Banking and Financial Services Uncertainty looms, high provisions hit earnings Sector Update

Q4FY2020 Results Review In Q4FY20, the impact of COVID-19 was over-arching, which affected the business growth as well as asset quality / provisions for the BFSI sector. The RBI’s moratorium helped to some Sector: BFSI extent (by providing a standstill on banks’ NPA recognition) but higher contingent/COVID- Sector View 19-related provisions (minimum regulatory requirement was provision of 5% of loans under moratorium, but in some cases, the management decided to set aside higher provisions) to Private Banks Positive cushion credit cost impact in FY21 impacted PAT performance. Larger banks reported a PSU Banks Negative moratorium rate between 25% and 35%, while NBFCs, small finance banks, SME financiers, Banks with MFIs segment, and NBFC-MFIs reported a higher moratorium range of 50-93%% NBFC Neutral in the first round (till May 20). Public-sector banks (PSBs) such as BOB and BOI reported & Others Positive moratorium loans of over 40% (mostly due to the opt-out option) but other PSBs like SBI and PNB reported lower moratorium rates of 23% and 30%, which compare well with larger private sector banks. However, moratorium proportions may not be strictly comparable due to the difference in classification of loans under the moratorium and the date of reporting, but are Our coverage universe more indicative. Companies CMP Reco. PT (Rs) (Rs) On the provisioning front, private banks like (53 bps), ICICI Bank (42 bps) conservatively made higher COVID-19-related provisions, but several PSBs (and few banks such as IndusInd Axis Bank 434 BUY 540 Bank as well) chose to provide just about the minimum regulatory requirements. On the Bank of 51 Hold 56 operating side, most private banks reported in-line operating performance (topline) but higher Baroda provisioning (mainly due to COVID-19), impacted profit after tax (PAT). Most PSBs reported soft Bank of 50 Hold 55 loan growth, but modest operating performance (helped by lower slippages/interest reversals) City Union 127 Positive 155 and treasury gains, even as high provisions (including COVID-19 related) impacted PAT. Deposit Bank growth showed strong traction for large banks helped by flow of deposits from small/mid-sized Federal 54 Buy 60 banks. Falling interest rates, lower recoveries and banks’ and NBFCs’ decision to carry excess Bank liquidity offset the fall in Cost in Funds result in stable margins. Among life insurers, due to the HDFC Bank 1103 Buy 1400 COVID-19 impact, growth was soft and profitability muted as the year end time (seasonally a strong period) was impacted due to the lockdown. HDFC Life saw a moderate value of new HDFC Life 585 Positive 572 business (VNB) growth but ICICI Prudential Life saw stable VNB (helped by improving business HDFC Ltd 1869 Buy 2113 mix). For NBFCs, the AUM growth was tepid for most players, but overall liquidity scenario ICICI Bank 362 Buy 454 improved for them post RBI’s intervention and relief measures. ICICI 1286 Positive 1485 Outlook: Lombard We retain preference for private banks, select NBFCs and are positive about insurance space: ICICI Pru Life 435 Positive 438 Potential stress in the economy along with uncertainty on COVID-19 related developments Kotak 1368 Positive 1662 continues to pose a challenge. However, recent regulatory measures, as well gradual opening Mahindra up of lockdown indicates a gradual normalization which will be significant positive for BFSI Cos’ Bank bottom-line. During the quarter, several corporate and retail banks chose to be conservative LICHSG 276 Hold 285 rather than be aggressive on growth to protect asset quality and capital optimization, which L&T Finance 70 Neutral 56 may continue for the medium term. Recent spate of capital raise and creating liquidity buffer Holdings will be positive for balance sheet strengthening but will crimp medium term return ratios. Many Max 560 Buy 570 smaller banks and NBFCs are looking to have higher liquidity buffer on their books (to counter Financials any eventuality, etc) which is likely to offset the gains of softening yields and keep their margins Services gains muted. We believe that asset quality would be impacted after Q2FY21 and for now, most PNB 37 Hold 45 BFSI companies indicated a risk-off stance towards credit growth. Most managements refrained from giving guidance (instead indicated subdued business growth with hopes of better credit RBL Bank 178 Neutral 135 growth in H2 FY21E). Factoring in the current scenario, we have revised our earnings estimates for Nippon Life 313 Positive 316 the sector. We believe that the collection trends in Q2 and Q3 earnings will be key monitorable India AMC going forward. We expect well-managed private banks, and SBI and strong/high-rated NBFCs to Spandana 560 Positive 611 continue to outperform their peers due to better capitalisation and better book quality. Sphoorthy Valuations: State Bank 188 Buy 262 of India We continue to prefer large corporate/retail private banks (PBs) and SBI among PSBs, and see a potential for them to gain market share as the situation normalizes. We like retail banks such as Bajaj 3109 Buy 3500 HDFC Bank and due to high earnings and asset quality visibility. We remain Finance selective in the NBFC space and prefer strong players such as HDFC and in the Bajaj Finserv 6284 Buy 7000 segment. Strong insurers, having healthy business metrics and backed by strong (and stable) Price chart bancassurance partnerships, are also attractive. 110.0 Key Risks: 100.0 A delay in economic recovery/prolonged or intermittent lockdown or significant economic distress 90.0 can lead to accretion to corporate and SME NPA, and slowdown in the retail segment which may 80.0 impact earnings. 70.0 Leaders in Q4FY2020: HDFC Bank, ICICI Bank, SBI, Bajaj Finance and 60.0 Laggards in Q4FY2020: LIC Housing and Union 50.0 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Preferred Picks: ICICI Bank, SBI, HDFC Bank, HDFC Life, Kotak Mahindra Bank, ICICI Lombard, Nifty 50 Nifty Bank ICICI Prudential

