AMBIT INSIGHTS

Bajaj Finance SELL

Risk reward not in favour; reiterate SELL
Result Update
Bajaj Finance’s (BAF) net profit at Rs2.21bn (up 27% YoY) was in line with our
and consensus expectations. Decline in NIMs and increase in credit costs have
resulted in BAF’s 4Q15 RoAs declining by ~20bps on YoY basis. Whilst we
expect BAF to deliver a fairly robust 20% EPS CAGR over FY15-17E, bulk of it Stock Information
would be derived from taking higher risk as corroborated by: i) higher Bloomberg Code: BAF IN
growth in unsecured portfolio wherein it is out-priced by banks; ii) Lowering CMP (Rs): 4,499
of the credit-filters in consumer durables loans; and iii) growth in mortgages TP (Rs): 2,691
driven by ticket sizes highest in the industry. With softening of real estate
Mcap (Rs bn/US$ bn): 226/3.5
prices, closing of the regulatory arbitrage between banks and NBFCs and
increasing competition in retail loans from the banks, the current valuations 3M ADV (Rs mn/US$ mn): 143/2.2
of 3.9x one year forward P/B (~100% premium to its cross-cycle averages)
make the risk-reward unfavorable for the stock. We reiterate our SELL stance
with a target price of Rs2,691/share implying 40% downside from the current Stock Performance (%)
levels. 1M 3M 12M YTD

Results overview: Bajaj Finance’s 4QFY15 net profit at Rs2.21bn (up 27% YoY) was Absolute (1) 7 153 29
in line with our and consensus expectations. NII grew by 34% YoY driven by 35% YoY Rel. to Sensex (1) 12 139 28
growth in AUM and decline in NIMs by ~13bps YoY. Whilst a ~52bps YoY Source: Bloomberg, Ambit Capital research
improvement in opex/AUM to 4.7% resulted in operating profits growth of 35% YoY,
increase in credit costs by 37bps YoY, resulted in PAT growth of 27% YoY.
Ambit Estimates (Rs bn)
AUM growth was robust at 35% YoY primarily driven by SME and consumer lending.
FY15 FY16E FY17E
NIMs declined by ~13bps YoY to 9.4% despite cost of funds declining by 36bps on
YoY basis, as yields declined by 13bps and the proportion of interest bearing NII 28.7 34.3 42.0
borrowings increased due to increase in leverage – from 6x in 4Q14 to 6.8x in 4Q15. Net profit 9.0 10.9 12.9
Diluted EPS (Rs) 171 207 247
Gross NPAs increased by 33bps on YoY basis to 1.51%, resulting in credit costs
increasing by ~37bps YoY to 1.4%, even as provisioning coverage declined by 6 Source: Bloomberg, Ambit Capital research

percentage points on YoY basis to 70%. Opex/AUM declined by 52bps YoY to 4.7%.
Overall, BAF has delivered 4QFY15 RoAs of ~2.8%, versus 4QFY14 RoAs of 3.0%
primarily due to decline in margins and increase in credit costs. However increase in
leverage has led to BAF improving its RoEs by ~80bps to ~19%.
The management highlighted increased competitive pressure in the loan against
property segment which resulted in BAF slowing down its growth in that segment. It
guides for 25% AUM growth to result in 20% PAT growth for the mid-term
Where do we go from here? We appreciate BAF’s competitive advantages around
customer acquisition, cross-selling and superior product and service which should
continue to drive a fairly robust 20% EPS CAGR over FY15-17E driven by 29% AUM
CAGR. However, bulk of this earnings growth would be derived from taking higher
risk as corroborated by:
i) BAF’s higher growth in unsecured products even as it is out-priced in the respective
segments (bank’s pricing of personal loans at 13% in contrast to BAF’s pricing of
excess 14.5%); Analysts
ii) Lowering of the credit-filters as indicated in our checks with consumer dealers (eg. Aadesh Mehta, CFA
disbursing consumer durable loans to non-credit card customers in metros); and aadeshmehta@ambitcapital.com
Tel: +91 22 3043 3239
iii) BAF’s ticket sizes in mortgages (~40% of its AUM) being at-least 3x of that of
industry averages. Pankaj Agarwal, CFA
pankajagarwal@ambitcapital.com
With our expectation of softening of real estate prices, closing of the regulatory Tel: +91 22 3043 3206
arbitrage between banks and NBFCs and increasing competition in retail loans from Ravi Singh
the banks, the current valuations of 3.9x one year forward P/B (~100% premium to its ravisingh@ambitcapital.com
cross-cycle averages) make the risk-reward unfavourable for the stock. We retain our Tel: +91 22 3043 3181
SELL stance with a target price of Rs2,691/share implying 40% downside from the
current levels.

