IDirect BajajFinance IC PDF

Initiating Coverage
September 10, 2015
Bajaj Finance (BAJAF)
Rating Matrix
Rating
Target
Target Period
Potential Upside
:
:
:
:
Buy
| 5600
12 months
11%
| 5049
Unique product offering commands premium!
YoY Growth (%)

YoY Growth
NII
PPP
PAT
EPS
FY14
29.1
28.2
21.6
11.3
FY15
29.6
29.0
24.9
24.6
FY16E
27.8
29.1
27.5
23.1
FY17E
28.6
31.3
27.3
23.4
Valuation Summary
FY14
34.9
38.8
6.4
7.1
19.5
3.4
P/E
Target P/E
P/ABV
Target P/ABV
RoE
RoA
FY15
28.0
31.1
5.4
6.0
20.4
3.1
FY16E
22.8
25.3
3.7
4.1
19.0
3.0
FY17E
18.4
20.5
3.3
3.6
18.5
3.0
Stock Data
Particulars
Bloomberg/ Reuters Code
BAF IN/ BJFN.BO
Sensex
25,401
Average Volumes
56,096
Market Capitalisation (| crore)
27,030
52 week H/L (|)
5718 /2460
Equity capital
53.3
Face value
| 10
DII Holding (%)
5.8
FII Holding (%)
18.1
Comparative return matrix (%)

Return %
Bajaj Finance
Shriram Transport
MMFS
Shriram City Union
1M
-8.3
-5.6
-0.3
-10.7
3M
20.6
5.5
1.1
-1.2
6M
20.6
-30.1
-3.0
-20.3
12M
110.4
-10.9
-11.1
-2.3
Price chart
9,500
6,000
9,000
5,000
4,000
8,500
3,000
8,000
2,000
Bajaj Finance
Aug-15
May-15
Feb-15
0
Nov-14
1,000
7,000
Aug-14
7,500
Nifty (L.H.S)
Research Analyst
Kajal Gandhi
kajal.gandhi@icicisecurites.com
Vasant Lohiya
vasant.lohiya@icicisecurites.com
Vishal Narnolia
vishal.narnolia@icicisecurites.com
ICICI Securities Ltd | Retail Equity Research
Bajaj Finance (BFL), is one of the leading asset finance NBFCs. The USP of
BFL is its stronghold in the consumer durable (CD) & lifestyle product
financing business (~15% of the AUM) wherein it does not have any major
competition (BFLs share is ~16%). These segments are under penetrated
and growing in size, thus providing a lucrative opportunity for growth. In
FY15, BFL served ~40 lakh clients in these segments. Further, it has a
diversified loan portfolio. Post induction of the new management in FY07,
BFL transformed itself from merely financing a few products to a wide
range of products divided into three broad categories viz. consumer finance
(40% of loans), SME (54%) & commercial & rural category (6%). Such
diversity has given BFL an edge in terms of AUM growth (44% CAGR to
| 32410 crore in FY11-15) and asset quality (GNPA ratio steady in 1.2-1.5%
range in the past three years) despite a weak economic environment. PAT
has increased at 38% CAGR in FY11-15 to | 897 crore. Over FY15-17E, we
expect PAT traction to remain strong at 27% CAGR to | 1456 crore.
Expect AUM traction at 27% CAGR over FY15-17E led by consumer finance
Strong AUM traction of 44% CAGR over FY11-15 to | 32410 crore was
mainly driven by the SME category increasing 51% CAGR followed by the
CF category, which rose at 41% CAGR. Within SME, it was the LAP (25% of
overall AUM) portfolio that saw high traction of 38% CAGR over FY11-15
while CD financing within CF book saw 47% CAGR. Going ahead, we expect
AUM growth at 27% CAGR to | 52686 in FY15-17E, led by CF segment
(31% CAGR) that will be driven by CD financing business. Enhanced
competition and growing risks in the LAP segment may keep traction in the
SME segment lower at 24.8% CAGR (refer exhibit 20).
Steady asset quality, strong margins reflect strength of model
BFLs GNPA ratio at 1.5% (| 471 crore) as on FY15, is better than some of its
peers wherein the ratio is above 2.5%. The asset quality has improved
sharply over the last five to six years. The GNPA ratio was at 16.6%, 7.6%
during FY09, FY10, respectively. Owing to its strong underwriting
processes, focus on affluent & mass affluent clients, NPA is expected to
remain acceptable. Further, such healthy asset quality & higher yields in CF
space enable BFL to earn one of the highest margins among its peers of
~10% as on FY15. We assume this will largely be sustained, going ahead.
Rich valuations to sustain on strong visibility in earnings
Strong performance in a weak economic scenario (healthy return ratios RoA at ~3%, RoE at ~20% GNPA at 1.5%) led to higher investor interest in
BFL & P/ABV multiple expanding from 1x to 3x since September 2013. We
believe its niche positioning in CD financing coupled with diversified nature
of its book that helps de-risk the portfolio hold key. BFLs premium
valuations are expected to sustain on better earnings visibility. We initiate
coverage with BUY rating & a TP of | 5600 valuing at 3.6x FY17E ABV.
Exhibit 1: Key Financials
Financial Performance
NII (| crore)
PPP (| crore)
PAT (| crore)
EPS(|)
P/E
P/ABV
RoA
RoE
Source: Company, ICICIdirect.com Research
FY13
1717
1053
591
130
38.8
7.5
3.8
21.9
FY14
2216
1350
719
144
34.9
6.4
3.4
19.5
FY15
2872
1741
897
180
28.0
5.4
3.1
20.4
FY16E
3671
2248
1144
221
22.8
3.7
3.0
19.0
FY17E
4721
2953
1456
273
18.4
3.3
3.0
18.5
Company background
Shareholding pattern (Q1FY16)

Shareholding Pattern
Promoters
Institutional investors
Others
Holdings (%)
57.6
23.9
18.5
Source: BSE, ICICIdirect.com Research
Institutional holding trend (%)

18.1
20
(%)
15
10
12.2
12.6
7.1
6.9
Q1FY15
Q2FY15
13.6
13.1
6.3
5.6
5.8
Q4FY15
Q1FY16
5
0
Q3FY15
FII
DII
Source: BSE, ICICIdirect.com Research
Bajaj Finance (BFL) is one of the leading non banking financial companies
(NBFC) in India and is part of the illustrious Bajaj group. The company was
incorporated in 1987 essentially as the captive financier to Bajaj Autos
vehicles. In 1995, it came out with an initial public offering (IPO). Initially,
BFL was promoted by the erstwhile Bajaj Auto and Bajaj Auto Holdings.
However, as per the scheme of de-merger of erstwhile Bajaj Auto in 2007,
the shareholding of Bajaj Auto in the company has been vested with Bajaj
Finserv, which is the financial services arm of the Bajaj Group.
As outlined above, BFL started as the captive financier to two and three
wheelers manufactured by Bajaj Auto. However, since then, the company
entered various other lending segments and became one of the significant
players in the retail asset-financing industry. BFLs diversified product suite
now comprises >10 product lines divided broadly into four categories like
consumer, SME, commercial and rural. The company is the largest financier
of two-wheelers and consumer durables in India.
The company has an AUM of ~| 32410 crore as on FY15 and witnessed
strong growth at 35% CAGR in the past three years. The liability mix is
mainly skewed towards banks, followed by NCD/CPs and fixed deposits.
BFL has a stable and deep management structure with 100 management
team members having experience with leading multi national companies
and transnational companies. The companys reach and distribution
channels are strong with a presence in 160 locations in urban areas and 50
branches in rural areas. Further, for various product lines, BFL has tie-ups
with all major manufacturers and dealers in consumer durables, lifestyle
financing, digital products etc.
Exhibit 2: Key management personnel