July 06, 2020 2 Sector Update

Q4FY2020 earnings performance Company Net Interest Income (Rs Cr) PPoP (Rs Cr) PAT (Rs Cr)

Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4 FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ %

PSU Banks 22,767 22,954 (0.8) (18.0) 15,734 16,933 (7.1) (13.7) 3,581 838 327.1 (35.9) 6,798 5,067 34.2 (4.6) 5,121 3,861 32.6 3.3 507 (991) NA NA 4,678 4,200 11.4 7.4 3,932 2,861 37.4 4.5 (697) (4,750) NA NA Bank of India 3,793 4,044 (6.2) (7.9) 2,653 2,303 15.2 (35.9) (3,571) 252 NA NA Private Banks ICICI Bank 8,927 7,620 17.2 4.5 7,390 6,233 18.6 (2.1) 1,221 969 26.0 (70.5) Axis Bank 6,808 5,706 19.3 5.5 5,851 5,014 16.7 1.9 (1,388) 1,505 NA NA HDFC Bank 15,203 13,090 16.1 7.3 12,958 10,843 19.5 0.1 6,927 5,885 17.7 (6.6) Federal Bank 1,216 1,097 10.9 5.3 959 755 27.1 29.0 301 382 (21.0) (31.6) Soft Coverage IndusInd Bank 3,231 2,232 44.7 5.1 2,857 2,067 38.2 3.6 315 360 (12.3) (75.9) Kotak Mahindra Bank 3,560 3,037 17.2 3.8 2,725 2,282 19.4 14.1 1,266 1,408 (10.1) (20.7) RBL Bank 1,522 1,148 32.5 7.9 765 560 36.6 4.5 114 247 (53.7) 63.7 420 421 (0.3) (1.8) 335 338 (0.8) 8.7 (95) 175 NA NA L&T Finance 1,624 1,551 4.7 (12.0) 958 901 6.3 (20.6) 385 552 (30.3) (34.9) Holding Spandana 209 162 28.5 3.3 289 126 129.9 35.7 78 71 9.2 (38.5) Sphoorty NBFC HDFC Ltd 3,780 3,227 17.1 11.7 3,966 4,051 (2.1) (67.3) 2,233 2,823 (20.9) (73.3) LIC Housing 1,156 1,260 (8.2) (9.8) 854 1,089 (21.6) (24.8) 421 693 (39.2) (29.5) Bajaj Finance 4,679 3,395 37.8 3.5 3,232 2,221 45.5 7.7 948 1,176 (19.4) (41.3) General Insurance Company GDPI (Rs Cr) PBT (Rs Cr) PAT (Rs Cr) Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % ICICI Lombard 3,232 3,528 (8.4) (14.3) 371 346 7.3 (5.0) 282 228 23.8 (4.1) Life Insurance Gross Written Premium (Rs Cr) PBT (Rs Cr) PAT (Rs Cr) Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % ICICI Pru Life 10,475 10,056 4.2 28.8 171 278 (38.5) (43.8) 178 261 (31.8) (41.1) HDFC Life 10,465 10,248 2.1 33.2 285 345 (17.6) 7.9 312 364 (14.4) 24.6 Max Life 5,873 5,521 6.4 55.3 131 201 (34.9) (26.1) 7 200 (96.7) (95.5) Financial Services Company Revenue from Operations (Rs Cr) PBT (Rs Cr) PAT (Rs Cr) Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % Q4FY20 Q4FY19 YoY % QoQ % Nippon Life India 255 324 (21.4) (10.8) 37 207 (81.9) (0.2) 12 145 (91.79) (91.7) AMC Bajaj Finserv 13294 12994 2.3 (8.7) 792 2129 (62.8) (97.0) 540 1433 (62.32) (72.7) Source: Company, Sharekhan Research

