september 11, 2015 : buy bajaj finserv (bafins) target...

September 11, 2015

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Unparalleled niche - Consumer Finance & General insurance Bajaj Finserv, a financial conglomerate under the flagship Bajaj brand and leadership of Sanjeev Bajaj, has witnessed a sharp surge in earnings in all three key business segments viz. finance, life insurance (BALIC) and general insurance (BAGIC). Backed by the strong brand, in general insurance it is the most profitable and efficient player among competitors. Bajaj Finance, a niche consumer durable lender, reported 4x increase in loan book in FY11-15 while earnings surged at 38% CAGR. BALIC enjoys a market share of ~6.8% in new business premium. It is consolidating after making peak profit of | 1311 crore in FY12. Going ahead, we expect consolidated Revenue, PAT to grow at CAGR of 13%, 22% to | 22977 crore and | 2532 crore, respectively, in FY15-17E. We are initiating coverage on Bajaj Finserv with a BUY recommendation. Niche in general insurance; superior return ratios compared to peers A strong business model generating RoE in excess of 24%, reporting underwriting profit on <100% combined ratio and extensive retail focus enable market share of ~6% in gross written premium (GWP). Prudent underwriting with 70% of net earned premium (NEP at | 3832 crore in FY15) in retail through motor and health insurance remains a key rationale for sustained profit and net worth growth. We expect NEP, PAT to grow at 15.1%, 10.3% CAGR to | 5073 crore, | 684 crore, respectively. Bajaj Finance profit surges, gaining mindful share in consolidated P/L A distinguished business model in consumer durables portfolio boosted its loan book (up 35% YoY to | 32410 crore in FY15) while asset quality sustained despite a weak economic environment. Margins sustained at ~10% due to higher IRR in products. PAT surged at 38% CAGR to | 897 crore in FY11-15 with bulging contribution of 42% from 25% earlier, to consolidated PAT. Expect PAT to moderate at 28% CAGR to | 1467 crore. Life insurance – huge potential, need right strategy to take off Bajaj Allianz Life Insurance recorded its first profit in FY10 of | 542 crore and earned higher PAT of | 876 crore in FY15. Post regulatory overhang on Ulip, etc. fading, business potential is huge. FY15-17E NBP to grow at 14% CAGR to | 3088 crore with 28% CAGR in PAT to | 1125 crore. Expected to exhibit growth coupled with stability; initiate with BUY Based on SoTP valuation, we ascribe a target price of | 2102 per share for Bajaj Finserv, which implies a multiple of 13x on FY17E consolidated earnings. The stock is available at reasonable P/E valuation of 11x FY17E earnings even post conservative forward estimates on life, general insurance while dividend from them can be upside risk. We initiate coverage with BUY rating and upside of 18% at the CMP of | 2102.

Exhibit 1: Valuation Metrics – Bajaj Finserv (Year-end March) FY14 FY15 FY16E FY17ERevenue (| crore) 15,554.0 18,030.9 20,279.5 22,977.3 PBT (| crore) 2,905.0 3,246.2 3,875.3 4,624.2 Net Profit (| crore) 1,547.7 1,689.8 2,038.3 2,532.2 EPS (|) 97.3 106.2 128.1 159.1 Growth (%) (1.6) 9.2 20.6 24.2 P/E (x) 18.2 16.7 13.9 11.2 Price /Book (x) 3.0 2.6 2.2 1.8 RoA (%) 2.2 2.0 2.1 2.3 RoE (%) 18.1 16.7 17.0 17.8

Source: Company, ICICIdirect.com Research

Bajaj Finserv (BAFINS)| 1775

Rating Matrix Rating : BuyTarget : 2102Target Period : 12-15 monthsPotential Upside : 18%

YoY growth (%) - Consolidated

(YoY Growth) FY14 FY15 FY16E FY17ERevenue 6.5 15.9 12.5 13.3 PBT 7.3 11.7 19.4 19.3 Net Profit (1.6) 9.2 20.6 24.2 EPS (1.6) 9.2 20.6 24.2

Current & target multiple (Consolidated)

z

FY14 FY15 FY16E FY17EP/E 18.2 16.7 13.9 11.2 Target P/E 21.6 19.8 16.4 13.2P/BV 3.0 2.6 2.2 1.8 Target P/BV 3.6 3.0 2.6 2.2 RoA 2.2 2.0 2.1 2.3 RoE 18.1 16.7 17.0 17.8

Stock Data

Particular AmountMarket Capitalization |28403 croreNet worth |10973 crore52 week H/L (|) 1001/2160Equity capital | 80 CroreFace value | 5DII Holding (%) 7.2FII Holding (%) 8.4

Comparative return matrix (%)

1M 3M 6M 12MBajaj Finserv L (9.9) 15.9 23.1 64.9 HDFC Ltd (8.6) (0.2) (13.3) 13.0 Reliance Capit (11.8) (5.8) (26.7) (39.2)

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BJFIN IN Equity NIFTY Index

Research Analyst

Kajal Gandhi [email protected]

Vasant Lohiya [email protected]

Vishal Narnolia [email protected]


Company background - Bajaj Finserv Bajaj Finserv Ltd was incorporated on April 30, 2007. As per the scheme of de-merger of the erstwhile Bajaj Auto Ltd in 2007, the shareholding of Bajaj Auto in Bajaj Finance and other financial businesses along with windmill has been vested with Bajaj Finserv, which is the financial services arm of the Bajaj Group. The de-merger was effective from the appointed date on March 31, 2007. Bajaj Finserv is now a financial conglomerate that is engaged in life insurance, general insurance, consumer finance and other financial products. Apart from financial services, the company has an operational wind energy asset. The portfolio of the company includes 74% in the two insurance companies viz. Bajaj Allianz Life Insurance Company (BALIC) and Bajaj Allianz General Insurance Company (BAGIC), 50% holding in Bajaj Allianz Financial Distributors, 57.6% in Bajaj Finance and 100% holding in Bajaj Financial Solutions. The company is engaged in life and general insurance through their joint ventures with Allianz SE (German) viz. Bajaj Allianz Life Insurance Company and Bajaj Allianz General Insurance. Bajaj Allianz Financial Distributors is a 50:50 joint venture (JV) between the company and Allianz SE, which is engaged in the business of financial products. Bajaj Finance, the listed subsidiary, offers various consumer finance products to customers like auto loans, personal loans, loans for consumer durables & computers and SME finance.

