Bajaj Finance - Initiating Coverage 30-09-14

Institutional
Equity
Research
Bajaj Finance Ltd

Banking | India
BAF IN; BJFN.BO
Initiating Coverage
BUY
Current price (29 Sep)

Target price
Upside/(downside)
2,654
3,220
21
Rs
Rs
%
Market data
Mkt capitalisation
Average daily vol
52-week H/L
Shares O/S
Free float
Promotor holding
Foreign holding
Face value
Rs bn
'000
Rs
mn
mn
%
%
Rs
133.1
38.8
2720 / 1141
50.1
19.2
61.6
12.2
10.0
Price performance (%)

Nifty (abs)
Stock (abs)
Relative to Index
1m
0.1
7.4
7.3
3m
6.0
32.7
26.7
Performance
3000
(Rs)
6m
18.9
47.6
28.8
(%)
1yr
36.4
125.4
88.9
80
60
2500
40
2000
20
1500
1000
Sep-13
Dec-13 Mar-14
Bajaj Finance (LHS)
Jun-14
(20)
Sep-14
Rel. to Bankex (RHS)
Source: Bloomberg, SSLe
September 30, 2014
Diversified financier; affluent franchise

Bajaj Finance Ltd. (BAF) incorporated as a captive financier for Bajaj vehicles
has transformed into a well diversified NBFC catering to 11 different business
lines. We expect the companys spotlight on affluent segments, sub-10 percent
borrowing profile, well diversified AUM and resilient asset quality makes it
suitable to be a prime pick amongst NBFCs. BAFs focus on SME and
consumer business is now a natural concomitant diversification. We therefore
expect its earnings to grow at a CAGR of 27% over F14-F17e. With a F17e
P/ABV of just 1.9x for RoAAs of ~3.0% we see a strong upside. We initiate
coverage with a BUY and a TP of Rs3,220 (2.3x F17e ABV).
Affluent segment financing model: BAF has successfully transformed from a 2wheeler financier to a well diversified lifestyle financier. BAF is now the largest
consumer electronics financier in India focusing on affluent customers and is one of
the few organized player in the sector with a market share of ~15%. Company has a
unique proposition in consumer durables that effectively competes with credit cards.
Borrowing profile amongst the lowest at 9.6%: Funding arrangements of BAF is
well funneled with sources among banks, debentures, CPs and fixed deposits.
Company has among the best credit ratings leading to cost of borrowings to be as low
as 9.6% for F14. We expect the same to continue ahead supporting its healthy NIMs.
Diversified AUM maximises earnings and growth profile: BAF focuses on three
verticals, viz., consumer, commercial and SME, with 11 business lines distributed
among them compared to the single product focus in most other NBFCs who identify
themselves either with CV finance, gold finance or auto finance. BAFs business
focus is on increasing volume with profitability. Home loans, LAP and commercial
lending are the big ticket business lines whereas 2/3-wheeler, consumer durables,
lifestyle finance and personal loans are the profit maximizers for BAF.
Asset quality to stay resilient: Strong loan origination, underwriting and collection
processes have imparted a stable asset quality. Focus on affluent segments,
enhanced usage of credit bureau, product rationalization and strong risk management
framework have ensured better than average asset quality inspite of its exposure in
riskier segments. Though GNPAs are expected to increase by 10-15 bps in the next
couple of years, we do not expect any significant deterioration going ahead.
Strong upside; BUY: With slower growth in 2/3-wheeler segment and winding-up of
its two commercial segments, we expect BAFs advances to grow at a CAGR growth
of 30% over F14-F17e unlike 54% CAGR over F10-F14. Strong NIMs and lower
credit cost are set to drive BAFs earnings by 27% CAGR over F14-F17e. At CMP of
Rs2,654, BAF trades at 1.9x F17e ABV (average peer valuation ~1.5x). Higher return
ratios and much better asset quality warrant higher valuations for BAF. We initiate
coverage on the stock with a target price of Rs3,220 (2.3x F17e ABV).
Key Risk: Prolonged economic slowdown could impact advances and earnings.
Financial Summary
Ankit Ladhani
+91 22 4227 3380
ankit.ladhani@sbicapsec.com
Ravikant Bhat
+91 22 4227 3349
ravikant.bhat@sbicapsec.com
Divyanshi Dayanand
+91 22 4227 3385
divyanshi.dayanand@sbicapsec.com
Amrita Rungta
+91 22 4227 3459
amrita.rungta@sbicapsec.com
Y/E March (Rs mn)

Net interest income
NIM (%)
Operating profit
PAT
EPS (Rs.)
ABV (Rs.)
P/E (x)
P/ABV (x)
Dividend yield (%)
RoE (%)
RoAA (%)
Source: Company, SSLe
SBICAP
Research on Bloomberg SBICAP <GO>, www.securities.com
F13
17,309
F14
22,156
F15e
28,046
F16e
34,101
F17e
43,053
11.8
10,534
5,913
119.4
670.0
22.2
4.0
0.6
22.0
3.8
11.1
13,490
7,190
144.5
788.8
18.4
3.4
0.6
19.6
3.4
10.5
17,171
9,187
184.7
946.3
14.4
2.8
0.7
20.9
3.2
9.8
21,130
11,258
226.3
1,141.0
11.7
2.3
0.8
21.2
2.9
9.5
27,386
14,671
294.9
1,399.6
9.0
1.9
0.9
22.7
2.9
Please refer to our disclaimer given at the last page.
Bajaj Finance
SBICAP Securities Ltd
Industry Analysis
2 wheeler, better performance vis--vis other auto