Name & Designation
Experience & Qualifications
Rajeev Jain (Managing

Director)
Has more than 20 years of experience in the consumer & small business segment lending industry. He has been with the company for eight years. He has
worked towards steering the organisation on to a path of fast-paced growth and defined an ambitious trajectory of building a diversified lending institution.
He has earlier worked with AIG, GE Money and American Express
Rakesh Bhatt (COO)
Rakesh Bhatt has an overall experience of 20+ years in the finance & technology industry. He is responsible for leading a large portfolio of critical functions
at the firm namely technology, operations, customer experience and quality. He has held leadership positions at GE Money, Reliance Industries, AIG and 3i
Infotech
Rajesh Viswanathan is responsible for the finance and treasury functions. He joined BFL from Bajaj Allianz Life Insurance where he was the CFO for eight
years. He has varied experience having worked previously with KPMG in the Middle East in their Bahrain assurance practice. Prior to that, he was with DSP
Rajesh Viswanathan (CFO)
Merrill Lynch and Mahindra & Mahindra in India. He is a chartered accountant and a cost accountant and has a bachelors degree in commerce from Mumbai
University
Pankaj Thadani (Chief

Compliance Officer)
Pankaj Thadani joined Bajaj Finserv lending in 2006, bringing with him a rich experience of 28 years in financing, financial accounting, cost accounting, tax
and systems. He has helped give direction and enabled the company to grow from a single business company to a diversified NBFC. He is a mathematics
graduate and a chartered accountant
Devang Mody (President

Consumer Business)
Devang Mody is responsible for the consumer business vertical that includes consumer durables and lifestyle finance, cross sell, credit cards and salaried
personal loans. He joined from AIG where he was Vice President - Business Development and CRM for the consumer finance business in India. Before AIG,
he spent over eight years in GE Money. He is a chartered accountant
Page 2
Exhibit 3: Group structure
Bajaj Holding Investment

Limited
Bajaj Auto Limited (49.24%

stake)
Bajaj Allianz Life

Insurance Company
(74% stake)
Bajaj General Insurance

Company (74% stake)
Bajaj Finserv Limited

(58.35% stake)
Bajaj Financial Solutions

(100% stake)
Wealth Management
Bajaj Finance Limited

(57.3% stake)
Page 3
Exhibit 4: BFLs product profile
Exhibit 5: Geographic presence
Exhibit 6: Distribution
Business Line
FY15
Product Line
Urban
161
Consumer durable product stores
7,000+
161
Lifestyle product stores
1,150+
119
Digital product stores
2,650+
232
2W3W Dealer/ASCs(3)/Sub-dealers
3,000+
Of which Consumer Lending branches

Of which SME Lending branches
Rural
Of which Rural branches
50
Of which Rural ASSC*
182
Source: Company, ICICIdirect.com Research; ASSC - Authorised Sales and Service

Centres
FY15
SME Direct sales agents
700+
Rural consumer durable product stores
1,500+
Exhibit 7: Number of new loans disbursed in FY15

Select Product Lines
FY15
Consumer durable
3579000
Lifestyle finance
80000
Digital finance
293000
2W & 3W
560000
PLCS
169000
Salaried Loans
38000
SME
31000
Rural finance
131000
Page 4
Investment Rationale
Bajaj Finance is an asset finance NBFC. The lending book can be broadly
diversified into four categories viz. consumer finance, SME finance,
commercial finance and rural finance. This book is funded through
diversified resources like bank loans, bond or debentures, commercial
papers, fixed deposits and funds raised via QIPs.
The key strength or highlight of BFLs business model is its
consumer finance (CF) business and in that, particularly,
the consumer durable (CD) financing & lifestyle product
financing business.
The edge in the consumer financing business acts as a

competitive advantage and has allowed BFL to command a
valuation premium compared to other NBFCs
However, the key strength or highlight of BFLs business model is its

consumer finance (CF) business and in that, particularly, the consumer
durable (CD) financing & lifestyle product financing business. These
businesses provide uniqueness to BFL as other financing business like SME
and commercial lending are covered by other NBFCs and banks. The edge
in the consumer financing business acts as a competitive advantage and
has allowed BFL to command a valuation premium compared to other
NBFCs (see exhibit 20).
Stronghold in CD financing & lifestyle product finance business.
In the four broad categories, CF book as on FY15 was at | 13127 crore,
comprising 40.5% of total AUM of | 32410 crore. Within the CF book, CD
financing and lifestyle product financing book were at | 4163 crore and |
498 crore, respectively. Apart from these, the CF book includes two & three
wheeler finance, personal loans and home loans to salaried individuals.
Exhibit 8: Break-up of consumer finance (CF) book
AUM (| Crore)
2W & 3W finance
Consumer durable finance
Lifestyle finance
Digital Product
Non Digital Product
Personal loans
Personal loans Cross Sell
Salaried Personal Loans
Home Loans (Salaried)
Total CF AUM
FY11
1953
893
511
NA
NA
3,357
FY14
3593
2531
174
NA
NA
2577
NA
NA
453
9,328
FY15
3324
4163
498
Q1FY16
3315
5147
565
FY16E
3526
6430
871
FY17E
4215
8640
1264
312
186
354
211
549
322
797
468
4303
4972
5517
7007
2412
1891
2741
2231
3145
2373
3994
3013
839
13,127
938
14,937
1079
17,424
1370
22,497
Exhibit 9: Detailed profile of products offered under consumer finance (CF) category
Particulars
Year started
Product profile
Target Segment
Ticket size (| Lacs)
Loan to Value ratio (%)
Duration/tenure
Distribution
network/presence
Yields range
Proportion of Total AUM
as on FY15
Amount (FY15- | crore)
Auto Financing
1987
2 -3 wheeler
Mass clients
2W - 0.45 lacs
3W - 1-1.5 lacs
2W - 65 to 70%
3W - 75 to 80%
2-3 years
Consumer Durable
1995
TV, AC, LED etc

Mass Affluent
0.28 lacs
Lifestyle Financing
2012
Digital - Mobiles,
Laptops etc & Non
Digital - Furnitiure,
PL to existing
Home Furnishing
customers
Mass Affluent Existing Clients
0.35 lacs
5 lacs
65 to 75%
Unsecured
~12 months
30-36 months
3000+ via Bajaj Auto

dealers, Sub dealers,
7000+ product
3800+ product
Authorised service centres stores
stores
22-25%
24-26%
25-26%
16-18%
10.3
3,324
9 months
12.8
4,163
1.5
498
Personal Loans
2012
Page 5
13.3
4,303
The new clients acquired each year in the CD financing

business have increased at 39% CAGR from 971000 in
FY11 to 3623000 new customers in FY15.
In the past five years, BFL has witnessed strong accretion in new customer
acquisition as can be seen in the exhibit below. The new clients acquired
each year in the CD financing business have increased at 39% CAGR from
971000 in FY11 to 3623000 new customers in FY15. Even lifestyle product
finance (that includes digital products financing i.e. mobile phones, laptops,
etc and non-digital i.e. furniture, watches etc) started in FY13 saw a robust
increase from 36000 customers served in FY13 to 373000 in FY15.
Exhibit 10: Number of new loans disbursed each year
Business Line
Consumer Durable Finance
Life style Finance (Digital + Non digital)
Personal Loans
2W
Rural Finance
SME/commercial
Total
FY11
FY12
FY13
FY14
FY15 Q1FY16
971000 1466000 1909000 2452000 3623000 1298000
36000
108000 373000
124000
67000
89000 116000 137000 207000
68000
522000
654000 736000
651000 560000
141000
22000 131000
79000
9000
12000
11000
20000
31000
10000
1569000 2221000 2808000 3390000 4925000 1720000
Currently, BFL is among the largest new client acquirers in India. This
increase is owing to BFLs large distribution network and reach. It is present
in more than 114 cities with 7000+ point of sales or distribution franchise in
consumer durable finance. Further, it has 3800+ dealer network in lifestyle
products (2650+ in digital financing and 1150+ in non digital financing).
Exhibit 11: Distribution franchise
Business Line
Sales Finance or Consumer electronics Dealer
Life style Fianance/ Non Digital
Digital Product stores
2WDealer/ASCs
Small/SME Businesses
Rural Consumer durable product stores
FY10
FY11
FY12
FY13
FY14
FY15 Q1FY16
2,000+ 2,500+ 2,800+ 3500+ 4900+ 7000+ 7900+
1150+ 1300+
- 850+ 1600+ 2650+ 2900+
1,275+ 1,500+ 2200+ 2600+ 2600+ 3000+ 3000+
225+ 250+
250+ 400+ 700+ 700+ 700+
- 1500+ 1800+
BFL capitalised strongly on its 0% financing product, which enabled it to