July 06, 2020 3 Sector Update

Valuations Company CMP Reco/ Target BVPS P/BV View Price FY21E FY22E FY21E FY22E

PSU Banks State Bank of India 188 Buy 262 244 263 0.8 0.7 Bank of Baroda 51 Hold 56 154 158 0.3 0.3 Punjab National Bank 37 Hold 45 89 90 0.4 0.4 Bank of India 50 Hold 55 129 133 0.4 0.4 Private Banks ICICI Bank 362 Buy 454 194 217 1.9 1.7 Axis Bank 434 Buy 540 327 356 1.3 1.2 HDFC Bank 1103 Buy 1400 348 404 3.2 2.7 Federal Bank 54 Buy 60 80 87 0.7 0.6 Soft Coverage Kotak Mahindra Bank 1368 Positive 1662 290 331 4.7 4.1 RBL Bank 178 Neutral 135 199 216 0.9 0.8 City Union Bank 127 Positive 155 78 90 1.6 1.4 L&T Finance Holding 70 Neutral 56 80 90 0.9 0.8 Spandana Sphoorty 560 Positive 611 458 516 1.2 1.1 NBFC HDFC Ltd 1869 Buy 2113 537 580 3.5 3.2 LIC Housing 276 Hold 285 373 408 0.7 0.7 Bajaj Finance 3109 Buy 3500 621 742 5.0 4.2 General Insurance Company EPS P/E CMP Reco/ Target FY21E FY22E FY21E FY22E View Price ICICI Lombard 1286 Positive 1485 39 52 32.6 24.6 Life Insurance Company EVPS P/EV per share CMP Reco/ Target FY21E FY22E FY21E FY22E View Price ICICI Pru Life 435 Positive 438 181 208 2.4 2.1 HDFC Life 585 Positive 574 122 145 4.7 4.0 Max Life 560 Buy 570 311 358 1.8 1.6 Financial Services Company EPS P/E

CMP Reco/ Target FY21E FY22E FY21E FY22E View Price Nippon Life India AMC 313 Positive 316 11 13 29.8 24.5 Bajaj Finserv 6284 BUY 7000 257 345 24.4 18.2 Source: Company, Sharekhan Research

