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- A Disciplined Financial Conglomerate in making !

Bajaj Finserv Ltd

Content Index
Bajaj Finserv Limited Investment Snapshot :- Slide #3 Industry Opportunity An Overview:- Slide #5 Bajaj Finserv Limited Business Overview :- Slide #11 Investment Rationale :- Slide #20 Bajaj Finserv Limited Financials:- Slide #29 Concerns & Reasoning :- Slide #30 Conclusion :- Slide #33

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Bajaj Finserv Ltd Investment Snapshot


(as on May 31, 2013) Recommendation :- BUY Maximum Portfolio Allocation :- 6-8 % Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 80 % Current Accumulation Range :- 600-650 Rs
Current Market Price Rs. 667.80 Current Dividend Yield 0.22% Bloomberg / Reuters Code BJF IN/ BJFS.NS BSE / NSE Code 532978 / BAJAJFINSV

Bajaj Finserv is a high Quality Finance stock with major Market Cap (INR BN / USD Mn) potential upsides from its Insurance business. We believe that 10657.32 /1897.31 [1 USD Rs. 56.17] this Stock is a Blind Multibagger Bet for a long Term Investor. Total Equity Shares [Mn] 144.68

Core Investment Thesis :


Bajaj Finservs biggest positive has been its Management which has been both Aggressive and rational in growing the business. We believe that the Insurance Industry has a huge growth potential and is going through a temporary slowdown. Buying a solid business at less than its value will always help Investors to grow their Wealth.

Face Value Rs. 10 52 Week High / Low Rs. 618.95 / Rs.983.95 Promoters Holding - 58.89 % Institutional Holding - 15.37 % Other Holdings - 25.74%

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Key Investment Highlights


1.) Rational Capital Allocators :- Company has been Investing its capital prudently there by generating healthy return ratios which are the best in the industry. Apart from this the company has the flexibility to infuse apt capital in businesses where they are required . 2.) Best Industry Metrics :- The company has one of the best return ratios and profitability parameters in the industry due to robust growth in its Insurance and lending business which are growing above industry average. 3.) Foot Hold in Billion Dollar Opportunities :- The Domestic insurance market both Life and general insurance are highly under penetrated with huge potential providing a billion dollar opportunity. The company is well poised to tap the opportunity. 4.) Steady and cheap Float :- There are very few Companies which have such steady and cheap float in the industry with combined ratio being amongst the best in the industry. 5.) Strong & Healthy Balance sheet :- Company has a very strong balance sheet that helps the company to invest in its business without equity dilution which is earnings accretive. 6.) Aggressive subsidiaries to cater to wide range of Financial needs :- Company has aggressive subsidiaries that cater to the wide range of financial needs with huge cross selling opportunities that exist due to its strong parentage. Its NBFC which has been growing strongly is a huge asset to the company. 7.) Disciplined Performance:- The company has a disciplined under writing culture that has resulted in steady performance over a number of years. This has culminated in favorable risk reward dynamics. 8.) New Opportunities :- Company has tie up with Berkshire Heathway owned by legendary Warren Buffet for selling Bajaj Alliance Insurance product. Banking is another new opportunity which might arise going forward. 9.) Management/ Corporate Governance :- The company has a good management and adheres to strong corporate governance norms. The company is run professionally by a young team led by Sanjeev Bajaj. Incidentally, Bajaj happens to be a household name in the Indian corporate sector known for integrity and professional competence. 10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations with 25% discount to its SOTP valuations. Also the company is quoting at 6.5X its Earnings which is very attractive for the Quality of this stock which has a ROE of 30%+and hence warrants a clear upside.

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Investment Rationale

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Industry Opportunity & Potential - An Overview

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Indian Economy Overview


Indias GDP on purchasing power parity stands at USD 4.7 trillion and is the worlds third largest economy after USA and China. The Indian economy has grown at 5.4% in 2012 adjusted for inflation. The services sector share in GDP is the highest at 65% and is the key driver of the growth in in the Indian economy. The outlook for the economy in the medium term is positive due to young population, low dependency ratio, healthy savings & investment rate and increasing integration with the global economy. The general health of the insurance Industry is affected by the performance of the Indian economy and markets.

