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Peerless Master Picks- October, 2019 Edition
October 4, 2019
3
October 4, 2019
ICICI Prudential Life Insurance Co. Ltd.
Rating – Accumulate | Potential Target-Rs 520 | Period- 12 months
We like IPRU’s re-engineered business model which focused on a more diversified product mix and an increasing
protection mix.
Larsen & Toubro Ltd.
Rating – Accumulate | Potential Target-Rs 1600 | Period- 12 months
L&T has consistently been delivering in terms of bagging orders, strong order execution, though with some temporary
concerns on working capital management owing to tight liquidity scenario. We believe L&T, being a strong
infrastructure play, is expected to benefit over the next few years, as the incumbent government envisages Rs. 100
lakh crore investments in infrastructure till 2024
HDFC Bank Ltd.
Rating – Accumulate | Potential Target-Rs 1350 | Period- 12 months
HDFC Bank is the largest private bank in India with the assets base of Rs 12,65,200 crore as of June 30. The retail and
wholesale lending constitute 54 percent and 46 percent of the total loan book of Rs 8,29,700 crore respectively. The
bank's distribution network was at 5,130 banking outlets. The liquidity pressure under NBFCs provides an opportunity to
gain market share for retail assets in the near to mid term. The return on equity is likely to improve by more than 60 bps
and the return on assets by 7 bps to 17.2 percent and 1.9 percent respectively in FY21 driven by income CAGR of 22
percent over the next two years.
Bajaj Finance Ltd.
Rating – Accumulate | Potential Target-Rs 4500 | Period- 12 months With the upcoming festive season and several planned online and offline mega sales events ahead, Bajaj Finance as the
best bet to play the India consumption story. We maintained that both AUM and EPS CAGRs of ~36% over FY19-21E
(after adjusting for tax cuts), backed by a solid cross-selling franchise and a high-quality sourcing mechanism. The
company's board has approved a QIP worth Rs 8,500 crore, which provides comfort over its valuations.
Key downside risks include elevated consumer leverage and prolonged rural distress.
Stock Picks in October, 2019
4
October 4, 2019
COMPANY SECTOR LTP (Rs) RATING
MARKET
CAP
(Rs BN)
POTENTIAL
TARGET
(Rs)
POTENTIAL
UPSIDE
ICICI Pru Life
Insurance Co. Ltd. Insurance-Life 458 Accumulate 670 520 14%
Larsen & Tourbo
Ltd. Infrastructure 1435 Accumulate 2049 1600 11%
HDFC Bank Ltd. Private Banking 1199 Accumulate 6685 1350 13%
Bajaj Finance Ltd. Finance 3958 Accumulate 2292 4500 14%
(Initiate price based on regular trading price as on October 4, 2019 in NSE, 1330 hrs)
(Note: All price target for next 12 months )
List of Stock Picks in October, 2019
5
SECTOR: INSURANCE-LIFE
CMP: Rs.458 Target Price: Rs.520
Period: 12 months
ICICI Prudential Life Insurance Co. Ltd Accumulate
Sector: Insurance-Life |NSE Code: ICICIPRU
Re engineered business model adds to more diversified product mix
adds scalability and edge
Since Q3FY19, the company has been trying to diversify its customer base and
has taken several initiatives in Business Growth and Product Mix. As a result of
this, the company has also witnessed a change in its product mix wherein the
share of non-linked savings has increased.
Retail business continues to dominate the product mix, contributing more than
90% of NB-APE.
The company has seen growth across product categories. Annuity and pro-
tection have grown well. Though ULIP continues to be the mainstay, its share
in the overall product mix has reduced
IPLI has a large addressable bancassurance network consisting of as many as
8,209 branches. Of this, 4,867 branches belong to parent ICICI Bank, which
exclusively sources for IPLI and does so with great cross sell culture and high
efficiency. We consider the bancassurance network of IPLI a key sustainable
competitive advantage that will serve to drive its growth for a considerable
period of time.
IPLI has the second best expense ratio among 9 key life insurer peers
IPLI has the third best persistency outcomes across time cohorts among 9 key
life insurer peers
Strong performance; VNB margins a positive surprise
1QFY20 PAT at Rs 2.8b came in marginally higher than our estimate of
INR2.7b. Gross premium was up 14.7% YoY, mainly led by robust growth in
single premiums. Group premiums grew 105% YoY to Rs 8.2b.