segment. Strong growth being witnessed in F15.
CAGR growth of 25.5% expected over F14-16e.
2-wheeler industry
2-wheeler industry has reported a comparatively better performance vis-a-vis the other
auto segments recently. For F13 and F14 the annual growth has been 2% and 7%
whereas for YTD F15, the growth has been strong at 19.3% YoY. However, the sharp
improvement is also largely supported by exports which grew by 29.2% in YTD F15.
Going ahead we expect 2-wheeler sector to grow at a CAGR of ~17% over FY14F16e. We expect 2-wheeler growth to be driven by scooter segment growing at a
CAGR of 25.5% over F14-F16e.
Exhibit 1: 2-wheeler sales growth improves
60.0%
45.0%
30.0%
15.0%
0.0%
F07
F08
F09
F10
F11
F12
F13
F14
YTDF15
-15.0%
Total
Domestic
Exports
Source: SIAM, SSLe
Consumer Durables have witnessed a decline in

F14 as well as YTD F15. Inspite of the same, BAF
has witnessed sharp increase in durables.
Consumer durables financing

Led by the economic slowdown, consumer durables segment is currently witnessing
an overall slowdown. The consumer durables have witnessed a slowdown for more
than the past 2 years. Consumer durables growth under IIP, slowed down from 14% in
F11 to 2.6% and 2% in F12 and F13. This was followed by a decline of 12.2% in F14.
For YTD F15 as well, the consumer durables segment has witnessed a decline of
12.5%.
Despite a slowdown witnessed in the consumer durables segment, BAF has been able
to increase its loan portfolio. An expected revival in economy is set to lead to an
improvement in the consumer durable segment although the transmittance of the
effect may follow with some lag. As the consumer durables segment growth bottoms
out and then increases gradually, we expect an expanded business opportunity for
BAF to kick in.
Exhibit 2: IIP- Consumer durables- GDP
40
(%)
26
12
(2)
F7
F8
F9
F10
F11
F12
F13
F14
YTDF15
(16)
IIP
Consumer Durables
GDP

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com
September 30, 2014 | 2
Bajaj Finance
Real estate in metro witnessing a slowdown due to

high prices whereas the business in tier II and tier III
cities remain strong. Competition in home loans
expected to increase from banks.
Home loan financing

With the real estate prices shooting up in the urban cities real estate markets have
witnessed a slowdown recently. This has led to a slowdown in financing of home
loans. Also with the banks aggressively expanding in the home loan segment, the
market has become highly competitive. Yet low cost housing space in the tier II and
tier III cities has witnessed a tremendous growth. The yield on advances in urban
regions in the home loan portfolio is close to 10.5-11% which is close to the base rate
of banks. However, in the Tier II and Tier III cities, NBFCs are able to garner business
at higher rates that are close to 11.5%. With the new RBI guidelines for regulatory
forbearance, wherein banks are not required to maintain CRR and SLR deposits for
home loans below Rs5.0mn (metro)/ Rs4.0mn (non- metro), the competition for
NBFCs is expected to intensify. Going ahead, the yields are unlikely to improve in the
housing finance segment. Housing loan segment has witnessed an 18% growth in
F14.
Exhibit 3: Housing loan growth for SCBs accelerates
6,000
5,408
19%
4,500
24%
4,567
18%
3,971
18%
3,591
(Rs bn)
5,680
3,009
17%
15%
3,000
12%
11%
1,500
6%
8%
0%
F10
F11
F12
Credit (LHS)
F13
F14
Growth (RHS)
4MF15
Source: RBI, SSLe
Loan against property

Loans against property (LAP) are generally disbursed in favour of SME customers.
Tenure of the loans is in the range of 3-5 years and the yields are 150-250bps higher
the home loans rates. Loan to Value (LTV) for LAP loans are in the range of 55-60%.
Going ahead an improvement in the economy will lead to a concomitant revival in the
growth for SME. BAF has sharply expanded the LAP portfolio and the same is
expected to drive growth going ahead.
Bajaj Finance
Investment Thesis
BAF has a well diversified portfolio mix. Key focus

remains in the SME and consumer finance
segment.
Well diversified portfolio mix

The companys business focus is on increasing volume along with profitability. Hence,
the portfolio is diversified between scale-building loans as well as high-yielding
advances. Home loans, LAP and commercial lending are the weightier constituents
whereas 2-wheeler/ 3-wheeler, consumer durables, lifestyle finance and personal
loans which are characterized by higher yields are the profit maximizers. This keeps
the lending book sufficiently bulked-up for growth even as higher yields lend support
the overall profitability of the company. Bajaj Finance offers its loans under three
different business segments viz., consumer, SME and commercial businesses. A
fourth segment that has been recently introduced, rural financing, is set to join their
ranks. BAF currently has 13 different products under these segments and though it is
discontinuing construction equipment and infrastructure financing segment, it is still
one of the most diversified NBFC. SME book forms the largest AUM share at 53.4%
followed by consumer finance at 38.8% and commercial lending at 7.6%.
Exhibit 4: AUM break-up (F14)
Commercial
lending
7.6%
SME
53.4%
Rural lending
0.2%
Consumer
Finance
38.8%
Exhibit 5: Break-up of AUM (F14)
Bajaj Finance

Exhibit 6: Product portfolio
Source: Company
Exhibit 7: Product launch journey
Source: Company
Consumer durables to drive growth in the

consumer finance division. Higher yields expected
to continue.
Consumer finance business focus on higher yielding business