enjoy widespread popularity in the CD financing space among customers.
Almost the entire CD financing and lifestyle product financing business is
through 0% financing. Under this scheme, the sale proposition is that the
customer will not have to pay any interest. The customer pays ~30% as
down payment and the balance amount in EMI of seven to eight months.
BFL gets 1-1.5% processing fees and ~6-8% of the product value as
subvention from manufacturers. Further, the company offers EMI (Existing
membership card) cards to its existing customers. This card enables the
holder to purchase consumer durables & lifestyle products, by availing a
loan from BFL without any documents thus providing quick & hassle-free
finance. Customers simply have to Swipe & Sign to buy using an EMI card.
As of Q1FY16, about 3.5 million EMI cards have been offered.
Almost the entire CD financing and lifestyle product
financing business is through 0% financing.
..leads BFL to command valuation premium over peers

BFLs stronghold in the CD financing business is on the back of its large
reach, formidable relationships with dealers and manufacturers, strong
brand, expertise of several years and database of such large customers.
These factors act as entry barriers in the CD financing business and give
BFL a competitive advantage. Further, we believe the competition will
remain low as banks are largely focused on housing finance or auto
financing within retail loans while other NBFCs are in niche areas like auto
finance, housing finance, gold finance or infrastructure finance.
In the past few years, a major reason for BFL to command a higher
valuation multiple vs. its peers is owing to its edge in the CF business and
within that, particularly in the consumer durable & life style financing
business. Going ahead, we expect BFL to maintain this premium owing to
its leadership position in the under penetrated CD financing and lifestyle
financing business with no major competitors.
Page 6
Sizeable financing market in consumer category products to offer great opportunity

As per BCG-CII report, the overall consumption expenditure of India is likely
to increase 3.6 times to US $ 3.6 trillion by 2020 from US $ 991 billion in
2010 (see Exhibit below). In that, Housing & Consumer durables is expected
to jump 4 fold to US $ 752 billion from 2010 levels. In 2000-2010 decade
also we observe that this segment quadrupled. The proportion of Housing
& Consumer durables in overall consumption expenditure increased to
18.8% in 2010 from 15.7% in 2000. This is expected to further rise to 21%
by 2020.
Housing & Consumer durables is expected to jump 4 fold to
Exhibit 12: Housing & consumer durables is expected to increase 4.0x by 2020
(in $ billion)
US $ 752 billion from 2010 levels as per BCG CII report
2000
2010
2020E
135
2.4x
328
2.7x
Housing & Consumer durables
47
4.0x
186
4.0x
752
Transport & Communication
43
3.9x
168
3.9x
664
Education & Leisure
17
4.2x
71
4.2x
296
Apparel
18
3.3x
59
3.8x
225
Health
14
3.5x
49
3.8x
183
Others
25
5.2x
129
4.4x
570
299
3.3x
990
3.6x
3585
Food
Total
895
Source: BCG CII Report, ICICIdirect.com Research
We have tried to gauge the market size in terms of sales of some of the
major products financed by Bajaj Finance.
The market size of major consumer durable products like TV, washing
machines, refrigerator and ACs is ~| 51000 crore as on FY15. This segment
has increased at 13% CAGR in past five years. Over FY15-20, it is expected
to increase at 16% CAGR to | 106000 crore. This is on the back of expected
revival in the economy, increased disposable income, easy access to credit,
increase in electrification of rural areas, higher investments by major global
companies in India etc. Further, consumer electronics (that includes DVD
players, home theatre systems, MP3 players, audio equipment, digital
cameras, etc) that has a market size of ~| 60000 crore is estimated to reach
| 176000 crore as per a report by Ernst & Young FICCI.
In India, smart phone sales have increased strongly in the past few years. In
FY13, ~4.4 crore smart phones were sold. This number is estimated to be
~11-12 crores in FY15. BY FY20, ~18 crore smart phones are expected to
be sold annually. BFL is one of the largest financiers of Samsungs smart
phones that has ~23% market share. Further, BFL also finances Apples
smart phones, which recorded sales of more than 1 million smart phones
last year.
The furniture market in India, which is highly unorganised (~90% of the
market) is currently at ~| 70000 crore. With expenditure on Housing
estimated to rise four fold as observed in the above exhibit, the furniture
market is estimated to increase to ~| 270000 crore by FY20.
The total market size of the segments discussed above such as consumer
durables, consumer electronics, smart phones and furniture is estimated at
about | 300000 crore and is expected to increase to around ~ | 700000
crore by FY20. Further, the company has indicated that in the CF space it is
also working on a new product segment that is expected to have a
financing market size of ~| 125000 crore. Entering the e-commerce
financing market can be an added advantage over time.
Page 7
Two wheeler, three wheeler financing business captive financing model

BFL has been present in two wheeler financing since its inception in the
early 1990s. This business has a captive financing model wherein BFL
finances two-wheelers produced by its group company Bajaj Auto. Until
FY08, two-wheeler financing comprised the bulk (~66%) of the overall
AUM, which has now dipped to 10.3% (| 3324 crore as on FY15) of AUM.
This is due to enhanced focus on the CD finance book, de-risking of the
book by diversifying to SME & commercial financing and also due to
increased asset quality stress seen in the two-wheeler book and 15% CAGR
decline in two-wheeler sale volumes of Bajaj Auto over FY13-15.
Currently, the company finances 30% of Bajaj Autos

domestic two-wheeler sales through 3000+ dealers and
authorised service centres.
Though there has been a decline in the two-wheeler financing proportion in

BFLs overall AUM, the company is the still the largest two-wheeler lender
in India focused on the semi-urban & rural markets. BFL has a market share
of 18% in the two-wheeler financing space. Currently, the company
finances 30% of Bajaj Autos domestic two-wheeler sales through 3000+
dealers and authorised service centres. BFL also finances about 15% of
Bajaj Autos three-wheeler sales. This business is currently operating in 16
states covering 216 key dealers of Bajaj Auto.
Exhibit 13: Slowing traction in two-wheeler finance book during FY14 & FY15
Two Wheeler Finance
Number of new loans disbursed
Amount Disbursed (| crore)
AUM (| crore)
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15 Q1FY16
397000 239000 442000 522000 655000 736000 652000 560000 141000
1484
783
1364
2034
2671
NA 3149
NA
NA
1647
1175
1393
1953
2725
NA 3593
3324
3315
Source: Company, ICICIdirect.com Research; NA = Not available
Going ahead, we expect two-wheeler volumes financed by BFL to increase

as domestic sale volumes of Bajaj Auto are expected to increase at 13%
CAGR over FY15-17E to 2255296 units. This will also lead to an
improvement in absolute AUM to | 4215 crore by FY17E. However, the
proportion in overall AUM may continue to dip to 8% from 10.3% of AUM
as on FY15.
The large number of customers acquired through the CD

financing business (~40 lakh new customers in FY15)
allows BFL to cross-sell various other products to
customers with a healthy credit history.
Cross-sales of products to existing large customer base