Total APE(Annual Premium Equivalent) grew 5.3% YoY to Rs 14.7b led by robust 88% YoY growth in Protection APE to
INR2.1b, even as Savings APE declined 2.1% YoY to Rs 12.5b. Share of Protection in total APE improved further to 14.6%
(8.2% in 1QFY19) while share of ULIPs in total APE
declined around 860bp YoY to 71.2%.
Protection mix improved to highest ever 14.6% leading to sharp increase in VNB.
VNB(Value of New Business) margins increased ~350bp YoY to 21% due to improvement in product mix, which resulted in 26.6%
YoY growth in the VNB to Rs 3.1b. Growth in the VNB was mainly led by Retail and the Group Protection business
(Management expects to double the VNB over the next 3-4 years). Thirteenth month persistency declined 140bp YoY to
84.4% (330bp YoY improvement in 61st month persistency). According to the sensitivity analysis disclosures, a 100bp change
in the interest rate could impact the VNB/EV by ~4.4%/~2.0%.
Company Data
No of Shares (Mn) 1435
Market Cap (Rs Bn) 670
52 week high (Rs) 471
52 week low (Rs) 277
6m avg. volume (NSE&BSE) 2.41 mn
Beta 0.99
Face value ( RS ) 10
Shareholding Pattern
Holder's Name
% Share
Holding as
on Jun2019
% Share
Holding as
on
Mar2019 Change %
Promoter 74.98 74.98 0
FIIs 11.48 10.08 1.40
Mutual Funds 5.67 5.92 -0.25
Insurance
Companies 0.55 0.53 0.02
Other DIIs 0.11 0.09 0.02
Non Institutional
Investors 7.21 8.4 -1.19
Source: BSE
6
Renewal premium growth was low at 7.9% YoY as large pool of policies crossed 5 year completion. While mass lapse ratio
has not increased surrender payouts increased and renewal premiums dropped.
The company reiterated its aspiration to double the FY19 VNB over the next 3-4 years on back of its four P strategy. VNB
growth in Q1FY20 was mainly attributable to improving product mix.
The company stated it is focusing on improving persistency further and is taking necessary measures. As per the company,
persistency experience continues to be better than assumptions factored into EV calculation.
The company stated that its Q1FY20 margin is based on assumptions including expense forecast for the full year. In turn,
expense forecast for the full year is the same as that experienced in FY19.
Margin expansion in FY19 over FY18, due to product mix change, was held back due to negative impact of worsening
expenses.
There is no such drag due to deterioration of expenses in Q1FY20.
Other highlights:
• The share of Banca in the distribution mix declined 320bp to 52.4%,
• Total AUM grew 15% YoY to INR1.6t with debt equity mix of 52%:48%,
• Solvency ratio stood at 217% (235% as at 1QFY19).
ULIP segment sales declined as equity market conditions remain tepid; additionally management is more focused on
protection.
Protection mix improved to highest ever 14.6% leading to sharp increase in VNB.
Reduction in cost ratios of savings business also contributed to expansion of VNB margins.
Business Metrics:
1QFY19 4QFY19 1QFY20 YOY (%) QoQ (%)
New Business Premium (Rs bn) 17.7 40.9 22.9 29.2 -44.1
Product mix on APE basis (Rs bn)
Individual Savings 12.6 21.4 12.3 -2.5 -42.5
PAR 1.4 2.3 1.4 4.4 -38
Non-PAR 0.1 0.3 0.4 238.5 57.1
ULIP 11.1 18.9 10.5 -6.1 -44.5
Group Savings 0.2 0.5 0.2 26.3 -55.6
Protection 1.1 2.6 2.1 87.7 -18
Individual Protection 0.7 2 1.4 91.7 -32.4
Group Protection 0.4 0.6 0.8 81 33.3
Total 14 24.6 14.7 5.3 -40.2
Product mix - APE Basis (%)
Individual Savings 90.5 87.2 83.8 -670bps -340bps
PAR 9.7 9.3 9.7 -10bps 30bps
Non-PAR 0.9 1.1 3 210bps 190bps
ULIP 79.8 76.7 71.2 -860bps -560bps
Group Savings 1.4 2.2 1.6 30bps -60bps
Protection 8.2 10.6 14.6 640bps 390bps
Individual Protection 5.2 8.3 9.4 420bps 110bps
Group Protection 3 2.3 5.2 220bps 290bps
Total 100 100 100
7
Risks:
PLI needs to do better on the Surrender Ratio front but has managed to make significant improvement
Persistency ratio captures all factors due to which a policy may not be ‘premium-paying’ at a given point in time including
surrender, lapse and other factors. Of these factors, surrender is a key consideration since, after surrender, the relationship
between the policyholder and insurer ends as far as the specific contract is concerned. A lapsed policy, on the other hand,
can always come back in force if a policyholder re-starts premium payment. Hence, it is important to look at the surrender
ratio metric separately, as it acutely focuses on the incidence of surrender.
