessen with scale. A capital infusion of Rs80-100bn is CAR (%) 24.7 20.7 19.0 18.3 17.9
imminent (not in our estimates). In such a scenario, BFL would ROA (%) 3.4 3.8 3.7 3.6 3.6
generate ~3.8% RoA, 22.5% RoE and 36% EPS Cagr over FY19-22ii ROE (%) 20.1 22.5 24.7 25.7 26.8
and our target price would be upgraded by 18-20%. BFL will continue to Source: Company, IIFL Research. Priced as on 09 July 2019
create value through gaining scale while maintaining profitability.
Abhishek Murarka | abhishek.murarka@iiflcap.com Pratik Chheda | pratik.chheda@iiflcap.com |
91 22 4646 4645 91 22 4646 4670
 Institutional Equities Bajaj Finance – BUY

Strong pace of franchise expansion sustains Figure 1: BFL’s market share in financing of Bajaj Auto’s sales has increased, aided by
the slowdown of other NBFCs, driving 55% YoY growth in auto loans in FY19

Consumer loans scaling up; strong uptick in transaction volumes (%) Two wheelers Three wheelers
50
AUM in Bajaj Finance (BFL)’s primary business segment, i.e. consumer
loans, has increased 44% YoY in FY19. This has primarily been driven 40
40 36 36
by the B2C segment growing 74% YoY, while the B2B segment also 32 33
reported sturdy AUM growth of 41% YoY. However, growth in consumer 28
30
durable finance (Consumer B2B Sales Finance), is the slowest in the 23
consumer lending segment at 33% YoY. While consumer durable is
20 16
often taken as the benchmark of growth, the data highlights that
incrementally, growth in consumer lending is driven by cross-sell
(personal loans) and auto loans rather than consumer durables whose 10
growth also remains high.
0
Analysis of the FY19 annual report (AR) shows that strong AUM growth FY16 FY17 FY18 FY19
in consumer loans has been backed by significant uptick in volumes Source: Company, IIFL Research
across the consumer lending segments. Key highlights are:
• In two- and three-wheelers, BFL continues to gain share in Bajaj Figure 2: Transaction volumes for consumer durables and digital products (B2B) have
Auto’s sales (Figure 1). It has financed 1million motorcycles in FY19. seen a benign increase; more transactions are being facilitated via EMI cards in force
• Purchases financed in consumer durables/digital lending
increased 28% YoY, whereas EMI card-enabled transactions (mn) FY18 (LHS) FY19 (LHS) Growth YoY (RHS) (%)
increased 70% YoY. 14 12.7 80
70 11.5
• The number of transactions in e-commerce finance, lifestyle finance 12 70
and retail spends have increased 200%, 105% and 53% YoY 9.9 60
10
respectively in FY19. 50
• In the B2C segment, personal loan growth was 56% YoY, while 8 6.8
40
growth in salaried personal loans was 36% YoY. 6
28 30
• In 1QFY20, there has been some softness in new loans booked, 4
which has increased 30% YoY versus a 45-50% YoY run-rate earlier 20
(Figure 6). 2 10
0 -
CD/Digital product purchases EMI Card enabled purchases
Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Figure 3: Number of transactions financed in e-commerce, retail spends at malls/stores Figure 5: Consumer lending segment break-up – Consumer durables finance (sales
and for lifestyle products are also increasing rapidly finance) is not the fastest growing segment in the consumer space, nor the largest. At
FY18 (LHS) FY19 (LHS) Growth YoY (RHS) the industry level, personal loans plus credit card outstanding is Rs7.2tn as of May ’19
(mn) (%)
(Rs bn) FY18 FY19 % YoY
2.5 250
200 2.1 Consumer - B2B (Auto finance) 63 97 55
2.0 200 Consumer - B2B (Sales finance – Consumer durable) 93 123 33
1.5 Consumer B2C (Personal loans) 89 139 56
1.5 150
105 Consumer B2C (Salaried personal loans) 64 87 36
1.0 0.7 0.7 100 Total Consumer Loans 308 446 45
53
0.5 Source: Company, IIFL Research
0.5 0.3 50
Figure 6: Quarterly trends in new loans booked have slowed down in 1QFY20 though
0.0 -
E-Commerce 'Retail spend' purchases Lifestyle finance (m) 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20
transactions financed transactions New loans booked 5.63 5.26 6.77 5.83 7.3
% YoY 49.3 62.8 49.1 53.4 29.7
Source: Company, IIFL Research;
Source: Company, IIFL Research
Retail spends financing business offers easy instalment options to customers for small ticket
purchases like fashion, travel, insurance and small appliances.
Lifestyle finance includes Home improvements and furniture, luxury watches, fitness equipment, Consolidation, new product introduction in the SME segment
digital lifestyle products, etc. • Professional loans grew ~73% YoY, while there has been some
moderation in business loans, which increased 21% YoY in FY19.
Figure 4: B2C loans consist of ~50% of the consumer segment AUM as of FY19 Management has been highlighting its cautious approach to SME
lending, which is evident in the growth in business loans.
• BFL has introduced two new products: i) used car financing and ii)
B2B (Sales
B2C (Personal secured enterprise loans. Both these segments are still scaling up.
finance)
loans) Deployments in these have been over Rs3bn in the initial year.
28%
31%