The large number of customers acquired through the CD financing business
(~40 lakh new customers in FY15) allows BFL to cross-sell various other
products to customers with a healthy credit history. These products include
personal loans, life/general insurance, etc. Total personal loans as on FY15
were at | 4303 crore (14% of AUM), which were largely to existing
customers. Further, home loans to salaried individuals are also covered in
CF financing. It had a book of | 839 crore as on FY15 and comprised 2.6%
of total AUM. During Q1FY16, | 633 crore of personal loans were disbursed
while | 116 crore worth of life insurance and | 67 crore worth of general
insurance policies were sold through cross sales.
We expect the share of the CF division in total AUM mix to increase to
42.7% (| 22497 crore) by FY17E from 40.5% as on FY15. It will be mainly
led by CD financing & lifestyle financing segment, which is expected to
witness strong AUM CAGR of 44% and 59%, respectively in FY15-17E (refer
exhibit 20). We expect such an increase on the back of a rise in sales of
consumer durable, increased finance penetration and jump in the share of
BFL in the overall financing market from 18% currently to ~23% by FY17E.
Page 8
LAP comprises the highest part in SME financing as well

as in the overall AUM at 25.4% as on FY15
SME financing Mortgage heavy book; traction to moderate; share to decline but
continue to remain highest in overall AUM
BFLs SME category is the largest of the four broad categories and
comprises ~53% of the total AUM. It stood at | 17198 crore as on FY15. It
includes small business loans, loan against property (LAP), home loans to
self employed & loan against securities (LAS). LAP comprises the highest
part in SME financing as well as in the overall AUM at 25.4% as on FY15.
LAP is followed by small business loans (9.8%), home loans (9.5% of
overall loans) and LAS (4.5%).
Exhibit 14: Break-up of SME book
AUM (| Crore)
Loans
Business Loans
Professional Loans
Loan against property
Home loans (Self Employed)
Loan against securities
SME cross sell
Total SME AUM
FY11
727
NA
NA
2251
0
321
0
3,299
FY14
2033
NA
NA
6907
2351
841
718
12,850
FY15
3084
Q1FY16
3795
FY16E
4356
FY17E
5637
2461
623
3058
737
3572
784
4623
1015
8232
3071
1578
1233
17,198
8424
3063
1516
1360
18,158
9583
3858
1950
1576
21,323
11933
4847
2397
1976
26,791
In the SME segment, the focus is on high net worth SMEs with average
annual sales of | 25 crore with established financials and a proven
borrowing track record. In it, BFL offers a range of working capital and
growth capital products.
Further, BFL offers a full range of mortgage products like LAP, lease rental
discounting & home loans to SME and self employed professionals.
Exhibit 15: Detailed profile of products offered under SME financing category
Particulars
Year started
Small Business Loans

2009
Target Segment
Ticket size
Duration/tenure
Yields range
Proportion of AUM as on FY15
Amount (FY15 - | crore)
SME clients
|10 lacs to 30 lacs
Unsecured
2-3 years
18-20%
9.8
3,084
LAP
2009
Affluent - i.e HNIs and Ultra
HNIs
| 1 crore to | 5 crore
40-60%
15-20 years
11.5 to 13%
25.3
8,232
Home Loans
2010

2009
SME Cross sell

2012
Self employed
| 75 lacs to | 2 crore
50-70%
15-20 years
10.3-12%
9.5
3,071
Affluent - i.e HNIs and Ultra HNIs

| 1 to | 2 crore
40-50%
1 year
12-13.8%
4.5
1,578
SME Clients
~ | 50 lacs
10.3-20%
3.6
1,233

Since FY11, the LAP book has witnessed robust growth of
38% CAGR to | 8232 crore.
Since FY11, the LAP book has witnessed robust growth of 38% CAGR to
| 8232 crore. Though yields in the mortgage business are much lower than
other products, at the profitability level it is not much dilutive with RoEs at
16-17%. Of late, traction in the LAP portfolio has slowed (proportion dipped
to 23.7% as on Q1FY16 from 28.7% in FY14) owing to enhanced
competitive pressures and higher commission payouts. This led RoEs of the
LAP business to fall below the comfortable range of 16-17%. The company
indicated that it is developing a direct to customer model, which will help
reduce commission payouts and lead to an improvement in product
profitability. However, owing to enhanced competition in the business from
other NBFCs and banks, going ahead, we expect the LAP portfolio traction
to moderate (20% CAGR till FY17E) and its proportion to shrink to 22.7% of
AUM as on FY17E.
Small business loans have also witnessed strong traction of 43% CAGR
since FY11 to | 3084 crore. The share in overall AUM has increased
continuously and is at 9.5% as on FY15. As per the management, healthy
traction in this segment should continue, going ahead, as profitability of this
business is improving. Small business loans include professional loans that
amount to | 623 crore of | 3084 crore. These loans are largely to doctors.
Page 9
Going ahead, we expect the proportion of small business loans to rise to

10.7% by FY17E from 9.5% as on FY15.
Under LAS, BFL offers loans to promoters and HNIs to enable them to meet
their working capital and other business purpose needs. Securities in this
case could be equity shares, bonds and mutual funds. During Q1FY16, the
company indicated that it is ready to execute its strategy wherein it will
partner with leading brokerages/banks with the objective of leveraging the
funding opportunity to their HNI & ultra HNI customer base.
A dedicated SME relationship management channel has also been created
to provide a wide range of cross-sales of products to BFLs SME franchise.
We expect the share of the SME category in the total loan mix to dip to
50.9% by FY17E from 53.1% in FY15 mainly led by shrinkage in the LAP
portfolio (refer exhibit 20).
Commercial financing traction dependent on underlying economic trend
In the commercial category, it provides finance in the construction
equipment (CE) and infrastructure space. Apart from these, BFL also offers
wholesale lending products covering short, medium and long term needs of
auto component vendors in India. The proportion of the overall commercial
segment has reduced from 18% of total AUM in FY12 to 5.4% in FY15
owing to a run down in the book related to CE and infra financing. These
segments witnessed asset quality pressures. Hence, BFL reduced its
exposure as can be seen in the below exhibit.
Exhibit 16: Break-up of commercial lending category
AUM (| Crore)
Construction equip. finance
Vendor Financing
Infrastructure lending
Total Commercial AUM
FY11
591
324
0
915
FY14
448
862
523
1,833
FY15
188
1146
418
1,752
Q1FY16
134
1333
473
1,940
FY16E
145
1452
415
2,012
FY17E
132
1765
448
2,345
The proportion of the commercial segment has reduced

from 18% in FY12 to 5.4% in FY15 owing to a run down of
the book in the construction equipment and infra financing
due to stress in these segments
Exhibit 17: Detailed profile of products offered under commercial category

Particulars
Year started
Target Segment
Ticket size
Duration/tenure
Yields range
Proportion of AUM as on FY15 (%)
Amount (FY15 - | crore)
Vendor Financing
2,009
Bajaj Auto's vendors
NA
NA
NA
NA
3.5
1,146
CE Financing
2,010
Strategic & Retail
| 1.0 crore to | 3 crore
70 to 80%
3 years
10.5% - 12.5%
0.6
188
Infra Lending
2,010
Affluent
NA
70 to 80%
1-15 years
12-14%
1.3
418
The company has indicated its intention to increase the proportion of the
commercial segment in the overall AUM to ~10% over the next four or five
years, mainly via CE financing and infrastructure lending. However, it will
depend on the how the economic scenario pans out and mainly on the
revival in the infrastructure space. Currently, the infrastructure space is in
doldrums owing to stalled projects and flow of lower fresh investments due
to which this space is not lucrative for further lending by banks and other
financial institutions. Over FY15-17E, we expect the commercial category
share to fall further to 4.5% of the total AUM as we believe any significant
improvement in the infrastructure financing space will take time.
Page 10
Rural financing to maintain strong growth on lower base, increasing reach