The surrender ratio for IPLI at 9.8% for FY18 is in the bottom 3 among 9 key Indian life insurers. However, IPLI has turned
things around materially in 1HFY19 with its Surrender Ratio dropping to 6.9%, though it needs to do more on this front.
Outlook & Valuation:
We like IPRU’s re-engineered business model which focused on a more diversified product mix and an increasing protection
mix. Sharp increase in VNB margin (to 21%) drive up. We rate ICICIPRU to ‘ACCUMULATE’ with target price of Rs 520 in time
frame of 12 months.
8
Larsen & Tourbo Ltd. Accumulate Sector: Infrastructure |NSE Code: LT
Profitability intact with strong order book
L&T posted a robust 9.7% YoY revenue growth in 1QFY20 (at Rs 29635
crore), largely driven by Infra, Hydrocarbon and the Services business.
EBIDTA margin improved 99bps YoY to 9.74%, led by a favorable
segmental mix.
L&T registered strong order inflows of Rs 38700 crore, up 11% YoY at the
group level, predominantly led by domestic orders that grew 15.5% to Rs
29700 crore. Key drivers for order inflows were infrastructure Rs 17492
crore) and hydrocarbon segments Rs 3444 crore) and power Rs 6700
crore).
While orders from the central and state governments were impacted
during general elections, strong PSU and private sector orders enabled
growth for the quarter. The expected strong bid pipeline of Rs 8.5 lakh
crore is expected to ensure 10-12% order inflow growth in FY20E.
Reasonable performance across business verticals
The management has maintained its guidance of 12-15% revenue growth
in FY20E. During the quarter, net working capital as percentage of sales
deteriorated 200 bps to 23%, YoY, due to sluggishness of payments from
state, central governments and vendor support on account of liquidity
crunch in the system.
Ramp up in Heavy Engineering is on the back a robust opening order
backlog of Rs 47000 crore.
In Defence, 2 year old tracked artillery gun order continues to drive
revenue and margins. Large order allocation in this segment accrues to
public sector amidst slow policy changes
IT and TS segment continues to be plagued by increasing protectionist
policies and mandated localization (in the US) leading to higher staffing
costs
Infrastructure margins continued to be weak and Larsen attributed the
same to seasonal volatility and the stage of completion on individual
projects
Key Financials Indicators: \
Indicator Jun '19 Jun '18 YoY(%)
Net Sales/Income from Operations 29,635.95 27,004.77 9.74%
Extra Ordinary Items 112.08 85.38 31.27%
Net Profit/(Loss) For the Period 1,878.97 1,213.07 54.89%
Equity Share Capital 280.62 280.35 0.10%
Diluted EPS 10.5 8.65 21.39%
(Rs Crore)
Shareholding Pattern
Holder's Name
% Share Holding as on
Jun2019
% Share Holding as on
Mar2019
Change %
Promoter
0
0
0
FIIs
20.03
19
1.03
Mutual Funds
17.43
16.59
0.84
Insurance Companies
19.52
21.33
-1.81
Other DIIs
0.93
0.91
0.02
Non Institutional Investors
42.09
42.17
-0.08
SECTOR: INFRASTRUCTURE
CMP: Rs.1435
Target Price: Rs.1600
Period: 12 months
Key Stock Data
No of Shares (mn) 1403
Market Cap ( Rs bn) 2049
52 week high (Rs) 1607
52 week low (Rs) 1182.50
6m avg Volume (NSE &BSE) 3 mn
Beta 1.35
Face value ( RS ) 2
9
Key Ratio: Indicators Mar-19 Mar-18 Mar-17
EPS(Consolidated) 63.4 52.49 43.05
Net Profit Margin 7.26 7.05 6.29
P/E 39 33.4 46.6
P/BV(X) 3.12 3.31 2.94
RoE% 14.31 13.27 12.06
ROA% 3.19 3.00 2.84
Segmental Quarterly Performance: Consolidated
Segment
Q1 FY20 Q1 FY19
Net
Revenue
EBITDA EBITDA
%
Net
Revenue
