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Bajaj Finance: SME vertical drives growth - Views on News from Equitymaster

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Bajaj Finance: SME vertical drives growth
Jan 20, 2014

Bajaj Finance Ltd declared its results for the third quarter of the financial year 2013-14 (3QFY14) results. The institution has reported a 29.8% YoY growth in total income while net profits have grown by 21.3% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Income from operations grows 29.8% YoY in 3QFY14 on the back of 45% YoY growth in deployments.
  • Other income increases by whopping 116% YoY in 3QFY14 and almost 180% YoY during 9mfy14.
  • Net profit grows by 21.3% YoY for 3QFY14 owing to steady income stream and healthy other income performance during the quarter. For 9mFY14, profits grew by 25.6% YoY on strong income growth.
  • Gross NPAs and Net NPAs stand at 1.15% and 0.23% respectively and the provision coverage ratio stands at 80% as at the end of 3QFY14.
  • Capital adequacy ratio (inclusive of tier II capital) is recorded at 19.53% during 3QFY14 and the company stands well-capitalized to boost its growth trajectory.

Standalone Financial Results:
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Income from Operations 8,247 10,703 29.8% 22,615 29,603 30.9%
Expenses 5,916 7,871 33.0% 16,347 21,639 32.4%
Profit from operations 2,331 2,833 21.5% 6,268 7,964 27.1%
Other Income 36 116 226.2% 64 180 179.8%
Profit before tax 2,366 2,949 24.6% 6,332 8,144 28.6%
Tax 765 1,007 31.6% 2,057 2,775 34.9%
Effective tax rate 32.3% 34.2%   32.5% 34.1%  
Profit after tax/ (loss) 1,601 1,941 21.3% 4,275 5,369 25.6%
Net profit margin (%) 19.4% 18.1%   18.9% 18.1%  
No. of shares (m)         49.8  
Book value per share (Rs)*         676.4  
P/E (x)         14.3  
P/BV (x)         2.3  
* (Standalone book value as on 31st March 2013)

What has driven performance in 3QFY14?
  • Underpinned by robust growth in SME vertical followed by steady growth in consumer durable and lifestyle financing (25% YoY growth), Bajaj Finance reported healthy growth of 21.3% YoY in profits during 3QFY14. Income from operations also grew healthy 29.8% YoY. The surprise came from the other income component that grew by whopping 226% YoY and drove the third quarter earnings for Bajaj Finance Ltd. Therefore, on sequential basis the return ratios have showed an upward trend.

  • The business growth for Bajaj Finance maintained healthy trend. The deployments during the quarter grew 45% YoY and the assets under management (AUM) grew 33% YoY.

  • While SME, consumer durable and lifestyle financing maintained the healthy growth momentum, the company continues to maintain a cautious view on commercial business on account of sectoral stress. However, given the subdued consumption demand across discretionary and non-discretionary products, the pressures coming from the consumer and lifestyle segment cannot be ruled out. Besides, the two-wheeler financing also witnessed a de-growth due to slowdown in the two-wheeler industry and reported 15% YoY decline. Nonetheless the steady state growth in three-wheeler financing continues to offset the pressures from the two-wheeler segment.

    Having said so, Bajaj Finance currently finances around 30% of two-wheeler sales of Bajaj Auto. The asset composition mix which stands at 40% from consumer financing, 52% from SME business financing and 8% from the commercial side as at the end of third quarter is expected to remain at current levels.

    PORTFOLIO MIX (%)
    Segment 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14
    Consumer Finance 39% 39% 41% 40% 42% 41% 40%
    SME business 45% 45% 46% 48% 49% 50% 52%
    Commercial lending 16% 16% 13% 12% 9% 9% 8%
    Source: Company presentation

  • The total expenses spiked 33% YoY during the quarter. With continued investments in systems and processes the operating costs have stood on the higher side. The total cost to income ratio was higher at 44% levels during 3QFY14.

  • The margins for the quarter remained stable backed by strong performance from the consumer electronic financing and the benign costs of funds. The borrowing mix of the company between banks and money markets currently stands at 60:40.

  • The strong performance in other income came on the back of good traction in fee based products across businesses. The other income for the quarter grew robust 226% YoY and 180% YoY during the 9MFY14.

  • Going with the trend, the asset quality remains healthy and the provision coverage stronger. The gross NPAs stood at 1.15% and the net NPAs at 0.23% during the third quarter. The provisions coverage was reported at 80%. Barring pain from the commercial equipment financing portfolio and the two-wheeler financing, the credit quality remained firm across other business segments. Two years back, the company started systematic shifting of all business to 90 days pass due (dpd), and over 95% of the assets now stands at 90 dpd.

  • The capital adequacy ratio stood at 19.5% in December 2013 and is way above the regulatory requirements. The company stands sufficiently capitalized to support its growth trajectory.
What to expect?
At the current price of Rs 1547, the stock is trading at 2.3 times our estimated FY16 adjusted book value. With the niche business focus backed by high-yielding loan portfolio, the business growth for Bajaj Finance is expected to remain intact. Moreover, healthy core income performance, strong fee-based income growth, cost control mechanisms and adequate provisioning policies will help guard the earnings profile of the company. However, the higher exposure to risky assets indicates that the asset quality pressures lie ahead for Bajaj Finance.

However, at current valuations the stock is fairly priced and we would recommend investors to not to buy the stock at these levels. We believe, the stock of Bajaj Finance can provide sufficient margin of safety in valuations at Rs 1,300 or lower.

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