Bajaj Finance is one of the leading non banking financial companies (NBFC) in India. The company was incorporated in 1987 essentially as the captive financier for Bajaj Auto’s vehicles. In 1995, it came out with an initial public offering (IPO). The company has an AUM of ~| 32410 crore as on FY15, that witnessed strong growth at 35% CAGR in the past three years and reported strong profit of | 897 crore in FY15. Bajaj Finserv operates 138 wind mills in Maharashtra with an installed capacity of 65.2 MW. Exhibit 2: Bajaj Holdings and Bajaj Finserv

Bajaj Holding Investment Limited

Bajaj Allianz Life Insurance Company

(74% stake)

Bajaj General Insurance Company (74% stake)

Bajaj Finance Limited (57.3% stake)

Bajaj Financial Solutions (100% stake)

Wealth Management

Bajaj Auto Limited (49.24% stake)

Bajaj Finserv Limited (58.35% stake)


Report is compiling three businesses discussed in detail with Valuations

1. Bajaj Allianz Life Insurance Company (BALIC) – Gearing for stable growth

2. Bajaj Allianz General Insurance (BAGIC) -– a class apart

3. Bajaj Finance (BFL) – Niche commands premium

4. Consolidated Bajaj Finserv – Financials and SoTP Valuation

Shareholding pattern (Q1FY16)

Shareholder Holding (%)Promoters 58.4

FII 7.2DII 8.4Others 26.1


FII & DII holding trend (%)

9.08.2 8.3

7.26.77.5 7.4

8.4

0

2

4

6

8

10

Q2FY15 Q3FY15 Q4FY15 Q1FY16

(%)

FII DII



Insurance sector exposure - key for re-rating in future Bajaj Allianz General Insurance (BAGIC) – a class apart Bajaj Allianz General Insurance Company (BAGIC) is a 74:26 JV between Bajaj Finserv and Allianz SE. The company has consistently maintained its strong position among private general insurance players, owing to its significant retail focus, wide distribution network and customer centric business approach. Retail (motor+ health) forms ~75% of GWP and is expected to continue to contribute a major portion of the overall business. We expect GWP to grow at 14.5% CAGR in FY16-17E to | 6856 crore. With prudent underwriting standards and anticipated increase in third party insurance rates, we expect combined ratio to remain below 100% in FY16-17E (combined ratio at 97-98% in last two years). Supported by investment yield of ~9%, we expect PAT to grow at 10.3% CAGR in FY16-17E with RoE staying ahead of peers at ~20-22%. Peer RoEs are in the range of -12.5-19% vs. 25% reported for BAGIC in FY15. Value BAGIC at | 429/share of Bajaj Finserv We have valued the BAGIC business at 15x FY17E PAT given consistent growth and superior RoE, resulting in business valuation of | 10260 crore. With limited period left to exercise the Call option vested with Allianz, we value Bajaj Finserv’s BAGIC stake at full 74%. This translates to a target valuation of | 7592 crore (74% stake) and | 429 per share of Bajaj Finserv post 10% holding company discount.

Bajaj Allianz Life Insurance Company (BALIC) – Gearing for stable growth Bajaj Allianz Life Insurance (BALIC), a 74:26 JV between Bajaj Finserv and Allianz recorded its first profit since FY10 of | 542 crore and is now earning higher PAT of | 876 crore after a peak of | 1311 crore. Gross written premium (GWP) has de-grown at 20% CAGR from FY12-15 to | 6017 crore, on account of a decline in linked premium led by surrenders. Traditional products have grown at 34% CAGR over the same period. Accordingly, APE has declined and new business (NBAP) margins moderated to 11-14% by FY14 and came in at 18% for FY15. NBP is expected to grow at 14% CAGR to | 3088 crore while APE is seen growing at 36% CAGR to | 1511 crore in FY15-17E. FY15 AUM was at | 43554 crore. PAT has turned into green since FY10, after seeing a decline in FY13-15. We expect PAT to grow at 28% CAGR to | 1127 crore. Value BALIC at | 674/share of Bajaj Finserv We are considering the full 74% economic interest of Bajaj Finserv in the business. Valuing the life business on appraisal valuation methodology with 1.2x EV +10x NBAP results in BALIC target valuation of | 161 billion on FY17E basis. This culminates to | 119 billion for 74% BALIC stake and thereby | 674/share of Bajaj Finserv post 10% holding company discount.

Exhibit 3: Valuation matrix - BALIC

Value (| crore)PAT (FY17E) 1126EV 11677NBAP 212Business value 1.2x EV + 10x NBAP 16128Bajaj Stake (%) 74%Value of Bajaj stake 11917Value/ share after 10% discount (|) 674

Basis


Exhibit 4: Valuation matrix - BAGIC Value (| crore)

PAT (FY17E) 684Networth 3518Multiple 15xBusiness value 10260Bajaj Stake (%) 74%Value of Bajaj stake 7592Value/ share after 10% discount (|) 429

Basis

15x PAT


BALIC –Life Insurance (Unlisted) | Crore FY14 FY15E FY16E FY17E

Net Premium Income 5,775.3 5,948.0 6,107.7 6,470.3

Payments to Policyholders 8,482.0 8,237.6 8,700.1 8,114.5

Transferred from PH to SH 639.1 488.1 564.3 620.0

Profit/ (Loss) before tax 1,162.2 1,006.8 1,170.3 1,294.8

Profit After Tax 1,024.6 876.4 1,018.1 1,126.5

BAGIC – General Insurance (Unlisted)