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Indian Insurance Industry


The Life Insurance Industry recorded a premium income of Rs.2.87cr in 201112 as against Rs.2.91cr in 2010-11 registering a negative growth of 1.57%. The renewal premium of life insurance accounted for 60.31% in 2011-12 as against 56.66% in 2010-11.First year premium accounted for 39.69% in 201112 as against 43.34% in 2010-11. During 2011-12 the growth in renewal premium was 4.77% as against 6.23% in 2010-11.First year premium registered a decline of 9.85% as against a growth of 15.02% in 2010-11. In the non-life insurance category the insurers underwrote gross direct premium of Rs.52876cr in 2011-12 as against Rs.42,576cr registering a growth of 22.98%.

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Under penetration offers immense growth potential


The Life Insurance Industry globally is assessed in two parameters i.e Penetration and density. The Life Insurance penetration had gone up from 2.15% in 2001 to 4.60% in 2009.In 2011, the penetration has dropped to 3.40% on the back of slowdown in the industry. The penetration of the non life segment has remained constant in the range of 0.500.75% during the past ten years. The life Insurance density has gone up from USD9.1in 2001 to USD49.0 in 2011.The Insurance density of non life sector has gone up from USD2.4 in 2001to about USD10 in 2011.

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Claims Ratio

In the year 2012 the Life Insurance companies settled 8.22 lakh claims on individual policies amounting to Rs.8409 crores. The settlement ratio of LIC moved from 97.03% in 2011 to 97.42% and the private players settlement ratio increased from 86.04% in 2011 to 89.34% in 2012.Accordingly,the industries settlement settlement ratio increased from 95.58% in 2011 to about 96.26% in 2012. The net incurred claims of non-life insurers stood at Rs.34998cr in 2012 as against Rs.29514cr in 2011 registering an increase of about 18.58%. The insured claims ratio of the non-life industry stood at 88.85% in 2012 as against 97.03% in 2011.

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Segment wise General Insurance Break Up

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Bajaj Finserv Ltd

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Bajaj Finserv Lines of Businesses


Bajaj Finserve is a financial services company which is engaged in Life and General Insurance, Consumer Finance and other financial services. The company is engaged in life and general insurance through their joint ventures with Allianz SE namely Bajaj Allianz Life Insurance Company Ltd(BALIC) and Bajaj Allianz General Insurance Ltd(BAGIC). Bajaj Allianz Financial Distributors Ltd is a 50:50 joint venture company between the company and Allianz SE, which is engaged in the business of distribution of financial products. Bajaj Finance Ltd - the listed entity, offers various consumer finance products to customers such as auto loans, personal loans, loans for consumer durables and computers and SME finance. The company operates 138 wind mills in Maharashtra with an installed capacity of 65.2 MW.

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Bajaj Finserv Lines of Businesses

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Bajaj Finserve Ltd Life Insurance Business Overview

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Bajaj Life Insurance Segment(BALIC)


ICs gross written p. BALICs GWP for FY2012 was ` 7,484cr. This was 22% lower than ` 9,610cr written during FY2011. Renewal premiums reduced by 22%, from 6,144cr in FY2011 to 4,766cr in FY2012. New business premiums for FY2012 were ` 2,718cr as against Rs. 3,466cr clocked in the previous year. Within the private sector, BALICs market share of new business premiums was 8.3% for FY2012, and it ranked fourth in this category among private life insurers. It ranked second among the private life insurers based on the number of new policies issued which stood at 1.05 million in FY2012 versus 1.54 million in the previous year.

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Changing product mix

ULIPs dominated BALICs business up to FY2011 though reducing from as high as 99% of the product mix in FY2008 to 58% in FY2011. The effects of the IRDA announcements of September 2010 have profoundly changed the mix. This change has invariably de-risked the companys business model. In FY2012, traditional life products dominated with 69% of the mix, with par accounting for 42% of the total and non-par 27%. In contrast, the share of ULIPs has fallen from 84% in FY2010 to 58% in FY2011 and has further reduced to 32% in FY2012. Traditional individual premiums comprised 44% of overall new business premiums in FY2012, compared to 30% in FY2011.