Consumer finance forms 39% of the AUM book. BAF has focused on strengthening of
the distribution network along with rationalization of the dealer network. It currently has
a strong dealer network of more than 10,000 which supports its business in the 2/3wheeler financing along with consumer durable segment.
Bajaj Finance

Exhibit 8: Break-up of consumer finance business (F14)
Personal loans
29.0%
Lifestyle finance
2.0%
Consumer
durable finance
28.5%
2W & 3W
finance
40.5%
2/3-wheeler book to continue to remain under

pressure. Market share expected to decline
BAF is the largest 2-wheeler financier in the country focused on semi urban and rural
markets. BAF contributes 28% of total Bajaj Autos domestic 2-wheeler sales. BAF
continues to capitalize on Bajaj Autos distribution network to build its 2/3-wheeler loan
book. BAF has access to more than 2,600 dealers.
The 2/3-wheeler book of the company has reported a slowdown in growth for F14 led
by a slowdown in domestic sales of 2-wheelers. Though a growth is being witnessed
in 2 wheeler industry, BAF expects the growth for its book to remain muted. Currently
2/3-wheeler forms 14.9% of the total AUM. We expect the same to decline to 10% by
Mar16.
Exhibit 9: 2-wheeler/ 3-wheeler loan growth
48,000
42%
46,840
40,730
35,930
24,000
34,883
27.9%
37,367
36,000
27,270
2W & 3W AUM (Rs mn)
39.6%
32%
21%
15.0%
12,000
11%
9.0%
3.0%
0
F12
F13
F14
2W & 3W finance (LHS)
4.0%
0%
F15e
F16e
F17e
Growth (%) (RHS)
Bajaj Finance
Consumer electronics to drive the growth for

consumer finance division. LED TVs and mobiles
to remain the key products.
.
BAF is the largest consumer electronics financier in India focusing on affluent

customers and is one of the few organized players in the sector with a market share of
~15%. Company has a unique proposition in consumer durables. It finances only high
value items such as mobiles, LCDs/LEDs, refrigerators and air-conditioners and
effectively competes with credit cards. Key competitiveness with credit card comes
from the turnaround time for loans and interest cost benefits for the consumer. After
investing in considerable resources, company has reduced the turnaround time for
loans to ~15 minutes. Faster turnaround time is backed by large in-house database
and data availability from CIBIL. BAF provides an EMI (Existing Membership
Identification) card to all its consumer durable customers that enables them to avail
quick credit on future purchases.
Consumer durable loans are available at 0% interest for a period of eight months but
the company charges 1-1.5% processing fee. Down payment of ~30% has to be made
and the balance is financed by BAF. The main source of income for BAF comes from
the spread earned from manufacturer of 5-12%. Demand for consumer durables
remains robust especially for LED TVs and mobiles.
BAFs latest initiative of rolling forth a rural financing segment is now financing
consumer durable loans even in tier II and tier III towns. Currently the consumer
durables lending is in 15 of the top tier I cities. BAF is expanding into the tier II and tier
III towns and expects huge business opportunities in the market.
Exhibit 10: Consumer durables AUM growth
51,000
47,686
44.0%
43.6%
40.3%
34,000
45%
40%
37.1%
25,310
35,500
34.1%
17,576
17,000
63,940
50%
12,820
Consumer Durables AUM (Rs mn)
68,000
F13
F14
F15e
35%
34.3%
30%
F12
Consumer durables (LHS)
F16e
F17e
Growth (%) (RHS)

Lifestyle financing is focused on financing of
home improvement and furniyure and modular
kitchen, digital lifestyle products etc.
Lifestyle financing is a recently started line of business set along the success
parameters that BAF encountered in the consumer durable business. The loans are
for home improvement and furniture, modular kitchens, digital lifestyle products etc.
BAF is operating through 1,700 dealer network and has tie-ups with lifestyle brands
such as Home Town etc. The company is continuously identifying new product
categories in the business to expand its product offerings in-line with its strategy that
envisages large growth in lifestyle finance.
Personal loan portfolio has been reporting a strong growth over the past several years.
Cross-selling of products along with personal loans to salaried individuals remain the
two key focus areas under the personal loan segment. The AUM for personal loan
grew by 70% CAGR over F11-F14.
Cross-selling opportunities reduce acquisition cost
Number of customers for consumer durable business is large and they provide huge
cross-selling opportunities for other lines of business. BAF acquires customers and
cross-sells products to those who have a strong track record. Company has a
database of ~6 mn customers and repeat business forms ~50% of the total. Loan
processing is a lot faster in case of repeat customers and that coupled with lower
acquisition costs for new customers supports the earnings growth.
Bajaj Finance
Focus on SME sector to continue. Growth in

mortgage and LAP segment to drive SME growth.
SME financing Mortgages to support growth in scale

SME business forms ~55% of the total AUM. BAF focuses on SMEs with average
annual sales of Rs250mn with established financials & demonstrated borrowing track
record. SME loans comprises of small business loans, LAP, home loans and loan
against securities.
Exhibit 11: Break-up of SME loans (F14)
Home loans
21.1%
SME cross sell