Ambit Capital Pvt Ltd 21 May 2015

 AMBIT INSIGHTS

Exhibit 1: Quarterly snapshot

Deviation from
Rs. Mn 4QFY15 4QFY14 3QFY15 4QFY15E YoY (%) QoQ (%)
estimates (%)
NII 7,414 5,532 8,240 7,387 34% -10% 0%
Interest Income 13,532 10,032 14,164
Interest Expense 6,118 4,501 5,924
Other Income 919 918 690 1,147 0% 33% -20%
Net Income 8,332 6,450 8,930 8,534 29% -7% -2%
Operating expenses 3,749 3,061 3,921 3,942 23% -4% -5%
Employee exp. 1,172 929 1,198
Marketing & Other comm. 613 570 830
Recovery Commission 558 467 520
Others 1,406 1,095 1,373 3,942
Operating Income 4,583 3,389 5,009 4,592 35% -9% 0%
Loan loss provisions 1,138 622 1,079 1,112
PBT 3,446 2,768 3,931 3,480 24% -12% -1%
Tax 1,136 947 1,347 1,192
PAT 2,310 1,821 2,584 2,288 27% -11% 1%
Diluted EPS 44 36 51 45 21% -14%
BVPS 950 814 942 987 17% 1%
RoA (%) 2.8% 3.0% 3.3% (23) (52)
RoE (%) 19.0% 18.2% 22.4% 74 (338)
Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd 21 May 2015

 AMBIT INSIGHTS

Balance sheet
Rs mn FY13 FY14 FY15 FY16E FY17E
Net-worth 33,670 40,203 49,829 57,453 68,710
Borrowings 140,734 208,400 290,274 389,406 490,021
Total liabilities 174,404 248,603 340,103 446,860 558,732
Fixed assets 1,762 2,199 2,492 3,115 3,893
Investments 53 282 3,323 3,323 3,323
Loans and Advances 175,170 240,610 324,100 429,703 540,133
Cash and Bank Balance 4,164 7,768 2,197 2,197 2,197
Deferred tax assets 904 1,392 2,123 2,654 3,317
Net working capital (7,648) (3,648) 5,869 5,869 5,869
Total assets 174,404 248,603 340,103 446,860 558,732
Source: Company, Ambit Capital research

Income statement
Rs mn FY13 FY14 FY15 FY16E FY17E
Net interest income 17,174 22,153 28,717 34,313 41,990
Interest Income 29,231 37,886 51,200 64,073 77,587
Interest Expense 12,057 15,732 22,483 29,760 35,597
Fee based and other income 1,866 2,848 2,983 5,556 7,050
Total Income 19,040 25,001 31,699 39,869 49,040
Total expenses 8,506 11,511 14,284 18,468 22,791
Operating and other expenses 6,055 8,103 9,777 12,834 15,748
Employee Cost 2,452 3,408 4,507 5,634 7,043
Pre provision profit 10,534 13,490 17,415 21,401 26,249
Provisions 1,818 2,578 3,846 5,189 6,925
Profit before tax 8,716 10,912 13,569 16,212 19,324
Tax 2,803 3,722 4,591 5,350 6,377
PAT 5,913 7,190 8,979 10,862 12,947
Source: Company, Ambit Capital research

Key ratios
FY13 FY14 FY15 FY16E FY17E
AUM growth (%) 33.6 37.4 34.7 32.6 25.7
Dil Consol EPS growth (%) 25.7 6.6 19.1 21.0 19.2
Net interest margin (NIM) (%) 11.2 10.7 10.2 9.1 8.7
Cost to income (%) 44.7 46.0 45.1 46.3 46.5
Opex (% of AAUM) 5.6 5.54 5.06 4.90 4.70
Gross NPAs (%) 1.1 1.2 1.5 1.5 1.5
Credit costs (% of AAUM) 1.19 1.24 1.36 1.38 1.43
Provision Coverage (%) 83.0 76.4 70.2 70.2 70.2
Capital adequacy (%) 22.0 19.5 18.0 16.2 15.7
Tier-1 (%) 18.7 16.5 14.2 12.4 11.9
Leverage (x) 5.7 5.7 6.5 7.3 8.0
Source: Company, Ambit Capital research

Key ratios
FY13 FY14 FY15 FY16E FY17E
BVPS (Rs.) 676 802 994 1,146 1,370
Dil. EPS (Rs) 134.7 143.7 171 207 247
ROA (%) 3.9 3.4 3.1 2.8 2.6
ROE (%) 21.9 19.5 19.9 20.2 20.5
P/E 33.4 31.3 26.3 21.7 18.2
P/BV 6.7 5.6 4.5 3.9 3.3
Dividend yield (%) 0.3 0.4 0.4 0.5 0.6
Source: Company, Ambit Capital research

Ambit Capital Pvt Ltd 21 May 2015

 AMBIT INSIGHTS

Bajaj Finance Ltd (BAF IN, SELL)

5,000

4,000

3,000

2,000

1,000

0
May-12

Nov-12

Mar-13

May-13

Nov-13

Mar-14

May-14

Nov-14

Mar-15

May-15
Jul-12

Sep-12

Jan-13

Jul-13

Sep-13

Jan-14

Jul-14

Sep-14

Jan-15
BAJAJ FINANCE LTD

Source: Bloomberg, Ambit Capital research

Ambit Capital Pvt Ltd 21 May 2015

 AMBIT INSIGHTS

Explanation of Investment Rating

Investment Rating Expected return (over 12-month)
BUY >10%
SELL <10%
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock
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