EBITDA EBITDA
%
Ex-Services business:
Infrastructure Segment 13,865 881 6.40% 12,135 830 6.80%
Power Segment 561 18 3.30% 1,080 44 4.10%
Hydrocarbon Segment 3,763 285 7.60% 3,511 247 7.00%
Heavy Engineering Segment 874 171 19.50% 333 120 36.10%
Defence & Aerospace 965 160 16.50% 727 81 11.10%
E&A Segment 1,359 230 16.90% 1,279 169 13.30%
Other Segment 1,148 277 24.10% 1,342 356 26.50%
Total (ex-services) 22,535 2,021 9.00% 20,407 1,848 9.10%
Services Business:
IT & TS Segment 3,819 888 23.20% 3,324 824 24.80%
Financial Services Segment 3,462 762 22.00% 3,058 740 24.20%
Developmental Projects Segment 1,178 118 10.00% 1,494 454 30.40%
Total (Services) 8,460 1,768 20.90% 7,876 2,019 25.60%
Total 30,994 3,788 12.20% 28,283 3,867 13.70%
Less: Segment Depreciation 492 456
Less: One-time Realty Provisions - -754
Segment PBIT 3,296 2,657
(Rs in crores)
10
Strong order book continues to support growth going forward:
Order Inflow momentum sustained through PSU & Private Sector orders. Award delays slow down International Order
Inflow. Robust Order Book provides hedge against cyclicality
Broad breakup of prospect pipeline (Rs 8.4tn): Infra – Rs 5.4tn, Power T&D – Rs 1tn, Power Generation – Rs 0.5tn,
Hydrocarbon – Rs 1tn and Others – Rs 0.5tn
In 1QFY20, private orders (45% share) and PSUs (45% share) have contributed significantly to inflows while both State
and Central Govt. inflows were largely muted
Outlook:
The company continues to post strong growth on the back of its strong business model with robust order book, diverse
skill sets, strong execution capabilities and increased focus on improving return ratios by exiting non-core assets. L&T
continued its strong order inflow momentum with 11% YoY growth at Rs387700 crore in 1QFY20 (FY19 +16% YoY), led
by Infrastructure and Power sector. We estimate a robust 11% top line growth for FY20/21E which will be driven by
Infra, hydrocarbon and the services segments
We maintain our ‘ACCUMULATE’ recommendation on L&T with current base business at 20.3X FY 20EPS with price
target of Rs 1600 in next12 months.
11
HDFC Bank
Accumulate Sector: Private Banking |NSE Code: HDFCBANK
Higher scale of Operation and Leverage Technology to bring down
costs for both the bank and his customers.
HDFC Bank continues to achieve more scale in operations and leverage
technology as it will cut down its cost-to-income ratio by 500 basis points
in five years. This would be achieved in focusing more on internet mobile
and digital platform based banking system which will help in reducing
costs significantly.
For the quarter ended Jun 30, HDFC Bank's cost-to-income ratio was am-
ong the lowest in industry at 39.4%. Scale will help the bank to not just cut
costs, but also allow to invest more, and go into semi-urban and rural
areas which constitutes 60% of the Indian population. The scale of operat-
-ions is genuinely bringing down costs for both the bank and his customers.
To bring down costs, the bank has been tying up with business correspond-
dents, cutting branch size, using more digital touch points and focusing on
data mining, without any strain on credit quality
The bank has been investing in technological infrastructure and instead
going slow on physical network addition. This strategy is stood well in terms
of better cost management (down since the past few quarters). We believe
digital banking is likely to continue providing operating leverage benefits
with reduced human cost and more process-driven business.