5.4%
LAS
6.3%
LAP
51.9%
Business loans
15.3%

LAP continues to gain focus. Will support balance
sheet growth.
LAP is one of the key growth drivers for SME business in the recent past. The LAP
portfolio has grown at 51% CAGR over F10-F14. LAP portfolio stands at Rs69bn in
F14 and forms 28.7% of total AUM. LAP book has witnessed a sharp growth aided by
increasing distribution and addition of new sales channels that introduce cross-selling
opportunities. Distribution points have more than doubled since 2012.
BAF undertook a value added initiative by tying up with Jones Lang Lasalle (JLL) for
its mortgage customers. It provided property search services via its tie-up. This
facilitates BAF's affluent customers to locate and acquire suitable property thereby
giving end-to-end solution.
BAF has added a new channel of home loans to salaried individuals to boost its
mortgage business. On the back of steady increase in real estate prices mortgage
book is likely to show a strong growth going ahead. Home loan book stands at 12% of
AUM as on F14.
Business loans are primarily working capital loans and have a ticket size of Rs1.8mn
with an average maturity of close to 3 years. Small business loans forms ~8.5% of the
total AUM and 7.6% of deployments for F15. In the LAS segment, company provides
working capital and growth capital to high net worth SMEs with established financials
against marketable securities.
Exhibit 12: SME book growth
180,000
90,000
80%
336,071
250,638
57.0%
186,589
69.5%
133,030
66.0%
84,749
270,000
50,010
SME Loans o/s (Rs mn)
360,000
60%
40%
40.3%
34.3%
34.1%
20%
0%
F12
F13
F14
SME Loans o/s(LHS)
F15e
F16e
F17e
Growth (%) (RHS)
Bajaj Finance
Commercial advances portfolio to decline. BAF is

moving out of the infrastructure lending and
construction equipment business.

Commercial advances to continue to decline
Commercial advances which forms 7.6% of AUM and 10.8% of deployments
(construction equipment, infrastructure and other commercial lending), have been
declining for the past couple of years. Disbursals as well as advances for this segment
have declined in F13 and F14 and are unlikely to revive. BAF has been cautious in the
construction equipment business due to under utilization of assets as well as
infrastructure segment due to policy paralysis. BAF has decided to discontinue with
the infrastructure lending and construction equipment portfolios. Going ahead, as
these two portfolios decline, the share of total commercial lending book as a
percentage of AUM will decline.
Exhibit 13: Commercial book disbursements - revival witnessed only in the past
two quarters
10,000
Disbursements in the Commercial
Segment (Rs mn)
8,850
7,740
8,110
8,080
7,310
7,500
6,950
7,070
6,250
6,420
5,000
2,500
0
1QF13 2QF13 3QF13 4QF13 1QF14 2QF14 3QF14 4QF14 1QF15
Exhibit 14: Share in AUM declines (Const Equip + Comm Lending + Infra Fin)
Share of Commercial Book in AUM
20.0%
18.7%
15.0%
12.6%
11.3%
10.0%
7.6%
5.7%
5.0%
4.4%
4.0%
F16e
F17e
0.0%
F11
F12
F13
F14
F15e
Growth rate to decline but to remain healthy

BAF is focusing on the growth in the consumer and SME business and continues to
focus on secured loans. Though the construction equipment and infrastructure book is
likely to run- off in the next 2-3 years, overall advances growth is expected to remain
higher. Advances have reported a strong growth rate of 54% over F10-F14. As the
advances growth slows down in the 2/3-wheeler segment along with BAF winding-up
its two commercial segments, we expect the advances to grow at a CAGR growth of
30% over F14-F17e.
Bajaj Finance

Exhibit 15: Advances growth to ease
560,000
80%
68.3%
31.5%
304,160
F13
F14
F15e
28.8%
31.5%
40%
515,116
391,614
36.6%
231,318
140,000
35.3%
169,323
280,000
60%
125,174
(Rs mn)
420,000
20%
0%
F12
Advances (LHS)
F16e
F17e
Growth (RHS)
Exhibit 16: Change in portfolio
Exhibit 17: Target customer base
Source: Company
September 30, 2014 | 10
Bajaj Finance

Diversified borrowings profile; cost of borrowings amongst the lowest
Funding profile of BAF is diversified among banks, debentures, CPs and fixed
deposits. Bank borrowings form the major portion of funding (58% in F14) followed by
28% from debentures, 13% from CPs and balance from the recently raised FDs. BAF
enjoys some of the highest ratings by Crisil and ICRA which has led to the borrowing
cost of BAF being at lower levels. BAF enjoys rating of CRISIL A1+ from CRISIL and
(ICRA) A1+ from ICRA for its short term debt programme of Rs35bn and Rs20bn
respectively. The long term NCDs have been assigned CRISIL AA+/Stable rating by
CRISIL and [ICRA] AA+(Stable) by ICRA of Rs33.5bn and Rs30bn respectively. The
Company has also been assigned CRISIL AA+/Stable rating by CRISIL and [ICRA]
AA+(Stable) by ICRA for Rs7bn lower tierII bond programme. The fixed deposit
scheme has been rated FAAA/Stable by CRISIL and MAAA/Stable by ICRA.
BAF has some of the highest ratings from credit

agencies. Borrowings cost at sub- 10%.
As regards the bank loan ratings, CRISIL has assigned CRISIL AA+/Stable rating for
BAFs cash credit/ working capital demand loan amounting to Rs20.5bn and long term
bank facilities amounting to Rs124.5bn and CRISIL A1+ rating for the short term
bank facilities amounting to Rs15.3bn.
However going ahead, BAF expects to raise additional funding from retail FDs and
expects its share to increase its share to ~15% in the next 3 years.
Being such a highly rated company, cost of borrowings for BAF stood at 9.6% for F14.
We expect the funding cost to continue to be at lower levels and as the interest rates
are expected to come down going ahead, the advances which are at fixed interest
rates will support the NIMs.
Exhibit 18: Break-up of borrowings (F14)
Debentures
28.2%
Banks
57.6%
Commercial
Paper
13.1%
Fixed
Deposits
1.1%
Higher NIMs provide strong earnings visibility.

