Buy Bajaj Finance, target Rs 3,100: Jefferies

Jefferies Group has a buy call on Bajaj Finance with a target price of Rs 3,100.

The current market price of Bajaj Finance is Rs 2,751.05.

Time period given by the brokerage is one year when Bajaj Finance price can reach the defined target.


Investment rationale by the brokerage:
Power of Cross Sell: BAF's scale and large cross-sell base of 19.7mn customers is its key moat, amidst intensifying competition. 60 per cent of consumer durable/electronics (CD) loans originates from repeat customers, as per CIBIL. This makes growth stickier. RoAs on repeat CD loans is 1.5-2.5 per cent higher vs new CD loans (lower opex, credit costs). Our simplified CD financier scenario suggests a) RoAs of a new CD financier could be negative in initial years, but could rise to 3.5-4 per cent as cross sell base scales up and b) cross sell of other products with higher ticket size (eg, personal loans) has a multiplier impact in terms of asset growth. Book growth may be 1.4-2x customer growth.

Growth- still a long runway ahead: Despite strong growth in last 5 years, BAF's loan book should grow at 32 per cent CAGR over FY19-21E. CD finance penetration is around 20 per cent with BAF share at 70 per cent, as per our estimate. Major metros is 35-40 per cent. Product category expansion in lifestyle segment (fitness, holiday, elective healthcare etc) and also deepening presence geographically should also drive loan growth.

EMI card base comparable to banks: Banks (eg HDFCB) are targeting CD market through cards/ cash back. Key advantages of cards are 1) limited documentation, faster processing at point of purchase and 2) drives share in e-commerce sales (online purchase financing is mainly through cards). Concerns are that banks could thus have an edge over BAF, but we note that BAF's EMI card base (+233 per cent CAGR over 3 yrs) of 16.5mn accounts for 27 per cent of system credit cards, 1.3x HDFCB credit cards and 43 per cent of HDFCB's total card base.

Multiple cost levers: BAF has multiple levers to reduce costs, given its multiple product lines. BAF's opex to assets fell 30 bps YoY in 3Q, though higher competition lifted customer acquisition costs. Operating leverage gains are visible. Further cost optimization due to segregation of mortgage business should lower costs further.

Asset quality much better than industry: Industry CD loan GNPA (90dpd) is stable, but overdue assets for lagged portfolio is edging up as per CIBIL. BAF's GNPA in CD segment is 0.86 per cent (industry 1.4 per cent). Also, overdue assets across most segments was stable in 3Q.