We opine HDFC Bank will continue to see compounding benefits as its
digitalisation, semi-urban and rural market penetration strategy witness
further pick up and gain traction. Management has been exploring
innovative solutions such as mobile POS App, business and technological
tie-ups with global search and social networking giants to offer banking
payment and other solutions, among others. These initiatives may take
time to meaningfully manifest, we believeour crucial and important growth
drivers for the bank.
Overall, the demand for credit was higher than supply, and that HDFC Bank
continued to see a rise in demand for loans, albeit led by working capital
and consumer lending at the moment.
Shareholding Pattern
Holder's Name
% Share Holding as on Jun2019
% Share Holding as on Mar2019
Change %
Promoter 26.25 26.5 -0.25
FIIs 38.64 38.71 -0.07
Mutual Funds
13.76
13.32
0.44
Insurance Companies
2.74
2.77
-0.03
Other DIIs
0.56
0.51
0.05
Non Institutional Investors
18.05
18.19
-0.14
SECTOR: Private Banking
CMP: Rs.1199
Target Price: Rs.1350
Period: 12 months
Key Stock Data
No of Shares (mn) 5420
Market Cap ( Rs bn) 6685
52 week high (Rs) 1282
52 week low (Rs) 942
6m avg Volume (NSE &BSE) 7.5 mn
Beta 1.19
Face value ( RS ) 1
12
Focus on strong credit growth to drive its profitability
HDFC Bank is starting to see growth in the market. If you see our portfolio, it spread along the same lines the government's
GDP between consumer and wholesale. We have gone in a big way into semi-urban and rural India. We are lending to lot of
people who did not get credit such as small shopkeepers and small and medium enterprises. Despite everything, working
capital demand is there. Private investment (will take off), the moment we see some growth coming.
Let's not colour everything with automobile sector. Capacity utilisation is around 77%, people generally start investing
around 80%. That will take some time and be a major fillip, till then, you will see gradual improvement in GDP.
So, as of now credit growth is being driven by working capital, semi-urban and rural India, consumer and small businesses.
Strong loan growth to remain key strength
We expect the loan growth trajectory to range between 18-20% for HDFC Bank. HDFC Bank has been gaining market share
consistently, which appears to sustain as competition from other peers, especially PSU banks and NBFCs, has weakened
significantly.
HDFC Bank has been gaining market share consistently, which appears to sustain as competition from other peers,
especially PSU banks and NBFCs, has weakened significantly. During Q1FY2020, HDFC Bank witnessed slower (by a tad) loan
book traction, as advances grew by 17.1% y-o-y on account of a 19.6% y-o-y increase in its domestic corporate book and
16.5% growth in its retail portfolio. While retail lending has comparatively grown at a slower rate during the quarter, we
believe the bank is calibrating its incremental growth in the retail segment, so as to optimise its credit cost margins mix
� High Quality Deposit Franchise with Low Funding Cost provides health margins
� Growing economy / banking industry, Gaining market share
� Nationwide urban & rural branch network and multiple channels
� Healthy balance sheet and revenue growth
� Leading player across multiple products / customer segments
� Leveraging analytics, AI/ML digital platforms
� Strong risk management, focus on asset quality
� Disciplined margin and capital management with a focus on RoA/RoE
� Proven ability to generate Shareholder Value
Strong Financial performance continues
In Q1FY20, loans and advances grew 17.1% YoY, with domestic wholesale loans registering 19.6% YoY growth.
The bank’s deposit base increased 18.5% YoY, aided by term deposit growth of 22.5% YoY and CASA growth of 12.8% YoY.
Net interest income recorded strong growth of 22.9% YoY helped by asset growth and improved Net Interest Margin
(+10bps YoY to 4.3%).
GNPA/NNPA ratio stood at 1.40%/0.43% in Q1FY20 versus 1.36%/0.39% in Q4FY19.
Gross advances increased by 17.1% to Rs 8,378 Bn
Deposits up by 18.5% to Rs 9,546 Bn
Core Net interest margin at 4.3%
Capital adequacy ratio (CAR)* - Total 16.9% of which Tier I at 15.6%
Business Metrics: Standalone quarterly performance
Rs In million Siource: Company website
Valuation Ratios:
Outlook & Valuation:
HDFC Bank currently trades at 3.3x its FY2021E BVPS, which we believe is attractive for a bank with its strengths and
consistency. The cut in corporate tax rate would likely benefit HDFC Bank in terms of increased net profit.