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BALICs ULIP Performance in line with bench mark

As on 31stMarch,2012 BALICs Asset under management stood at Rs.39417cr which included ULIPs of Rs.29,984cr. ULIP linked funds have decreased by 8.8% in FY12 vs. FY11.However,these funds have performed better than comparator funds with returns in line with the bench mark. The portfolios are carefully managed keeping in mind the asset allocation requirements. Yield on Non unit linked investments in 2012 was 8.7% vs. 8.2% in 2011.

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Bajaj Finserve Ltd General Insurance Business Overview

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Bajaj General Insurance Market

Penetration of General Insurance as a percentage of GDP and per capita spend on General Insurance are significantly lower when compared to other emerging economies. This leaves scope for high growth of the segment in the coming years. Gross Written Premium(GWP) of the industry ,excluding the specialized insurers have grown from Rs.12,390cr in 2002 to Rs.53,040cr in FY12 growing at a CAGR of around 15.7%. The Indian third party Insurance pool is an arrangement where all general insurers ceded the premium with respect to third party risks of commercial vehicles and related losses to the third party pool which were then redistributed back to all the general insurers in proportion to their market share.Since,2011 the industry was affected on account of increasing provisioning for motor pool losses. Howver,IRDA has recently modified the motor pool sharing which will drive future growth for the segment.

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Second largest private sector player in General Insurance


Company National New India Oriental United Public - Total Bajaj Allianz Bharti AXA Cholamandalam MS Future Generali HDFC ERGO ICICI Lombard IFFCO Tokio L&T Raheja QBE Reliance Royal Sundaram SBI General Shriram TATA AIG Universal Sompo Private - Total Grand Total Market Market Total Premium(Rs.Cr) Share(%) Share(%) 2010-11 2011-12 2010-11 2011-12 6220.72 7790.69 14.61 14.73 7097.14 8542.87 16.67 16.16 5457.33 6047.89 12.82 11.44 6376.66 8179.29 14.98 15.47 25151.85 30560.74 59.07 57.8 2869.96 3286.62 6.74 6.22 553.9 884 1.3 1.67 967.99 1346.54 2.27 2.55 600.16 919.76 1.41 1.74 1279.91 1839.46 3.01 3.48 4251.87 5150.14 9.99 9.74 1783.18 1975.24 4.19 3.74 17.24 143.4 0.04 0.27 4.9 14.79 0.01 0.03 1655.43 1712.55 3.89 3.24 1143.99 1479.79 2.69 2.8 43.02 250.14 0.1 0.47 780.89 1266.44 1.83 2.4 1173.09 1641.57 2.76 3.1 299.1 404.58 0.7 0.77 17424.63 22315.03 40.93 42.2 42576.47 52875.77 100 100

Bajaj Finserv is the second largest private sector player in the general Insurance segment after ICICI Lombard. Bajaj Finserv did a total premium of Rs.3286.62cr in FY12 as against Rs.2869.96cr in FY11 registering a growth of about 14.52%. Bajaj Finserv in 2011 had a market share of 6.74% as against 6.22% in FY12. The decline in market share is due to the company policy of doing policies which are profitable and enhance their margins apart from enabling the company to focus on better client servicing .

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BAGIC Business Performance

BAGIC has focused on profitability with careful selection of risk and under writing business which meet its profitability hurdle rates. BAGIC had GWP of Rs.3338cr in FY12 as against Rs.2905cr in FY11 registering a growth of 14.90% BAGIC is strengthening its marketing efforts in retail chain such as agency, bancassurance,broker and direct to enhance its reach. BAGIC focuses on strong control over expenses to control profitability.

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BAGIC GWP from different Channels

Retail channels like Agency and Bancassurance continue to be the main channel stay of BAGICs channel mix contributing to over 70% of business. BAGIC has one of the largest network of independent partner banks including national banks with strong regional presence and cooperative and rural banks. For the Off shelf retail products like motor and health insurance BAGIC has an effective online sales channel that drives this business.