In the rural eco system, BFL is a highly diversified lender. The company is
currently present in CD financing, asset backed financing, gold loans,
personal loans, etc. BFL functions through a hub & spoke model. The
company operates its rural business in Maharashtra, Gujarat and Karnataka.
BFL is expected to open branches in rural areas of Madhya Pradesh in
Q2FY16 followed by Tamil Nadu. The company has a presence across 232
towns and villages and a retail presence in 1800+ stores.
Exhibit 18: Rural proportion to rise, going ahead, but still stay a small part of the AUM
In rural areas, BFL is currently present in CD financing,
AUM (| Crore)
Rural financing
% of Total AUM
FY14
50
0.21
asset backed financing, gold loans, personal loans, etc.
FY15
333
1.03
Q1FY16
522
1.47
FY16E
726
1.75
FY17E
1054
2.00
Owing to its small size, the segment has witnessed sharp

traction with the loan book increasing to | 333 crore in
FY15 from | 50 crore in FY14
As business commenced recently i.e. in FY13, the book size is small and
witnessed sharp traction. AUM increased to | 333 crore in FY15 from | 50
crore in FY14. Recently, the company also launched its MSME lending
business in rural areas. We expect the rural portfolio to continue to witness
sharp traction, going ahead. We have factored in that its share will rise to
2% of total AUM at | 1054 crore as on FY17E.
Overall book expected to grow at 27% CAGR over FY15-17E
BFL has a diversified loan portfolio. Further, the company has a leadership
position in under penetrated & growing segments like CD financing, lifestyle
product financing, two-wheeler financing, LAP, etc. which accounts for
~50% of its portfolio. These factors have allowed BFL to clock strong AUM
CAGR of 44% over FY11-15 to | 32410 crore. This has been despite a weak
economic environment in the past few years.
The traction in AUM in the past four years has been led by the SME
category, which increased at 51% CAGR to | 17136 crore as on FY15
followed by the CF category, which rose at 41% CAGR to | 13202 crore.
The LAP portfolio in the SME category, which accounts for highest
proportion in overall AUM at 25.4%, grew at 38% CAGR in FY11-15 to
| 8232 crore. CD financing in the CF book has seen 47% CAGR to | 4163
crore as on FY15.
Of the total AUM, BFL places about 4-5% for securitisation for better assetliability management. As on FY15, of the total AUM of | 32410 crore, about
| 1211 crore was the off book or securitised amount. The balance | 31199
crore is actual advances outstanding in the balance sheet as on FY15.
Going ahead, we expect overall advances traction at 27% CAGR in FY1517E to | 50718 crore driven by CF segment.
at 27% CAGR in FY15-17E to | 50718 crore driven by the
Exhibit 19: Credit (AUM securitised amount) growth to stay healthy at 27% CAGR in next two
years
CF segment
60000
50000
70.1
80.4
50718
68.9
(| crore)
40000
30000
20000
10000
2893
-18.1
2370 4032
7272
FY08
FY09
FY11
12283
39935
31199
37.2
36.3
35.8
22971
16744
28.0
80
60
40
27.0
20
0
-20
-40
FY10
Loan
FY12
FY13
FY14
FY15
FY16E FY17E
Loan Growth (RHS)
100
Page 11
(%)
Going ahead, we expect overall advances traction for BFL
Exhibit 20: AUM break-up

AUM (| Crore)
2W & 3W finance
Consumer durable finance
Lifestyle finance
Digital Product
Non digital product
Personal loans
Personal loans Cross Sell
Salaried Personal Loans
Home Loans (Salaried)
Consumer Finance category
FY11
1,953
893
FY16E
3,526
6,430
871
FY17E
4,215
8,640
1,264
312
186
549
322
797
468
5,517
7,007
2,412
1,891
3,145
2,373
3,994
3,013
839
13,127
1,079
17,424
1,370
22,497
3,084
4,356
5,637
2,461
623
3,572
784
4,623
1,015
6,907
2,351
841
718
12,850
8,232
3,071
1,578
1,233
17,198
9,583
3,858
1,950
1,576
21,323
11,933
4,847
2,397
1,976
26,791
448
862
523
1,833
188
1,146
418
1,752
145
1,452
415
2,012
132
1,765
448
2,345
50
333
726
1,054
7,571
24,061
32,410
41,485
52,686
AUM (| Crore)
Consumer Finance
SME Business
Commercial
Rural
Total AUM
FY11
3,357
3,299
915
7,571
FY14
9,328
12,850
1,833
50
24,061
FY15
13,127
17,198
1,752
333
32,410
FY16E
17,424
21,323
2,012
726
41,485
FY17E
22,497
26,791
2,345
1,054
52,686
AUM (Mix %)
Consumer Finance
SME Business
Commercial
Rural
Total AUM
FY11
44.3
43.6
12.1
100
FY14
38.8
53.4
7.6
0.2
100
FY15
40.5
53.1
5.4
1.0
100
FY16E
42.0
51.4
4.9
1.8
100
FY17E
42.7
50.9
4.5
2.0
100
3,357
727
2,251
321
3,299
Construction equip. finance

Vendor Financing
Infrastructure lending
Commercial category
591
324
915
Rural lending
Total
2,577
FY15
3,324
4,163
498
4,303
Loans
Business Loans
Professional Loans
Loan against property
Home loans (Self Employed)
SME cross sell
SME category
511
FY14
3,593
2,531
174
453
9,328
2,033
CAGR
FY11-15
14.2
46.9
70.4
40.6
27.6
27.8
30.9
43.5
35.2
38.3
20.4
25.6
23.3
26.6
24.8
48.9
51.1
(24.9)
37.1
17.6
(16.3)
24.1
3.5
15.7
77.9
43.8
CAGR
FY11-15
40.6
51.1
17.6
43.8
FY15-17E
12.6
44.1
59.3
Page 12
27.5
FY15-17E
30.9
24.8
15.7
77.9
27.5
Borrowings are well diversified with banks proportion

highest at 54% followed by NCDs at 37%, CPs/FDs at 9%
Well diversified funding; strong parentage & credit rating enable lower CoF
The borrowings of BFL as on FY15 stood at | 26690 crore. The borrowings
are well diversified with banks proportion being the highest at 54%
followed by NCDs at 37% and CPs/FDs at 9%. Owing to strong parentage
and credit rating (consistently holding AA+/stable and LAA+ stable rating
from Crisil and Icra over the last seven years, with a positive outlook.
Further, the fixed deposit scheme has been rated FAAA/Stable by Crisil and
MAAA/Stable by Icra) the company is able to raise funds at competitive
rates from various sources as reflected in CoF being better than peers as
seen in below exhibit.
Exhibit 21: BFL manages to keep CoF lower than peers
12
10
10.4
11
10.5
9.4
8.1
(%)
8
6
4
2
0
Bajaj Finance
Chola Mandalam
Mahindra Finance Shriam Transport Shriram City Union

Finance
CoF (FY15)
Further, at regular intervals, the company was able to raise funds via QIP,
which also helps in reducing its cost of borrowings. Recently, BFL raised
~| 1800 crore via allotment of warrants to promoters and equity to QIBs.
Going ahead, the mix of borrowings is expected to change depending on
market rates. However, we believe bank borrowings will continue to
dominate.
Exhibit 22: Trend in borrowings
42,121
52.6
35,000
30,000
25,000
20,000
15,000
10,000
50.4
50
33,465
26,691
10,226
28.4
13,133
19,750
40
35.1
25.4
25.9
30
20
10
5,000
0
0
FY12
FY13
FY14
Borrowings
FY15
FY16E
FY17E
Growth (RHS)
60
Page 13
(%)
(| crore)
45,000
40,000
(%)
Exhibit 23: Resource mix expected to be tilted towards banking

100
90
80
70
60
50
40
30
20
10
0
0.0
7.9
9.0
8.1
53.2
57.6
52.9
38.9
33.4
39.1
FY11
FY12
FY13
14.1
9.0
8.7
8.5
53.8
53.7
53.3
37.1
37.6
38.2
FY15
FY16E
FY17E
35.6
57.6
64.4
FY10
NCDs/Tier II debt
28.2
FY14
Banks
Deposits/CPs
The margins of BFL are one of the highest among its peers.
Its margins during FY15 were at 10.3%. Such high margins
were on the back of its strong blended yields of 18.9% and
competitive CoF, which helps the company to earn overall
spread of 9.2%
Margins one of the highest; to moderate a bit, going ahead

