Buy Bajaj Finserv, target Rs 7,680: IIFL

IIFL has a buy call on Bajaj Finserv with a target price of Rs 7,680.

The current market price of Bajaj Finserv is Rs 6,411.65.

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


View of the brokerage on the company:
We resume coverage on Bajaj Finserv (BJFIN) with a BUY rating and 12-m target price of Rs 7,680. BJFIN is a retail financial services conglomerate with a trinity of assets in the underpenetrated markets of financing and insurance. We expect the financing business (BAF) to continue to drive value for BJFIN over the medium term, similar to the past five years. However, we believe franchise value of insurance businesses remains under-appreciated. Divestment of stake in the insurance businesses to JV partners could unlock further value.

Insurance: Non-life doing well but life needs a lifeline: We expect the general insurance business (BAGIC) to sustain its robust performance as the second largest private player but with the best combined ratios in the sector. We forecast 21 per cent EPS Cagr over FY18-21ii with 23 per cent RoE. A gradual improvement in the growth outlook for the life insurance business (BALIC) via higher VNB margin could provide additional upside after the underperformance during FY12-17.

Financing- Key value driver for long term: BJFIN has established a well-diversified financial services firm – Bajaj Finance (BAF) – with stron g franchises in consumer and small business lending. It has delivered significant value over the past five years and is scalable enough to sustain the robust AUM growth. Cost competitiveness would drive strong earnings growth in the medium term. Hence, contribution to earnings and franchise value from financing would continue to rise.

Initiate with BUY, insurance story under-appreciated: We value BJFIN using SoTP methodology to arrive at our 12-month tar get price of Rs 7,680, implying 21 per cent potential upside. We believe 22 per cent rally YTD in BJFIN has largely been fuelled by strong performance at BAF (up 56 per cent YTD, 64 per cent of SoTP) while the insurance businesses remain under-appreciated. Potential corporate actions in insurance businesses including divestment of stake sale in favour of a JV partner or high dividend payout are potential catalysts.