1. May 2013 Multibagger Stock Bajaj Finserv Ltd

8/13/2019 1. May 2013 Multibagger Stock Bajaj Finserv Ltd

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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

Specialists in discovering Multibagger stocks


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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

Bajaj Finserv is a high Quality Finance stock with majorpotential upsides from its Insurance business. We believe thatthis Stock is a Blind Multibagger Bet for a long Term Investor.

Current Market Price Rs. 667.80

Current Dividend Yield 0.22%

Bloomberg / Reuters Code BJF IN/BJFS.NS

BSE / NSE Code 532978 / BAJAJFINSV

Market Cap (INR BN / USD Mn)

Bajaj Finserv is a high Quality Finance stock with majorpotential upsides from its Insurance business. We believe thatthis Stock is a Blind Multibagger Bet for a long Term Investor.

Core Investment Thesis :

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

. . . .

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%



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Key Investment Highlights1.) Rational Capital Allocators :- Company has been Investing its capital prudently there by generating healthyreturn ratios which are the best in the industry. Apart from this the company has the flexibility to infuse apt capital inbusinesses where they are required .

2.) Best Industry Metrics :- The company has one of the best return ratios and profitability parameters in theindustry 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 arehighly under penetrated with huge potential providing a billion dollar opportunity. The company is well poised to tapthe opportunity.

4.) Steady and cheap Float :- There are very few Companies which have such steady and cheap float in the industrywith 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 inits business without equity dilution which is earnings accretive.

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.that cater to the wide range of financial needs with huge cross selling opportunities that exist due to its strongparentage. 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 steadyperformance 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 strongcorporate 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 Valuationswith 25% discount to its SOTP valuations. Also the company is quoting at 6.5X its Earnings which is very attractive forthe Quality of this stock which has a ROE of 30%+and hence warrants a clear upside.



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Industry Opportunity & Potential -



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Indian Economy Overview Indias GDP on purchasing powerparity stands at USD 4.7 trillion and

is the worlds third largest economyafter USA and China.

The Indian economy has grown at5.4% in 2012 adjusted for inflation.

The services sector share in GDPis the highest at 65% and is the keydriver of the growth in in the Indianeconomy.


The outlook for the economy inthe medium term is positive due toyoung population, low dependencyratio, healthy savings & investmentrate and increasing integration with

the global economy. The general health of theinsurance Industry is affected bythe performance of the Indianeconomy and markets.


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Indian Insurance Industry The Life Insurance Industry recorded apremium income of Rs.2.87cr in 2011-

12 as against Rs.2.91cr in 2010-11registering a negative growth of 1.57%.

The renewal premium of life insuranceaccounted for 60.31% in 2011-12 asagainst 56.66% in 2010-11.First yearpremium accounted for 39.69% in 2011-12 as against 43.34% in 2010-11.


ur ng - e grow n renewapremium was 4.77% as against 6.23% in2010-11.First year premium registered adecline of 9.85% as against a growth of 15.02% in 2010-11.

In the non-life insurance category theinsurers underwrote gross directpremium of Rs.52876cr in 2011-12 asagainst Rs.42,576cr registering a growthof 22.98%.


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Claims Ratio In the year 2012 the LifeInsurance companies settled8.22 lakh claims on individualpolicies amounting to Rs.8409crores.

The settlement ratio of LICmoved from 97.03% in 2011 to97.42% and the private playerssettlement ratio increased from86.04% in 2011 to 89.34% in

2012.Accordingly,the industriessettlement settlement ratio


increased from 95.58% in 2011to about 96.26% in 2012.

The net incurred claims of non-life insurers stood atRs.34998cr in 2012 as against

Rs.29514cr in 2011 registeringan increase of about 18.58%.

The insured claims ratio of thenon-life industry stood at88.85% in 2012 as against97.03% 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 afinancial servicescompany which is

engaged in Life andGeneral Insurance,Consumer Finance andother financial services.

The company is engagedin life and generalinsurance through their

joint ventures with Allianz

Life Insurance CompanyLtd(BALIC) and BajajAllianz General InsuranceLtd(BAGIC).


Bajaj Allianz Financial Distributors Ltd is a 50:50 joint venture company between the company and AllianzSE, 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 autoloans, 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 Life Insurance Segment(BALIC)ICs gross written p . BALICs GWP for FY2012 was `7,484cr. This was 22% lowerthan ` 9,610cr written duringFY2011. Renewal premiumsreduced by 22%, from 6,144crin FY2011 to 4,766cr in FY2012.

