Bajaj Finance* – A diversified consumer financier

(Initiating Coverage Report)

* Bajaj Finance is now re-named

re named as Bajaj Finserv lending

Analyst – Abhisek Sasmal

033-3051-2100
[email protected] Microsec Research reports are also available on Bloomberg <MCLI>

29th October’ 2010 Microsec Research

 Bajaj Finance – Size does matter
We Initiate Bajaj Finance with a BUY and a 18 month target price of INR 1082, which is
BUY 2x FY13 expected book value of INR 541. The stock currently trading at PEx of 7 and
Market Data P/BVx of 1.44 on its FY13 expected earnings which we found attractive relative to its
Current Market Price (INR) 770* peers.
Target Price (INR) (18 Month) 1082
Bajaj Finance is among the Top 3 companies in 2-3 wheeler and consumer durable
Upside Potential 41%
financing. However over the past few years, it has reinvented itself from being an in-
52 Week High / Low (INR) 818/245 house two-wheeler financier to become a diversified consumer finance player with now
Market Capitalization (In INR Mn) 27960 less than 20% of disbursals toward two wheeler loans. Company’s new ventures in
mortgages, construction equipment is expected to drive the loan book growth and the
Non‐
Institution unsecured part is expected to drive the margins going forward.
s
26%
Investment Rationales

 Loan book to grow at a scorching pace of 39.6% CAGR over FY10-13 – mostly
di
driven b its
by it secured
d book
b k which
hi h is
i expected
t d to
t grow att a CAGR off 70% over FY10-13.
FY10 13
Total of 
Promoter 
Institution and   Stable margin with some downward bias in near term– change in business mix ,
s Promoter  rising interest rates is expected to hurt margins in near term, however in the next 2 years
19% Group
55% time, margins (NIMs) are expected to be stable at around 12%.

 NPA the key risk – however we believe it has already peaked for Bajaj finance.
STOCK SCAN
More focus on secured lending, help from Credit Bureau (CIBIL), cleaning up of the
BSE C
Code
d 500034 legacy
l b k would
book ld reduce
d NPA significantly
i ifi l going
i forward
f d and
d would
ld boost
b b
bottom-line
li
NSE Code BAJFINANCE due to lesser provisioning.
Bloomberg Ticker BAF IN
Strong disbursement growth, stable credit cost, improving cost-to-income, increasing
Reuters Ticker BJFN.BO leverage are expected to drive RoE from the current 8% to ~21% in FY13. We believe
Face Value (INR) 10 the stock has potential to reward its investors. However, execution delay in its new
Equity Share Capital (INR. Mn.) 366 ventures may act as a key risk to our call.
Average P/E/PBV 21.4/0.93
Particulars (in INR Mn) 2009 2010 2011E 2012E 2013E
Beta vs Sensex 0.7
Total Income 4,350.00 7,145.00 11,623.59 13,198.71 15,279.95
Average Daily Volmes (6 M) 159930
Dividend Yield (%) 0.8 Growth - 64.3% 62.7% 13.6% 15.8%

Stock Return (1 Yr) 168.2 NII 4,123.00 6,080.00 10,752.44 12,398.71 14,479.95

300.0 Growth% - 47.5% 76.8% 15.3% 16.8%

Net Profit 339.00 894.00 2,208.58 2,920.72 4,065.54

250 0
250.0
Growth% - 163.7% 147.0% 32.2% 39.2%
200.0
EPS 9.30 24.40 60.34 79.80 111.08

150.0 P/E 83.87 31.97 12.93 9.77 7.02

NII% 10 15.5 12.72% 11.98% 11.70%

100.0
ROE 3.1% 7.8% 16.3% 18.1% 20.5%
50.0
NNPA% 5.5 2.2 2 1.8 1.65
21‐Nov‐09

21‐Jan‐10

21‐Jun‐10
21‐Jul‐10
21‐Aug‐10
21‐Oct‐09

21‐Dec‐09

21‐Feb‐10
21‐Mar‐10
21‐Apr‐10
21‐May‐10

21‐Sep‐10

BV 297.46 314.89 369.20 441.02 540.99

P/BV 2.62 2.48 2.11 1.77 1.44

Bajaj Finance Ltd SENSEX
* All prices as on 28th October’10 Source: Company, Microsec Research

29th October’ 2010 Microsec Research

 Management
Name Designation Previous Organisation Experience (Years)

