INSUBCONTINENT EXCLUSIVE:
Emkay Global Financial Services has a buy call on Bajaj Finance with a target price of Rs 3,618.
The current market price of Bajaj Finance
is Rs 3,035.50.
Time period given by the brokerage is one year when Bajaj Finance price can reach the defined target.
Investment rationale
increasing its asset base
Long runway of AUM growth: Despite intensifying competition and a high base, we believe that now is the time when cross sell kicks in for
This growth should come at a lower credit cost, thus expanding return metrics
NIM compression unavoidable; operating leverage holds the key: In our view, BAF could see some margin compressions over the next two years
(from nearly 9.8 per cent in FY19E to nearly 8.9 per cent in FY21E), dominantly on account of the expansion of low-yielding housing book
In addition, NIM compression is not expected to reduce PBT margins as operational leverage is expected to kick in
Outlook and valuations: Though BAF currently trades at rich valuations (P/B 7.1x FY20E and P/B 5.7x FY21E), we understand that its
aggressive growth would require a capital infusion over the next 12-24 months, driving valuations down
Accordingly, we maintain Buy rating on the stock with a revised target price of Rs 3,618 (P/B 6.8x FY21E and P/E 32.9x FY21E), without
factoring in the equity infusion
Maintain our OW stance in our EAP - NBFCs
Key risks include substantial build-up of consumer leverage and a prolonged rural distress scenario.