Buy Bajaj Finance, target Rs 3,618: Emkay Global Financial Services

Emkay Global Financial Services has a buy call on Bajaj Finance with a target price of Rs 3,618.

The current market price of Bajaj Finance is Rs 3,035.50.

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


Investment rationale by the brokerage-
Outstanding collection and recovery procedures: Our recent channel checks on BAF’s in-class, incentive-driven, specialized and deeply penetrated collection and recovery system have driven our thesis on the company’s ability to maintain low credit costs while increasing its asset base. We are believers in the premise that the success of a lender’s business hinges on its ability to recover dues in a timely and an efficient manner. Understanding BAF’s top-class collection and recovery system has strengthened our conviction in its ability to keep running on the long runway.

Long runway of AUM growth: Despite intensifying competition and a high base, we believe that now is the time when cross sell kicks in for BAF. BAF’s out-of-the-class data analytics and growing product basket enable it to make available the new products to its high existing customer base of nearly 32.6mn. This growth should come at a lower credit cost, thus expanding return metrics. Our channel checks also indicate deeper rural penetration, fueling BAF’s geographic expansion.

NIM compression unavoidable; operating leverage holds the key: In our view, BAF could see some margin compressions over the next two years (from nearly 9.8 per cent in FY19E to nearly 8.9 per cent in FY21E), dominantly on account of the expansion of low-yielding housing book. We see this as its management’s positive intent to diversify risks and manage them better. In addition, NIM compression is not expected to reduce PBT margins as operational leverage is expected to kick in.

Outlook and valuations: Though BAF currently trades at rich valuations (P/B 7.1x FY20E and P/B 5.7x FY21E), we understand that its aggressive growth would require a capital infusion over the next 12-24 months, driving valuations down. Accordingly, we maintain Buy rating on the stock with a revised target price of Rs 3,618 (P/B 6.8x FY21E and P/E 32.9x FY21E), without factoring in the equity infusion. Maintain our OW stance in our EAP - NBFCs. Key risks include substantial build-up of consumer leverage and a prolonged rural distress scenario.