Rajiv Jain Chief Executive Officer AIG 18

Pankaj Thandani Chief - Financial Officer Bajaj Auto 28
Rakesh Bhat Chief - Information Officer AIG Consumer finance 17
Rajesh K Chief Risk Officer HSBC 13
Sanjeev Vij Business Head - Construction Equipment Finance ABN Amro Bank 19
Deepak Reddy Business Head - Personal & Small Business Loans Ameriacn Express 17
Amit Gainda Business Head - Loan Against Properties GE Money 13
Devang Modi Business Head - Sales Finance AIG NA
Vi k Likhite
Vivek Likhit B i
Business Head
H d - Loan
L Against
A i t SSecurities
iti TATA Motor
M t Finnace
Fi 20

Company Background

Bajaj Finserv Lending is one of the most diversified NBFCs in the market catering to more than 5 million
customers across the country. Apart from being a well recognized organization, it is holding the highest
credit rating of FAAA/Stable for any NBFC in the country today. Its product offerings include Consumer
Durable Loans, Personal Loans, Loan Against g Property,
p y Small Business Loans, Two-wheeler and Three-
wheeler Loans, Construction Equipment Loans, Loan Against Securities and Insurance Services (3rd party
distribution). It offers loans for Bajaj Auto Two Wheelers under the name of Bajaj Auto Finance Ltd.

Business segments & performance

Unsecured Book Secured Book
Consumer Personal & small Construction
2&3 wheeler loans LAP & Mortgages LAS
Durables Business loans Equipment

Current Portfolio Mix% 10.4 33.9 24.3 28.4 3 0

Market Size (Annual Disbursement INR Bn) 85 215 53 225 125 95

Manufacturers, Manufacturers, Infrastructure

Target Segment Individuals Individuals HNIs
Professionals Professionals companies

Average Ticket Size (INR Mn) 0.023 0.04 ~2 5-12 3- 20 7-40

Duration (Months) 8 24 60 120 60 36

450 Bajaj Auto Dealers

Distribution Network 1650 dealership DSA DSA DSA, Dealers DSA
& 2250 sub dealers

Presence Top 50 cities All Bajaj auto dealers Top 16 cities Top 14 cities Top 10 cities Top 10 cities

Regional NBFCs, Birla

Competition SCUF SCUF,HDFC HDFC, ICICI Bank HDFC SREI,Magma, Banks
Money

Yield on Advances% 26 23 18.6 11.56 11 10.7

cost of borrowings% 8.6 8.6 8.6 8.6 8.6 8.6
Spread% 17.4 14.4 10 2.96 2.4 2.1
NIM% 18.6 15.6 11.2 4.16 3.6 3.3
RoE% 7 16.3 22 20 7.5 10

Source: Company, Microsec Research

3

29th October’ 2010 Microsec Research

 Diversified business model

Business Model

Margin Enhancers Scale Builders

Consumer Small business

LAP LAS
Bajaj Finance has made Durables loans
significant investments
into technology up
gradation to realign its Construction
cost base, tighten risk 2-wheeler
equipment
loans
policies, increase usage
of credit bureau (CIBIL)
and undertake branch
rationalization.
Currently, the business
model revolves around
(1) Sustainable
profitability (2) focused 2&3 wheeler Personal & small Construction
Consumer Durables loans Business loans LAP & Mortgages Equipment LAS
distribution in existing
business; and
Cyclical, prone to Interest rate Under penetrated Backbone of
((3)) maintainingg asset Charecteristics
pricing
i i change
h sensitive
iti market
k t
Longg term p
play
y
i f t t
infrastructure
Highly
g y volatile
quality.

More focus on
Targeting affluent Deals in multiple
Targetting the SME building HNI &
classes, Using it as Captive financiaer Targetting the self purpose generic
Company Strategy with working promoter book
customer to Bajaj Auto. employed people assets with a high
capital loans with select focus
acquisition engine re-sale value.
on top 7 markets

Competetive intensity Stable High Low High High Low

Source: Microsec Research

29th October’ 2010 Microsec Research

 2013 – How will the picture look like?