July 06, 2020 4 Sector Update

Revision in earnings estimates Company Name Change in Reasoning Current Previous Target Estimate Reco Reco Price Mixed numbers; Operating results were in line but Axis Bank Fine-tuned Buy Buy 540 elevated provisions caused the bank to post a loss. Credit growth expected to be muted and the Bank of Baroda Revised down corporate segment’s asset quality remains key Hold Hold 56 monitorable Credit growth expected to be muted and the Bank of India Revised down corporate segment’s asset quality remains key Hold Hold 55 monitorable There was significant on-ground uncertainty in the City Union Bank Fine tuned Positive Positive 155 main borrower segment i.e. SMEs, Mid Corporates. Going forward, we expect credit cost and provision Federal Bank Fine tuned burden to keep a check on growth in the medium Buy Buy 60 term but SMA book at 0.7% is positive. Strong business growth, asset quality appears HDFC Bank Fine tuned Buy Buy 1400 manageable Largely HDFC Life Favourable business mix, long term outlook positive Positive Positive 572 maintained Largely HDFC Ltd Expect reasonable AUM growth and stable margins Buy Buy 2113 maintained Operational performance was strong, Asset quality ICICI Bank Revised down Buy Buy 454 performance stable Medium term GDPI growth and loss ratios may be ICICI Lombard Fine tuned Positive Positive 1485 impacted, long term outlook positive. ICICI Prudential Life Fine tuned Improving business mix, long term outlook positive Positive Positive 438 Healthy performance is expected to continue with Kotak Mahindra Bank Fine tuned Positive Positive 1662 reasonably stable asset quality LIC Housing Finance Revised down Concerns over developer book persist Hold Hold 285 Liquidity buffer, tightening of credit filters etc likely to L&T Finance Holdings Revised down Neutral Hold 56 impact FY2021E growth and profitability. For the medium term premium recovery and MAX Financial Services Fine tuned incremental sales may be impacted; Positive for the Buy Buy 570 long term Credit growth expected to be muted and the PNB Revised down corporate segment’s asset quality remains key Hold Hold 45 monitorable Asset quality concern but improved Capitalization RBL Bank Fine tuned Neutral Neutral 135 helps Near-term AUM growth may be impacted, key Nippon Life India AMC Revised down Positive Positive 316 monitorable; long term Outlook Positive Increased uncertainties, Healthy capitalization is a Spandana Sphoorthy Revised down Positive Positive 611 positive Near term growth concerns, Overall performance SBI Revised down Buy Buy 262 operationally was in-line Loan growth expected to moderate in medium term; Bajaj Finance Fine tuned operating metrics such as margins, cost to income Buy Buy 3500 should remain steady Subsidiary Loan growth to moderate for medium Bajaj Finserv Fine tuned term, Insurance earnings growth to moderate, Buy Buy 7000 Operating metrics to remain steady Source: Sharekhan Research

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July 06, 2020 5 Bajaj Finance Decline in moratorium book is encouraging Stock Update Stock