| Crore FY14 FY15E FY16E FY17E

Gross Written Premium 4,584.0 5,229.8 5,962.0 6,856.3

Net Incurred Claims 2,525.0 2,756.0 3,155.4 3,653.0

Underwriting Results (1.6) 82.8 110.1 142.0

Income from Investments 590.8 701.9 759.6 835.1

Profit After Tax 409.0 562.3 608.8 684.0

APE market share private players - BALIC

z

Others20%

Kotak4%

Max8%

Birla8% ICICI

19%

Reliance8%

SBI14%

HDFC Standard13%

Bajaj Allianz6%

Source : IRDA, ICICIdirect.com research

NEP market share - BAGIC Bajaj Allianz

6% HDFC ERGO3%

ICICI Lombard

8%Reliance

3%

SBI General1%

TATA AIG3%Private

others16%

Public Total60%

Initiating Coverage


Unique product offering commands premium! Bajaj Finance (BFL), is one of the leading asset finance NBFCs. The USP of BFL is its stronghold in the consumer durable (CD) & lifestyle product financing business (~15% of the AUM) wherein it does not have any major competition (BFL’s share is ~16%). These segments are under penetrated and growing in size, thus providing a lucrative opportunity for growth. In FY15, BFL served ~40 lakh clients in these segments. Further, it has a diversified loan portfolio. Post induction of the new management in FY07, BFL transformed itself from merely financing a few products to a wide range of products divided into three broad categories viz. consumer finance (40% of loans), SME (54%) & commercial & rural category (6%). Such diversity has given BFL an edge in terms of AUM growth (44% CAGR to | 32410 crore in FY11-15) and asset quality (GNPA ratio steady in 1.2-1.5% range in the past three years) despite a weak economic environment. PAT has increased at 38% CAGR in FY11-15 to | 897 crore. Over FY15-17E, we expect PAT traction to remain strong at 27% CAGR to | 1456 crore. Expect AUM traction at 27% CAGR over FY15-17E led by consumer finance Strong AUM traction of 44% CAGR over FY11-15 to | 32410 crore was mainly driven by the SME category increasing 51% CAGR followed by the CF category, which rose at 41% CAGR. Within SME, it was the LAP (25% of overall AUM) portfolio that saw high traction of 38% CAGR over FY11-15 while CD financing within CF book saw 47% CAGR. Going ahead, we expect AUM growth at 27% CAGR to | 52686 in FY15-17E, led by CF segment (31% CAGR) that will be driven by CD financing business. Enhanced competition and growing risks in the LAP segment may keep traction in the SME segment lower at 24.8% CAGR (refer exhibit 20). Steady asset quality, strong margins reflect strength of model BFL’s GNPA ratio at 1.5% (| 471 crore) as on FY15, is better than some of its peers wherein the ratio is above 2.5%. The asset quality has improved sharply over the last five to six years. The GNPA ratio was at 16.6%, 7.6% during FY09, FY10, respectively. Owing to its strong underwriting processes, focus on affluent & mass affluent clients, NPA is expected to remain acceptable. Further, such healthy asset quality & higher yields in CF space enable BFL to earn one of the highest margins among its peers of ~10% as on FY15. We assume this will largely be sustained, going ahead. Rich valuations to sustain on strong visibility in earnings Strong performance in a weak economic scenario (healthy return ratios - RoA at ~3%, RoE at ~20% GNPA at 1.5%) led to higher investor interest in BFL & P/ABV multiple expanding from 1x to 3x since September 2013. We believe its niche positioning in CD financing coupled with diversified nature of its book that helps de-risk the portfolio hold key. BFL’s premium valuations are expected to sustain on better earnings visibility. We initiate coverage with BUY rating & a TP of | 5600 valuing at 3.6x FY17E ABV. Exhibit 5: Key Financials Financial Performance FY13 FY14 FY15 FY16E FY17ENII (| crore) 1717 2216 2872 3671 4721PPP (| crore) 1053 1350 1741 2248 2953PAT (| crore) 591 719 897 1144 1456EPS(|) 130 144 180 221 273 P/E 38.8 34.9 28.0 22.8 18.4P/ABV 7.5 6.4 5.4 3.7 3.3RoA 3.8 3.4 3.1 3.0 3.0RoE 21.9 19.5 20.4 19.0 18.5


Bajaj Finance (BAJAF)| 5049

Rating Matrix

Rating : BuyTarget : | 5600Target Period : 12 monthsPotential Upside : 11%

YoY Growth (%) YoY Growth FY14 FY15 FY16E FY17ENII 29.1 29.6 27.8 28.6 PPP 28.2 29.0 29.1 31.3 PAT 21.6 24.9 27.5 27.3 EPS 11.3 24.6 23.1 23.4

Valuation Summary FY14 FY15 FY16E FY17E

P/E 34.9 28.0 22.8 18.4Target P/E 38.8 31.1 25.3 20.5P/ABV 6.4 5.4 3.7 3.3Target P/ABV 7.1 6.0 4.1 3.6RoE 19.5 20.4 19.0 18.5RoA 3.4 3.1 3.0 3.0

Stock Data Particulars

Bloomberg/ Reuters Code BAF IN/ BJFN.BO

Sensex 25,401

Average Volumes 56,096

Market Capitalisation (| crore) 27,030

52 week H/L (|) 5718 /2460

Equity capital 53.3

Face value | 10

DII Holding (%) 5.8

FII Holding (%) 18.1

Comparative return matrix (%) Return % 1M 3M 6M 12MBajaj Finance -8.3 20.6 20.6 110.4Shriram Transport -5.6 5.5 -30.1 -10.9MMFS -0.3 1.1 -3.0 -11.1Shriram City Union -10.7 -1.2 -20.3 -2.3

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Research Analyst Kajal Gandhi [email protected]

Vasant Lohiya [email protected] Vishal Narnolia [email protected]


Life insurance industry – Quick snapshot The life insurance industry has remained on a high growth trajectory till 2008 since the entry of private players in 2001. Today, it is second only to banks in terms of mobilised savings (15.6% of financial savings) and is among the major domestic contributors to the capital markets. The life insurance sector has been instrumental in contributing towards infrastructure funding and, thereby, assisting the government in nation building. However, the sector penetration is just 2.6% of GDP in terms of premium as on FY15, declining from 3.1% in FY14. Key statistics : Annual premium of | 327539 crore in FY15, 20 lakh plus individual insurance agents, over 2.4 lakh employees based in ~11,000 branches and assets under management (AUM) of over | 23.4 trillion with over | 2.9 trillion invested in infrastructure development.

Exhibit 7: Life insurance industry premium structure (| billion), LIC losing market share with linked premium growth resuming | bn, policies in lacs FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Sector total premium 2,217.0 2,653.0 2,904.0 2,870.7 2,872.0 3,142.8 3,275.4 3,495.4 3,774.6

FYP - New Business Premium 489.0 608.0 636.0 622.4 521.9 526.9 469.8 540.2 626.7

Renewal Premium 1,345.0 1,553.0 1,646.0 1,731.3 1,798.4 1,939.6 2,144.0 2,300.1 2,499.5

Single Premium 382.0 492.0 622.0 517.1 551.7 676.3 661.6 655.0 648.5

APE - New Business 528.0 658.0 698.0 674.1 577.1 594.5 535.9 605.7 691.5

YoY growth in new business - APE -10.0 25.0 6.0 -3.4 -14.4 3.0 -9.9 13.0 14.2

Industry renewal conservation (%) 84.7 76.2 75.9 76.4 83.6 86.9 88.0 88.0

Number of new policy issued (in Lacs) 509.0 532.0 482.0 442.0 442.0 409.0 380.8 398.3 420.7

Premium per policy in | 17,112.0 20,676.7 26,099.6 25,778.8 24,289.8 29,418.0 29,712.2 30,009.3 30,309.4

New Business Premium Share FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Private Insurer (%) 39.1 34.9 31.1 28.2 28.6 24.5 30.8 33.5 36.1

LIC (%) 60.9 65.1 68.9 71.8 71.4 75.5 69.2 66.5 63.9

Source: IRDA, ICICIdirect.com Research, APE (Annualised Premium Equivalent )= 10% of Single +100% of FYP

Insurance industry penetration, density still away from peaks

India's insurance sector penetration fell to 3.3% in FY15 compared to 3.9% in FY14 as per a report by global re-insurer Swiss Re. India is fifteenth globally with respect to premium income, same as last year. The only positive is insurance density figures, which have risen to $55 (| 3,498) from $52 (~| 3,307). In life insurance, India had penetration of 2.6% in FY15, down from 3.1% in FY14. On non-life side, it was 0.7%, down from 0.8%. Exhibit 8: Insurance penetration (as percentage of GDP)

1.9 2.3 2.7 3.3 2.9 3.2 3.1

4.8 4.7 4.65.2 5.1

4.1 4.0 3.93.3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)

(Life + General) insurance penetration (as % of GDP)

Source: IRDA, ICICIdirect.com Research

Exhibit 6: LI second in saving mobilisation

Year CurrencyBank

depositsLife

insurance

Provident &

pension fund

Shares & debentures

FY07 8.8 56.1 15.0 9.5 6.6

FY08 10.5 50.4 22.0 9.3 9.6

FY09 12.7 57.5 21.0 10.1 -0.3

FY10 9.8 40.2 26.2 13.1 4.5

FY11 13.0 46.5 19.9 1.3 -0.4

FY12 11.4 52.7 20.9 10.2 -0.3

FY13 10.9 52.1 17.6 11.9 4.2

FY14 8.0 48.7 15.6 10.6 2.6

Source: RBI, ICICIdirect.com Research, Proportionate share of gross financial savings

Insurance penetration refers to premiums as a percentage of GDP whereas insurance density (measured in dollar) refers to per capita premium or premium per person


Life Insurance Business structure

The life insurance business model is a function of prudent underwriting in policies and increasing AUM at efficient costs. Premiums earned form revenue, expenses incurred for the same and, thereby, operational underwriting profit/loss is generated. As AUMs surge, investment income improves generating returns for both policyholders (PH) and shareholders (SH). Due to high upfront costs, profits are delayed and breakeven takes longer in the life insurance business.

