Bajaj Finserv (BAFINS) CMP: | 11000 Target: | 11500 (5%) Target Period: 12 months HOLD April 30, 2021 Gradual revival in finance; insurance picks pace Bajaj Finserv reported a mixed performance with a gradual pick-up in lending business and robust growth in life insurance while general insurance momentum was slower. Consolidated topline grew 15.7% YoY to | 15387 crore, led by improved traction in insurance business, partially offset by moderation in lending business. Consolidated earnings increased 4x YoY to | 980 crore with improvement in all segments. Particulars Consolidated AUM witnessed QoQ growth of 4% YoY to | 152947 crore, led Particular Amount by mortgages. NII remained broadly flat YoY at | 4,659 crore. Lower Market Update Result | 176612 crore provision at | 1230 crore led to higher earnings at | 1346 crore, up 42% YoY Capitalization and 18% QoQ. Asset quality has synced with proforma GNPA, NNPA by Q4 Net worth | 35830 crore reaching at 1.79%, 0.75% (post ~| 2000 crore i.e. 1.3% write-off in Q4) from 52 week H/L (|) 11299 /3986 proforma GNPA, NNPA of 2.86%, 1.22%, respectively, in Q3FY21. Face value | 5 Gross written premium (GWP) in general insurance increased 5% YoY to DII Holding (%) 6.1 | 2787 crore. Excluding crop insurance, GWP increased 10% YoY to | 2663 FII Holding (%) 9.1 crore. The 2-W, 4-W saw healthy growth at 21.4%, 27.9%, respectively, but CV business (especially passenger CV) remains muted with de-growth of Key Highlights 2%. Growth in retail health business moderates. Stance on group health insurance still continues to remain cautious. Claim ratio increased to 64.3% Robust 44% YoY growth in life vs. 62.1% in Q4FY20, primarily due to strengthening of reserves for third insurance premium with NBP uptick of party motor claims. Hence, combined ratio (claim + opex) came in at 96.6% 64% YoY vs. 93.8% in Q4FY20. Higher claim provisioning led to lower underwriting GWP in general insurance showed profit coming at | 6 crore though FY21 profit came in at | 237 crore. modest growth of 5% YoY Investment income remained healthy at | 353 crore, up 38% YoY. Life insurance GWP grew 44% YoY to | 4501 crore, led by robust new Downgrade to HOLD with revised business premium (NBP) accretion at 64% YoY to | 2493 crore, attributable target price of | 11500 to pick-up in individual & group protection business. Individual rated Risk to our call premium grew 63% YoY to | 989 crore (led by guarantee & protection product) while group premium increased 34% YoY to | 739 crore, led by Persistent impact of pandemic may pick up in loan disbursement. Renewal premium witnessed an uptick lead to increased claims and impact Retail Equity Research Equity Retail business reporting 25% YoY growth to | 2008 crore. New business value increased – 59% YoY to | 361 crore. AUM grew 32% YoY to | 73773 crore, reflecting Faster-than-expected growth in life impact of rebound in equity markets and strong inflows. insurance and lending segment could Valuation & Outlook boost profitability Gradual pick-up in AUM in finance business, robust premium accretion in Research Analyst life insurance and growth in general insurance with under writing profit to Kajal Gandhi aid business momentum and earning trajectory. Robust pick-up in life [email protected] Securities ICICI insurance business, selective product mix (pick up in unit linked products) Vishal Narnolia and improvement in VNB margins remains positive. The management focus [email protected] on selective segment like PV, 2-W, property and retail health bodes well to keep a tab on claim ratio. Recent resurgence in Covid cases remain near Sameer Sawant term risk. Factoring in revival in business segments, we revise our target [email protected] price to | 11500/share (earlier | 10500), based on SOTP valuation, implying a multiple of ~26x on FY23E consolidated earnings. However, given recent price run up, we downgrade the stock from BUY to HOLD. s Key Financial Summary | crore FY20 FY21 FY22E FY23E CAGR (FY21-23E) Revenue 54,351.5 60,591.6 62,136.1 73,536.0 10% PAT 2269.0 4470.5 5287.7 6822.4 24% EPS (|) 269.7 235.6 332.3 428.8 BV (|) 2026.3 2260.2 2590.7 3017.7 P/E 40.8 46.7 33.1 25.7 P/BV 5.4 4.9 4.2 3.6 RoA 1.9 1.2 1.4 1.6 RoE 15.3 11.0 13.7 15.3 S Source: Company, ICICI Direct Research Result Update | Bajaj Finserv ICICI Direct Research Exhibit 1: Variance Analysis Q4FY21 Q4FY21E Q4FY20 YoY (%) Q3FY21 QoQ (%) Comments Sequential degrowth in premium due to lower crop General Insurance 2787.4 3452.1 2,655.5 5.0 3,392.0 -17.8 business Growth in individual and group NBP propelled life Life Insurance 4501.3 3441.1 3,128.3 43.9 3,147 43.0 insurance premium Net premium 7288.7 6893.3 5,783.8 26.0 6,539.0 11.5 Investment and 1837.3 2438.7 275 569.1 3,659 -49.8 other income Reinsurance Ceded 590.5 413.6 206 186.0 491 20.2 Reserve for -71.3 200.0 -214 -66.7 305 -123.4 Total Insurance 8606.9 8718.3 6,066.3 41.9 9,401.9 -8.5 Retail financing 6854.9 7297.1 7,229 -5.2 6,655 3.0 Gradual pick seen in finance segment Windmill 2.4 7.5 7.1 -66.8 3.9 -38.9 Investment and 311.7 70.0 381 -18.3 79 292.9 Total 15387.3 15910.5 13,294 15.7 15,961 -3.6 Interest and Finance 2147.4 664.6 2,552.3 -15.9 2,258.4 -4.9 Charges Other Exp 10880.0 12912.0 9,949.0 9.4 10,922.8 -0.4 Total Expenses 13027.5 13576.7 12,501.4 4.2 13,181.3 -1.2 PBT 2359.8 2333.9 792.9 197.6 2,779.5 -15.1 Gradual pick in finance segment, strong growth in PAT 980.4 1102.7 194.4 404.2 1,290.3 -24.0 life insurance and capital gains led to YoY growth in Source: Company, ICICI Direct Research Exhibit 2: Change in estimates FY22E FY23E (| Crore) Old New % Change Old New % Change Total Income 59458.9 62,136.1 4.5 69985.6 73,536.0 5.1 PBT 10,565.6 11,679.3 10.5 13,209.7 14,816.9 12.2 PAT 4,863.1 5,287.7 8.7 6,449.3 6,822.4 5.8 ABV (|) 2,581.8 2,590.7 0.3 2,985.4 3,017.7 1.1 Source: Company, ICICI Direct Research Exhibit 3: Assumption Current Earlier FY20 FY21 FY22E FY23E FY22E FY23E Commercial Finance growth (%) 25.7 3.8 18.0 21.7 19.7 21.7 Life Ins Premium growth (%) 10.1 15.4 23.7 14.0 11.4 12.7 General Ins GWP growth (%) 15.6 5.0 11.0 12.0 12.0 13.0 Source: Company, ICICI Direct Research ICICI Securities | Retail Research 2 Result Update | Bajaj Finserv ICICI Direct Research Valuation and Outlook A gradual pick-up in AUM in the finance business, robust premium accretion in life insurance and growth in general insurance with under writing profit to aid business momentum and earning trajectory. Robust pick-up in life insurance business, selective product mix (pick up in unit linked products) and improvement in VNB margins remains positive. Management focus on selective segment like PV, 2-W, property and retail health bode well to keep a tab on claim ratio. Recent resurgence in Covid cases remain near term risk. Factoring in a revival in business segments, we revise our target price to | 11500/share (earlier | 10500), based on SOTP valuation, implying a multiple of ~26x on FY23E consolidated earnings. However, given the recent price run up, we downgrade the stock from BUY to HOLD. Exhibit 4: SOTP valuation Value/ Value of stake (| Business Basis Stake (%) Business Value share after 30% crore) discount (|) Bajaj Allianz Life Insurance 1.5x FY23E EV 74 27827 20562 905 Bajaj Allianz General Insurance 25x PAT 74 51394 38288 1684 Bajaj Finance 6.7x FY23E BVPS 55 363440 199201 8903 Windmill |4 per mw 100 260 143 8 Total 11500 Source: ICICI Securities | Retail Research 3 Result Update | Bajaj Finserv ICICI Direct Research Story in Charts Exhibit 5: Consolidated profit summary Particulars Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 General Insurance 2547 3402 2843 4279 3055 2655 2289 4156 3392 2787 Life Insurance 2123 3290 1837 2236 2552 3128 1700 2677 3147 4501 Total Insurance 6179 7782 6537 7905 7632 6066 7641 8526 9402 8607 Investments & others 54 51 52 410 60 381 42 48 79 312 Windmill 10 16 8 12 12 7 8 10 4 2 Retail financing 4995 5269 5808 6323 7026 7229 6650 6523 6655 6855 Less: Inter-segment revenue 96 123 133 426 169 389 148 55 179 389 Total revenue 11142 12995 12272 14224 14561 13294 14192 15052 15961 15387 Interest and Finance Charges 1782 1884 2054 2313 2419 2552 2395 2340 2258 2147 Other Exp 7136 8981 7963 9285 9514 9949 9229 10555 10923 10880 Total Expenses 8918 10864 10017 11598 11934 12501 11624 12895 13181 13027 PBT 2224 2130 2255 2626 2627 793 2568 2157 2779 2360 PAT 851 839 845 1204 1126 194 1215 986 1290 980 Source: Company, ICICI Direct Research Exhibit 6: Consumer finance largest contributor to loan mix 100 15 16 18 20 22 23 24 24 25 80 8 8 8 10 9 9 9 9 9 12 10 9 8 10 60 7 9 9 9 28 25 25 23 23 23 23 22 21 (%) 40 20 39 39 39 39 39 37 36 36 35 0 Q1FY20 Q4FY19 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Consumer Finance SME Business Commercial Rural Mortgage in HFC 0060 Source: Company, ICICI Direct Research Exhibit 7: Strong growth in new business premium in life insurance 3000 2493 2500 1818 1706 2000 1699.7 1519 1411 1394 1372 1235 1213 1500 1171 1014 944 721 | crore | 1000 500 0 Q1FY19 Q2FY21 Q3FY18 Q4FY18 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q3FY21 Q4FY21 Source: Company, ICICI Direct Research Exhibit 8: Strong growth in total premium driven by sharp uptick in NBP Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Total premium 3290 1837 2235 2552 3129 2658 2677 3147 4501 New business premium 1818 1014 1235 1411 1519 1700 1372 1706 2493 Renewal premium 1472 823 1000 1141 1610 958 1305 1441 2008 Policyholder profits 31 -30 -1 10 11 -52