Loan Book Break up (FY10) Loan Book (FY13)

LAS Consumer Durables
0% LAS 6%
Construction  2%
equipment
3% Consumer 
D bl
Durables
10% Construction 
LAP &  equipment
Mortgages 14%
28%
2‐3 wheeler loans
21%
2‐3 wheeler 
loans
34% LAP & Mortgages
Personal Lonas
42%
Small business  7%
loans
15% Personal 
Lonas Small business loans
10% 8%

120,000.00  Transition from a low ticket business to high ticket business. 90%
109,696.60 
Advances to grow at a 80%
80.0%
CAGR of 39.6% over 100,000.00 
69.8% 87,778.46  70%
FY10-13.
FY10 13. However
better than expected 80,000.00  72,468.00  60%
growth in secured book
50%
may propel it higher. 60,000.00 
BAF’s balance sheet is 40%
40,258.00 
well capitalized with 40,000.00  30%
26% CAR that can 23,704.00  25.0%
21.1% 20%
support this growth. 20,000.00 
10%

‐ 0%
FY09 FY10 FY11E FY12E FY13E
Advances (INR Mn) Growth% (RHS)

16,000.00  90%
14,479.95 
14,000.00  76.8% 80%
12,398.71 
70%
12,000.00 
NII to grow at a CAGR 10,752.44 
,
60%
of 33.5% over FY10-13 10,000.00 
47.5%
led by rapid growth in 50%
8,000.00 
advances. 6,080.00  40%
6,000.00 
4,123.00  30%
4,000.00  16.8%
20%
15.3%
2,000.00  10%

‐ 0%
FY09 FY10 FY11E FY12E FY13E
Growth slightly muted on
NII (INR Mn) Growth% (RHS) account of NIMs contraction
and higher base.

Source: Company, Microsec Research

5

29th October’ 2010 Microsec Research

NIMs is expected to contract 16.0%
by 170 bps , driven by 13.40%
14.0%
almost 287 bps reduction in
spread in the next 3 years 11.98%
12.0% 12.72% 11.70%
time. We believe a NIM of
10.0%
around 10.5% is sufficient 10.04%
8.78% 7.50%
for the company to reward 8.0%
its shareholder as the book 7.17%
6.0%
size is expected to double by
FY13. BAF’s strong pricing 4.0%
power in key segments and
2.0%
the group’s backing to
protect against a sharp 0.0%
compression in NIM also 2010 2011E 2012E 2013E
lends credibility.
Spread% NIM%

4,500.00  180%
4,065.54 
163.7%
4,000.00  160%
Lesser provisioning on 147.0%
3,500.00  140%
its secured loan 2,920.72 
book, reduction in cost 3,000.00  120%
to income
i on account off 2,500.00  100%
2,208.58 
technological up
gradation are expected 2,000.00  80%
to help PAT to grow 1,500.00  60%
4.5x over FY10-13. 894.00 
1,000.00  39.2% 40%
32.2%
500.00  339.00  20%

‐ 0%
FY09 FY10 FY11E FY12E FY13E

PAT (INR Mn) Growth% (RHS)

25,000.00  22.67% 25%

19.45% 19,800.36 
20,000.00  20%
17 25%
17.25%
16,141.37 
Networth is expected
to double in next 3 15,000.00  13,512.72  15%
years 10,887.00  11,525.00 

10,000.00  10%

5.86%
5,000.00  5%

‐ 0%
FY09 FY10 FY11E FY12E FY13E

Networth (INR Mn) Growth% (RHS)

6 Source: Company, Microsec Research

29th October’ 2010 Microsec Research

 Relative valuation seems cheap compared to its peers

Forward Earnings Valuation

28th
Oct'10 Trailing 12 months ROE% ROA% P/BV P/E
Market Cap
CMP (INR Crs) Spread% NIM% NNPA% ROE% ROA% FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E

Bajaj Finance 755 2851 12.5 14 1.56 12.3 2.8 16.34 18.1 2.94 3.22 2.11 1.77 12.93 9.77

HDFC 681 108224 2.3 3.3 0.1 19.7 2.75 20.46 21.34 2.68 2.69 5.72 4.99 29.32 24.6

LICHFL 1333 13695 2 2.85 0.12 19.5 1.7 20 21.2 1.67 1.68 3.02 2.5 15 11.7

M&M Finance 730 6532 11.2 10.35 0.95 21 4.45 23.2 23.25 4.3 4.4 3.3 2.73 15.8 12.9

SCUF 664 3203 13.5 12.65 2.2 22 3.3 21 23 3.13 3.2 2.5 1.96 13 10.3

Source: Bloomberg, Company, Microsec Research

1000
Time for Out-performance

800

2 years prolonged underperformance

600 was due to lack of business vision
and conflict for ownership

400

200

Bajaj Finance Ltd Housing Development Finance Corporation Ltd
LIC Housing Finance Ltd Mahindra & Mahindra Financial Services Ltd
Shriram City Union Finance Ltd Source: ACE

29th October’ 2010 Microsec Research

 Valuation & Recommendation

The stock currently trading at PEx of 7.02 and P/BVx of 1.44 on its FY13 expected earnings which we
found inexpensive relative to its peers. We valued Bajaj Finance at 2x FY13 expected book value of
INR 541 and assigned a 18 month target of INR 1082 (40% upside from the current level). The target
multiple is almost 15% discount to that of peers.

