Bajaj Finance: Strong visibility to support high valuations

A better-than-expected performance for the March 2013 quarter boosted the Bajaj Finance scrip, which made a new high of Rs 1,450 on Wednesday and ended the day with gains of about 1.5 per cent as against 2.5 per cent rise in the Sensex. The scrip has outperformed the Sensex over the last one year because of its strong fundamentals as well as the possibility of it getting a bank licence.

While there have been reports of Bajaj Finance being a front-runner, the Reserve Bank of India is yet to announce the list of candidates. Given Bajaj Finance's strong outlook, most analysts remain bullish on the company. Ishank Kumar, analyst at Religare Capital Market, says, "We remain positive on the stock due to strong earnings growth, healthy return on equity and low concerns on asset quality. Valuations are fair at 1.8 times FY14 estimated book value."

Bajaj Finance, which has been focusing on high growth, under-penetrated segments such as consumer durable loans and loan against securities as its main segments, also plans to enter rural markets this financial year with 13 branches.

"Despite our conservative approach, which factors in higher slippages, moderation in spreads and loan growth, return ratios remain among the best in the industry (return on equity at 21 per cent and return on assets at 3.5 per cent in FY15)," leading brokerage Axis Direct wrote in a recent report on the company. It has a 'Buy' rating on the stock with a price target of Rs 1,700.

Q4: Retail drives growth
Bajaj Finance's assets under management (AUM) grew 34 per cent to Rs 17,517 crore for the quarter. Though growth has moderated from the 41 per cent levels witnessed in the December 2012 quarter and 71 per cent in the March 2012 quarter, it is still strong given the weakening macro. Consumer and SME business witnessed 40 per cent-plus growth driven by traction in all sub-segments such as loan against property, loan against securities and working capital loan. The commercial business AUM fell 18 per cent as the management continued to scale down its exposure to the troubled infrastructure sector in a bid to clean up its balance sheet.

The management will continue to be cautious while lending to the commercial segment, going forward. Total disbursements growth stood at 21 per cent as against a meagre 12 per cent witnessed in the December 2012 quarter.

The company expects to clock in AUM and net profit growth of 20-25 per cent in FY14.

Bajaj Finance's loan losses and provisions grew 11 per cent to Rs 45 crore and was up sequentially as well (excluding one-off impact of Rs 8 crore in the December 2012 quarter), indicating some pressure on asset quality.

Rajeev Jain, chief executive officer, Bajaj Finance, says, "Though we have seen some improvement in the default rate, the next two quarters will be very critical as far as asset quality is concerned. Our infrastructure and capital equipment segments are witnessing significant stress, despite the reduced portfolio."

The company's assets to loan loss provisions ratio has remained between 0.90-1.10 per cent in the past few quarters and the management expects this metric to inch up to 1.10-1.30 per cent this fiscal. However, the net non-performing assets ratio remained stable at 0.2 per cent in the March 2013 quarter. Net profit for Q4 grew 51.3 per cent to Rs 164 crore.