Bajaj Finance Ltd (BFL) reported its Q1FY21 provisional figures where Sector: Banks & Finance even though AUM growth was muted (mainly due to the COVID-19 related Result Update lockdown impact), the decline in the proportion of loans under moratorium is a significant positive. Overall, the AUM grew by ~7% YoY to Rs 138,000 Change crore as of June 2020, but declined by 6% q-o-q. The muted AUM growth Reco: BUY  was largely expected, mainly as the business was impacted due to the lockdown across India. Notably, AUM under moratorium decreased from CMP: Rs. 3,109 27% of total loans (as on April 30, 2020) to around 15.5% as on June 30, Price Target: Rs. 3,500 á 2020. We view this as a positive development, as a higher proportion of Loans under moratorium was viewed as a concern and expected to add á Upgrade  No change â Downgrade to the credit cost. New loans booked during Q1FY21 stood at 1.7 million as against 7.3 million in Q1 FY20 and 6.03 million in Q4FY20 respectively, Company details again since most of the quarter was impacted by the lockdown. The New customers added stood at 0.5 million (was 2.46 million in Q4 FY20) and Market cap: Rs. 1,87,084 cr overall customer franchise now stands at 43 million as of Q1FY21, from 42.6 million as on Q4 FY20. 52-week high/low: Rs. 4,923/1,783 The deposit book stood at approximately Rs 20,000 crore as of Q1 FY21 NSE volume: 72.1 lakh from Rs 15,084 crore in Q1 FY20 and Rs 21,427 crore as of Q4FY20. The (No of shares) decrease in the moratorium book is positive and indicates reduced burden of delinquencies (from earlier expectations). We are cognizant of the near- BSE code: 500034 term concerns regarding asset quality and loan growth challenges due NSE code: BAJFINANCE to the still evolving pandemic situation, but we also believe that these conditions are transient in nature. Due to the encouraging outlook, we Sharekhan code: BAJFINANCE have increased our target multiples for the stock. We believe that due to a strong balance sheet, robust risk management and prudent management, Free float: 26.4 cr BFL is a strong franchise for the long term and is well placed to ride over (No of shares) medium term challenges. We maintain our Buy rating on the stock with a revised price target (PT) of Rs. 3,500.

Shareholding (%) Our Call Valuation - We believe that though risks continue to exist, and the pandemic Promoters 56.2 impact is still unfolding, yet we believe that present decline in the moratorium FII 21.2 book is encouraging and indicates the collection efficiency improving, which is a positive. Due to the encouraging outlook, we have tweaked our target DII 10.6 multiples for the stock. We believe that given BFL’s strong balance sheet, and its business strengths, the company is structurally a 20% + ROE business Others 12.0 franchise in a normalised steady state basis. We believe that its stable leadership, well capitalized balance sheet, robust risk management and prudent management make BFL a strong franchise for the long term and is Price chart well placed to ride over medium term challenges. We maintain our Buy rating 5000 on the stock with a revised price target (PT) of Rs. 3,500. 4000 Key Risks 3000 Prolonged or intermittent lockdown may result in slower growth and 2000 operational challenges, which along with worsening of economic parameters 1000 will pose a challenge. 20 19 20 19 - - - - Jul Jul Nov Mar Financial summary Rs cr Particulars FY18 FY19 FY20 FY21E FY22E Net interest income (Rs cr) 8,050 11,762 16,901 19,151 21,406 Price performance Net profit (Rs cr) 2,496 3,995 5,264 5,590 8,239 (%) 1m 3m 6m 12m EPS (Rs) 43.3 68.9 87.7 93.2 137.3 PE (x) 71.8 45.1 35.4 33.4 22.6 Absolute 24.0 38.0 -22.4 -8.9 Book value (Rs/share) 283 342 499 621 742 P/BV (x) 11.0 9.1 5.8 5.0 4.2 Relative to 17.8 16.6 -11.7 -3.2 Sensex RoAE (%) 19.3 22.1 20.2 16.1 20.1 RoAA (%) 3.3 3.7 3.6 3.1 3.6 Sharekhan Research, Bloomberg Source: Company, Sharekhan Estimates

