Bajaj Finance - Business growth moderates but asset quality robust - Religare

BAF's Q2FY14 results were largely in line with estimates. While business growth moderated as the company went slow amid tight liquidity, asset quality was robust and credit costs remained low. AUM grew by 29% YoY (vs. 33% YoY in Q1FY14) and was driven by Consumer and SME segments. We remain positive on BAF given its strong earnings CAGR (~22% over FY13-FY15), reasonable valuations (1.6x FY14 BV), healthy asset quality and robust ROEs. A banking license, if granted, would be a key catalyst.

- Strong business, earnings growth: Disbursements in the Consumer/SME segments grew 26%/36% YoY to Rs 27bn/Rs 19bn, while those in the Construction Equipment/Infra segments declined further by 23% YoY. AUM for the Consumer/ SME segments was strong at 36%/42% YoY (although down from 41%/45% YoY in Q1FY14), while that for the Commercial segment declined further by 3% QoQ/26% YoY. As per management, discretionary spends continue to moderate, which could result in lower AUM growth of 20-25%.

- Asset quality stable despite a tough macro: GNPLs/NNPLs were stable at 1.1%/ 0.3% and the provision coverage was healthy at 78%. Total provisions remained low at Rs 523mn (112bps on AUM on annualised basis). Overall asset quality was healthy in Q2FY14, and the stress in retail segments remained low.

- C/I ratio at 48%; CAR healthy at ~21%: Opex growth was marginally higher than revenue growth at 41% YoY, and thus the C/I ratio increased from 45% in Q1FY14 to 48% in Q2FY14. BAF's capital position remains comfortable with a CAR of 21%.

- Banking license application by Bajaj Finserv: A banking license, if granted, would hit near-term profitability. However, we remain positive as a banking license would boost BAF's long-term growth profile and enable it to compete with banks.

Source : Equity Bulls

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