Portfolio

Investment Focus - Bajaj Finance: Buy

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Fresh investments can be considered in the stock of Bajaj Finance, a diversified non-banking finance company (NBFC) that has presence in nine segments across consumer, equipment and small industry finance. Even as the stock gained as much as 110 per cent in a year, the valuation still seems relatively attractive in comparison to other NBFCs.

Bajaj Finance has also delivered strong earnings growth in the past. The prospects continue to look bright as both consumer and SME loan segments are under-penetrated. While the sales of Bajaj Auto moderated during the current fiscal, Bajaj Finance managed to grow its auto loan portfolio thanks to increased market share in Bajaj Auto loans. Strong distribution network in the form of dealers help the loan book growth across geographies.

At current price of Rs 1,264, the stock is discounting its FY14 adjusted book value by 1.7 times and earnings by 8.3 times. On a price-to-book value basis, the stock is trading at a discount to other diversified NBFCs such as Shriram City Union, Cholamandalam Finance and M&M Finance.

Restructuring initiatives by the company in the last few years have paid off in terms of loan book growth and asset quality improvement, leading to better profitability. The earnings of Bajaj Finance grew by 110 per cent compounded annually over the period 2008-12 while the loan book growth was 38 per cent. The net non-performing assets (NPA) ratio as of September 2012 was 0.2 per cent. Lean operations, superior margins due to lower cost of funds, helped the company maintain return on average assets at close to 4 per cent. The net interest margin as of September was 12 per cent. Any cut in interest rates may benefit the company as it not only reduces the cost of funds but also enables it to raise long-term resources (Tier 2 capital).

The company is expected to face regulatory headwinds due to new NBFC prudential guidelines. For instance, RBI guidelines propose that NBFCs should recognise NPAs after 90 days past due instead of 180 days. But such move may only add another 40 basis points to gross NPA (1.1 per cent as of September). The company has been proactively setting aside more than the required provisions to reduce the impact on profitability. The company also got capital infusion through warrant conversion from the parent company which improved its capital adequacy ratio.

The capital adequacy is at 17.7 per cent as of September against 15 per cent required by the RBI. The company plans to come up with Rs 750 crore rights issue that may further strengthen the capital base. Given the high rate of growth in earnings, the equity dilution will be offset by earnings growth.

Published on December 22, 2012

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