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Bajaj Finance: Riding high on SME credit - Views on News from Equitymaster

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Bajaj Finance: Riding high on SME credit
Oct 20, 2014

Bajaj Finance Ltd declared its results for the second quarter of the financial year 2014-15 (2QFY15). The institution has reported a strong 18.7% YoY increase in net interest income while net profits have grown by 18.0% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net interest income rises by strong 18.7% YoY in 2QFY15 on the back of staggering 50% YoY growth in deployments.
  • Other income moves up by staggering 312.9% YoY in 2QFY15.
  • Provisions spike up by 52.9% YoY.
  • Net profit grows by healthy 18.0% YoY for 2QFY15 owing to robust core income stream and other income during the quarter.
  • Gross NPAs and Net NPAs stand at 1.41% and 0.48% respectively and the provision coverage ratio stands at 67% during 2QFY15.
  • Capital adequacy ratio (inclusive of tier II capital) is recorded at 19.3% during 2QFY15 and the company stands well-capitalized to boost its growth trajectory.
Standalone Financial Snapshot
(Rs m) 2QFY14 2QFY15 Change
Income from Operations 9,617 12,322 28.1%
Interest expense 3,821 5,445 42.5%
Net Interest Income 5,796 6,878 18.7%
Net interest margins (NIMs) (%) 12.0% 11.0%  
Other Income 23 96 312.9%
Other Expense 2,769 3,186 15.1%
Provisions and contingencies 523 800 52.9%
Profit before tax 2,527 2,987 18.2%
Tax 857 1,016 18.6%
Effective tax rate 33.9% 34.0%  
Profit after tax/ (loss) 1,670 1,972 18.0%
Net profit margin (%) 17.4% 16.0%  
No. of shares (m)   50.1  
Book value per share (Rs)*   880.2  
P/BV (x)   3.0  
* (Standalone book value as the half year end 30th Sep 2014)
* (NIMs stand as at the end of half-year period)

What has driven performance in 2QFY15?
  • Despite the second quarter being inherently weak, Bajaj Finance continues to report healthy credit growth and robust volume momentum. Consumer and SME portfolios drove the loan book for the company during second quarter of FY15. However the two-wheeler and three wheeler financing segments together reported 15% YoY decline in deployments during 2QFY15. Nonetheless, underpinned by superior performance in consumer durable finance, lifestyle financing and SME businesses, the profits for the company have grown by healthy 18.0% YoY during 2QFY15.

  • Bajaj Finance currently finances around 28% of two-wheeler sales of Bajaj Auto. The asset composition mix which stands at 40% from consumer financing, 54% from SME business financing, 6% from the commercial segment and now 0.5% emerging from rural lending portfolio as at the end of second quarter remains more or less at the same levels. The deployments have stood higher reporting a staggering 50% YoY growth in 2QFY15. So did the assets under management that have grown by robust 41% YoY during 2QFY15. The consumer durable business (37% YoY growth) and the lifestyle financing business (robust 241% YoY growth) were the star performers during the quarter. Personal loan has also reported healthy performance during 2QFY15. And the rural lending business portfolio has turned out to be profitable with the company expanding its footprint. While the commercial infra business segment continued to degrow, the company has planned to wind up its Construction Equipment business by September 2015 due to continued poor performance.

    Portfolio Mix (%)
    Segment 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15
    Consumer Finance 42% 41% 40% 39% 40% 40%
    SME business 49% 50% 52% 53% 53% 54%
    Commercial lending 9% 9% 8% 8% 7% 6%
    Rural - - - - - 0.5%

  • The interest outgo for the company has jumped 42.5% YoY during 2QFY15. That said, the diversified borrowing mix that's well balanced between banks, money markets and retail deposits as 53:45:02 is expected to keep the costs well under control.

  • 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. However one Infra account has slipped into NPA and this account had earlier gone through CDR in 2012. Gross NPA and Net NPA for 2QFY15 stood at 1.41% and 0.48% respectively with a provisioning coverage ratio of 67% as of 30 September 2014.
What to expect?
At the current price of Rs 2597, the stock is trading at 2.4 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 consumer financing business and hence would continue to sustain a quality earnings performance.

With the stock price witnessing huge momentum, we recommend investors to hold on their positions in the stock and not buy further at higher levels; but wait for an appropriate opportunity to do so.

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