The margins of Bajaj Finance are one of the highest among its peers. Its
margins during FY15 were at 10.3%. Such high margins were on the back
of strong blended yields of 18.9% and competitive CoF, which helps the
company to earn overall spread of 9.2%. Yields in the consumer financing
category are high as outlined in the above exhibit.
In the past few years, margins witnessed a slide owing to a change in loan
mix towards lower yielding segments as BFLs strategy was to go for scale
and secured products like in the SME category (like LAP), which impacted
the yield, to some extent, but also helped maintain steady asset quality. LAP
portfolio where yields are ~13% increased at 38% CAGR over FY11-15.
Exhibit 24: BFL earns highest margins among peers in FY15
12
10.3
10
8.7
7.1
(%)
6.7
6
4
2
0
Bajaj Finance
Chola Mandalam
Mahindra Finance
Shriam Transport
Finance
NIM (FY15)
With banks reducing their base rates and owing to the recent fund raising,
the company could benefit, going ahead, on the CoF front. However, it
would be arrested by an increase in exposure towards relatively lower
yielding assets like SME. We expect margins to moderate a bit around 30
bps and stay at ~ 10% in FY16E, which is still healthy compared to peers.
Page 14
Exhibit 25: Margins to stay at strong levels

25.0
22.7
20.4
20.0
20.1
19.1
18.9
18.3
18.2
9.6
9.7
9.5
9.4
(%)
15.0
10.0
7.5
8.8
10.3
5.0
0.0
14.6
12.2
11.6
10.8
10.3
10.0
10.1
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
NIM
YoA
CoD
Page 15
BFLs asset quality has improved sharply over the last five
or six years. The GNPA ratio was at 16.6%, 7.6% during
FY09, FY10, respectively. As on FY15, the GNPA ratio was
at 1.5%
Asset quality remains at acceptable levels; expect to stay steady

Bajaj Finances gross NPA ratio at 1.5% (| 484 crore) as on FY15 is relatively
better than some of its peers and also considering the weak economic
environment of the past two or three years. The asset quality has improved
sharply over the last five or six years. GNPA ratio was at 16.6%, 7.6%
during FY09, FY10, respectively. This was owing to high stress witnessed in
the two-wheeler financing and computer financing business then.
Post such a setback in asset quality, BFL focused on improving its risk
management process and framework. This included product rationalisation
like exiting the computer financing business, focusing on safer products like
LAP and mortgages during the weak economy of FY11-14, increased use of
Cibil scores, focusing on repeat customers with good repayment pattern
and on affluent & mass affluent customers. These efforts yielded large gains
with improvement in asset quality as the absolute GNPA declined from
| 416 crore in FY09 to | 148 crore by FY12 before increasing to | 484 crore
by FY15. However, the loan book size is much larger now than in FY09
(>13x of FY09 loan book).
1000
900
800
700
600
500
400
300
200
100
0
18
16
908
16.6
14
12
10
668
11.9
7.4
253 5.4
181
484
416
FY08
7.6
283 318
1433.6
FY09
220
FY10
603.0
0.8
189
148
FY11
GNPA
298
280
161.2
0.1
FY12
NNPA
66
1.2
0.3
33
1.1
0.2
FY13
FY14
GNPA (%)
143
189
1.7
0.5
1.5
0.5
FY15
8
6
4
(%)
(crore)
Exhibit 26: Asset quality witnesses sharp improvement; expect to stay at acceptable levels going
ahead
1.8 2
0.6 0
FY16E FY17E
NNPA (%)
Exhibit 27: BFL in better position in terms of asset quality compared to peers
7.0
6.0
6.0
(%)
5.0
3.8
4.0
2.8
3.0
2.0
2.7
1.54
1.0
0.0
Bajaj Finance
Chola Mandalam
Mahindra Finance Shriam Transport Shriram City Union

Finance
GNPA (FY15)
Page 16
The credit cost (i.e. provisions as percentage of loans) also declined from
8.1% of advances in FY10 to 1.2% by FY13 and 1.4% levels as on FY15.
Exhibit 28: Trend in credit cost
(%)
9
8
The credit cost (i.e. provisions as percentage of loans) also

declined from 8.1% of advances in FY10 to 1.2% by FY13
and 1.4% levels as on FY15.
7
6
5
4
3
2
8.1
6.2
3.9
3.6
1.6
1.2
1.3
1.4
1.5
1.7
FY13
FY14
FY15
FY16E
FY17E
1
0
FY08
FY09
FY10
FY11
FY12
Credit cost (%)
Concerns were raised about the companys entry into the CE financing and
infra financing when BFL entered these spaces in FY09 as the company
lacked experience in these business. During the downturn, the company did
face certain NPL issues in this exposure along with falling RoEs in the
segment. Post this realisation, BFL consciously started reducing its
exposure to both these segments that fared well on the asset quality front.
The commercial category proportion has reduced to 5.4% in FY15 from
18.5% in FY12.
Going ahead, we expect the GNPA ratio to increase a bit in FY15-17E to
1.8% by FY17E. However, these levels are still acceptable and better than
peers.
Page 17
Well capitalised to clock strong growth, going ahead

BFL is in a comfortable position on the capital front especially after the
recent capital raising of ~| 1800 crore. In June 2015, the company allotted
warrants to the promoter i.e. Bajaj Finserv at | 4412/share amounting to
| 408 crore. Further, BFL raised | 1400 crore via allotment of equity shares
to QIBs at | 4275/share. The total capital adequacy ratio as on Q1FY16 is
20.7 with Tier I ratio at 17.4% (up from 14.2% as on FY15 owing to recent
capital raising). We expect the current capital to be sufficient to meet
growth requirements for the next two or three years.
We expect the current capital to be sufficient to meet the
Exhibit 29: Comfortable on capital adequacy front
growth requirements for the next two or three years

25
20
3.2
(%)
15
10
3.3
2.97
2.5
16.8
15.0
FY11
FY12
18.7
16.17
3.31
3.82
17.41
14.15
0
FY13
FY14
Tier I
FY15
Q1FY16
Tier II
Exhibit 30: Capital raising history

Date
January 2006
January 2006
November 2006
March 2007
July 2007
March 2012
January 2013
June 2015
June 2015
Mode of capital raising

Preferential allotment
Right Issue in ratio of 6:10
Conversion of Warrants
Right Issue in ratio of 3:19
Issued to QIBs
Price per share (|)

420
460
325
410
410
650
1100
4275
4412
Amount raised (| crore)

161
42
410
72
51
305
744
1400
408
Source: Company, Capitaline, ICICIdirect.com Research
Page 18
Financials
NII growth to moderate from past trends but still remain sturdy
BFLs NII has witnessed robust traction in the past on the back of strong
margins and loan growth. In the past five years, the NII CAGR has been
36% while in the past three years it has been maintained above >30% at
32% to | 2872 crore as on FY15. The margins, on an average, have been
above 10% over the past three to five years. Strong traction on the
advances front of 51% CAGR in the past five years and 36% CAGR in the
past three years has helped maintain NII traction despite decline in margins.
In the past five years, the NII CAGR has been 36% while in
the past three years it has been maintained above >30%
at 32% to | 2872 crore as on FY15
Going ahead, as we factor in a slight moderation in margins and a drop in

the pace of loan growth, NII traction is accordingly expected to decline to
28% CAGR over FY15-17E. However, despite moderation it is still better off
compared to the expected NII growth of its peers owing to the strength of
its business model and steady asset quality expected ahead.
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
4721
76.1
70
3671
239
345
FY08
FY09
608
913
60
2872
50.2
44.2
2216
36.9171737.4
29.1
1250
80
50
40
29.6
27.8
28.630
20
(%)
(| crore)
Exhibit 31: Healthy credit growth + strong margins to support healthy NII traction ahead
10
0
FY10
FY11
FY12
NII
FY13
FY14
FY15
FY16E FY17E
NII growth
Operational efficiency to kick in, going ahead