Strong disbursement growth,

growth stable credit cost,
cost improving cost-to-income,
cost to income increasing leverage are
expected to drive RoE from the current 8% to ~24% in FY16. We believe the stock has potential to
reward investors in the long run. However, execution delay in its new ventures act as a key risk to our
call.

Current valuation is on
the higher side if we
compared it to
historical parameters.
However we believe
the current price has
not discounted the full
future potential yet
and relative
outperformance to its
peers has jjust started.
p
We expect the
valuation gap to its
peers to narrow down
going forward.

Key Risks to our call

 Execution delays in case of business restructuring.

 Increased competition in some of its business segment. And more than expected margin
erosion as a result of it

29th October’ 2010 Microsec Research

 Financials & Projections

Income Statement Spread Analysis 2010 2011E 2012E 2013E

in Mn 2010 2011E 2012E 2013E
Avg yield on earning assets 23.9 27.00% 22.46% 22.22%
Interest earned 8,097.00 15,218.28 17,994.58 21,939.32
NIM% 15.5 12.72% 11.98% 11.70%
Interest expense
p 2,017.00 4,465.84 5,595.88 7,459.37
NII 6,080.00 10,752.44 12,398.71 14,479.95
Other Income 1,065.00 871.15 800.00 800.00 Growth% 2010 2011E 2012E 2013E
Total Income 7,145.00 11,623.59 13,198.71 15,279.95 Advances 69.8% 80.0% 21.1% 25.0%
Operational expense 3,196.00 5,521.21 5,939.42 6,111.98
Gross Profit (ppp- Pre Provision NII 47.5% 76.8% 15.3% 16.8%
Profit) 3,949.00 6,102.38 7,259.29 9,167.97 PAT 163.7% 147.0% 32.2% 39.2%
Provisions 2606 2806 2900 3100
PBT 1,343.00 3,296.38 4,359.29 6,067.97
Operating Metrices 2010 2011E 2012E 2013E
Tax 449.00 1,087.81 1,438.57 2,002.43
PAT 894.00 2,208.58 2,920.72 4,065.54 Cost to Income 44.7% 47.5% 45.0% 40.0%
EPS 24.40 60.34 79.80 111.08 ROE 7.8% 16.3% 18.1% 20.5%
ROA 2.04% 2.94% 3.22% 3.60%

Balance Sheet
Asset Quality 2010 2011E 2012E 2013E
in Mn 2010 2011E 2012E 2013E
Liabilities Gross NPA Ratio - - - -
Equity Capital 366.00 366.00 366.00 366.00 Net NPA Ratio 2.2 2 1.8 1.65
Reserve & Surplus 11,159.00 13,146.72 15,775.37 19,434.36
Networth 11,525.00 13,512.72 16,141.37 19,800.36
CRAR Ratio 2010 2011E 2012E 2013E
Total Debt 32,268.00 61,597.80 74,611.69 93,242.11
Total 43,793.00 75,110.52 90,753.06 113,042.46 Tier1 Ratio 26 24 19 18
CAR% 26 24 19 18
Assets
Fixed Asset 505.00 600.00 720.00 864.00
Valuation Ratios 2010 2011E 2012E 2013E
Investments 3,018.00 3,000.00 3,000.00 3,000.00
PE 31.97 12.93 9.77 7.02
Advances 40,258.00 72,468.00 87,778.46 109,696.60
Net Current Assets 3,535.00 2,642.52 2,974.60 3,345.87 P/PPP 0.20 0.13 0.11 0.09
Total 43,793.00 75,110.52 90,753.06 113,042.46 P/ABV 2.48 2.11 1.77 1.44

Source: Company, Microsec Research

Key Assumptions 2009 2010 2011E 2012E 2013E

Provisions as % of Advances 7% 6.5% 3.9% 3.3% 2.8%

Loan disbursements growth% -19% 87% 90% 70% 70%

Tax rate% 34% 33.4% 33.0% 33.0% 33.0%

Source: Microsec Research

29th October’ 2010 Microsec Research

 Intentionally left blank

10

29th October’ 2010 Microsec Research

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29th October’ 2010 Microsec Research

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29th October’ 2010 Microsec Research