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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
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
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%
Investment Rationale
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.
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.
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.
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.
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 .
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.
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.
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.
Attractive Valuations
Financials
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
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.
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
Conclusion
Price Chart
Dec
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
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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