Exhibit 9: Life insurance industry statistics over the years - including LIC | crore FY10 FY11 FY12 FY13 FY14 FY15

Total Premium Earned 261,372 286,572 283,869 282,722 313,503 327,539

Growth (%) 94.0 9.6 -0.9 -0.4 10.9 4.5

New Business Premium 109,290 125,826 114,233 107,011 119,641 113,141

Growth (%) 1.5 -0.9 -0.6 1.2 -0.5

Renewal Premium ` 152,082 160,746 169,636 175,711 193,862 214,398

Growth (%) 12.9 5.7 5.5 3.6 10.3 22.0

Expenses by management

Commission 17,582 17,864 17,848 18,839 20,770 19,441

Growth (%) 13.4 1.6 -0.1 5.6 10.3 3.2

Operating Expenses (including shareholder expenses and FBT) 23,874 28,237 27,998 27,835 36,521 36,287

Growth (%) -7.4 18.3 -0.8 -0.6 31.2 30.4

Benefit paid to Policyholders

Death Claims 8,403 10,277 11,105 12,268 13,716 14,981

Growth (%) 22.3 8.1 10.5 11.8 22.1

Total claims (including death claims) 83,371 141,847 151,649 191,336 218,137 213,325

Growth (%) 70.1 6.9 26.2 14.0 11.5

PAT -989 2,657 5,974 6,948 7,588

Growth (%) 124.8 16.3 9.2

Number of branches 11,927 11,461 11,082 10,253 11,013 11,030

Growth (%) 1.8 -3.9 -3.3 -7.5 7.4 7.6

Number of agents (Individual) 2,917,454 2,608,820 2,345,601 2,125,758 2,209,894 2,067,856

Growth (%) 0.4 -10.6 -10.1 -9.4 4.0 -2.7

Number of direct employees 267,940 242,682 248,703 245,159 244,522 249,221

Growth (%) -6.1 -9.4 2.5 -1.4 -0.3 1.7

Equity (at Market Value) 446,881 507,434 473,855 464,849 526,265 629,967

Growth (%) 123.8 13.6 -6.6 -1.9 13.2 35.5

Fixed Income (at Book Value) 810,904 953,052 1,109,087 1,276,462 1,452,268 1,682,750

Growth (%) 14.4 17.5 16.4 15.1 13.8 31.8

Total AUM 1,289,946 1,480,950 1,618,544 1,768,665 2,006,867 2,344,228

Growth (%) 38.1 14.8 9.3 9.3 13.5 32.5

Source: Life Insurance Council, ICICIdirect.com Research


Bajaj Allianz Life Insurance (BALIC)

Company Background Bajaj Allianz Life Insurance Company (BAGIC) is a joint venture (JV) between Bajaj Finserv and Allianz SE, undertaking life insurance business in India. The company commenced operations in 2001 after receiving certificate of registration from Insurance Regulatory and Development Authority of India (IRDA). With a wide product portfolio ranging from Ulips to traditional plans, a vast distribution network of over 759 branches spread across India along with a tie-up with corporate agent, insurance brokers and individual agents, it has managed to maintain its single digit market share among private players. As of March 2015, BALIC made a profit before tax (PBT) of | 1007 crore and PAT of | 876 crore. Post nationalisation of the insurance sector in 1956, Life Insurance Corporation of India (LIC) became sole life insurance provider in the country. This decision was taken by government in order to channel more resources towards national development, increase penetration and safeguard policy holders interest. In 2001, the life insurance sector was opened to private players, after which the domestic life insurance sector witnessed dynamic changes including entry of new private players resulting in higher competition and product development. In 2001, the erstwhile Bajaj Auto entered into a joint venture agreement with Allianz SE, a Germany based multinational financial services company, to engage in life insurance business. Bajaj subscribed to 74% of initial paid-up capital whereas the remaining 26% stake, by then maximum permissible limit for foreign partner, was taken up by Allianz SE. Post de-merger of the erstwhile Bajaj Auto, the strategic business undertaking comprising financial services was vested with Bajaj Finserv. Hence, BALIC came under the purview of Bajaj Finserv with the 74:26 joint venture with Allianz remaining intact as before. Exhibit 10: New business premium (NBP) private market share FY15

Others31%

Kotak4%

Max7% Birla

6%

ICICI15%

Reliance6%

SBI7%

HDFC Standard16%

Bajaj Allianz8%


Shareholding pattern (FY15)

Shareholder Holding (%)

Bajaj Finserv 74.0

Allianz SE 26.0 Source: Company, ICICIdirect.com Research

As of March 2015, BALIC made a profit before tax of

| 1007 crore and PAT of | 876 crore


BALIC - Treading through a rough patch in life insurance

Bajaj Allianz Life Insurance (BALIC), a 74:26 JV between Bajaj Finserv and Allianz SE recorded its first profit from FY10 of | 542 crore. The company is now earning higher PAT of | 876 crore, after touching peaks of | 1311 crore. However, first year new business premium (NBP) growth has been under pressure from FY09 onwards due to a slowing economy while declining traction in Ulip from FY10 further impacted total premiums, to reach | 5844 crore in FY14 from over | 10600 crore in FY09.

A slowdown in financial savings, lower Ulip commissions, lack of a strong bancassurance partner and new regulations led to a slowdown in the distribution channel. Hence, the NBP decline was higher than industry for BALIC over the last few years.

Group premium has been driving the business for BALIC currently at 80% of NBP in Q1FY16 and 61% in FY15. We factor in an improvement in the scenario with linked NBP from individual growing at 14% CAGR to | 3088 crore and APE seen growing at 36% CAGR (on lower base) to | 1511 crore over FY15-17E.

Accordingly, the AUM and PAT is expected to grow at a CAGR of 12.5% and 28.5% to | 48680 crore and | 1123 crore, respectively, by FY17E.

