MOSL: BAJAJ FINANCE (Neutral)-Hitting the pedal on asset-light profitability-Key vectors – rural, cross-sell and retailization of liabilities

BAJAJ FINANCE: Hitting the pedal on asset-light profitability; Key vectors – rural, cross-sell and retailization of liabilities

(BAF IN, Mkt Cap USD20.7b, CMP INR2541, TP INR2375, 7% Downside, Neutral)

• We are optimistic on Bajaj Finance’s (BAF) outlook, given its traction in multiple products, new initiatives in various business segments (on both the asset and liability sides) and able top management.
• We are particularly enthused about the new emerging vectors of profitability: (a) asset-light model, (b) operating efficiency, (c) granular retail portfolio, (d) improving risk management parameters led by technology and (e) capital efficiency.
• In our view, BAF is structurally moving toward a retail banking structure, with a growing deposit franchise, rising penetration in hinterlands, credit and fee-based product offerings, and management depth to handle bank structure responsibilities.
• While we like BAF’s superior business model, valuations appear rich at a P/B of 5.9x FY20E. We, thus, maintain our Neutral rating with a TP of INR2,375 (5x Dec’20E BVPS).

Product extension and cross-sell – key focus areas

BAF has maintained its strong growth trajectory, primarily led by customer addition in the flagship consumer durables business. The company has set a target to broaden its customer base to 75m by FY23 from 30m as of 1HFY19. Newer products like life-care financing (where the business model is similar to CD financing) are likely to bring in more customers on board. Encouragingly, BAF has achieved a cross-sell ratio of 59%, which has inched up steadily from 49% in FY15. In our view, this will help accelerate the asset-light income source for the company.