Rs446bn

B2B (Auto
finance) B2C (Salaried
22% personal loans)
19%

Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Figure 7: Growth in the SME segment has been driven by professional loans Figure 9: BFL’s commercial lending business declined 3% YoY in FY19
(bn) FY18 (LHS) FY19 (LHS) Growth YoY (RHS) (%) (bn) FY18 (LHS) FY19 (LHS) Growth YoY (RHS) (%)
120 80 140 124 80
101 73 120
70 120 69
100 60
83 60 92
100
80 50
80 40
60 53 40 55
60 20
40 31 30
21 20 40
20 (3) -
10 20
0 - 0 (20)
Business loans Professional loans Rural lending Commercial lending
Source: Company, IIFL Research Source: Company, IIFL Research

Figure 10: AUM – Consumer, Mortgage and Rural continue to drive AUM growth
Rural lending emerging as another key growth driver;
commercial loans to consolidate (Rs bn) 4QFY18 3QFY19 4QFY19 YoY (%) QoQ (%)
BFL continues to expand its foot print in rural areas. During FY19, of the Consumer (ex-HL) 285 438 445 56 2
total 498 branches added across the country, 301 have been added in SME (ex-HL) 113 141 157 38 11
rural areas. This has taken the ratio of rural branches to ~49% in FY19 Commercial 109 119 120 10 1
compared with ~45% in FY18. Hence, it has aided the 69% YoY growth Rural 55 88 92 69 5
in rural lending. Moreover, BFL has also started offering fixed deposits
Mortgage - BFL 226 173 168 (25) (2)
to rural customers, from February 2019.
Mortgage - BHFL 36 140 176 389 25
Figure 8: In FY19, ~60% of the incremental branches were opened in rural areas Total 824 1,099 1,159 41 5
Particulars FY18 FY19 Growth % % mix
Locations across the country 1,332 1,830 37 Consumer (ex-HL) 35 40 38
- Of which rural locations 602 903 50 SME (ex-HL) 14 13 14
% of location in Rural areas 45.2 49.3 Commercial 13 11 10
Source: Company, IIFL Research Rural 7 8 8
Mortgage - BFL 27 16 15
On the other hand, AUM in commercial lending declined 3% YoY, as BFL Mortgage - BHFL 4 13 15
decided to wind down its warehouse receipt financing business from Source: Company, IIFL Research
April 2019, on account of high stress levels and lack of a sustainable
profit model.

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 Institutional Equities Bajaj Finance – BUY