Exhibit 11: BALIC total premium in private sector (| crore)

0 20,000 40,000 60,000 80,000 100,000 120,000

FY09

FY10

FY11

FY12

FY13

FY14

FY15

(| c

rore

)

BALIC Private

Source: IRDA, Company, ICICIdirect.com Research

Exhibit 12: BALIC Market share in total premium (private)shrinking

16.5

14.4

10.9

8.9 8.87.6 6.8

0

2

4

6

8

10

12

14

16

18

FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)


Exhibit 13: Premium growth expected at 9.7% CAGR, with renewal remaining flattish

9,72510,625

11,420

9,607

7,4806,893

5,844 6,017 6,232 6,602

0

2,000

4,000

6,000

8,000

10,000

12,000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

-40

-20

0

20

40

60

80

100

(%)

Total premium Growth


Going ahead, premium growth is seen primarily from

traditional products. We expect 9.7% CAGR in FY15-17E in

total premium


Exhibit 14: Market share in NBP maintained in FY11-15 with higher group business

13.2%11.6%

8.8% 8.5%9.7% 8.8% 8.9%

0%

2%

4%

6%

8%

10%

12%

14%



First year premium CAGR for the insurance industry (FY09-

14) was 6.6%, with private insurers witnessing a decline of

-2.9% due to a slowdown in Ulip sales

With traditional product in focus, LIC grew at 11.3% CAGR

over FY09-14


Investment Rationale Linked premium growth to improve, individual pie to increase its share The industry has seen linked premium declining from 65% to 7% of new business premium to | 8609 crore over the last seven years. A capital market slowdown, stringent IRDA regulations and cap on charges to consumer impacted linked premium growth.

Following suit, BALIC’s linked premium share in total premium has also declined from highs of 94% in FY09 (| 9986 crore) to 29% (| 1746 crore) in FY15. On an NBP basis, it has declined from 99% to 19% in FY15. However, the transparency in linked products and charges are no longer a deterrent for growth. Erstwhile surrenders due to three year lock-in have already happened for the insurance sector. Economic and market conditions are improving post elections while the sector has seen growth resuming in premiums both linked and non-linked.

We, therefore, expect the share of linked premium in new business to rise to 21% growing at 27% CAGR to | 662 crore by FY17E. Lower renewals in linked premium results in overall linked premium declining at 32% CAGR and its contribution in total premium still declining to <20%. Non-linked products are expected to grow at 8% CAGR to | 2427 crore in new business. However, on consistent renewals, the total non linked premium is expected to grow at 27% CAGR. Hence, the share of individual business is expected to grow from 39.1% in FY15 to 41.4% to | 1278 crore in FY17E as linked premiums are largely individual basis (exhibit 17). Exhibit 15: Private sector - Linked premium share declining in new business

89 92 86 8369

41 35 29

11 8 14 1731

59 65 71

0

20

40

60

80

100

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(| c

rore

)

Linked FYP Non Linked FYP


Exhibit 16: BALIC - Product wise premium contribution (new business)

99 93 8470

31 19 18 19 20 21

1 7 1630

69 81 82 81 80 79

0

20

40

60

80

100

120

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17E

(%)

Linked Non-linked


Exhibit 17: BALIC - Product wise premium contribution (total business)

96 94 90 8357

35 24 29 19 18

4 6 10 1743

65 76 71 81 82

0

20

40

60

80

100

120


(%)

Linked Non-linked


Bajaj has improved the overall product mix with traditional

(non linked) forming 71% and Ulip at 29% in FY15


Exhibit 18: Category wise premium contribution - group single premium surges

0

20

40

60

80

100

120


(%)

Individual Single Premium Individual Non-Single PremiumGroup Single Premium Group Non-Single Premium


APE de-growth moderating, NBAP margins to stabilise… The life Insurance industry measures revenue via annualised premium equivalents (APE), which weigh premium income via {(100% of first year premium) + (10% of single premium)}. This refers to annualised premium relevant to the year. APE de-grew from | 1720 crore in FY12 to | 985 crore in FY15 as group single premium (low margin fund based business) rose faster from | 317 crore to | 888 crore during the same period. With APE decline, new business achieved profit (NBAP) margins moderated from 14.3% to 11% but surged again to 18% in FY15 on a lower APE base (APE excludes group superannuation business). We believe these NBAP margins are unsustainable in the near term. Also, on account of rising share of linked premium and regulatory changes stabilising, we expect margins to stabilise around 13-14% over the next two years led by expected APE growth at 53% CAGR to | 1511 crore in FY15-17E. BALIC had been garnering higher margins in past (around 2008) at 20-22% with higher Ulip sales, (linked - 94% in FY09). However, post 2010, significant regulatory changes led to margins shrinking to as low as 11%. The fall was steeper for BALIC vs. other peer mainly due to weak distribution with no strong bancassurance partners.

Exhibit 19: APE based market share declined

Others20%

Kotak4%

Max8%

Birla8% ICICI

19%

Reliance8%

SBI14%

HDFC Standard13%

Bajaj Allianz6%


Exhibit 20: APE - BALIC vs. industry

3660 2424 1935 2078 1332 986

34934

28832

23683 22780 2165625036

0

5000

10000

15000

20000

25000

30000

35000

40000

FY10 FY11 FY12 FY13 FY14 FY15

(| c

rore

)

APE BALIC APE private

Source: Company, IRDA, ICICIdirect.com Research

Going ahead, premium growth is expected at 9.7% CAGR

over FY15-17E in total premium. Hence, average margins

are expected to stabilise at 13-14%

BALIC product-wise margin & surrender

Product Margins vs Surrender

Term Highest Nil

Individual - Traditional Higher Medium

Individual - Linked High High

Group Low Medium Source: Company, ICICIdirect.com Research


Exhibit 21: NBAP margin moderation to stay

721

608

475

215 186147

199 175212

0

100

200

300

400

500

600

700

800

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

02468101214161820

(%)

NBAP NBAP Margin


Commission expense lower than peers but opex ratios relatively high

Commission expenses and business acquisition expenses form a significant part of cost for the insurance industry. They are the major costs due to which life insurance companies make losses in the first year of business acquisition. Bank led insurers are relatively better off on expense ratios. BALIC incurred a commission to gross premium ratio of 3.4% (| 1514 crore) in FY15 while industry (private + LIC) had 5.9% commission ratio. It appears lower due to higher group premium share and rise in linked premiums sequentially where upfront commission payouts are lower. Commission expenses are higher for LIC vs. the private sector. We believe agency models like Bajaj Allianz, Max India and Reliance Life will continue to have higher commission and opex ratios.

Bancassurance tie-ups are expected to increase with RBI allowing banks to be insurance brokers with minimum two tie-ups and maximum three in each category of insurance (life, general and health). This can be seen assisting large agency based players to diversify.

For BALIC, bancassurance formed 7% of GWP and 84% of agency in FY14 while it was 0.8% and 91%, respectively, in FY15 due to the full impact of the lack of a bank tie-up. Earlier, it had a bancassurance tie-up with Standard Chartered. This was discontinued in FY13 due to Standard Chartered’s global tie-up with Prudential Inc. Accordingly, growth in new business premium has stayed negative at -5% in the last four years with agency forming the largest share at 91% of new business.

We still believe agency will continue to drive a larger share of the new business with a strong force of ~120000 agents with bancassurance providing the extra fillip.

Opex (including commission) to GWP ratio at 23% in FY15 was higher for BALIC compared to 17% for industry led by sales overheads for agency channel, etc. In FY13 and FY14, the ratio was high at 26-27% due to slower premium growth. We expect the overall opex ratio to rise to 25.5% by FY17E as regular traditional products and linked products both have higher costs compared to the group business.

