Buy Bajaj Finserv; target of Rs 5619: KR Choksey

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KR Choksey's research report on Bajaj Finserv

Bajaj Finserv recorded a PAT of INR 7.5 bn, up 22% yoy/14.8% qoq. The strong growth in PAT has come on back of superior performance of the lending arm (Bajaj Finance Ltd.) and general insurance (Bajaj Allianz General Insurance Company Ltd. /BAGIC) which recorded yoy PAT growth of 39%% and 30% respectively (for 9MFY18). For the life insurance arm (Bajaj Allianz Life Insurance Company/BALIC), GWP was up 24% yoy at INR 49.1 bn while the total insurance GWP was up 12.7%. While the management is confident about the performance of the lending business to continue along with synergistic additions in the form of Mobikwik, general insurance business of Bajaj Finserv is likely to stay one of the most efficient and profitable ones (combined ratio – 92.1% for Q3FY18 versus 99.6% for Q3FY17 and 96.8% for FY17).

Outlook

Given Bajaj group’s years of experience in the financial services industry along with extensive distribution network, we believe the entity to continue to outpace the industry in terms of profitability. Prudent provisioning despite stable/improving asset quality has only made Bajaj Finance’s balance sheet stronger and favorable macros (low insurance penetration) along with strong operational experience is only expected to work in favor of BAGIC and BALIC over the long term. Strong outlook on the lending business as well as the insurance businesses should translate into strong earnings for the consolidated entity, ultimately resulting in high return ratios. Further, stake sales in the insurance arms could provide further unlocking for the consolidated entity. We have value the stock on SOTP valuation methodology, arriving at a value per share of INR 5,619. Hence, we recommend to BUY.

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