Cost analysis – Causes of operating leverage Figure 11: BFL has significantly cut-back on four key cost heads, which together
comprise ~18% of total operating expenses
% Growth YoY FY16 FY17 FY18 FY19
BFL’s cost-to-income ratio saw a significant drop of ~500bps to 35% in
Employee costs 40 48 54 35
FY19, as growth in operating expenses (28% YoY) continued to lag AUM
growth (41% YoY). The annual report reveals a cut-back in four key Outsourcing/back-office costs 6 28 43 (1)
cost heads, viz. outsourcing costs, IT infrastructure costs, IT infrastructure costs 53 60 50 18
advertisement & branding expenses and travelling costs. We observe an Branding/advertisement costs 114 (10) 146 10
overall slowdown in growth across other cost heads in FY19 as well, Travelling costs 58 41 58 26
versus FY18. Our key observations are:
Recovery costs 14 36 55 32
• In FY19, BFL has not increased its outsourcing/back-office costs over
FY18. The consolidation of its back-office business using technology Others 31 27 (27) 28
has allowed the company to reap efficiency gains; in its AR, BFL Source: Company, IIFL Research
alludes to this.
 Excerpt: “…BFL, for its flagship consumer finance business, has Figure 12: Mix of operating expenses as of FY19
consolidated its front office, mid office and back office processes (%) FY15 FY16 FY17 FY18 FY19
on a single cloud platform. This has brought more efficiency in Employee costs 32 33 36 44 46
the processes, increased front-end productivity, digitally enabled Outsourcing/back-office costs 8 6 6 6 5
the merchant eco-system with an integrated view of transactions IT infrastructure costs 3 3 4 4 4
and faster time to cash”.
Branding/advertisement costs 2 4 3 5 4
• It has also moderated expenses on the travelling (26% YoY),
Travelling costs 3 4 4 5 5
information infrastructure (18% YoY) and branding/advertisement
expenses (10% YoY) in FY19. Recovery costs 14 12 12 15 15
• Recovery expenses (as % of AUM) have also declined in FY19. Others 38 38 35 20 20
• Employee costs continue to grow at a rapid pace, outstripping Total 100 100 100 100 100
growth in AUM. Geographic expansion and investment in its Source: Company, IIFL Research
technology and analytics teams (which would be high cost resources
as well) could keep growth in this cost head high in the near term. Figure 13: Opex/average AUM for individual cost heads
(%) FY16 FY17 FY18 FY19
BFL has created significant excess capacity through its investments in Employee costs 1.64 1.78 2.01 1.96
technology for its consumer lending business. As per the AR, the Outsourcing/back-office costs 0.30 0.28 0.30 0.21
present platform can handle a 5x increase in sales volumes from current
IT infrastructure costs 0.15 0.18 0.19 0.17
levels. This should continue driving an improvement in operating
leverage and lower overall cost ratios going forward. Branding/advertisement costs 0.20 0.13 0.23 0.18
• Excerpt: “…This platform has been one of the largest technology Travelling costs 0.19 0.19 0.22 0.20
reforms for BFL’s voluminous and most dispersed sales financing Recovery costs 0.61 0.61 0.69 0.65
business. It has the potential to sustain a five-fold increase in scale Others 1.87 1.74 0.94 0.86
over current volumes.” Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Figure 14: Growth in operating expenses has consistently lagged AUM growth…
Asset quality stable, despite high loan growth
(%) Operating expense growth YoY AUM growth YoY
50 Sector-wise GNPA trends remain benign
41 Despite high AUM growth, BFL’s asset-quality has improved across
37 36 37 segments, apart from a slight deterioration for corporate borrowers.
40 35 35 35 36
33
Though GNPA in auto loans continues to be relatively high at 5.1%, it
27 28
30 24 has improved by ~60bps in FY19. Unsecured and other personal loans
have also shown signs on stable asset quality in FY19.
20
Figure 16: Sector-wise GNPA trends
10 GNPA (%) FY15 FY16 FY17 FY18 FY19
Corporate borrowers 2.4 0.7 1.1 0.3 0.4
0
Unsecured personal loans 2.0 1.4 1.4 1.6 1.4
FY14 FY15 FY16 FY17 FY18 FY19
Auto Loans 4.1 4.3 5.2 5.7 5.1
Source: Company, IIFL Research
Other Personal loans 0.7 1.4 2.2 0.8 0.7
Source: Company, IIFL Research
Figure 15:…as a result, cost ratios have continuously declined over FY12-19; however,
there has been a sharper than usual cut-back in expenses in FY19
Roll-forward rates increase marginally
(%) Cost/Income (LHS) Cost/Assets (RHS) (%) Analysis of movement of gross loans within Stages 1, 2 and 3 shows
50 6.2 6.5 that roll-forward rates from Stage 1 to Stages 2 and 3 (as a % of
6.0 opening loans of Stage 1 loans) have increased.
5.5
40 5.4 • Roll forward rate from Stage 1 to Stage 2 has increased to 2.18% in
5.5 FY19 from 1.46% in FY18 (of opening loans in Stage 1)
5.0
30 4.8 4.7 5.0 • Roll-forward rate from Stage 1 to Stage 3 has increased to 2.06% in
4.5 FY19 from 1.90% in FY18.
4.5
20 4.0 • Roll-forward rate from Stage 2 to Stage 3 also has increased to 52%
4.0 in FY19 from 44.5% in FY18.
10 • A key point to note is that ~75% of the additions to Stage 3 gross
3.5
47 45 46 45 43 41 40 35 loans come directly from Stage 1 and only 26% are from Stage 2
0 3.0 loans.
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Figure 17: Trend of roll-forward rates across stages Adequate coverage ratio across secured and unsecured loans
(Rs m) FY18 FY19 BFL’s ECL coverage ratio continues to be adequate for both secured as
Opening loans in Stage 1 544,447 747,773 well as unsecured advances. Despite a slight decline, the coverage ratio
for secured Stage 3 and Stage 2 assets is ~51% and 12.7%,
Transfer to Stage 2 during the FY (7,952) (16,323)
respectively in FY19. For Unsecured assets, the ECL coverage ratio is
% Of opening loans 1.46 2.18 expectedly higher, at 73% and 40% for Stage 3 and Stage 2 assets
Transfer to Stage 3 during the FY (10,368) (15,386) respectively. For Stage 1 assets also, coverage ratio for unsecured loans
% Of opening loans 1.90 2.06 at 0.8% continues to ~2x of the secured loans.

