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Motilal Oswal Securities neutral on Bajaj Finance, target price Rs 3550

​Bajaj Finance’s (BAF) AUM growth has been driven largely by volumes.

Updated: Sep 04, 2019, 01.03 PM IST
Motilal Oswal has a 'neutral' rating on Bajaj Finance with a price target of Rs 3,550 on higher fee income, low expense ratio, which it feels will be the key drivers of RoA improvement.


Bajaj Finance’s (BAF) AUM growth has been driven largely by volumes. Growth in its customer base accelerated to 32 per cent YoY in FY19 from 28 per cent over the prior two years. At the same time, the number of new loans disbursed increased at a consistent pace of ~50 per cent YoY in the year, in line with past trends. The ‘EMI card’ is gaining strong traction. Notably, the number of EMI cards outstanding has more than tripled over the past three years to 18.5m. More importantly, the share of new loans booked via EMI cards increased meaningfully from 22 per cent in FY16 to 49 per cent in FY19. Note that the EMI card not only reduces opex for the company but also results in lower credit cost (as the card is used by an existing customer).

While BAF toned down its 2W disbursements in FY18, it did the opposite in the subsequent year (number of 2Ws financed by BAF increased 50 per cent YoY to 1.02m in FY19). Outstanding AUM now stands at INR97b, almost equal to that of HDFCB. Interestingly, the average ticket size increased from Rs 56,000 in FY16 to Rs 81,000 in FY19 – higher than that of most peers.

Fee income has grown faster than the balance sheet. Total fees more than doubled from Rs 800 crore to Rs 1,700 crore YoY in FY19. The key driver was ~3x increase in distribution income to Rs 660 crore during the year. With fee income at 1.7 per cent of average AUM in FY19, BAF is one of the highest fee income generators under our coverage universe (others are sub-1 per cent).

Interestingly, the unsecured loan book of BAF has lower stage-2/3 loans (0.8 per cent/1.4 per cent) compared with the secured loan book (2.4 per cent/1.7 per cent). However, naturally, ECL provisioning on the unsecured book is significantly higher (40 per cent/73 per cent compared with 13 per cent/51 per cent).

The share of new loans booked from consumer durables declined meaningfully from 71 per cent in FY17 to 54 per cent in FY19. However, the increase in the share of other products probably points to repeat purchase, as customers generally start their association with BAF using a CD loan and then use other products. In addition, one of every two loans booked in FY19 came from the EMI card, as against one in every five loans in FY16. This indicates higher repeat business and, in turn, low incremental opex and credit costs for these loans.

BAF accelerated its 2W disbursements significantly in FY19. The number of 2Ws financed during the year increased 50 per cent YoY to 1.02m, while disbursements were up 55 per cent YoY to Rs 8,300 crore. The loan book now stands at INR97b, marginally lower than HDFCB’s INR100b. Average disbursement ticket size CAGR has been 13 per cent over the past two years (at INR81k in FY19). This segment has the highest delinquency among all of BAF’s products, with 0dpd+ at 10-12 per cent of loans.

"While BAF continues its robust growth trajectory, it has also enhanced its capabilities on two fronts –fee income and the deposit franchise, over the past two years. With a scale back in certain products, we expect AUM growth to slow down to 30 per cent YoY in FY20 (41 per cent in FY19). We keep our estimates unchanged – we have not factored in the possibility of a capital raise in our numbers. We maintain a 'neutral' rating with a targer price of Rs 3,550 (at 7 times FY21E BVPS)," the brokerage said.

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