Bajaj Finserv: Chennai floods drag Q3 profits

But lending business continues to grow at a robust pace, and outlook remains healthy

Bajaj Finserv posted mixed results for the December quarter. Weak profitability of its general insurance business due to the Chennai floods impacted consolidated earnings. Net profit fell short of Bloomberg consensus estimate of Rs 473 crore, despite growing at a healthy clip of 26 per cent over a year to Rs 437 crore. Good traction in general insurance as well as lending (Bajaj Finance) businesses though enabled the company to grow its income from operations by 26 per cent to Rs 2,395 crore, ahead of expectations of Rs 2,217 crore.

Lending business (45 per cent of its sum-of-the-parts, or SOTP, valuations) continued to post good show in the December quarter. Its assets under management (AUM) growth, earnings growth as well as asset quality remained healthy. AUM growth of 41 per cent was led by strong all-round growth in lending to consumer, commercial, small and medium enterprise as well as rural segments. The company's leadership position in the niche consumer durables segment distinguishes it with most of its peers and provides high scope for growth. At 1.29 per cent, the gross non-performing assets remain minuscule.

Despite improvement in gross written premium growth in its general insurance business to 14 per cent, Chennai floods affected this segment's profitability. The management remains confident of achieving profitable growth in this business (21 per cent of SOTP). Life insurance business (one-third of SOTP) continued to witness decline in both renewal and new business premiums, in tandem with its private-sector peers. This segment’s profits, however, were boosted by transfer of surplus in the policyholders’ revenue account to the shareholders’ account in the December quarter and not at the end of the financial year. The management remains positive. CFO S Sreenivasan says, “We are in the process of rebuilding the life insurance business, which should lead to better premiums over the next year. It will take a couple of years for this segment’s earnings to stabilise on a sustained basis.” Strengthening of its distribution channel via any bancassurance tie-up will be a key catalyst. The recent deals in the insurance sector, where foreign stake-holders have raised their holding in Indian insurance firms at premium valuations, have led most analysts to raise their valuations for Bajaj Finserv’s insurance businesses as well, leading to higher target prices.

In this backdrop of good show in lending business and improving prospects across most of them, a majority of analysts remain positive on Bajaj Finserv and expect upsides of 18 per cent from the current levels.