Opening loans in Stage 2 10,455 10,817 Figure 19: ECL coverage ratio for secured loans declined in FY19
Transfer to Stage 3 during the FY (4,657) (5,624) (%) Stage 1 Stage 2 Stage 3
% Of opening loans 44.5 52.0 70
Source: Company, IIFL Research
61.3
60 55.5
51.0
Figure 18: ~75% of the gross loans in Stage 3 come directly from Stage 1 50

(%) Stage 1 Stage 2 40

100.0 30
20.0
31 26 20 17.0
80.0 12.7
10
60.0 0.3 0.4 0.4
-
40.0 FY17 FY18 FY19
69 74
Source: Company, IIFL Research
20.0

-
FY18 FY19

Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Figure 20: ECL coverage ratio for unsecured loans continues to be high
Other Excerpts
(%) Stage 1 Stage 2 Stage 3
100 Outlook for FY20
80.3
75.8 73.3
• Despite such excellent outcomes, we at BFL believe that FY2020
80
may be a challenging year. Our views are based on four factors
 Recent increases in international crude prices;
60  Some high frequency indicators — such as growth in
41.2 40.5 40.3 manufacturing and capital goods, the Index of Industrial
40 Production, auto sales — suggest a significant moderation in
activity, amid a slowing global economy;
20  The possibility of El Niño and its risk to food prices; and
1.1 1.0 0.8  Budgetary and political announcements such as basic minimum
- income support for the poor, if implemented across-the-board,
FY17 FY18 FY19 could result in higher fiscal deficit and inflation.
Source: Company, IIFL Research • Having stated our concerns, it should also be stated that, with a
large customer franchise, strong liquidity position, diversified
Figure 21:Share of unsecured advances has steadily increased to 41% of consol AUM portfolio mix, granular geographical distribution and robust risk
metrics, we at BFL are confident of successfully dealing with these
(%) Secured advances Unsecured advances challenges in FY2020.
Rs602bn Rs824bn Rs1,159bn
100 Data and analytics
80 37 40 41
• In the past few years, the technology and analytics landscape has
evolved dramatically. Newer capabilities like Big Data, Cloud
60 Computing and Open Source software like R and Python now allow
access to statistical techniques that were not possible in the past.
40 This has taken analytics and insights to a level where solutions are
63 60 59 much more nuanced and specific.
20

-
• ‘Data as Oil’, an important initiative for FY2019, focuses on large
volume of data capture and its effective utilisations for business and
FY17 FY18 FY19
risk management. Significant investments have been committed to
Source: Company, IIFL Research strengthen our data lake ecosystem and ML capabilities to enable
data mining on semi-structured and unstructured data

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 Institutional Equities Bajaj Finance – BUY