Opex to GWP ratio at 23% in FY15 is higher for BALIC

compared to 17% for industry led by sales overheads for

agency channel


Exhibit 22: Commission expenses moderate after Ulip regime

15.4

9.98.4

6.4 5.2 4.12.5 3.4 4.0 4.5

0

2

4

6

8

10

12

14

16

18

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E(%

)


Exhibit 23: Share of agency in GWP rising for BALIC post no bank tie-up

54.9 66.0 76.2 84.0 91.742.6 45.1 38.0 31.2 25.430.8 20.1 17.0 16.3 16.553.8 51.7 53.0 49.8 45.8

67.4 63.6 63.0 64.8 67.2

53.8 37.5 35.0 31.4 28.1

050

100150200250300350

FY11 FY12 FY13 FY14 FY15

(%)

BALIC ICICI Prudential HDFC Standrad SBI Life Birla Sunlife Max L


Exhibit 24: FY15 - Insurer wise distribution channel BALIC

91.7

25.4 16.545.8

67.2

28.4

0.8

57.5 67.0

51.7 18.5

56.1

5.3 10.3 10.0 1.2 2.7 9.5

0

20

40

60

80

100

BALI

C

ICIC

IPr

uden

tial

HDFC

Stan

drad

SBI L

ife

Birla

Sunl

ife

Max

Life

(%)

Individual Agents Banks Corporate AgentsBrokers Direct Selling


Exhibit 25: Commission expenses lower than peers

4.1

5.7 5.74.9

5.8

9.3

2.5

5.04.2

5.2 4.9

9.4

0

2

4

6

8

10

BALIC ICICIPrudential

HDFCStandrad

SBI Life Birla Sunlife Max Life

(%)

Commission ratio - FY13 FY14


FY14 was an aberration for BALIC due to write-back in Ulip commission on agent terminations.

The productivity per agent has also seen an improvement as the number of agents has moved down from 1,70,000 in FY12 to 1,20,000 in FY15.


Exhibit 26: Agent productivity picking up with rationalisation

0

50000

100000

150000

200000

250000


(Num

ber o

f age

nt)

0

1

2

3

4

5

6

7

8

(| la

kh)

Agent Productivity (FYP) Productivity (TP)


Exhibit 27: Management expenses – Opex ratio (including commission), quite high in industry

27.6 23.9 23.1 24.0 27.3 27.7 23.7 26.0 25.5

72.1 73.8

91.7 92.8 90.7 95.588.1 91.1 86.0

0

20

40

60

80

100

120


(%)

Management Expense Ratio Opex/ APE


Higher surrenders, decline in persistency hit AUM growth

Surrenders include policies surrendered by policyholders anytime before maturity though generally it is in the initial few years. Surrenders as a proportion to AUM have been rising, particularly due to linked policies completing their three year and five year lock-in period and, thereby, coming for surrender. However, the same has resulted in AUM growth remaining sluggish for BALIC as well as industry. Linked AUMs have grown at 74% CAGR in FY09-13 while AUM of policyholders (non-linked) has grown faster at 278% CAGR over the same period. Regulatory changes in September 2010 along with market correction in FY08-09 led linked new business premium to shrink leading to a double whammy impact on linked AUM. It declined from | 32880 crore in FY11 to | 21287 crore in FY14. Surrenders, at the same time, increased from | 4464 crore in FY11 to | 7250 crore in FY14. We expect surrenders to moderate as pre-September 2010 Ulip policies, which were coming up for surrender, have passed their lock-in tenure. Accordingly, a significant portion of Ulip surrenders would have been over.

Surrenders include policies surrendered by policyholders

anytime before maturity though generally it is in the initial

few years


Exhibit 28: Thirteenth month persistency improving, sixtieth month declining on high surrenders

0102030405060708090

100


(%)

13th month 25th month 37th month 49th month 60th month


Persistency ratio for the thirteenth month has been improving from 52% to 61.6% since FY10. However, sixtieth month persistency has taken a huge knock led by surrenders. Players with strong traditional products have seen sixtieth month persistency improving over the years. Overall conservation ratio for renewal business {(calculated as renewal premiums/(FYP+ LY renewal)} has now improved to 68.4% in FY15 from the 55-59% range in FY11-14 for BALIC. With better Ulip growth picking up again under new regulations and lower surrenders, conservation ratio is expected to sustain around 68% over the next couple of years.

Exhibit 29: Higher surrenders, lower persistency hit AUM growth

0

10000

20000

30000

40000

50000

60000


(| c

rore

)


Persistency ratio is the number of life insurance policies

remaining in force


Profit pressure to ease with rising linked AUM, better investment income

The life insurance business is a function of better business underwriting and increasing AUM at efficient costs.

Investment is a significant income contributor for the insurance business. The surge in equity markets and improving debt incomes fuelled investment income both in policyholders and shareholders investment in FY15. Rising surrenders in Ulip had impacted linked AUM growth. Accordingly, income arising in policyholders funds for AUM management was impacted. This further lowered the surplus arising from policyholders (PH) P/L to be transferred to shareholders (SH) P/L. The same moderated to | 488 crore in FY15 from a peak of | 1069 crore seen in FY12. Increasing AUM will assist interest income while lower surrenders will boost persistency ratios. Therefore, after witnessing a decline in PAT from FY13 to FY15 due to declining AUM, we expect PAT to grow at 28% CAGR to | 1125 crore with AUM growth at 12.5% CAGR over FY15-17E.

PAT has turned into the green from FY10. Hence, networth has surged 4.5x from | 1192 crore to | 6749 crore in the last six years led by profits. We expect the same to grow to | 8893 crore by FY17E. No dividend has been distributed till date.

Exhibit 30: Profit seen stabilising at | 1000 crore over next two years

(400)

(200)

0

200

400

600

800

1,000

1,200

1,400


(| c

rore

)

(1,000)

(800)

(600)

(400)

(200)

0

200

(%)

PAT Growth


After witnessing a decline in profitability in FY13-15, we

expect PAT to grow at 28% CAGR to | 1125 crore in FY16-

17E


RoE, RoEV to achieve consistency post pick-up in individual business

The company is still striving to maintain consistency in life insurance profitability. Accordingly, RoE has remained volatile in the last five years of profitability. Also, with no dividend distribution, networth is growing faster impacting RoE surge. We expect RoE to moderate to 13-14% from a high of 31%. However, if dividend distribution happens, RoE can surge upwards. Also, embedded value (EV), a combination of value of in-force (VIF) business and net worth (NW), has grown at 10% CAGR in FY12-15. We expect EV to grow at 8% CAGR from | 9323.5 crore to | 11677 crore by FY17E after 11% increase seen in FY13-15. Hence, we expect return on embedded value (RoEV) to stabilise around 9.6%.

Exhibit 31: Net worth of life insurers

6749

4863

2592

3974

2170 2014

0

2000

4000

6000

8000

BALIC ICICIPrudential

HDFCStandrad

SBI Life BirlaSunlife

Max Life

(| c

rore

s)

FY14 FY15


Exhibit 32: RoE and RoEV – BALIC

0

10

20

30

40

50

FY12 FY13 FY14 FY15 FY16E FY17E

(%)

0

5

10

15

20

25

(%)

RoE (LHS) RoEV


Solvency ratio maintained higher than peers as no payouts done yet IRDA mandates required solvency margin (RSM) of 150% for all life insurance companies. Solvency ratio is determined by dividing available solvency margin (ASM) by the RSM. BALIC has high networth, purely generated from profit as no major equity issuance has happened since initial capital in 2002. Hence, solvency ratio remains high at 7.6 i.e. 760% of RSM.