Though likely to decline, still remains comfortable
NIMs likely to decline by ~80-100 bps

BAF has traditionally maintained higher margins led by a strong exposure to highyielding segments and funding at competitive rates led by strong credit rating. NII
witnessed a CAGR growth of 37% over F10-F14 led by a CAGR advances growth of
54% over the period. However company has shifted focus to lower-yielding but
secured advances over the past couple of years leading to a dip in NIMs. Company
has witnessed a decline in its margins. We expect this trend to continue as the home
loans and LAP share of business increases leading to a further dip in margins going
ahead. We expect NIMs to contract by 100-150bps over the next couple of years.
September 30, 2014 | 11
Bajaj Finance

Exhibit 19: NIMs to contract
16.0%
15.6%
13.1%
11.8%
12.0%
11.1%
10.5%
9.8%
9.5%
F16e
F17e
8.0%
4.0%
0.0%
F11
F12
F13
F14
F15e
Aggressive expansion in network along with growth

in large ticket size loans like LAP and home loans
will support reduction in ticket size
Improved product penetration via restructuring, operating efficiencies and

increasing ticket size to improve cost-to-income ratio
BAF has extensively expanded its network in the past several years. It has built its
presence across consumer retailing chains for strengthening its consumer durables
business. Company had made investment in technology to streamline its loan
processing platform. Though this had led to an increase in its cost-to-income ratio
previously, company is since then reaping the benefits of the same. Meanwhile, as
BAF is expanding into segments with larger ticket sizes like LAP and home loans, an
improvement in the cost-to-income ratio is foreseen.
We expect cost-to-income ratio to improve from 46% in F14 to 43% in F17e.
Exhibit 20: Cost-to-income ratio to improve
48.0%
46.9%
46.0%
46.0%
44.9%
44.7%
44.5%
44.6%
44.0%
43.3%
42.0%
40.0%
F11
F12
F13
F14
F15e
F16e
F17e
September 30, 2014 | 12
Bajaj Finance
Asset quality stable inspite of economic slowdown.

Expected to remain largely stable

Asset quality to stay resilient on the back of diversification and better risk
management; credit cost to remain stable
Despite operating in high risk segments, BAF has been able to maintain its asset
quality on the back of its strong loan origination, underwriting and collection
processes. Focus on affluent segments, enhanced usage of credit bureau, product
rationalization and strong risk management framework have ensured better than
average asset quality warding-off costs from its exposure to riskier segments. BAF has
witnessed a marked improvement in asset quality over the years. GNPA and NNPA
currently stand at 1.1% and 0.3% (1QF15) whereas the PCR stands at 76%. Despite a
persistent slowdown in economy, asset quality of BAF has remained pretty stable.
However, backed by a tenacious improvement in economy for F15e, we expect a
marginal rise in GNPA and NNPA going ahead. GNPA and NNPA are expected to
increase to 1.3% and 0.3% in FY17e.
BAFs strong credit appraisal policy has led to an improvement in its overall credit cost
from 8.1% in F10 to 1.3% in F14. However, we expect credit cost to remain stable
going ahead.
Exhibit 21: Asset quality
3.0%
2.9%
2.3%
1.5%
1.2%
1.2%
1.1%
1.3%
1.3%
1.3%
0.8%
0.7%
0.1%
0.2%
0.3%
0.3%
0.3%
0.3%
0.0%
F11
F12
F13
GNPA
F14
F15e
F16e
F17e
NNPA
Exhibit 22: Credit cost

4.0%
3.7%
3.0%
1.8%
2.0%
1.2%
1.3%
1.3%
1.3%
1.3%
F13
F14
F15e
F16e
F17e
1.0%
0.0%
F11
F12
CAR to remain adequate for funding growth but

management to raise capital to maintain
comfort.
Capital raising likely

CAR for BAF currently stands at 18% with a tier I capital of 15.2%. Company had last
raised equity capital of Rs7.5bn in Jan-13 via rights issue. Based on our advances
growth estimates, BAFs CAR is likely to remain above the RBI guideline of 15% in
FY16e. However, company is planning to raise tier I capital in 1QFY16e to maintain
headroom for advances growth.
September 30, 2014 | 13
Bajaj Finance

Exhibit 23: CAR break-up
1.4%
12.2%
1.6%
1.8%
13.5%
16.1%
14.5%
3.0%
3.3%
15.0%
6.0%
16.8%
12.0%
18.7%
2.5%
18.0%
3.2%
24.0%
F15e
F16e
F17e
0.0%
F11
F12
F13
F14
Tier I
Tier II
Superior RoAA and RoE to continue. Strong loan

growth, higher NIMs and stable asset quality to
support return ratios
Superior return ratios to continue

BAF has delivered strong earnings growth supported by improved credit profile, strong
NIMs and best in class asset quality along with lower credit costs. RoAA have seen
some sharp improvement from 1% in F09 to 3.4% in F14. We believe that with a
unique business model, focus on high-yielding and secured segments along with focus
on newer markets and products will be the key positives for the company.
We expect BAF to continue to outpace the sector growth and sustain its superior
return ratios. We estimate the company to deliver 27% CAGR in net earnings over
F14-F17e, driven by 30% CAGR loan growth over the period. RoAA are expected to
maintain at their current levels going ahead.
Exhibit 24: RoAA
4.8
3.8
3.8
3.8
3.4
(%)
3.6
3.2
2.9
2.9
F16e
F17e
2.4
1.2
0.0
F11
F12
F13
F14
F15e
September 30, 2014 | 14
Bajaj Finance
Healthy return ratios. 27% CAGR growth in earnings

led by 30% growth in advances.
Well entrenched business model; healthy return ratios

