Hold Bajaj Finserv; target of Rs 5337: Edelweiss

Edelweiss' research report on Bajaj Finserv

Bajaj Finserv’s Q2FY18 was marked by robust performance in general insurance (BAGIC) and sustained momentum in lending business (BFL). The latter clocked yet another strong performance—AUM jumped ~38% and PAT grew >36% YoY (marginally below estimate on higher opex as it continued to invest for growth). It was a strong quarter for BAGIC as well—combined ratio at 88.8% (lowest among peers) and PAT up > 20% QoQ. Life insurance’s (BALIC) operating metrics continued to improve—better individual growth, persistency—though sustainability is key. While we are enthused by business performance, 1) BFL’s steep valuations (>5.5x FY19E P/BV post equity raising) pricing in near-term growth potential; 2) general insurance’s 25x FY19E EPS valuation and; 3) life insurance’s embedded value at 1.9x, indicate limited upside. Maintain ‘HOLD’.

Outlook

We are enthused by improvement in operating variables across businesses. BFL is going strong with 35% plus asset and earnings surge. There has also been significant value discovery in life and general insurance businesses over past couple of quarters. Incorporating this in our target multiples for BALIC & BAGIC and also factoring in strong performance & capital raising at BFL, we revise our SOTP-based TP to INR5,337 (INR4,892 earlier). However, recent stock outperformance limits upside; hence, we maintain ‘HOLD/SP’.

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