July 06, 2020 6 Top shareholders 10 Key management personnel Data Additional July 06, 2020 worsening of economic parameters will pose achallenge. pose will parameters of economic worsening with along which challenges, operational and slower lockdownresult in may growth intermittent or Prolonged Key Risks term. long the in base as trajectory well as and profitability margin on back ofhealthy franchise expansionand increasing customer book loan its maintain to BFL expect we pandemic, the of impact term medium the Despite company. the of capability underwriting credit robust and management risk the on focus high of the indicative is quality asset stable The BFL quality. asset very good and NIMs years, stable but high with few growth strong consistent posting last been has During cycles. rate and margin cycles and credit across growth company consistent the by the maintained in seen performance is market the in BFL’sdominance liabilities. and assets retail in presence strong with space finance Consumer Indian the in position dominant a enjoys (BFL) Finance Bajaj theme Investment performance. asset-quality conservative and margins well-maintained with performance steady deliver to continues Finance Bajaj entity, business a As India. in locations, lenders durables rural consumer largest 951 the be and to continues BFL locations points. urban distribution 91,700 over944 with through operates Company The niches. key its as BFL financing finance. infrastructure consumer and business small and re-defined and FY08 in equipment restructuring organizational and business construction undertook businesses, two-wheelers, small for loans housing, provides and durables, finance consumer consumer for NBFCs largest India’s of one is Finance Bajaj company About Source: Bloomberg Source: CompanyWebsite 10 9 8 7 6 5 4 3 2 1 Sr. No. Mr. AnupSaha Mr. Atul Jain Mr. Rajeev Jain Mr. Rahul Bajaj Sharekhan Limited,itsanalystordependant(s)ofthemight beholdingorhavingapositioninthecompaniesmentionedarticle. Vanguard GroupInc/The UTI AssetManagementCoLtd BlackRock Inc Steadview CapitalMauritius Ltd Capital GroupCosInc/The AXIS MUTUAL FUNDTRUSTEEL Axis AssetManagementCoLtd/India SBI FundsManagementPvtLtd Maharashtra ScootersLtd Republic ofSingapore Holder Name President –ConsumerBusiness Chief Executive Officer(BHFL) Managing Director Chairman Holding (%) 0.98 0.83 0.83 1.42 3.61 1.87 3.15 2.13 1.21 2.1 7

Stock Update Bajaj Finserv Outlook for lending subsidiary improves Stock Update Stock

Bajaj Finance Ltd (BFL, Bajaj Finserv holds 56.2% stake), the lending Sector: Banks & Finance subsidiary of Bajaj Finserv, reported encouraging (provisional) figures Company Update for Q1 FY21 where loans under moratorium declined, even as a slow AUM growth (mainly due to the COVID-19 related lockdown impact) Change was seen. Overall the AUM grew by ~7% y-o-y, but declined by 6% on a QoQ basis and was largely expected mainly as the business was Reco: Buy ßà impacted due to the lockdown across India. Notably, the Asset Under CMP: Rs. 6,285 Management (AUM) under moratorium decreased from 27% of total loans (as on April 30, 2020 ) to around 15.5% as on June 30, 2020. We view Price Target: Rs. 7,000 á this as a positive development, as a higher proportion of Loans under moratorium was viewed as a concern and expected to add to the Credit á Upgrade ßà No change â Downgrade cost. Bajaj Finserv’s insurance subsidiaries, Bajaj Life (BALIC) and Bajaj Allianz General Insurance (BAGIC) are the other contributors Company details to the overall franchise value. Bajaj Life continues to steadily improve Market cap: Rs. 99,994 cr its business by diversifying its product and channel mix and its focus on persistency and expense management is positive, even though for 52-week high/low: Rs. 10,297/3,985 the medium term, the challenges due to lockdown will be a drag for FY21E growth. BAGIC is likely to see volatility but the pandemic also NSE volume: (No of provides it with an opportunity to expand its health insurance business, 8.4 lakh shares) with lower motor claims (likely to be offset by lower automobile sales). We believe that due to the COVID-19 impact, insurers would be sensitive BSE code: 532978 to bond downgrades (for corporate bonds, etc), and their investment NSE code: BAJAJFINSV portfolios and investment earnings are vulnerable (due to market volatility). Private life insurers reported a 28% y-o-y decline for total first- Sharekhan code: BAJAJFINSV year premium for May, but the decline was expected due to the COVID-19 lockdown impact, and on the whole, was an improved performance on Free float: (No of m-o-m basis. For general insurers, renewal premium growth is expected 6.2 cr shares) to be weak due to cashflow issues and an overall weak sentiment. While near-term headwinds are present, sound fundamentals of business franchises are likely to sustain during present times as well. Due to the Shareholding (%) encouraging outlook for Q1 FY21 of BFL, we have increased our target multiples. Consequently, we maintain our Buy recommendation on Promoters 60.8 Bajaj Finserv with a revised SOTP-based price target of Rs. 7,000.