BAF has successfully transformed from a 2-wheeler financing company to a well
diversified NBFC. BAF has set its focus on expansion of its loan book along with
healthy profitability. Company is focusing on a strong balance sheet via loans in home
loan and the LAP segment whereas the consumer durables and SME financing will
help maintain the overall profitability. Strong operating performance; healthy advances
growth; lower borrowing cost and healthy asset quality are the key highlights of the
company. Strong NIMs, lower credit cost and healthy return ratios are expected to
drive the earnings growth of BAF by 27% CAGR over F14-17e, driven by 30% CAGR
loan growth over the period.
The stock has in the past year seen its valuations expand from nearly 1.5x (1-yr
forward) to 2.5x as the company accelerated its business plans after raising adequate
capital. At CMP of Rs2,654, the F17e P/ABV of just 1.9x for RoAAs of ~3.0% we see
a strong upside. Peers trade an average of 1.5x F17e. We initiate coverage on the
stock with a BUY and a target price of Rs3,220 (2.3x F17e ABV)
Valuation
Exhibit 25: 1-yr forward P/ABV bands
3,200
(Rs)
2,400
Three year average multiple (P/ABV) for BAF is

1.6x
1,600
Price
1.5x
2.0x
2.5x
Sep-14
Mar-14
Sep-13
Mar-13
Aug-12
Feb-12
Aug-11
Feb-11
Feb-10
Aug-10
Aug-09
Feb-09
Aug-08
Jul-07
0.8x
Jan-08
Jan-07
Jul-06
Jan-06
Jul-05
800
3.0x
Exhibit 26: Key assumptions

Y/E Mar (Rs mn)
Balance Sheet Assumptions
Credit Growth (%YoY)
Borrowings Growth (%YoY)
Asset Quality Assumptions
Net Slippage Ratio (%)
Credit Cost (%)
Provisioning Cover (%)
Source: SSLe
F15e
F16e
F17e
31.5
38.6
28.8
34.1
31.5
35.2
0.5
0.5
0.4
1.3
76.0
1.3
76.0
1.3
76.0
Exhibit 27: Peer comparison

1QF15
CAR
RoE
RoA
GNPA
NNPA
P/BV (F17e)
Bajaj Finance
269,430
AUM
Borrowings
212,100
18.0
20.4
3.6
1.1
0.3
1.9
Mahindra Finance
342,707
250,975
18.1
12.0
1.9
6.2
3.0
1.9
Magma Fincorp
182,950
111,280
17.1
10.6
1.3
3.2
2.4
1.1
Shriram Transport
543,582
364,400
22.9
17.4
2.5
3.7
0.8
1.6
L&T Finance
407,650
362,760
16.7
11.3
2.1
3.6
2.7
1.5
Source: Bloomberg, Company, SSLe
September 30, 2014 | 15
Bajaj Finance
Key risks
Prolonged economic slowdown: A prolonged economic slowdown is a key risk and
could impact advances growth and earnings of BAF. Further, it may result in
deterioration of asset quality and could adversely affect its profitability.
Increased competition: Any significant increase in competition, mainly in consumer
durables and two/three-wheeler space, could impact adversely as company may have
to compromise practices to protect its business.
Sharp surge in credit losses: Although we have been conservative in our credit cost
assumptions, higher-than-expected delinquencies due to unseasoned loan book
(construction equipment, LAP and infrastructure finance) remain a risk to our
estimates.
September 30, 2014 | 16
Bajaj Finance
Company background
Bajaj Finance Ltd (BAF), a Bajaj group company, was incorporated in 1987 and
commenced operations as a captive financier for Bajaj Auto vehicles. Over the past
few years, its business model has been broadened and reliance on Bajaj Auto has
reduced, enabling it to emerge as diversified consumer finance NBFC. BAF forayed
into the consumer finance business in late 2007, which coincided with the downtrend
in overall economic environment. However, being a late entrant to the consumer
business enabled BAF to survive the cyclical stress as many players exited the
sector/segment. BAF has implemented several initiatives to restructure the cost base,
tighten risk policies, increase usage of credit bureau and undertake branch
rationalization.
Exhibit 28: Holding company structure
Source: Company
September 30, 2014 | 17
Bajaj Finance
Key Management Personnel

Rahul Bajaj-Chairman
He took charge of the erstwhile Bajaj Auto as the Chief Executive Officer in 1968. Post
demerger of the company, he continues to act as the non-executive chairman. He is a
Graduate in Economics (Honours) and Law and did his MBA from Harvard Business
School.
In 1992 he was appointed a Member of the Prince of Wales International Business
Leaders Forum by His Royal Highness and The Prince of Wales. He was awarded the
Padma Bhushan by the President of India in 2001.
Rajeev Jain-Chief Executive Officer
He was earlier with American International Group as a Deputy CEO of its Consumer
Finance business. Before that, he was with American Express where he spent more
than eight years doing various roles across various products like credit cards, personal
and business loans etc. At the time of leaving American Express, he was the Head of
Personal and Small Business Lending in India. Rajeev is a Management graduate
from T A Pai Management Institute, Manipal with a Bachelors Degree in Commerce.
Rajesh Viswanathan -Chief Financial Officer
He joined BAF from Bajaj Allianz Life Insurance where he was the CFO for 8 years.
He has varied experience having worked previously with KPMG in the Middle East in
their Bahrain Assurance practice and prior to that in DSP Merrill Lynch and Mahindra
and Mahindra. Rajesh holds the BCom degree from the Mumbai University and is a
qualified CA and ICWA.
September 30, 2014 | 18
1,387
PAT (LHS)
Growth (%) (RHS)

