Bajaj Finance - Time to take profit off the table - BRICS

We were buyers of Bajaj Finance (BFL) since June 2010 (Rs300) until about the Rs1,000-1,100 odd levels, when we downgraded the stock to Reduce; but at CMP of Rs1,270, valuation (1.9x Q2FY14 book, 9x 12-month forward earnings) seems extremely stretched. BFL plans to curtail exposure to the infra/construction verticals within 6-8 quarters of starting these businesses, highlighting its limited underwriting capability, as asset quality deteriorated sharply. In its core business product - consumer-durable and cross-sell - we foresee rising competitive intensity in the next 4-6 quarters with mispricing creeping in, which will exert pressure not only on margins, but possibly on asset quality as well. We guess this could be one of the reasons why BFL increased provisioning in consumer-durable book to 60% in Q2FY13 from 50% (90dpd). To ward off competition, BFL needs to continuously innovate with new products and new marketing strategies, and, this we believe, is mostly behind us, with the introduction of cross-sell products like EMI cards and category based personal loans, e.g. doctor loans and new business line of lifestyle financing. We downgrade the stock to Sell from Reduce while maintaining our target price at Rs1,070 (16% downside to CMP).

Change in estimates: We expect RoE to normalize to 20-21% over FY14-15 from 23-24%+ in FY12-13, driven mainly by a fall in NIM to sub 11% level over FY12-14 from 12% in FY12, and lower disbursal (CAGR of 17.4% over FY12-14). We have maintained credit cost at 1.4% over the next two years, which should result in a CAGR of 26% in PAT and 16.2% in diluted EPS over FY12-14. We expect RoA to come off its recent highs of 3.5-3.8% and remain stable at 3.3%.

Valuation: We expect RoE to normalize to 20-21% in about a year and based on that, our Gordon growth multiple stands at 1.6x, resulting in a target price of Rs1,070 on Q2FY14 adjusted book. The stock currently trades at 1.9x forward book, which we believe, is stretched, given the tough business environment. Hence, we downgrade the stock to Sell.

Source : Equity Bulls

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