Bajaj Finance: Core earnings remain strong

May 16, 2014

Bajaj Finance Ltd declared its results for the fourth quarter (4QFY14) and the financial year 2013-14. The institution has reported a 29.0% YoY growth in total income from operations while net profits have grown by 11.2% YoY during the quarter. For full year, the profits have grown by 21.6% YoY. Here is our analysis of the results.

Performance summary

• Income from operations grows 29.0% YoY in 4QFY14 on the back of 38% YoY growth in deployments.
• Other income increases by whopping 113.1% YoY in 4QFY14 and 137.5% YoY during FY14.
• Net profit grows by modest 11.2% YoY for 4QFY14 owing to steady income stream and healthy other income performance during the quarter. For FY14, profits grew by 21.6% YoY on strong income growth.
• Gross NPAs and Net NPAs stand at 1.18% and 0.28% respectively and the provision coverage ratio stands at 76% as at the end of 4QFY14.
• Capital adequacy ratio (inclusive of tier II capital) is recorded at 19.13% during 4QFY14 and the company stands well-capitalized to boost its growth trajectory.

Financial performance: A snapshot

(Rs m)	4QFY13	4QFY14	Change	FY13	FY14	Change
Income from Operations	8,305	10,711	29.0%	30,920	40,314	30.4%
Expenses	6,034	8,183	35.6%	22,381	29,822	33.2%
Profit from operations	2,272	2,529	11.3%	8,540	10,493	22.9%
Other Income	112	239	113.1%	177	419	137.5%
Profit before tax	2,384	2,768	16.1%	8,716	10,912	25.2%
Tax	746	947	27.0%	2,803	3,722	32.8%
Effective tax rate	31.3%	34.2%		32.2%	34.1%
Profit after tax/ (loss)	1,638	1,821	11.2%	5,913	7,190	21.6%
Net profit margin (%)	19.7%	17.0%		19.1%	17.8%
No. of shares (m)					49.8
Book value per share (Rs)*					801.4
P/E (x)					12.4
P/BV (x)					2.2

* (Standalone book value as on 31st March 2014)

What has driven performance in FY14?

• Healthy credit growth and robust volume momentum ensured a stable quarter for Bajaj Finance. 4Q being a subdued quarter of the cyclical consumer financing business of Bajaj Finance, the profitability has stood modest. Nonetheless, underpinned by superior performance in consumer durable finance, lifestyle financing and SME businesses, the profits for the company have grown by 11.2% YoY during 4QFY14 and robust 21.6% YoY for the full year FY14. Also, owing to the better than expected top-line growth, the company's profits have exceeded 11% than our estimates.

• The loan portfolio mix for Bajaj Finance has remained almost unchanged during the last quarter of FY14. Bajaj Finance currently finances around 30% of two-wheeler sales of Bajaj Auto. The asset composition mix which stands at 39% from consumer financing, 53% 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	4QFY14
  Consumer Finance	39%	39%	41%	40%	42%	41%	40%	39%
  SME business	45%	45%	46%	48%	49%	50%	52%	53%
  Commercial lending	16%	16%	13%	12%	9%	9%	8%	8%

  
  
• The deployments have stood higher reporting a staggering 38% YoY growth in 4QFY14. So did the assets under management that have grown by robust 37% YoY during 4QFY14. While consumer and SME business have been the star performers during 4QFY14, two-wheeler financing, three-wheeler financing and commercial lending business have reported a sluggish growth. The slowdown in commercial vehicle industry has dampened the three-wheeler business that has reported a 38% YoY de-growth during 4QFY14. The commercial lending business has also taken a toll on account of sectoral stress. The rural lending business has picked up well for the company and the company plans to add 21 new branches and 100 spokes to the rural branch network in FY15.

• The total expenses for the quarter continue to burgeon and have reported 35.6% YoY increase during 4QFY14. Consequently, the opex to NII have spiked to 47% in 4QFY14 from 45% same quarter a year ago.

• The interest costs have stood on the lower side for the company; hence the spreads have remained intact. The borrowing mix of the company remains quiet healthy with 58% coming from banks and 42% from money markets and retail deposits. This again keeps the costs in check.

• The whopping 113.1% YoY growth in other income during 4QFY14 was largely driven by fee-based products. Even for full year, the company has reported a staggering 137.5% YoY growth.

• Bajaj Finance continues to boast impeccable asset quality. The Gross and Net NPA has remained healthy at 1.18% and 0.28% respectively. Barring sectors such as construction equipment and infrastructure, the company has maintained the credit quality. However, the loan loss provisions have turned out to be higher in FY14 and jumped 42% YoY. That's because the company continues to make provisions exceeding the regulatory requirements. The provisioning coverage has been reported at 76% as of 31 March 2014.

• Stable profitability growth during 4QFY14 has led to superior return ratios for the company. The return on assets (RoA) and return on equity (RoE) for Q4 FY14 have been registered as 3.6% and 19.4% respectively.

• The capital adequacy ratio (inclusive of tier II capital) has been recorded at 19.13% during 4QFY14 and the company stands well-capitalized to boost its growth trajectory.

What to expect? At the current price of Rs 1793, the stock is trading at 1.7 times our estimated FY16 adjusted book value.

Going forward, the company should be mindful of maintaining operating cost efficiencies and asset quality maintenance owing to its exposure to certain risky assets. While adequate provisioning policies continue to work in favor the company, the higher loan loss provisions might restrict a strong profitability growth.

Nonetheless, the company with its niche business focus is well-placed to meet the growing demand from the LAP and consumer financing business and hence would continue to sustain a quality earnings performance.

Since the business of Bajaj Finance is extremely vulnerable to economic cyclicality we would insist on a higher margin of safety. Therefore we would recommend investors to buy the stock of Bajaj Finance at Rs 1,300 or lower.