New business premiums forFY2012 were ` 2,718cr as againstRs. 3,466cr clocked in theprevious year. Within the private


sec or, s mar e s are onew business premiums was8.3% for FY2012, and it rankedfourth in this category amongprivate life insurers.

It ranked secondamong the private life insurersbased on the number of newpolicies issued which stood at1.05 million in FY2012 versus1.54 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 mixin 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 thetotal and non-par 27%. In contrast, the share of ULIPs has fallen from 84% in FY2010 to 58% in FY2011 andhas further reduced to 32% in FY2012.

Traditional individual premiums comprised 44% of overall new business premiums in FY2012, compared to30% 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 betterthan 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 General Insurance Market


Penetration of General Insurance as a percentage of GDP and per capita spend on General Insurance aresignificantly lower when compared to other emerging economies. This leaves scope for high growth of thesegment in the coming years.

Gross Written Premium(GWP) of the industry ,excluding the specialized insurers have grown fromRs.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 withrespect to third party risks of commercial vehicles and related losses to the third party pool which were thenredistributed back to all the general insurers in proportion to their market share.Since,2011 the industry wasaffected on account of increasing provisioning for motor pool losses. Howver,IRDA has recently modified themotor pool sharing which will drive future growth for the segment.


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Second largest private sector player in General Insurance

Bajaj Finserv is the secondlargest private sector player inthe general Insurance segmentafter ICICI Lombard.

Bajaj Finserv did a totalpremium of Rs.3286.62cr in FY12as against Rs.2869.96cr in FY11

registering a growth of about14.52%.

CompanyTotal Premium(Rs.Cr)

MarketShare(%)

MarketShare(%)

2010-11 2011-12 2010-11 2011-12

National 6220.72 7790.69 14.61 14.73New India 7097.14 8542.87 16.67 16.16Oriental 5457.33 6047.89 12.82 11.44United 6376.66 8179.29 14.98 15.47Public - Total 25151.85 30560.74 59.07 57.8Bajaj Allianz 2869.96 3286.62 6.74 6.22Bharti AXA 553.9 884 1.3 1.67Cholamandalam MS 967.99 1346.54 2.27 2.55Future Generali 600.16 919.76 1.41 1.74


Bajaj Finserv in 2011 had amarket share of 6.74% as against6.22% in FY12. The decline inmarket share is due to the

company policy of doing policieswhich are profitable and enhancetheir margins apart fromenabling the company to focus onbetter client servicing .

. . . .ICICI Lombard 4251.87 5150.14 9.99 9.74IFFCO Tokio 1783.18 1975.24 4.19 3.74L&T 17.24 143.4 0.04 0.27Raheja QBE 4.9 14.79 0.01 0.03Reliance 1655.43 1712.55 3.89 3.24

Royal Sundaram 1143.99 1479.79 2.69 2.8SBI General 43.02 250.14 0.1 0.47Shriram 780.89 1266.44 1.83 2.4TATA AIG 1173.09 1641.57 2.76 3.1Universal Sompo 299.1 404.58 0.7 0.77Private - Total 17424.63 22315.03 40.93 42.2Grand Total 42576.47 52875.77 100 100


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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 directto 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 channelmix contributing to over 70% of business.

BAGIC has one of the largest network of independent partner banks including national banks with strongregional presence and cooperative and rural banks.

For the Off shelf retail products like motor and health insurance BAGIC has an effective online sales channelthat 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 statutoryrequirement 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%.Thecompany has maintained capital and capital adequacy despite not raising money from deposits and hassourced most of its borrowings through banks which constitute 58% and the balance 42% was sourced fromother sources.


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High Capital Efficiency and good combined Ratio

BAGIC s net worth has beenconsistently growing over the years

and this is expected to continue inthe medium term. BAGICs networth has increased fromRs.672.5cr in FY09 to aboutRs.1255.3cr in FY13.The net worth inFY13 has risen by about 30.94%compared to last year.

BAGIC has maintained a good


combined ratio which is one of thebest in the industry. The combinedratio in FY13 was at 93.4% as against96.1% in FY12.

In 2012 IRDA has dismantledIndian third party insurance pool .Ithas prescribed the clean cut methodwhich is a well accepted principle of accepting long tail outstandingliabilities. This would de-risk thegeneral 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 yearold NBFC with ademonstrated track recordof profitability.