FII 8.6 Our Call Valuation - Bajaj Finserv has witnessed consistent performance from DII 6.2 its lending business and we expect its strong business model to be able to withstand near-term challenges. While the COVID-19 has had Others 24.3 an unprecedented impact and course correction across industries, we believe that India’s structural long-term growth potential for the insurance business continues. All three of Bajaj Finserv’s businesses are Price chart strong franchises in their respective fields and are well-poised to deliver 10000 sustainable profitability going forward. Due to the improved asset quality outlook of Bajaj Finance (on basis of the Q1 FY21 provisional figures) we 8000 have increased the target multiple for Bajaj Finance. Consequently, we maintain our Buy rating on Bajaj Finserv with a revised SOTP-based PT of 6000 Rs. 7,000. 4000 Key Risks 19 19 20 20 - - - -

Jul Jul Slowdown in consumer finance growth and worsening of economic Nov Mar parameters may pose challenges.

Price performance SOTP Valuation Rs cr (%) 1m 3m 6m 12m Particulars Holding Value per share Rationale Life Insurance 74.0% 1,272 1.7x FY22E EV Absolute 15.5 33.0 -30.9 -17.2 General Insurance 74.0% 1,151 20x FY22E PAT Relative to Bajaj Finance 52.8% 6,933 4.7x FY22E BVPS 9.4 11.7 -20.2 -11.5 Sensex Less: Holding Co Discount 25% 2,352 - Total 7,004 Sharekhan Research, Bloomberg Source: Company; Sharekhan Research

July 06, 2020 8 Stock Update Stock

Life insurance Industry Update for FY2020: The life Insurance industry recorded a growth of 6.2% in individual rated new business premium in FY2020. However, due to the COVID-19 lockdown, new business was severely impacted in March 2020. The individual rated new business premium growth which was strong at 18% in the 11 months ended February 2020, dropped to 6.2% for the financial year ended March 31, 2020. BALIC outperformed industry growth on individual rated new business–growing at 24.8% till February 2020 and ending the year with a 10.6% growth.

Premium in India — the life insurance industry Individual rated new business (Rs Cr) New business (NB) (Rs Cr) Particulars FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 FY2020 FY2019 (upto Feb (upto Feb (upto Feb (upto Feb 2020) 2020) 2020) 2020) BALIC 1,692 1,356 1,927 1,742 4,593 3,741 5,180 4,923 Private sector 37,845 33,173 42,031 40,125 72,577 59,799 80,919 72,481 Industry 67,511 57,191 73,488 69,183 2,33,488 1,77,214 2,58,896 2,14,673 Source: Company

Individual rated new business (as % of Full Year) FY2020 (upto Feb 2020) FY2019 (upto Feb 2020) BALIC 87.8% 77.8% Private sector 90.0% 82.7% Industry 91.9% 82.7% Source: Company; Sharekhan Research

New business (NB) (as % of Full year) FY2020 (upto Feb 2020) FY2019 (upto Feb 2020) BALIC 88.7% 76.0% Private sector 89.7% 82.5% Industry 90.2% 82.6% Source: Company; Sharekhan Research

General Insurance Industry update for FY2020: FY2020 was a challenging year for the general insurance industry. The industry posted one of its lowest growth rates in recent years growing below 10%. The growth rate for the full year was badly affected in March 2020 due to the COVID-19 lockdown, as sales of vehicles came to a standstill.

