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Bajaj Finance Q1FY15 results update

July 17, 2014, Thursday, 07:16 GMT | 02:16 EST | 10:46 IST | 13:16 SGT
Contributed by Nirmal Bang

Bajaj Finance Ltd (BFL) reported net profit of Rs 211.4 cr (+20.3% YoY) in Q1FY15 which was above expectations primarily due to higher than expected Net Interest Income (NII). NII increased 23.2% YoY and 23.0% QoQ with increase in consumer durable segment. AUM growth remained strong at 40.1% YoY and disbursements increased 48.3% YoY led by growth in Consumer Durables (digital product sales and lifestyle financing) and SME business.

Asset quality witnessed improvement in Q1FY15 with gross NPA at 1.15% and net NPA at 0.27% (vs 1.18% and 0.28% in Q4FY14). Almost all the product mixes witnessed satisfactory performance in an extremely challenging environment which is commendable.

Going forward, SME business will continue to drive disbursement growth. Capital Adequacy Ratio of 18% will support BFL’s growth plan for the next 4-5 quarters and the company does not intend to raise capital in near term. However, with increasing contribution from SME business; comparatively lower margin yielding business could lead to some margin compression going forward.

Strong loan growth, focus on distribution income, control over costs coupled with stable asset quality would drive performance for BFL. We expect earnings to grow at 25.4% CAGR over FY14-FY16E. Continued focus on rural lending will further strengthen its position as a retail finance company. Despite the challenging macroeconomic environment and the high risk segments where BFL operates, its focus on affluent segments and strong risk management framework have ensured stable asset quality, even in the riskier segments.

At CMP the stock is trading at 2.35x FY15E and 1.95x FY16E ABV and 12.38x FY15E and 9.69x FY16E EPS. We maintain our HOLD rating on the stock and arrive at target price of Rs 2,410 (2.15x FY16E ABV); an upside of 10.3% from current levels.

- BFL will wind its Construction Equipment business due to continued poor ROE performance. The residual portfolio of around Rs 400 cr will be re-paid in due course of 15-18 months. BFL does not foresee any major credit loss to emerge in the residual portfolio.

- Net interest income increased 23.2% on YoY basis which is lower than the volume growth reported by the company. This is primarily due to re adjustment of portfolio towards lower yielding SME segment led to lower spreads for the company. Going forward, declining yields on SME portfolio will continue to result in lower margins.

- Operating expenses increased by 26.8% YoY and 12.0% QoQ. The increase is due to one-time ad spend of Rs 8 cr on brand campaign. Cost to income ratio increased to 45.9% in Q1FY15 vs 45% in Q1FY14.

- 2W financing de grew 13% (20% last quarter) whereas three wheeler business de grew 20 (38% last quarter) % in Q1FY15.

- Market share of BFL in the 3W business stood at 22% which is lower than 27% last quarter due to slowdown in commercial vehicle industry.