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Capital & CAR maintained as per Regulations

Bajaj Finserve has maintained a capital adequacy ratio of 18% in FY2012 as against the statutory requirement of 15%. Bajaj Finserve equity base(including share premium) was Rs.1211cr with no fresh infusions in FY2012. Bajaj Finserve solvency ratio was 516% in FY2012 vs the minimum regulatory requirement of 150%.The company has maintained capital and capital adequacy despite not raising money from deposits and has sourced most of its borrowings through banks which constitute 58% and the balance 42% was sourced from other sources.

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High Capital Efficiency and good combined Ratio


BAGIC s net worth has been consistently growing over the years and this is expected to continue in the medium term. BAGICs net worth has increased from Rs.672.5cr in FY09 to about Rs.1255.3cr in FY13.The net worth in FY13 has risen by about 30.94% compared to last year. BAGIC has maintained a good combined ratio which is one of the best in the industry. The combined ratio in FY13 was at 93.4% as against 96.1% in FY12. In 2012 IRDA has dismantled Indian third party insurance pool .It has prescribed the clean cut method which is a well accepted principle of accepting long tail outstanding liabilities. This would de-risk the general insurance industry.

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Bajaj Finserve Ltd Lending Business Overview

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Bajaj Finance A Snapshot


Bajaj Finance is a 25 year old NBFC with a demonstrated track record of profitability. The company focuses on Consumer, SME and commercial lines of businesses spread across nine product lines. The company has about Rs.19,366cr of assets under management with net NPA of 0.19%.The NPA of 0.19% is the lowest in the NBFC space. Bajaj Finance is the largest two wheeler lender in India focused on semi urban and rural markets. This constitutes 30% of Bajaj Autos domestic sales. Bajaj Finance is the largest consumer electronics lender in India with electronic market share at 20%. Among the few non banks with an active co-branded credit card.

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Strong distribution Reach & Credit rating drive growth


Bajaj Finance has a Pan India presence through its presence in 20 states with 75 branches which cater to the lending requirements of its customers through the length and breadth of the country. Bajaj Finance has traditionally maintained a strong credit rating owing to a healthy capital adequacy ,strong parentage and steady performance. Bajaj Finance has an excellent credit rating with the highest rating of CRISIL A1+ from CRISIL and (ICRA) A1+ from ICRA for BFLs short term debt programme. Bajaj Finance has been able to receive reasonable cost of funds despite difficult conditions in the Indian and global economy on account of its strong credit rating.

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Vast potential for consumer Financing


Bajaj Finance consumer finance portfolio consist of consumer durable financing, personal loans, captive two wheelers and three wheeler financing for existing customers of Bajaj Auto, salaried loans and co-branded credit cards. Bajaj Finance small business loan segment consist of mortgage loans, loans against securities and unsecured loans. Bajaj Finance commercial loans consist of infrastructure project loans, construction equipment and secured vendor financing. Bajaj Finance is in a sweet spot with respect to its consumer financing as India is one of the countries with the lowest consumer debt to GDP ratio. India is likely to benefit from rising consumer spend backed by strong GDP growth.

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Attractive Valuations

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Financials

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Earnings Projection
Particulars(Rs.Cr) Net Sales Total Expenditure Operating Profit OPM(%) Interest & Financial charges Depreciation PBT Tax Tax Rate PAT Minority Interest after PAT Adjusted PAT EPS FY11 2415.27 916.45 1498.82 37.94 0 22.02 1648.67 177.7 10.78 1470.97 377.02 1093.95 77.06 FY12 3874.65 1664.44 2210.21 42.96 301.14 18.52 2226.22 336.47 15.11 1889.75 551.98 1337.77 92.46 FY13

Bajaj Finserv revenues are 5072.43 5909.8 7336.29 expected to grow by 16.51% and 24.14% in FY14 & FY15 driven by 1145.93 1300.16 1613.98 increased contributions from Insurance and robust consumer 3926.50 4609.64 5722.31 financing business.
22.59 22.00 22.00

FY14E

FY15E

744.1 1203.58 1418.35 14.12 17.27 20.09

2708.11 3174.20 3939.65 493.94 18.24 634.84 20.00 787.93

Bajaj Finserv has been historically operating at high operating profit margins with 22% operating profit margin recorded in FY13 and this is expected to remain at those levels in 2014 and 2015.