10,500
(10)
Customer Acqusition (LHS)
(%)
(20.2)
63.0
Commercial
3,500
12,520
4QF14 7,680
39.4
SME Business
9,620
7,000
54.5%
45.1%
4QF14
1QF15
50.7%
51.0%
2QF14
3QF14
54.6%
46.3%
1QF14
4QF13
56.7%
13.6%
11.5%
8.5%
35.4% 9.6%
42.9%
40.8%
37.0% 12.0%
34.1% 11.3%
40.1%
29.3% 14.1%
18.7%
Commercial
1QF15
20
SME Business
3QF14
14,000
(28.8)
Consumer Finance
2QF14 6,900
30
55.8
Growth (%) (RHS)
9,690
Exhibit 33: PAT

0%
(25.3)
(20)
1QF14
10
25%
32.6%
Consumer Finance
4QF13 6,220
3QF13
75%
38.6
40
8,330
100%
48.7%
60
2QF13
Growth (%) (RHS)
(20.1)
1QF15
39.8%
38.8%
4QF14
40.9%
2QF14
39.7%
41.6%
1QF14
3QF14
40.7%
40.9%
3QF13
4QF13
38.8%
2QF13
0%
39.1%
3.0
1QF13
25%
2QF13 6,010
269,430
6.0
32.3% 16.4%
Exhibit 31: Deployments

(%)
53.3%
53.4%
51.9%
50.0%
48.7%
47.9%
45.9%
45.4%
44.6%
50%
51.3%
1QF15
7.1
12.0
13.3
6.6%
7.6%
8.4%
9.1%
9.7%
11.3%
13.1%
15.8%
16.3%
75%
1QF13
20
(%)
31.6
240,610
224,610
198,290
9.8
12.0
49.8
92,660
4QF14
3QF14
3.1
175,170
9.6
10.5
100%
3QF13
600
15.0
7,520
1QF15
(6.5)
44.9
(%)
16.1
4QF14 70,420
75,320
2QF14
192,290
4.0
168,440
9.0
Customer Acquisition ('000s)
2,114
(6.2)
3QF14
(16.8)
1QF14
4QF13
3QF13
153,700 6.1
144,850
Exhibit 29: AUM
1QF13
1QF15
1,821
1,800
4QF14
16.2
51,990
22.4
100,000
1,941
2QF14
62,500
(1.8)
20.0
2QF13
1QF13
300,000
3QF14
Deployments (LHS)
(5.0)
1QF14
4QF13
51,060
52,000
75,000
1,670
7.3
2.3
3QF13
AUM (LHS)
2QF14
1,757
1,638
24.4
(8.3)
12.4
AUM (Rs mn)
150,000
1QF14
4QF13
1,200
1,601
2,400
2QF13 43,340
3QF13
25,000
47,280
50,000
(7.2)
1QF13
75,000
28.1
Deployments (Rs mn)
225,000
2QF13 1,287
1QF13
PAT (Rs mn)
Bajaj Finance
Quarterly Trends
Exhibit 30: Sectoral composition of AUM
Rural
Exhibit 32: Sectoral composition of deployments
50%
Rural
Exhibit 34: Customer acquisition
90
60
30
(30)
(60)
Growth (%) (RHS)
September 30, 2014 | 19
Bajaj Finance
Financials
Income statement
Y/E Mar (Rs mn)
F13
F14
F15e
F16e
F17e
Ratio analysis
Y/E Mar (Rs mn)
F13
F14
F15e
F16e
F17e
Interest earned
29,366
37,889
51,002
65,147
84,684
Interest expended
12,057
15,732
22,957
31,046
41,632
Advances
35.3
36.6
31.5
28.8
31.5
Net interest income
17,309
22,156
28,046
34,101
43,053
Borrowings
28.4
50.4
38.6
34.1
35.2
18.7
Growth (%)
Other income
31.9
28.0
26.6
21.6
26.2
1,730
2,845
3,123
4,026
5,222
Growth Ratios (%)
Earnings Ratio
Fee based income
Average yield on loans
19.9
18.9
19.0
18.7
Other misc. income
Average cost of borrowings
10.3
9.6
9.7
9.7
9.6
9.6
9.3
9.3
9.0
9.0
Operating income
Growth (%)
19,040
25,001
31,169
38,128
48,274
Spread
33.5
31.3
24.7
22.3
26.6
NIM
11.8
11.1
10.5
9.8
9.5
Operating expenses
8,506
11,511
13,998
16,998
20,888
RoE
22.0
19.6
20.9
21.2
22.7
Staff expenses
2,452
3,408
4,476
5,763
7,580
3.8
3.4
3.2
2.9
2.9
Other operating expenses
6,055
8,103
9,523
11,235
13,308
10,534
13,490
17,171
21,130
27,386
39.2
28.1
27.3
23.1
29.6
44.7
46.0
44.9
44.6
43.3
Non-tax provisions
1,818
2,578
3,251
4,072
5,158
4.8
4.7
4.2
3.9
3.6
PBT
8,716
10,912
13,920
17,058
22,229
Taxes
2,803
3,722
4,733
5,800
7,558
32.2
34.1
34.0
34.0
34.0
Net profit
5,913
7,190
9,187
11,258
14,671
Growth (%)
45.5
21.6
27.8
22.5
30.3
Pre-provision profits (PPP)

