Buy Bajaj Finance, target price Rs 5,200: BOBCAPS

Bank of Baroda Capital Markets (BoBCAPS) has a buy rating on Bajaj Finance with a target price of Rs 5,200. After meeting the Bajaj Finance management, the brokerage learnt that there would be customer additions of 2-2.2 million per quarter; a second credit card partner is coming on board; the mortgage business will largely cater to the salaried class and credit costs will hold steady. BoBCAPS expects Bajaj Finance’s customer relationship value (i.e. profit divided by cross-sell franchise) to log a 16 per cent CAGR for FY19-FY22.

Bajaj Finance share price moved up by 0.89 per cent from its previous close of Rs 3672.25. The stock's last traded price is 3705.10. It's average credit cost was 240 bps over FY11-FY19 and 150 bps over FY15-FY19. The brokerage has arrived at the conservative figure of 200-210 bps during FY20-FY22, but the company management believes the costs could go below estimates.

Bajaj Finance Ltd., incorporated in 1987, is a large cap company with a market cap of Rs 221123.74 crore, operating in the NBFC sector.


Investment Rationale

The share is trading at 7.1 times-5.9 times FY20E/FY21E BV for an estimated ROE of 22.4 per cent/22.1 per cent. BOBCAPS values the stock based on a residual income model and maintains March’21 target price at Rs 5,200. The assumptions include cost of equity of 12.8 per cent, risk-free rate of 7.75 per cent, risk premium of 5 per cent, and a long-term growth rate of 5 per cent. The brokerage keeps the estimates unchanged and maintains a “Buy” as it expects consumer financing and cross-sell to remain key moats for the NBFC. SME and commercial financing would form sustainable scale builders and focus on opex would drive profits. The mortgage business is expected to add scale, and asset quality drive return ratios.

Financials

For the quarter ended 31-12-2019, the company reported consolidated sales of Rs 7011.05 crore, up 10.91 per cent from last quarter sales of Rs 6321.45 crore and up 40.63 per cent from last year's same quarter sales of Rs 4985.39 crore. The company has reported net profit after tax of Rs 1614.11 crore in the latest quarter.