However, high solvency has stayed for long now (since FY12) as withdrawal or distribution via dividend is not happening. We believe that till clarity emerges on the Allianz stake, we may continue to see higher capital residing in the balance sheet leading to higher solvency margin.

Exhibit 33: Solvency ratio above regulatory requirement

2.95.2

6.3 7.3 7.6 8.4 8.6

0

2

4

6

8

10

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(%)


Exhibit 34: Solvency ratio for peers (FY14)

7.6

2.03.3

2.2 1.50

2

4

6

8

BALIC HDFC Standard ICICI Prudential SBI Life LIC

(%)


Solvency ratio is determined by division of available

solvency margin (ASM) against the required solvency

margin


Life Insurance Valuation The life insurance business in India is valued as a combination of existing business underwritten and new business expected. Hence, Embedded Value (EV) plus Structural value of new business is referred as Appraisal Value. As most companies started reporting sustainable profit and EV, Appraisal Value is used to calculate market valuation of a life insurance company.

• EV = Net Worth(NW) + Value of in-force business (VIF)

• Structural value of new business (future) = NBAP x multiple assumed

• Appraisal value = (Target multiple x EV) + Structural value

Majority of life insurance companies have now started reporting EV in the last couple of years in India. Several assumptions on interest rates, operating cost variances, MTM on investments, etc are made to derive EV using Networth as the basis. BALIC’s reported EV has grown at 11% CAGR to | 9332 crore from | 6775 crore over FY12-15.

As per the past agreed terms, Allianz has a Call option, which they can exercise to raise their stake to 50% in Bajaj Allianz Life Insurance (BALIC) at a price of | 5.42/share plus interest at 16% per annum compounded annually from April 23, 2001 to the date of payment. This is applicable if the Call option is exercised up to April 22, 2016.

With the FDI limit raised to 49% from 26%, Allianz has option to claim enhanced stake at a substantially discounted valuation, which is negative for the holding company. However, the recent ruling of RBI denying Tata’s buyback of Docomo’s stake in the telecom venture at a higher than market price and changed IRDA norms on transfer pricing have raised the probability of transfer at fair market prices or till the time period expires.

We are considering the full 74% economic interest of Bajaj Finserv in the business as only marginal time period is left. Valuing the life business on appraisal valuation methodology with 1.2x EV +10x NBAP results in BALIC’s target valuation of | 161 billion on an FY17E basis. This culminates to | 119 billion for a 74% BALIC stake and, thereby, | 674 per share of Bajaj Finserv post 10% holding company discount. Exhibit 35: Life insurance appraisal value (| crore)

FY13 FY14 FY15 FY16E FY17EEV 7653 7601 9323 10589 11677NBAP 186 147 199 175 212Multiple Assigned (x)NBAP (x) 10 10EV (x) 1.2 1.2BALIC Valuation (EV x 1.2 + NBAP x10) 14452 16128Bajaj Finserv stake 74% 74%BALIC for SOTP 10695 11917Value per share of Bajaj Finserv (|) 672 749Value per share at 10% discount (|) 605 674

Source: Company, ICICIdirect.com Research, New Business Achieved Profit (NBAP) – Its profit made on new business sold.


Lower the surrenders, higher the persistency ratio and better margins as seen for HDFC Life, Max Life as their product portfolios are tilted towards the traditional business. Exhibit 36: BALIC - Relative Analysis

Insurer (FY15) BALIC ICICI PrudentialHDFC

Standard SBI LifeBirla

Sunlife Max Life

Net worth (| crore) 6749.0 4863.0 2591.8 3974.0 2169.6 2014.0

AUM (| crore) 43553.8 99490.7 67024.0 69384.8 30184.7 31220.0

PAT (| crore) 876.2 1634.4 785.5 820.0 285.4 414.2

Solvency ratio (%) 7.6 3.3 2.0 2.2 2.1 4.3

Surrender to AUM (%) 15 11 5 8 12 8


Exhibit 37: BALIC - Relative Valuation Analysis

BALIC *ICICI Prudential HDFC Standard *Max Life

Embedded Value (EV) 9323.5 13721.0 9944.0 5232.0

Valuation Life (Price) 16127.9 21000.0 18950.6 13156.0

Price/EV 1.7 1.5 1.9 2.5

Source: Company, ICICIdirect.com Research *ICICI and Max are consensus'

Sensitivity analysis on NBAP margins, NBAP multiple Our sensitivity analysis suggest that NBAP margins and NBAP multiples also have a significant impact on the valuation of the life business. NBAP margins have been varying on product mix change while the NBAP multiple has been impacted by market conditions and economic growth. Our BALIC target is on the basis of 14% NBAP margin and 10x NBAP multiple. With margins surging 2% to 16% and multiples expanding to 12x, the value per share increases 7% for BALIC in SOTP. This value is before 10% holding company discount. Exhibit 38: Life insurance valuation - Sensitivity analysis on new business (FY17E)

8 10 12 14 1610 617 635 653 672 69013 639 662 686 710 73414 646 672 697 723 74916 661 690 719 749 778

NBAP Multiple (x)

NBA

P M

argi

n (%

)


RBI rejects Tata offer for Docomo’s Teleservices stake In January, Docomo dragged the Tatas to an arbitration court in London, alleging that the Indian firm failed to honour its commitment to arrange a buyer for its 26.5% stake in TTSL, or buying it back itself. According to the agreement signed between the two in 2008-09, the Tata Group was to ensure that its partner in the loss-making joint venture gets the higher of either half the investment it made or the stake's fair market price in case the company fails to perform at a certain level.

The RBI has clarified that it cannot accede to Tata’s request to buyback at half the investment price as it is not in conformity with the current Foreign Exchange Management Act (Fema) regulations. Moreover, the central bank has advised that any such buyback of shares must be at the current fair value of shares.


Financial Summary (BALIC) Exhibit 39: Income statement | crore (Year-end March) FY13 FY14 FY15 FY16E FY17E

Total Income 9880 10727 13573 12169 11597

Net Premium Income 6835 5775 5948 6108 6470

Income from Investments 3026 4914 7459 6062 5127

Total Expenses 2050 1768 1514 1807 1882

Commission 280 148 206 249 297

Operating Expenses 1600 1473 1221 1371 1386

Payments to Policyholders 9307 8482 8238 8700 8114

Increase in Actuarial Liability -2339 -173 3393 1088 966

Provision for Tax 169 147 87 187 198

Surplus/Deficit from Operations 862 649 429 574 635

Transferred from PH to SH

(Year-end March) FY13 FY14 FY15 FY16E FY17E

Transferred from PH to SH 917 639 488 564 620

Income From Investments 433 540 652 640 707

Other Income 2 3 2 0 0

Total income 1351 1179 1140 1204 1327

Other expenses -5 -10 -17 -19 -20

Contribution to PH -2 -7 -116 -15 -12

Total expenses -7 -17 -133 -34 -32

Profit/ (Loss) before tax 1344 1162 1007 1170 1295

Provision for Taxation -58 -138 -130 -152 -168

Source: Company, ICICIdirect.com Research *PH – Policyholder account, SH – Shareholder account