20.00 Bajaj Finservs PAT in 2013 is

Rs.2214.17Cr and is expected to report PAT of Rs.2539.35Cr and Rs.3151.72Cr in FY14 and FY15 640.53 736.41 914.00 registering a growth of 14.69% and 24.11% respectively driven 1573.64 1802.94 2237.72 by strong top line growth.
2214.17 2539.35 3151.72 98.90 113.31 140.63

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Concerns & Reasoning


1.) Alliance Raising stake will impact Financials : Alliance has the right to excise call option to raise its stake from the current 26% to 50% subject to parliament approving law for increasing FDI in Insurance. This will impact the consolidated financials of Bajaj Finserv and impact the profitability. Our SOTP valuations suggest a value of Rs.845 per share if Alliance has 50% stake while the SOTP values are at Rs.1046 per share if current stake is maintained there by providing huge upside potential for the stock even in a worse case scenario. 2.) Re-Insurance Risk : Both BAGIC and BALIC seek to mitigate their risks by entering into reinsurance arrangements with reinsurance companies such as the General Insurance Corporation of India Limited as well as with other foreign reinsurers. Reinsurance is a mechanism by which BAGIC and BALIC seek to minimize their risks by sharing the same with a panel of carefully selected reinsurers. Consequently however, both BAGIC and BALIC are exposed to risks associated with entering into such reinsurance arrangements, which include inter alia, risks associated with inadequate reinsurance, the inability to obtain reinsurance on favorable terms, in a timely manner or at all, and, risks associated with any default and/or breach in connection with such arrangements and risks associated with legal enforcement of foreign reinsurers obligations under the contract of reinsurance. Any of these risks could have an adverse impact on the operations and profitability of BAGIC and/or BALIC. 3.) Third Party Motor Insurance Claims: Unlimited liability towards third party motor insurance claims together with inability to freely price the premium for the third party motor insurance products could adversely affect the operations, financial condition and profitability of BAGIC.

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Conclusion

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Price Chart

Mar Share Holding % Promoters FII DII Others

Dec

Sep 2012 58.88 10.31 4.71 26.10

Jun 2012 58.88 9.99 5.12 26.01

Bajaj Finserv has been correcting over the last 6 months

2013 2012 58.89 58.89 11.03 10.63 4.34 4.60

and the stock continues to slide down. But on a yearly basis, the stock has still delivered decent results and the long term uptrend is still intact. The Stock has had a very successful rights Issuance and there was good response to the issue.

25.74 25.88

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Conclusion
Insurance Industry is a sector where a disciplined Operator can generate Huge, Cheap and Stable floats. When this Float capital goes in the hand of an efficient Capital Allocator in a growing economy, the Value creation is just enormous. There are several examples of this across the world including the most famous Insurance entity Berkshire Hathways Insurance operations. While we are certainly not comparing Bajaj Finserv to it, but our understanding shows that the company ticks all the necessary items to be a large profitable Insurance player. More over, Bajaj Finserv being a holding company has been able to develop multiple lines of business and is moving towards becoming a strong Financial Conglomerate. We believe that the company also has a good opportunity to bag a Banking license. Its Finance business is a clear example of the Managements competency and focus in scaling up a good Business. The NBFC has currently become one of the leading lenders to consumers with a strong Credit appraisal process. We believe that the Management under Mr. Sanjiv Bajaj has been clearly focused on taking Bajaj Finserv to the next level as a major player in the Financial industry. The team already shown their commitment and competence to build this business out for the long term. Company has been picking the right opportunities and allocating Capital in the best possible manner, thereby creating value for Investors. Bajaj Finserv is currently available at 1.3X Trailing Book Value and less than 7X its Trailing Profits. It is definitely cheap considering the Quality of the business. The potential to grow its Insurance and Finance business is huge and with a stable Management and a disciplined process, the value creation for Investors would be big. We believe that, there is enough opportunity on both the Re-Rating front and also on the Earnings growth front to make this Stock a Multibagger Bet.

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