BFLs cost-to-income ratio in the past six years has been steady at 45%
while opex as a percentage of average assets has witnessed an
improvement as seen in the exhibit below. This is owing to higher growth in
assets vs. income growth. As asset generation happened more rapidly, BFL
had to continuously resort to large investments to streamline operations,
upgrade technology for maintaining large database of customers, their
behavioural pattern and on other analytics in consumer durables, lifestyle
financing and the SME business.
The cost-to-income ratio has been steady for BFL in the
past few years. We expect BFL to witness some operating
leverage, going ahead
Further, the staff cost increases largely in tandem with the rising book size.
However, we believe that, to a large extent, fixed costs have been incurred
and BFL should see some operating leverage, going ahead. We expect cost
to income ratio to decline to 42.5% by FY17E from 45% currently while
opex to assets should decline from 5% to 4.6% over next two years.
Page 19
Exhibit 32: Operating efficiency to improve, going ahead
60
50
7.0
6.4
6.2
5.5
5.2
40
(%)
9
8
8.4
30
58.1
50.7
20
44.7
44.5
47.0
5.4
46.0
44.7
5.0
45.1
4.7
44.1
4.6
42.5
10
7
6
5
4
3
2
(%)
70
1
0
0
FY08
FY09
FY10
FY11
FY12
FY13
Cost to Income ratio
FY14
FY15
FY16E
FY17E
Cost to assets ratio (RHS)
Expect strong traction in profitability, healthy return ratios to stay

On the back of strong traction in NII growth, steady cost to income ratio and
declining credit costs, BFL was able to clock strong PAT CAGR of 59% in
FY10-15 and a CAGR of 30% over the past three year to | 898 crore in FY15.
Accordingly, return ratios improved sharply in FY10-12 (RoE increased to
24% from 8% while RoA improved to 3.8% from 2.3% in FY10). However,
post FY12, due to a decline in margins owing to a change in the loan mix,
RoA declined to 3.1% by FY15. Accordingly, RoE dipped to 20% in FY15.
We expect PAT growth to remain strong at 27% CAGR
over FY15-17E to | 1456 crore with return ratios expected
to stay healthy
We expect PAT growth to remain strong at 27% CAGR over FY15-17E to

| 1456 crore with return ratios staying healthy. RoEs are expected to dip
from current levels owing to ~| 1800 crore fund raised via QIP in FY16. Any
major improvement in the economic scenario would be an upside risk to
our estimates.
Exhibit 33: Profitability to be maintained at benign levels
1,600
(| crore)
176.3
1,143.7
897.4
1,000
800
400
200
591.0
64.7
247.0
33.9
89.4
FY09
FY10
718.5
406.264.4
45.5
24.9
21.6
27.5
0
FY11
FY12
PAT
FY13
FY14
FY15
FY16E
FY17E
Growth (RHS)
Page 20
(%)
163.5
1,200
600
200
180
160
140
120
100
80
60
40
27.3
20
0
1,456.3
1,400
Exhibit 34: Healthy return ratios

30
3.8
3.4
(%)
20
10
3.0
2.3
15
3.1
19.7
1.0
2.0 0.6 3.2
FY08
FY09
24.0
21.9
19.5
20.4
19.0
3.5
3.0 3.0
2.5
18.5
8.0
FY10
0.5
0.0
FY11
FY12
RoE
FY13
FY14
FY15
FY16E FY17E
RoA (RHS)
2.0
1.5
1.0
Page 21
(%)
3.8
3.8
25
4.5
4.0
Risk & concerns

Fresh competition may impact edge in consumer financing business
BFLs key strength against its peers is in its stronghold in the CD financing
business and lifestyle product financing business. As such, currently there
are no major players in this business who can pose a challenge to BFL but
there are no entry barriers too. With demand for corporate loans and SME
loans expected to remain weak, other financial institutions like banks and
NBFCs may look towards this under penetrated CD financing business. This
may reduce BFLs strong positioning or compel it to resort to risky ways of
going about its business. This may lead to a reduction in the premium
multiple it gets currently.
Higher concentration in certain segments

Though BFLs loan book is well diversified, certain products like LAP, home
loans, CD financing and personal loans have a higher share of 25.4%,
12.1%, 13% and 13.3%, respectively. The mortgage related book accounts
for ~40% of the AUM as on FY15. In case of LAP and home loans, the book
has grown at a brisk pace in recent times and is not seasoned. Hence, any
large decline in property price could lead to asset quality stress cropping up
from this book. The unsecured loans i.e. the proportion of personal loans
has also increased recently. This portfolio could pose a risk.
Lower-than-expected rise in Seventh Pay Commission

Demand for consumer durables depends on various factors like state of the
economy, employment opportunities etc. The Seventh Pay Commission
report, which deals with pay scales of central bank employees, is expected
to be announced on September 20, 2015. Any letdown can also impact
demand for consumer durables and other lifestyle products. In turn, this
could impact the advances growth of BFL and, consequently, its
profitability.
Recent marginal cost basis lending rate calculation may flow to NBFCs too
Recently, RBI released draft guidelines for calculation of base rates by banks
on a marginal cost basis vs. the average cost basis followed earlier. The
same will be implemented from April 1, 2016 once the final guidelines are
announced. These guidelines will impact banks margins as under marginal
cost method once the deposit rates are revised lower the entire calculation
of cost of funds need to be done on the basis of this new lower rate. This is
despite the fact that most of the borrowings still are at the higher deposit
rate.
As has been witnessed in the past, the RBI has gradually subjected NBFCs
to the same NPA provisioning guidelines as applicable to banks. Similar,
instance can also happen in lending rate calculation for NBFCs which can
have negative implications NBFCs margins.
Page 22
Valuation
We expect return ratios to stay steady over next two years

with RoA of 3% and RoE of ~19%.
We believe the
opportunity size in consumer and SME space remains
In the past two years, investors have taken keen interest in BFL as reflected
in the 357% rise in its stock price since September, 2013. The stock
performance has surpassed its peers. It is currently trading at 3.3x FY17E
ABV for a RoA of 3% and RoE of 19%. The two year forward multiple
increased from 1x to >3x currently post September 2013. We believe the
reason for such strong interest is owing to its leadership position in the
short duration, lower ticket sized, CD financing and lifestyle product
financing business along with the diversified nature of its loan portfolio.
This has allowed BFL to register strong AUM growth of 44% CAGR in the
past four years to | 32410 crore as on FY15 with asset quality staying under
control (GNPA ratio at 1.5%). PAT over FY11-15 period rose at a robust
pace of 38% CAGR to | 897 crore as on FY15.
buoyant and BFL is well placed to capture it.
Over FY15-17E, we expect PAT CAGR to moderate compared to the past

but still stay healthy at 27% CAGR to | 1456 crore by FY17E driven by a
steady operating performance, strong growth & margins and controlled
asset quality & credit cost. We expect return ratios to stay healthy over the
next two years with RoA of 3% and RoE of ~19%. We believe the
opportunity size in the consumer and SME space remains lucrative and BFL
is well placed to capture it.
BFL is trading at premium valuations to its peers (see exhibit below) in the
NBFC space due to better visibility in earnings. We initiate coverage on BFL
with a BUY recommendation & a TP of | 5600 valuing at 3.6x FY17E ABV.
Exhibit 35: Peer Comparison Bajaj Finance commands premium multiples as it is well placed among peers
Bajaj Finance
STFC
MMFS
SCUF
CIFC
CMP (|)
5049
845
240
1770
609
Mcap (| crore)
27030
19179
13662
11665
8756
AUM (| crore)
32410
59108
36878
16717
25452
RoA (%)
FY16E FY17E
3.0
3.0
2.1
2.2
2.5
2.6
3.3
3.2
2.1
2.2
GNPA (FY15 - %)
1.5
3.8
6.0
2.7
2.8
RoE (%)
FY16E FY17E
19.0
18.5
13.4
14.6
15.6
17.0
14.9
16.0
17.4
17.8
ABV
FY16E
FY17E
1363.7 1550.2
407.0
442.0
100.4
114.5
675.0
760.0
203.0
235.0
P/ABV (FY17E)
3.3
1.9
2.1
2.3
2.6
P/E (FY17E)
18.5
12.1
12.0
14.9
13.5
Source: Company, Bloomberg, ICICIdirect.com Research; STFC = Shriram Transport Finance; MMFS = Mahindra Finance; SCUF = Shriram City Union Finance; CIFC = Cholamandalam
Finance
Exhibit 36: Trend in P/ABV multiple