The company focuses onConsumer, SME andcommercial lines of businesses spread acrossnine product lines.

The company has aboutRs.19,366cr of assets undermanagement with net NPAof 0.19%.The NPA of 0.19% isthe lowest in the NBFCspace.


Bajaj Finance is the largest two wheeler lender in India focused on semi urban and rural markets. Thisconstitutes 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 Indiapresence through its presence in20 states with 75 branches which

cater to the lending requirementsof its customers through thelength and breadth of thecountry.

Bajaj Finance has traditionallymaintained a strong credit ratingowing to a healthy capitaladequacy ,strong parentage and


s ea y per ormance.

Bajaj Finance has an excellentcredit rating with the highestrating of CRISIL A1+ from CRISILand (ICRA) A1+ from ICRA for

BFLs short term debtprogramme. Bajaj Finance hasbeen able to receive reasonablecost of funds despite difficultconditions in the Indian andglobal economy on account of itsstrong credit rating.


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Vast potential for consumer Financing Bajaj Finance consumer financeportfolio consist of consumerdurable financing, personal loans,captive two wheelers and threewheeler financing for existingcustomers of Bajaj Auto, salariedloans and co-branded credit cards.

Bajaj Finance small business loansegment consist of mortgage loans,

loans against securities andunsecured loans.


Bajaj Finance commercial loansconsist of infrastructure projectloans, construction equipment andsecured vendor financing.

Bajaj Finance is in a sweet spotwith respect to its consumerfinancing as India is one of thecountries with the lowest consumerdebt to GDP ratio. India is likely tobenefit from rising consumer spendbacked by strong GDP growth.


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Attractive Valuations



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Financials



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Earnings Projection

Bajaj Finserv revenues areexpected to grow by 16.51% and

24.14% in FY14 & FY15 driven byincreased contributions fromInsurance and robust consumerfinancing business.

Bajaj Finserv has beenhistorically operating at high

operating profit margins with22% operating profit margin

Particulars(Rs.Cr) FY11 FY12 FY13 FY14E FY15E

Net Sales 2415.27 3874.65 5072.43 5909.8 7336.29

Total Expenditure 916.45 1664.44 1145.93 1300.16 1613.98

Operating Profit 1498.82 2210.21 3926.50 4609.64 5722.31

OPM(%) 37.94 42.96 22.59 22.00 22.00

Interest & Financial charges 0 301.14 744.1 1203.58 1418.35

Depreciation 22.02 18.52 14.12 17.27 20.09recorded in FY13 and this isexpected to remain at thoselevels in 2014 and 2015.

Bajaj Finservs PAT in 2013 isRs.2214.17Cr and is expected toreport PAT of Rs.2539.35Cr andRs.3151.72Cr in FY14 and FY15registering a growth of 14.69%and 24.11% respectively drivenby strong top line growth.


PBT 1648.67 2226.22 2708.11 3174.20 3939.65

Tax 177.7 336.47 493.94 634.84 787.93

Tax Rate 10.78 15.11 18.24 20.00 20.00

PAT 1470.97 1889.75 2214.17 2539.35 3151.72

Minority Interest after PAT 377.02 551.98 640.53 736.41 914.00

Adjusted PAT 1093.95 1337.77 1573.64 1802.94 2237.72

EPS 77.06 92.46 98.90 113.31 140.63


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Concerns & Reasoning1.) 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 toparliament 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 has50% stake while the SOTP values are at Rs.1046 per share if current stake is maintained there by providinghuge 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 withreinsurance 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


. ,BALIC are exposed to risks associated with entering into such reinsurance arrangements, which includeinter alia, risks associated with inadequate reinsurance, the inability to obtain reinsurance on favorableterms, in a timely manner or at all, and, risks associated with any default and/or breach in connection withsuch arrangements and risks associated with legal enforcement of foreign reinsurers obligations under thecontract 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 thepremium for the third party motor insurance products could adversely affect the operations, financialcondition and profitability of BAGIC.


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Conclusion



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Price Chart

Bajaj Finserv has been correcting over the last 6 monthsand 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 andthere was good response to the issue.


Share Holding %Mar Dec Sep Jun

2013 2012 2012 2012

Promoters 58.89 58.89 58.88 58.88

FII 11.03 10.63 10.31 9.99

DII 4.34 4.60 4.71 5.12

Others 25.74 25.88 26.10 26.01


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THANK YOU


Documents

1. May 2013 Multibagger Stock Bajaj Finserv Ltd