We rate HDFC BANK to ‘ACCUMULATE’ rating on the stock with a target price of Rs. 1350 in next 12 months.
13
Mar 19 18-Mar % Change Basic EPS (Rs.) 78.65 67.76 16.07%
Book Value [Incl. Reval Reserve]/Share (Rs.)
547.89 409.6 33.76%
Dividend/Share (Rs.) 15 13 15.38%
Operating Revenue / Share (Rs.) 363.43 309.2 17.54%
Net Profit/Share (Rs.) 77.4 67.38 14.87%
Key Performance Ratios
Net Profit Margin (%) 21.29 21.79 -2.29%
Operating Profit Margin (%) 3.48 2.82 23.40%
Return on Assets (%) 1.69 1.64 3.05%
Return on Equity / Networth (%) 14.12 16.45 -14.16%
Net Interest Margin (X) 3.87 3.76 2.93%
Valuation Ratios
Enterprise Value (Rs. Cr) 1624316.4 1298053.5 25.13%
EV Per Net Sales (X) 16.41 16.18 1.42%
Price To Book Value (X) 4.23 4.62 -8.44%
Price To Sales (X) 6.37 6.12 4.08%
Retention Ratios (%) 80.77 100 -19.23%
Earnings Yield (X) 0.03 0.04 -25.00%
Bajaj Finance Ltd. Accumulate Sector: Finance |NSE Code: BAJFINANCE
Market leader in consumer lending business with diversified retail play:
With 40% business contribution from consumer lending, BAF is well placed
to leverage upon the rapidly expanding consumption market in India.
Recording 43% business CAGR over FY10-19 led by core consumer durable
(CD) & lifestyle product financing, it maintains its leadership position across
consumer electronics, white goods and digital products and personal loans.
(Refer Exhibit 76) Over past 3 years, BAF has reported 2x increase in consumer
lending business led by 5x increase in digital product finance, 4x increase
in home loan portfolio and 3x increase in personal loan cross sell. BAF has
developed a formidable technology-led diversified lending model spread
across more than 50 products encompassing consumer, SME, commercial
and rural segments.
Mortgage Spin off to accelerate growth:
It has spin off mortgage business into a separate step down entity (Bajaj
Home Finance Ltd) which will enable lean opex business structure, access to
low cost funding (NHB, ECB) and cross sell opportunity to BAF’s credit filtered
customer base (27mn).
SME Lending – Huge prospective customer base:
With 37% of the overall AUM share, SME lending forms second biggest
portfolio for BAF that has grown at 40% CAGR over the past decade.
Commercial lending expansion:
Contributing 15% to overall AUMs, commercial has grown at 53% CAGR over
FY14-19. However, competitive intensities and challenging funding
environment in the market called for selective expansion with adequate
provisioning for key account.
Rural lending – key business driver:
Banking on the underpenetrated rural consumption market, BAF caters to the needs of rural consumer and MSME
customers with a unique hub and spoke business model pan India. With diversified offerings across 10 rural products
namely: durable loans, digital lifestyle, personal loans, loans to salaried and gold loans in consumer category, the rural
MSME business offers unsecured and secured loans to self-employed clients in rural markets. Business loans form part of
unsecured loans and professional loans (Doctors, Engineers and CA’s) loans are offered as secured LAP.
