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Bajaj Finance: 1QFY15 reports stable earnings - Views on News from Equitymaster

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Bajaj Finance: 1QFY15 reports stable earnings
Sep 5, 2014

Bajaj Finance Ltd declared its results for the first quarter of the financial year 2014-15 (1QFY15). The institution has reported a robust 24.6% YoY growth in net interest income while net profits have grown by 20.3% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income grows by strong 24.6% YoY in 1QFY15 on the back of staggering 48% YoY growth in deployments.
  • Other income disappoints with 42.8% YoY drop in 1QFY15.
  • Provisions spike up by 29.8% YoY.
  • Net profit grows by healthy 20.3% YoY for 1QFY15 owing to robust core income stream during the quarter.
  • Gross NPAs and Net NPAs stand at 1.13% and 0.27% respectively and the provision coverage ratio stands at 76% as at the end of 1QFY15.
  • Capital adequacy ratio (inclusive of tier II capital) is recorded at 18.0% during 1QFY15 and the company stands well-capitalized to boost its growth trajectory.

Standalone Financial Snapshot
(Rs m) 1QFY14 1QFY15 Change
Income from Operations 9,283 12,436 34.0%
Interest expense 3,314 4,996 50.7%
Net Interest Income 5,969 7,440 24.6%
Other Income 41 24 -42.8%
Other Expense 2,703 3,428 26.8%
Provisions and contingencies 639 829 29.8%
Profit before tax 2,669 3,206 20.1%
Tax 911 1,092 19.9%
Effective tax rate 34.1% 34.1%  
Profit after tax/ (loss) 1,757 2,114 20.3%
Net profit margin (%) 18.9% 17.0%  
No. of shares (m)   50.1  
Book value per share (Rs)*   843.5  
P/E (x)   54.9  
P/BV (x)   2.7  
* (Standalone book value as on 30th June 2014)

What has driven performance in 1QFY15?
  • Bajaj Finance continues to report healthy credit growth and robust volume momentum. 1QFY15. Consumer and SME portfolios drove the loan book for the company during first quarter of FY15. However the two-wheeler and three wheeler financing segments witnessed 13% and 20% YoY decline during 1QFY15. Nonetheless, underpinned by superior performance in consumer durable finance, lifestyle financing and SME businesses, the profits for the company have grown by healthy 20.3% YoY during 1QFY15.

  • The company has realigned its loan portfolio from the risk-return perspective. Bajaj Finance currently finances around 28% of two-wheeler sales of Bajaj Auto. The asset composition mix which stands at 40% from consumer financing, 53% from SME business financing and 7% from the commercial segment as at the end of first quarter remains more or less at the same levels. The deployments have stood higher reporting a staggering 48% YoY growth in 1QFY15. So did the assets under management that have grown by robust 37% YoY during 4QFY14. The consumer financial segment (34% YoY growth) and the lifestyle financing business (robust 216% growth) were the star performers of the first quarter of FY15. Personal loan and rural lending business portfolios have also reported healthy performance during 1QFY15. While the commercial infra business segment continued to degrow, the company has closed down its Construction Equipment business due to continued poor earnings performance.

  • The interest outgo for the company has jumped 50.7% YoY during 1QFY15. That said, the diversified borrowing mix that's well balanced between banks, money markets and retail deposits as 58:42:02 is expected to keep the costs well under control.

  • The 1QFY15 has witnessed increased operating expenses primarily on account of higher employee related expenditure.

  • Bajaj Finance continues to boast impeccable asset quality. While the bad loans have been contained each quarter, the company has also chosen to cut down on the high risk business portfolios. Barring construction equipment and infra portfolios that continue to give stress, the other portfolios continues to show up healthy credit quality.
What to expect?
At the current price of Rs 2313, the stock is trading at 2.1 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. We believe the company 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.

We recommend investors to hold on their positions in the stock and not buy further at current levels.

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