Buy Bajaj Finserv, target Rs 6,500: Sharekhan

Sharekhan has a buy call on Bajaj Finserv with a target price of Rs 6,500.

The current market price of Bajaj Finserv is Rs 5,314.95.

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


Investment rationale by Sharekhan:
Modest operating performance: In Q2FY2019, Bajaj Finserv (BFS) posted modest numbers overall. Though the lending business’ performance was satisfactory, profitability of the insurance subsidiaries -Bajaj Allianz General Insurance (BAGIC) and Bajaj Allianz Life Insurance (BALIC) weakened. Consolidated income from operations grew by 25.9 per cent y-o-y to Rs 5,065 crore while premium and other income increased by 9.2 per cent y-o-y to Rs 4,632 crore. Net profit remained flat at Rs 704 crore, rising by just 0.8 per cent y-o-y.

Lending business continues to outperform: The lending subsidiary Bajaj Finance (BFL) posted strong numbers, with net interest income rising by 41.8 per cent y-o-y to Rs 2,729 crore. Net profit jumped by 54.3 per cent y-o-y to Rs 923 crore. Assets under management (AUM) grew at a healthy 38 per cent y-o-y, driven by, a 44 per cent y-o-y rise in consumer B2C loans; a 32 per cent rise in the mortgage lending business and a 38 per cent y-o-y growth in commercial loans. Asset quality remained healthy, with a gross non-performing asset (GNPA) of 1.49 per cent and a net NPA (NNPA) of 0.53 per cent.

Outlook: BFS is an attractive play on the long-term structural theme of financialisation of savings in the economy. We believe that in Q2, one-off events such affected business, which need to be seen in perspective. Events such as the Kerala floods affected the insurance business, but we expect it to normalise in the medium term. We expect BFL to maintain its loan book trajectory in the medium term. BAGIC is expected to continue clocking healthy operating metrics and profitability going ahead. BALIC focuses on strengthening the life insurance distribution channel and the protection business, which would add to margins in the long run; the life insurer has seen its persistency ratio improve and has a healthy solvency ratio, both of which are positive.

Valuation: We expect BFL to maintain its growth momentum. However, as the current environment for non-banking financial companies (NBFCs) has turned challenging, with asset quality pressures clouding the sector outlook is likely to be an overhang on BFL in the near term. For BAGIC, profitability is expected to normalise in the medium term. The life Insurance business would see a shift towards the high-margin protection business. If, however, the equity markets come under pressure, a slower growth in unit-linked insurance plans (ULIPs) could stretch the road to recovery. Considering the above, we maintain our Buy rating on BFS with a revised price target of Rs 6,500.