Bajaj Finance Limited - Going strong - Antique

Bajaj Finance reported strong performance in Q4FY13 with earnings growth at 51%, driven by strong asset growth and stable asset quality. Despite ~50% decline in disbursements to the commercial space (Infrastructure, CE and vendor finance), overall disbursement growth was strong at 21% YoY and driven by 67% growth in SME and 37% growth in consumer disbursements. Margins declined 120bps sequentially to 11% due the change in the asset mix. Asset quality remained stable with GNPAs at 1.1% and provisioning costs were contained at 27bps.

Given the diverse asset growth drivers, we expect growth to remain robust at 24% CAGR over FY13-15E. Consumer finance and SME loans are likely to make a larger contribution to growth over the next two years. While newer products may pressurize yields, declining cost of wholesale funds would arrest sharp margin compression. Asset quality will likely remain benign as prudent management policies and lower risk profile of new businesses lend stability. Earnings Cagr of 25% over FY13-15E will drive RoAs of 3.7% and RoE of 19%. We reiterate Buy on the stock and value the stock at Rs1,600/share.

SME drives strong AUM accretion, future opportunities large

Overall disbursements grew 21% YoY even as disbursements in the commercial space declined 45% YoY. The growth was largely driven by SME segment, which grew 66% YoY. Even as the infrastructure, construction equipment, 2-wheeler and select consumer durable business has moderated, growth opportunities will continue to emerge from new initiatives such a life style financing, salary home loans, gold financing, etc and drive AUM CAGR of 24% over FY13-15E.

Margin decline, operating leverage benefits accrues

Margins declined 120bps sequentially, led by seasonal decline in yields. Benefits from operating leverage continued to accrue, resulting in 41% YoY growth in operating profits. Going ahead, we expect the benefit from declining interest rates to be offset by declining yields on the relatively de-risked consumer & SME portfolio. Operating leverage benefits will ensure pre-provisioning profit CAGR of 26% over FY13-15E.

Asset quality stable, capital adequacy healthy

Although GNPAs increased 10bps sequentially to 1.1%, it was largely on account of a single account in the SME segment. Improvement was witnessed across all major businesses and credit costs were contained at 27bps for the quarter. Going ahead, we expect credit costs to be contained at 140bps and 120bps for FY14E and FY15E respectively given that the company has consciously focused on diversifying its asset base. Capital position remains strong with tier 1 ratio at ~19% (augmented after the recent rights issue).

Source : Equity Bulls

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