7000
6000
transformation story in the past eight years. Post induction
5000
of a new management in 2007, BFL got transformed from a
4000
predominantly two & three wheeler finance company to a

financier of large spectrum of loans in the consumer, SME
and commercial categories with >10 product lines
(|)
Bajaj Finance can be truly described as a successful
3000
2000
1000
Price (|)
4.5x
3.5x
2.5x
1.5x
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
0.5x
BFL has recently tied up with major e-commerce players. Any positive
fallout of such a deal on growth could be an upside risk to our call. Further,
higher-than-expected growth in the economy would lead to higher-than
expected loan book growth and, consequently, lead to higher-thanexpected traction in profitability. This, in turn, could lead to a further rerating of the stock and, hence, remains an upside risk to our call.
Page 23
Exhibit 37: Income Statement

(Year-end March)
Interest Earned
Interest Expended
Net Interest Income
Growth (%)
Non Interest Income
Operating Income
Employee cost
Other operating Exp.
Operating Profit
Provisions
PBT
Taxes
Net Profit
Growth (%)
EPS (|)
(| crore)
FY13
2923.1
1205.7
1717.4
37.4
186.6
1904.0
245.2
605.8
1053.1
181.8
871.3
280.3
591.0
45.5
129.8
FY14
3789.6
1573.2
2216.3
29.1
284.8
2501.1
340.8
810.8
1349.5
258.9
1090.7
372.2
718.5
21.6
144.4
FY15
5120.0
2248.3
2871.7
29.6
298.3
3169.9
450.7
978.2
1741.0
384.6
1356.4
459.1
897.4
24.9
179.9
FY16E
6513.4
2842.5
3670.9
27.8
351.9
4022.8
572.4
1202.1
2248.3
533.5
1714.8
571.0
1,143.7
27.5
221.5
FY17E
8257.7
3536.3
4721.4
28.6
411.8
5133.2
715.5
1464.9
2952.8
747.9
2204.9
748.6
1,456.3
27.3
273.4
Exhibit 38: Balance sheet

(Year-end March)
Sources of Funds
Capital
Reserves and Surplus
Networth
Borrowings
Other Liabilities & Provisions
Total
FY13
FY14
FY15
FY16E
FY17E
49.8
3317.3
3367.0
13133.2
1320.9
17,821.2
49.8
3941.1
3990.9
19749.6
877.5
24,618.0
50.0
4749.7
4799.7
26690.8
1321.3
32,811.8
53.3
7171.7
7225.0
33464.9
1889.4
42,579.3
53.3
8503.4
8556.7
42120.8
2436.9
53,114.4
Application of Funds
Fixed Assets
Investments
Advances
Other Assets
Cash
Total
587.7
5.3
16743.6
68.2
416.4
17,821.1
763.3
28.2
22971.0
78.7
776.8
24,618.0
894.0
332.3
31199.5
165.8
219.7
32,811.2
920.8
355.6
39935.3
174.1
1193.6
42,579.3
948.4
373.3
50717.8
181.1
893.7
53,114.4
Page 24
Exhibit 39: Key ratios

(Year-end March)
Valuation
No. of shares (crore)
EPS (|)
DPS (|)
BV (|)
ABV (|)
P/E
P/BV
P/ABV
Yields & Margins (%)
Net Interest Margins
Yield on assets
Avg. cost on funds
Yield on average advances
Avg. Cost of Borrowings
Quality and Efficiency (%)
Cost to income ratio
Cost to assets ratio
GNPA
NNPA
ROE
ROA
FY13
FY14
FY15
FY16E
FY17E
5.0
129.8
15.0
676.4
669.8
38.8
7.5
7.5
5.0
144.4
15.9
802.2
788.8
34.9
6.3
6.4
5.0
179.9
18.0
959.9
931.4
28.0
5.3
5.4
5.3
221.5
19.0
1399.2
1363.7
22.8
3.6
3.7
5.3
273.4
20.0
1606.1
1550.2
18.4
3.1
3.3
11.6
19.8
8.4
20.1
10.3
10.8
18.5
7.8
19.1
9.6
10.3
18.4
8.1
18.9
9.7
10.0
17.8
7.9
18.3
9.5
10.1
17.7
7.7
18.2
9.4
44.7
5.5
1.1
0.2
21.9
3.8
46.0
5.4
1.2
0.3
19.5
3.4
45.1
5.0
1.5
0.5
20.4
3.1
44.1
4.7
1.7
0.5
19.0
3.0
42.5
4.6
1.8
0.6
18.5
3.0
FY13
37.9
36.3
28.4
37.4
33.5
27.1
39.2
45.5
65.6
24.5
FY14
38.1
37.2
50.4
29.1
31.4
35.3
28.2
21.6
18.5
11.3
FY15
33.3
35.8
35.1
29.6
26.7
24.1
29.0
24.9
20.3
24.6
FY16E
29.8
28.0
25.4
27.8
26.9
24.2
29.1
27.5
50.5
23.1
FY17E
24.7
27.0
25.9
28.6
27.6
22.9
31.3
27.3
18.4
23.4
Exhibit 40: Growth ratios

(Year-end March)
Total assets
Advances
Borrowings
Net interest income
Operating Income
Operating expenses
Operating profit
Net profit
Net worth
EPS
Page 25
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey
Head Research
pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com
Page 26
ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.
Terms & conditions and other disclosures:

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in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is Indias largest private sector bank and has its various
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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
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Initiating Coverage

September 10, 2015

Bajaj Finance (BAJAF)

Unique product offering commands premium!

YoY Growth (%)

BAF IN/ BJFN.BO

Market Capitalisation (| crore)

52 week H/L (|)

DII Holding (%)

FII Holding (%)

Comparative return matrix (%)

ICICI Securities Ltd | Retail Equity Research

Source: Company, ICICIdirect.com Research

Shareholding pattern (Q1FY16)

Source: BSE, ICICIdirect.com Research

Institutional holding trend (%)

Source: BSE, ICICIdirect.com Research

Exhibit 2: Key management personnel

Experience & Qualifications

Rajeev Jain (Managing

Rakesh Bhatt (COO)

Pankaj Thadani (Chief

Devang Mody (President

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Exhibit 3: Group structure

Bajaj Holding Investment

Bajaj Auto Limited (49.24%

Bajaj Allianz Life

Bajaj General Insurance

Bajaj Finserv Limited

Bajaj Financial Solutions

Bajaj Finance Limited

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Exhibit 4: BFLs product profile

Source: Company, ICICIdirect.com Research

Exhibit 5: Geographic presence

Consumer durable product stores

Lifestyle product stores

Digital product stores

Of which Consumer Lending branches

Of which Rural ASSC*

Source: Company, ICICIdirect.com Research; ASSC - Authorised Sales and Service

SME Direct sales agents

Rural consumer durable product stores

Source: Company, ICICIdirect.com Research

Exhibit 7: Number of new loans disbursed in FY15

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

The edge in the consumer financing business acts as a

However, the key strength or highlight of BFLs business model is its

Source: Company, ICICIdirect.com Research

TV, AC, LED etc

3000+ via Bajaj Auto

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

The new clients acquired each year in the CD financing

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

BFL capitalised strongly on its 0% financing product, which enabled it to

ICICI Securities Ltd | Retail Equity Research

..leads BFL to command valuation premium over peers