Growth (%)
Tax rate (%)
Balance sheet
Y/E Mar (Rs mn)
Capital
F13
F14
F15e
F16e
RoAA
Operating ratios (%)
Op. exps / income
Op. exps. / avg. assets
Asset quality, capital adequacy (%)
Gross NPA
1.1
1.2
1.3
1.3
1.3
Net NPA
0.2
0.3
0.3
0.3
0.3
PCR
82.4
76.0
76.0
76.0
76.0
CAR
22.0
19.1
16.3
15.1
13.6
Tier I
18.7
16.1
14.5
13.5
12.2
Tier II
3.3
3.0
1.8
1.6
1.4
F17e
495
498
498
498
498
Reserves & surplus
33,024
39,411
47,519
57,536
70,779
Shares outstanding (mn.)
49.5
49.8
49.8
49.8
49.8
Networth
33,520
39,909
48,016
58,033
71,277
EPS
119.4
144.5
184.7
226.3
294.9
Book value
676.6
802.2
965.2
1,166.5
1,432.7
Adjusted book value
670.0
788.8
946.3
1,141.0
1,399.6
15.1
16.1
18.5
21.3
24.5
Borrowings
Per share data (Rs.)
131,332
197,496
273,720
366,953
496,274
Current liabilities
13,211
8,776
9,945
13,072
17,425
Total liabilities
178,063
246,180
331,681
438,058
584,976
Dividend per share
Advances
Valuation ratios (x)
169,323
231,318
304,160
391,614
515,116
Investments
53
282
282
282
282
Fixed assets
1,762
2,199
2,419
2,660
2,926
Other assets
6,926
12,381
24,820
43,502
66,652
Total assets
178,063
246,180
331,681
438,058
584,976
22.2
18.4
14.4
11.7
9.0
P / BV
P/E
3.9
3.3
2.7
2.3
1.9
P / ABV
4.0
3.4
2.8
2.3
1.9
Dividend yield (%)
0.6
0.6
0.7
0.8
0.9
RoAA decomposition
Y/E March (%)
F13
F14
F15e
F16e
F17e
Interest earned
19.11
17.86
17.65
16.93
16.56
Interest expended
Net interest income
Other income
7.85
7.42
7.95
8.07
8.14
11.26
10.45
9.71
8.86
8.42
1.13
1.34
1.08
1.05
1.02
12.39
11.79
10.79
9.91
9.44
Operating expenses
5.54
5.43
4.84
4.42
4.08
Staff cost
1.60
1.61
1.55
1.50
1.48
Other operating expense
3.94
3.82
3.30
2.92
2.60
Pre-provision profits (PPP)
6.85
6.36
5.94
5.49
5.35
Non-tax Provisions
1.18
1.22
1.13
1.06
1.01
Profit before taxes
5.67
5.14
4.82
4.43
4.35
Taxes
1.82
1.75
1.64
1.51
1.48
Profit after taxes
3.85
3.39
3.18
2.93
2.87
Operating income
September 30, 2014 | 20
Bajaj Finance
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Bajaj Finance
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September 30, 2014 | 22

Bajaj Finance - Initiating Coverage 30-09-14

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Bajaj Finance - Initiating Coverage 30-09-14

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Institutional

Bajaj Finance Ltd

BAF IN; BJFN.BO

Current price (29 Sep)

Price performance (%)

Bajaj Finance (LHS)

Rel. to Bankex (RHS)

Source: Bloomberg, SSLe

September 30, 2014

Diversified financier; affluent franchise

Y/E March (Rs mn)

Please refer to our disclaimer given at the last page.

SBICAP Securities Ltd

2 wheeler, better performance vis--vis other auto

Source: SIAM, SSLe

Consumer Durables have witnessed a decline in

Consumer durables financing

Source: Bloomberg, SSLe

September 30, 2014 | 2

SBICAP Securities Ltd

Real estate in metro witnessing a slowdown due to

Home loan financing

Source: RBI, SSLe

Loan against property

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com

September 30, 2014 | 3

SBICAP Securities Ltd

BAF has a well diversified portfolio mix. Key focus

Well diversified portfolio mix

Source: Company, SSLe

Exhibit 5: Break-up of AUM (F14)

Source: Company, SSLe

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com

September 30, 2014 | 4

SBICAP Securities Ltd

Exhibit 7: Product launch journey

Consumer durables to drive growth in the

Consumer finance business focus on higher yielding business

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com

September 30, 2014 | 5

SBICAP Securities Ltd

Source: Company, SSLe

2/3-wheeler book to continue to remain under

2W & 3W AUM (Rs mn)

2W & 3W finance (LHS)

Growth (%) (RHS)

Source: Company, SSLe

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com

September 30, 2014 | 6

SBICAP Securities Ltd

Consumer electronics to drive the growth for

BAF is the largest consumer electronics financier in India focusing on affluent

Consumer Durables AUM (Rs mn)

Consumer durables (LHS)

Growth (%) (RHS)

Source: Company, SSLe

ankit.ladhani@sbicapsec.com I ravikant.bhat@sbicapsec.com I divyanshi.dayanand@sbicapsec.com I amrita.rungta@sbicapsec.com

September 30, 2014 | 7

SBICAP Securities Ltd

Focus on SME sector to continue. Growth in

SME financing Mortgages to support growth in scale

SME cross sell

Source: Company, SSLe

SME Loans o/s (Rs mn)