Gross direct premium in India–the general insurance industry Gross premium (Rs cr) Particulars FY2020 (upto Feb 2020) FY2019 (upto Feb 2020) FY2020 FY2019 BAGIC 12,052 10,038 12,780 11,059 Private sector 84,470 73,591 91,177 81,287 Industry 1,50,807 1,34,459 1,64,219 1,49,946 Source: Company; Sharekhan Research

Gross direct premium in India–the general insurance industry Gross premium (Rs cr) Particulars FY2020 (upto Feb 2020) FY2019 (upto Feb 2020) BAGIC 94.3% 90.8% Private sector 92.6% 90.5% Industry 91.8% 89.7% Source: Company; Sharekhan Research

July 06, 2020 9 Stock Update Stock

Outlook With the impact of lockdown impact still unfolding, we believe risks to portfolios like unsecured loans, SME etc segment has risen sharply. We believe that due to the COVID-19 impact, insurers would be sensitive to bond downgrades (for corporate bonds, etc), and their investment portfolios and investment earnings are vulnerable (due to market volatility). Private life insurers reported a 28% y-o-y decline for total first-year premium for May, but the decline was expected due to the COVID-19 lockdown impact, and on the whole, was an improved performance on m-o-m basis. For general insurers, renewal premium growth is expected to be weak due to cashflow issues and an overall weak sentiment. While near-term headwinds are present, sound fundamentals of business franchises are likely to sustain during present times as well. Valuation Bajaj Finserv has witnessed consistent performance from its lending business and we expect its strong business model to be able to withstand near-term challenges. While the COVID-19 has had an unprecedented impact and course correction across industries, we believe that India’s structural long-term growth potential for the insurance business continues. All three of Bajaj Finserv’s businesses are strong franchises in their respective fields and are well-poised to deliver sustainable profitability going forward. Due to the improved asset quality outlook of Bajaj Finance (on basis of the Q1 FY2021 provisional figures) we have increased the target multiple for Bajaj Finance. Consequently, we maintain our Buy rating on Bajaj Finserv with a revised SOTP-based PT of Rs. 7000.

July 06, 2020 10 Stock Update Stock

About company Bajaj Finserv (BFS) is a diversified financial services group with a pan-India presence in life insurance, general insurance, and lending. It is the holding company for Bajaj Finance Ltd (BFL) and BFS’ shareholding in BFL (Bajaj Finance Ltd.) was 54.81%. It also holds 74% each in Bajaj Allianz General Insurance (BAGIC, 2nd largest private general insurer in India as of FY19 in terms of Gross Premium) and Bajaj Allianz Life Insurance (BALIC, is among top 5 private life insurers in India on new business in FY20).

Investment theme Bajaj Finserv is a financial conglomerate having presence in the financing business (vehicle finance, consumer finance and distribution) via Bajaj Finance (BFL) and is among the top players in the life insurance (BALIC) and general insurance (BAGIC) segments. We expect BFL to maintain its loan book trajectory in the long term as and when business environment normalises. Near term challenges are mostly related to disruption of normal business due to the lockdown which have impacted medium term business of subsidiaries. However, for BAGIC and BALIC, we find their healthy operating metrics and profitability positive. The insurance arms are focusing on strengthening distribution channel and profitability and are likely to emerge as attractive businesses over time.

Key Risks Slowdown in consumer finance growth and worsening of economic parameters may pose challenges.

Additional Data

Key management personnel Mr. Managing Director & CEO S Sreenivasan CFO V. Rajagopalan President - Legal Mr. Ganesh Mohan Group Head – Strategy Mr. Ajay Sathe Head – Group Risk Management Rajeev Jain Managing Director – Bajaj Finance Limited Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 Jamnalal Sons Pvt Ltd 9.6 2 Jaya Hind Industries Ltd 3.9 3 Maharashtra Scooters Ltd 2.3 4 Life Insurance Corp of India 2.2 5 Bajaj Sevashram Pvt Ltd 1.5 6 Bachhraj & Co Pvt Ltd 1.2 7 NIRAJ BAJAJ 1.2 8 BlackRock Inc 1.0 9 Axis Asset Management Co Ltd 0.9 10 Vanguard Group Inc 0.9 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

July 06, 2020 11 Know more about our products and services

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