Bajaj Finance rating: Maintain ‘neutral’ with target price of Rs 3,850

Bajaj Finance’s (BAF) PBT grew 41% y-o-y in Q2FY20, PAT increased 63% y-o-y to `1,500 crore owing to the lower tax rate. The quarter was characterised by continued strong AUM growth and stable margins/asset quality.

Consolidated AUM increased 38% y-o-y to Rs 1.4 lakh crore, led by strong growth across segments, barring commercial lending. BAF continues being cautious on digital products, auto finance and SME finance. The share of new loans to existing customers increased y-o-y from 66% to 70%.

The company continues financing a large share of Bajaj Auto’s 2Ws (52%) and 3Ws (46%) compared to the historical average of 30-35%. Margins (calc) were stable q-o-q at 12.1%, with CoF too largely stable at 8%. The share of bank borrowings rose 500 bps q-o-q to 38%. Fee income continues growing faster than the balance sheet — it was up 66% y-o-y to `630 crore. The management guided that it would continue growing in excess of the balance sheet. Asset quality stable with the GNPL ratio at 1.6% and PCR at 60%. Credit costs are likely to be 1.7-1.8% in FY20 v/s average of 1.5-1.6%.

Book now stands at ~Rs 25,700 crore, up 18% q-o-q. It reported a PAT of `130 crore. Asset quality was largely stable with the GS3 ratio at 0.06%.

Valuation view: BAF has maintained its robust growth trajectory with deepening geographical penetration and increasing repeat business. Over the past two years, it has also enhanced its capabilities on two fronts — generating higher fee income and improving the deposit franchise. We expect the improving deposit franchise to be a key driver for incremental liabilities over the next few years. Given its parentage and AAA-credit rating, BAF has comfortably sailed through the recent liquidity crisis and maintained strong growth rates. While growth has slowed down, AUM CAGR is still estimated at 27% over FY19-22. We raise our estimates by ~6% to factor in the higher top line. Maintain ‘neutral’ with a target price of `3,850 (6.2x September 21 BVPS).