• The Company is also actively investing and deploying capabilities in

Artificial Intelligence (AI) and Machine learning (ML) in the area of
Earnings outlook remains sanguine
facial recognition, optical character recognition (OCR), natural
Growth moderation, part of our base case
language processing (NLP) and voice. These technologies will enable
frictionless customer experience at various touch points. Given an increasing base as well as oncoming sector headwinds, we
 Machine learning (ML): BFL has deployed advanced machine believe BFL’s AUM growth would slow down to 35-36% Cagr over
learning models in the area of risk management, fraud FY19-22ii versus 39% Cagr over FY17-19. Strong transaction
prevention, pre-approved offer generation, offer pricing and offer volumes, increasing penetration and higher duration of the mortgage
recommendation. portfolio will help sustain such AUM growth. While two new loan
 Facial recognition: BFL has currently deployed facial segments have been launched, they will take time to scale up. Given
recognition technologies in offices and some branches on pilot the company’s granular structure, we believe the risk of a very sharp
basis. In future, facial recognition technology will provide a slowdown in AUM growth is low. However, we estimate a gradual
differentiated and frictionless check-in experience to its slowdown in our base case.
customers — enabling BFL to identify its customers from a pre-
stored customer photograph database and provide seamless Figure 22: AUM growth outlook already factors in a slowdown
product and service offerings. (Rs bn) AUM (LHS) YoY growth (RHS) (%)
 Natural language processing (NLP): BFL uses sophisticated 3500 50
technology to process unstructured text onto a structured 41 41
3000 38
dataset. With NPL, we can read through digital underwriting 36 37 37 35 40
notes, derive data variables from plain text based information 33
2500
like chat-bots, and thereby enrich its customer insights. 30
2000
• BFL’s entire data ecosystem and analytic workloads are now hosted 1500 20
on Microsoft Azure platform. This allows the flexibility on compute to
1000
develop and deploy Big Data workloads 10
500
602 824 1,159 1,602 2,163 2,884
• With scalable cloud based Enterprise Data Warehouse (EDW) 0
312 441
0
architecture, BFL has invested in real-time data stream ingestion FY15 FY16 FY17 FY18 FY19 FY20ii FY21ii FY22ii
technology for unstructured data analyses and re-marketing. BFL
now runs large data workloads on Big Data infrastructure. Having Source: Company, IIFL Research
the Big Data environment co-located with enterprise data warehouse
has significantly powered customer segmentation, bureau time As AUM growth moderates, revenue jaws would narrow
series, collection skip trace and de-duplication workloads. As AUM growth moderates and the mix of lower yielding loans in
SME, mortgages, etc. increases, we believe the revenue jaws will
Cross-sell and risk gradually close. While BFL has demonstrated a 28% CAGR in
• BFL’s strategy of ‘acquire and cross-sell’ to manage cost and operating expenses over FY17-19, we have built in the elevated
portfolio risk, based on the axiom that an existing customer poses cost, to remain conservative. Ideally, as the deployment of
significantly lower credit risk than a new customer, ensures lower technology intensifies and productivity gains set in, BFL could keep
risk across portfolios. the growth in operating expenses under control.

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 Institutional Equities Bajaj Finance – BUY

Figure 23: Revenue jaws would close, as AUM growth moderates; strong control on Figure 24: BHFL – RoE decomposition
costs and benefits from using technology and analytics could help lower the growth in FY19 – P&L Rs m % of AAUM
operating expense Interest income 9,978 9.4
(%) Revenue growth Cost growth Interest expenses 6,847 6.5
50.0 Net interest income 3,131 3.0
Non-interest income 1,515 1.4
Total operating income 4,647 4.4
40.0 Employee cost 2,197 2.1
Other expenses 776 0.7
Total operating expenses 2,973 2.8
30.0 Pre provision operating profit 1,674 1.6
Provisions for loan losses 251 0.2
Profit before tax 1,423 1.3
20.0 Taxes & Exceptional items 453 0.3
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20ii FY21ii FY22ii
RoAA 1,098 1.0
Source: Company, IIFL Research
Leverage 4.6
RoE 4.8
The HFC’s adjusted ROA were higher in FY19
Source: Company, IIFL Research
Bajaj Housing Finance (BHFL) has already achieved 1% RoA and
4.8% RoE in FY19. Key changes in the HFC’s RoA profile would be
Figure 25: AUM mix of BHFL as of FY19 – The standalone AUM was Rs175.6bn
driven by:
• NIM – 4.5% in FY19 – could decline, as leverage increases and the Loan against
effect of excess equity comes off property
12%
• Cost/income ratio – 63% in FY19 – will continue to decline, as the LRDs
book scales up. Currently, it is significantly higher than the sub-20% 10%
levels of fully leveraged, scaled up and efficient HFCs
• As per management, nearly half the costs in the subsidiary income Developer
statement pertain to servicing of the portfolio housed in the parent Home loans
financing
balance sheet. Hence, the effective cost/income ratio of the 66%
4%
subsidiary is actually 31.5% as of FY19. This would mean that BHFL Rural Mortgage
delivered a 2.1% RoA (adjusted for such costs) and 9.8% RoE in loans
FY19. 5%
Other Loans
3%

Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Despite the high valuations, we believe BFL will continue to Figure 28: P/B trend (5-yr)
compound steadily, given better than industry growth rates and (x) 12m fwd PB Avg +/- 1SD
steady profitability. We value BFL at 6.8x FY21ii BVPS or
9.0
Rs3,710/share. The upside is moderate at current levels.
8.0
Figure 26: Key earnings drivers 7.0 +1 Std. Dev:6.1x
(%) FY17 FY18 FY19 FY20ii FY21ii FY22ii 6.0
5.0
Loan growth 29.1 41.9 42.2 42.3 35.0 33.3
4.0 Avg:4.6x
Net interest margin 11.5 11.4 12.0 11.7 11.7 11.7
3.0
Net int income growth 39.8 35.6 45.9 36.1 36.0 34.7 -1 Std. Dev:3.1x
2.0
Non-int inc as % of total 3.1 0.2 0.1 0.1 0.1 0.1
1.0
Operating costs growth 35.2 27.3 28.4 34.1 36.3 36.0 0.0
Cost/income ratio 41.5 40.1 35.3 34.8 34.9 35.2 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Gross NPAs as % of loans 1.7 1.5 1.6 1.6 1.7 1.7
Source: Company, IIFL Research
Total prov as % of loans (bps) 154.2 144.5 151.4 148.3 168.6 172.3
Tax rate 34.8 35.0 35.3 35.3 35.3 35.3 Figure 29: P/E trend (5-yr)
Source: Company, IIFL Research
(x) 12m fwd PE Avg +/- 1SD
Figure 27: RoE decomposition 40
(%) FY17 FY18 FY19 FY20ii FY21ii FY22ii 35
+1 Std. Dev:30.5x
Net interest income 11.1 11.1 11.3 10.8 10.9 11.0 30
Non-interest income 0.4 0.0 0.0 0.0 0.0 0.0 25
Total operating income 11.4 11.1 11.4 10.9 10.9 11.1 20 Avg:24x
Employee cost 1.7 2.0 1.9 1.8 1.7 1.8 15 -1 Std. Dev:17.5x
Other operating expenses 3.0 2.5 2.2 2.0 2.0 2.1 10
Total operating expenses 4.7 4.5 4.0 3.8 3.8 3.9 5
Pre provision operating profit 6.7 6.6 7.3 7.1 7.1 7.2 0
Provisions for loan losses 1.5 1.4 1.4 1.4 1.6 1.6 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Profit before tax 5.2 5.2 5.9 5.7 5.5 5.5
Source: Company, IIFL Research
Taxes 1.8 1.8 2.1 2.0 1.9 2.0
RoAA 3.4 3.4 3.8 3.7 3.6 3.6
Leverage 6.6 5.9 5.9 6.7 7.2 7.5
RoE 22.4 20.1 22.5 24.7 25.7 26.8
Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

A capital raise would bolster competitive positioning

We have not built in a capital raise into our estimates. However, BFL
will target raising Rs80-100bn of capital in FY20ii. This would provide
it higher growth capital, and aid margins and RoA. In the event of
such capital infusion, BFL’s RoA would improve by 20-30bps over
FY19-20ii. Also, such an infusion would be EPS and BVPS accretive,
whereas RoE would dilute to 21-22% over FY19-22ii. While the stock
is currently trading at 6.8x FY21ii BVPS, post the capital infusion, it
would trade at 5.4x FY21ii BVPS.