14
Shareholding Pattern
Holder's
Name
% Share Holding as on
Jun2019
% Share Holding as on
Mar2019
Change
%
Promoter 58.26 55.17 3.09
FIIs 21.28 20.67 0.61
Mutual Funds
6.99
7.17
-0.18
Insurance Companies
0.71
0.79
-0.06
Other DIIs 0.56 0.54 0.02
Non Institutional Investors
12.2
15.66
-3.46
SECTOR: FINANCE
CMP: Rs.3958
Target Price: Rs.4500
Period: 12 months
Key Stock Data
No of Shares (mn) 580
Market Cap ( Rs bn) 2292
52 week high (Rs) 4111
52 week low (Rs) 1912
6m avg Volume (NSE &BSE) 2.18 mn
Beta 1.36
Face value ( RS ) 2
Retail credit to expand:
10.3% CAGR in consumer durable credit market, changing consumer behaviour, evolving spending patterns and improved
credit access has enabled huge growth in retail credit market over last few years. Retail lending grew 4x over past decade
and poised for 1.5x expansion over next 2 years
Business Metrics: Financial performance Financials snapshot Q1 FY20 Q1 FY19 Y-o-Y FY19 FY18 Y-o-Y
Assets under management 1,28,898 91,287 41% 1,15,888 82,422 41%
Assets under finance 1,25,113 87,877 42% 1,12,513 79,103 42%
Interest income 5,101 3,510 45% 16,349 11,586 41%
Fee and other income 707 428 65% 2153 1,171 84%
Total Income 5808 3,938 47% 18502 12,757 45%
Interest expenses 2,113 1,359 55% 6,624 4,614 44%
Net Interest Income 3695 2,579 43% 11878 8,143 46%
Operating Expenses 1293 955 35% 4198 3,270 28%
Loan losses and provisions (ECL stage 1 & 2)
130 93 40% 260 129 102%
Loan losses and provisions (ECL stage 3 & write off)
421 234 80% 1241 901 38%
Profit before tax 1851 1,297 43% 6179 3,843 61%
Profit after tax 1,195 836 43% 3,995 2,496 60%
Ratios
Total Opex to Net Interest Income
35.00% 37.00% 35.30% 40.20%
Loan loss to AUM* 0.43% 0.36% 1.30% 1.25%
Earning per share- Basic (`) * 20.7 15 69.3 44
Return on Average Assets* 1.0% 1.0% 4.2% 3.7%
Return on Average Equity * 5.9% 5.1% 22.5% 20.1%
Source: Company website
Results Highlights:
Robust AUM portfolio growth BFL reported strong growth in asset under management during Q1FY20 (+41.2% YoY to Rs.
128,898 cr), as mentioned in the provisional release on 9th July, with Consumer business segment being the highest
contributor at 38.4% of total AUM and mortgage lending at 28.3%. Strong operating performance but provisions up
significantly YoY Net Interest income grew 43.1% YoY to Rs. 3,688 cr, while operating expenses were only 35.4% higher YoY
as cost-to-income ratio improved by 200bps YoY to 35.0% in Q1FY20. Pre-provision profit increased strongly by 47.9% YoY
to Rs. 2,402cr, but was partly offset by higher provisions (up 68.6% YoY to Rs. 551cr), resulting in net income growth of
43.0% YoY to Rs. 1,195 cr in Q1FY20. While the significant growth in provisions can be partly attributed to tough comp in
Q1FY19 (7% YoY growth), provisions also increased 34.6% QoQ.
15
Key Risks
Asset quality deteriorated slightly The company’s GNPA ratio deteriorated marginally in Q1FY20 (+6bps QoQ) to 1.60% as
GNPA increased to Rs. 2,094cr on higher slippages, although NNPA ratio remained stable at 0.64% (+1bps QoQ). Capital
adequacy ratio decreased to 19.5% in Q1FY20 as compared to 20.7% in Q4FY19, while liquidity buffer surplus was at Rs.
6,343 cr.
Outlook & Valuation: Given formidable franchise in consumer financing, strong growth momentum in rural finance and expected uptick in
mortgage business post spin off in step down subsidiary. BAF has emerged strong in the recent NBFC rout. Robust growth
across segments, increasing customer base, expanding presence across rural and urban India are expected to support the
company’s overall margins and growth.
We recommend ‘ACCUMULATE’ with our target price to Rs 4500 in next 12 months, based on 46X PE Jun21E (expected
growth of 35%) on account of robust earnings growth in EPS which is likely to continue for next few years.
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Disclaimer
RATING PARAMETER
BUY We expect the stock to deliver more than 15% return over the next 12months
ACCUMULATE We expect the stock to deliver 6% - 15% return over the next 12months
REDUCE We expect the stock to deliver 0% - 5% return over the next 12months
SELL We expect the stock to deliver negative return over the next 12months
NOTE: Target prices are for a period of 12-month perspective unless specified. Returns stated in the rating parameter are for our internal benchmark.
TECHNICAL CALL RATING PARAMETER
BUY: A condition that indicates a good time to buy a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using.
SELL: A condition that indicates a good time to sell a stock. The exact circumstances of the signal will be determined by the indicator that an analyst is using.
A recommendation to buy or sell stock when it trades at specified price. They serve to either protect your profits or limit your losses.
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17
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