Figure 30: Estimates assuming capital infusion of Rs80bn@Rs3,700 per share

Post capital infusion Base case Impact (%/bps)
FY20ii FY21ii FY22ii FY20ii FY21ii FY22ii FY20ii FY21ii FY22ii
No. of shares (m) 599 599 599 577 577 577 4 4 4
Net profit (Rs bn) 58 76 101 55 72 96 5 6 5
RoA (%) 3.9 3.8 3.8 3.7 3.6 3.6 17 22 17
RoE (%) 21.8 20.9 22.5 24.7 25.7 26.8 (289) (474) (431)
Tier-1 ratio (%) 19.6 17.8 16.7 14.6 13.9 13.5 503 397 318
Total CAR (%) 24.0 22.2 21.1 19.0 18.3 17.9 503 397 318

EPS (Rs/share) 96 128 168 95 125 166 1 2 1

BVPS (Rs/share) 551 669 823 429 544 697 28 23 18

P/E (x) 37.5 28.2 21.5 37.8 28.8 21.7

P/BV (x) 6.5 5.4 4.4 8.4 6.6 5.2

CMP (Rs/share) 3,603

Source: Company, IIFL Research

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 Company snapshot Bajaj Finance – BUY
Institutional Equities

Background: Bajaj Finance (BFL), erstwhile Bajaj Auto Finance, provides financing for two-wheelers, consumer durables, housing, small businesses,
construction equipment and infrastructure finance. BFL undertook business and organizational restructuring in FY08 and re-defined small business and
consumer financing as its key niches. The new initiatives have been delivering tangible results since FY09, with 41% and 61% Cagr in AUM and net profit
respectively, over FY09-19. The Company operates through 927 urban locations and 903 rural locations, with over 91,700 distribution points as of FY19.
BFL continues to be the largest consumer durables lender in India.

Management
Name Designation
Rahul Bajaj Chairman
Sanjiv Bajaj Vice Chairman
Rajeev Jain Managing Director
Source: Company

Key earnings drivers / P/B Chart

Y/e 31 Mar, Parent FY15 FY16 FY17 FY18 FY19
Loan Growth (%) 35.3 36.9 29.1 41.9 42.2
Net Interest Margin (%) 10.8 11.2 11.5 11.4 12.0
Net int income growth (%) 30.4 41.0 39.8 35.6 45.9
Core fee income growth (%) 0.0 0.0 0.0 0.0 0.0
Non-int inc/total inc (%) 4.1 2.7 3.1 0.2 0.1
Operating costs growth (%) 24.1 32.9 35.2 27.3 28.4
Cost/income ratio (%) 45.1 43.1 41.5 40.1 35.3
Gross NPLs ratio (%) 1.6 1.2 1.7 1.5 1.6
Total Prov/avg loans (%) 1.4 1.4 1.5 1.4 1.5
Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Financial summary
Income statement summary (Rs bn) Ratio analysis - I
Y/e 31 Mar, Parent FY18A FY19A FY20ii FY21ii FY22ii Y/e 31 Mar, Parent FY18A FY19A FY20ii FY21ii FY22ii
Net interest income 81.3 118.6 161.4 219.5 295.7 Balance Sheet Structure Ratios (%)
Fee Income 0.0 0.0 0.0 0.0 0.0 Loans / Deposits 0.0 0.0 0.0 0.0 0.0
Portfolio gains 0.0 0.0 0.0 0.0 0.0 Loan Growth 41.9 42.2 42.3 35.0 33.3
Others 0.1 0.2 0.2 0.3 0.4 Growth in Deposits 0.0 0.0 0.0 0.0 0.0
Non-interest income 0.1 0.2 0.2 0.3 0.4 Growth in Total Assets (%) 36.9 46.5 39.6 33.1 31.9
Total operating income 81.4 118.8 161.6 219.8 296.1 Profitability Ratios
Total operating expenses 32.7 42.0 56.3 76.7 104.3 Net Interest Margin 11.4 12.0 11.7 11.7 11.7
Pre provision operating profit 48.7 76.8 105.4 143.1 191.8 ROA 3.4 3.8 3.7 3.6 3.6
Provisions for loan losses 10.3 15.0 20.5 31.7 43.5 ROE 20.1 22.5 24.7 25.7 26.8
Other provisions 0.0 0.0 0.0 0.0 0.0 Non-Int Income as % of Total Income 0.2 0.1 0.1 0.1 0.1
Profit before tax 38.4 61.8 84.9 111.4 148.3 Net Profit Growth 35.9 60.0 37.5 31.2 33.2
Taxes 13.5 21.8 30.0 39.3 52.3 FDEPS Growth 29.3 59.6 37.5 31.2 33.2
Net profit-pre exceptional 25.0 39.9 54.9 72.1 95.9 Efficiency Ratios (%)
Exceptional items 0.0 0.0 0.0 0.0 0.0 Cost to Income Ratio 40.1 35.3 34.8 34.9 35.2
Reported net profit 25.0 39.9 54.9 72.1 95.9 Salaries as % of Non-Interest costs 43.9 46.2 46.6 46.1 46.5

Ratio analysis - II
Balance sheet summary (Rs bn) Y/e 31 Mar, Parent FY18A FY19A FY20ii FY21ii FY22ii
Y/e 31 Mar, Parent FY18A FY19A FY20ii FY21ii FY22ii Credit Quality Ratios (%)
Net loans & advances 793.6 1,128.2 1,605.0 2,166.5 2,887.9 Gross NPLs as % of loans 1.5 1.6 1.6 1.7 1.7
Placements to other banks 0.0 0.0 0.0 0.0 0.0 NPL coverage ratio 74.5 59.8 61.3 62.1 62.5
Cash & equivalents 3.4 3.5 3.9 3.2 2.0 Total prov charges as % avg loans 1.4 1.5 1.5 1.7 1.7
Other interest-earning assets 31.4 86.0 94.6 104.0 114.5 Net NPLs as % of net loans 0.4 0.6 0.6 0.6 0.6
Total interest-earning assets 835.6 1,228.7 1,715.1 2,285.9 3,017.6 Capital Adequacy Ratios (%)
Fixed assets 4.7 6.9 10.4 11.5 12.6 Total CAR 24.7 20.7 19.0 18.3 17.9
Other assets 7.7 6.7 8.7 11.3 14.7 Tier I capital ratio 19.7 16.3 14.6 13.9 13.5
Total assets 848.0 1,242.3 1,734.2 2,308.7 3,044.9 Source: Company, IIFL Research
Customer deposits 0.0 0.0 0.0 0.0 0.0
Other interest-bearing liabilities 665.6 1,015.9 1,449.7 1,942.5 2,568.0
Total interest-bearing liabilities 665.6 1,015.9 1,449.7 1,942.5 2,568.0
Non-interest-bearing liabilities 23.9 29.5 36.9 52.3 74.7
Total liabilities 689.5 1,045.4 1,486.5 1,994.8 2,642.7
Total Shareholder's equity 158.5 197.0 247.7 313.9 402.2
Total liabilities & equity 848.0 1,242.3 1,734.2 2,308.7 3,044.9
Source: Company, IIFL Research

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 Institutional Equities Bajaj Finance – BUY

Disclosure: Published in 2019, © IIFL Securities Limited (Formerly ‘India Infoline Limited’) 2019

India Infoline Group (hereinafter referred as IIFL) is engaged in diversified financial services business including equity broking, DP services, merchant banking, portfolio management services, distribution of Mutual Fund,
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 Institutional Equities Bajaj Finance – BUY

A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Abhishek Murarka(MBA), Pratik Chheda(Chartered Accountant)
IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22)
4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22)
25806654 E-mail: mail@indiainfoline.com Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates.
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Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 223 stocks rated in the IIFL coverage universe, 111 have BUY ratings, 7 have SELL ratings, 70 have ADD ratings and 34 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is
a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

Date Close price Target price Rating Date Close price Target price Rating
(Rs) (Rs) (Rs) (Rs)

27 Jul 2016 9848 11430 BUY 24 Oct 2018 2084 2470 BUY
28 Oct 2016 1105 1250 BUY 30 Jan 2019 2512 2800 BUY
12 Dec 2016 895 910 ADD 11 Apr 2019 3009 3560 BUY
31 Jan 2017 1055 980 ADD 17 May 2019 3110 3600 BUY
18 May 2017 1325 1450 ADD
20 Jul 2017 1542 1760 BUY
12 Sep 2017 1921 2250 BUY
17 Oct 2017 1886 2120 BUY
06 Nov 2017 1801 2050 BUY
18 May 2018 2067 2530 BUY
20 Jul 2018 2520 2860 BUY
08 Oct 2018 2023 2480 BUY

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