Exhibit 40: Balance sheet | crore (Year-end March) FY13 FY14 FY15 FY16E FY17E

Shareholders' Funds 4844 5871 6749 7767 8894

- Share capital 151 151 151 151 151

- Reserves and surplus 4696 5720 6598 7616 8743

Policyholders' Funds 33314 33142 36535 38640 39606

- Fair value change account 5 68 208 70 40

- Policy liabilities 8769 11708 14606 17026 19441

Insurance reserves

- Provision for linked liabilities 24497 21288 21645 21615 20166

Funds for future appropriations 174 184 124 134 149

Reserve for lapsed ULIP 49 145 284 341 358

- current liabilities 1392 1328 1525 1707 1878

- provisions 194 323 400 447 506

Total liabilities 39918 40847 45332 49038 51392

Shareholders' investments 4688 5810 7187 8321 9462

Policyholders' investments 8769 11536 14438 16685 19052

Assets held to cover linked liabilities 24497 21288 21645 21615 20166

Loans 24 46 96 115 129

Fixed assets 252 255 227 234 239

Current assets 1644 1833 1740 2068 2344

Total assets 39874 40769 45332 49038 51392



Exhibit 41: Key ratios (Year-end March) FY13 FY14 FY15 FY16E FY17E

Opex ratio (Mgmt+ comm) 27.3 27.7 23.7 26.0 25.5

Commission ratio 4.1 2.5 3.4 4.0 4.5

Opex/APE 90.7 95.5 88.1 91.1 86.0

RoEV 16.8 13.5 9.4 9.6 9.6

RoE calculated 30.6 19.1 13.9 14.0 13.5

Solvency Ratio 5.2 6.3 7.3 7.6 8.4

Conservation Ratio (calculated) 59 55 68 69 68

Growth ratio (%)

AUM -3.6 2.1 11.6 7.7 4.4

NBP 7.2 -18.1 -4.5 9.7 10.1

Renewal -18.1 -16.7 2.0 -0.5 1.7

Networth 36.0 21.2 15.0 15.1 14.5

PAT -1.9 -20.3 -14.5 16.2 10.6


Exhibit 42: Business Figures (| crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E

AUM 38000 38780 43269 46621 48680

PH funds 8769 11536 14438 16685 19052

Linked funds 24497 21288 21645 21615 20166

SH funds 4688 5810 7187 8321 9462

Surrenders 8660 7329 6386 6061 5404

Premium 6893 5844 6017 6232 6602

NBP 2988 2592 2702 2921 3088

Single 1016 994 1201 1297 1414

Renewal 3905 3251 3315 3299 3356

EV 76529 76010 93235 105892 116774

EV per share (Rs) 481 478 586 665 734



Bajaj Allianz General Insurance Company Company Background Bajaj Allianz General Insurance Company (BAGIC) is a joint venture between Bajaj Finserv and Allianz SE, undertaking the non-life insurance business in India. It commenced operations in 2001 after receiving the certificate of registration from the Insurance Regulatory and Development Authority of India (IRDA) on May 2, 2001. With a wide product portfolio and vast distribution network of over 210 branches spread across 25 states along with tie up with dealers, corporate agent, insurance brokers and individual agents, it has managed to maintain second position among private sector non-life players. As of March 2015, BAGIC made a profit before tax of | 777 crore and PAT of | 562 crore. The company has reported underwriting profit of | 83 crore in FY15 after making a loss in the previous seven years. The Indian general insurance sector, which had four public sector companies operating in the space, was opened to private players in 2000. In 2001, the erstwhile Bajaj Auto entered into a joint venture (JV) agreement with Allianz SE, a Germany based multinational financial services company, to engage in the general insurance business. Bajaj subscribed to 74% of initial paid up capital whereas the remaining 26% stake, by then maximum permissible limit for foreign partner, was taken by Allianz SE. Post de-merger of erstwhile Bajaj Auto, a strategic business undertaking comprising financial services was vested with Bajaj Finserv. Hence, BAGIC came under the purview of Bajaj Finserv while the 74:26 joint venture with Allianz continued to remain intact as before.

Exhibit 43: BAGIC product portfolio

•

Corporate Miscellaneous

Motor Health Travel Rural Asset • Commercial Vehicle • Workmen’s Compensation

• Private cars • Health Care Supreme • Overseas Travel • Farmers Package • Householders Package • Marine Cargo • Education Package

• 2 Wheeler • Surgical Protection Plan • Travel Companion • Cattle and Livestock Insurance • Shopkeepers Package • Marine Hull • Bankers Indemnity

• Health Guard • E Travel Value • Weather Protect Insurance • Easy Householders Package Policy • Fire

• Personal Accident Policy • Travel Assist Card • Crop Insurance • Jewellers Block • Engineering –Projects

• Critical Illness Policy • Pravasi Bhartiya • Engineering - Operational

• Comprehensive Care Plan Bima Yojna • Clinical Trail Liability

• Hospital Cash Daily Allowance • Aviation Insurance

Retail

BAGIC


As of March 2015, BAGIC made a profit before tax of | 777

crore and PAT of | 562 crore

Shareholding pattern (FY15)

Shareholder Holding (%)

Bajaj Finserv 74.0

Allianz SE 26.0 Company, ICICIdirect.com Research


Investment Rationale Rapid premium growth; low penetration presents significant headroom The Indian general insurance sector, till 2000, comprised four public sector companies. In 2000, the Indian insurance industry was opened to the private sector, post which the industry witnessed a rapid expansion. Today, there are 28 general insurance companies operating in the country comprising four public sector entities, 17 private players, five specialised insurance companies and two government sponsored insurers (Agricultural Insurance Corporation & Export Credit and Guarantee Corporation). Since the entry of private players, the general insurance sector has grown significantly with gross direct premium increasing from | 12723 crore in FY02 to | 79934 crore in FY14, which corresponds to a CAGR of 16.5%.

Exhibit 44: Industry gross direct premium

19522 2247227135 30480 33565

3922648213

59820

7120379934

0

5

10

15

20

25

30

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(%)

0100002000030000400005000060000700008000090000

(| c

rore

)

Gross direct premium YoY growth (%)


While the Indian general insurance industry has evolved significantly over the last decade, insurance density (($10 in FY13) and insurance penetration (0.7% of GDP in FY13) levels remain significantly lower compared to other developed as well as developing nations across the globe. Lack of overall financial awareness and propensity to buy insurance products based on regulatory requirement or tax incentive can be attributed as the primary reasons for under-penetration of general insurance, offering long term growth prospects for the industry.

Exhibit 45: General insurance density

10 64 189 215 295

15781188

2130

0

300

600

900

1200

1500

1800

2100

2400

India China Brazil SouthAfrica

Russia Germany UK USA

($)

Insurance density (2013)


Exhibit 46: General insurance penetration

0.71.2 1.5

2.7 2.3

3.6 3.1

4.5

00.5

11.5

22.5

33.5

44.5

5

India China Brazil SouthAfrica

Russia Germany UK USA

(%)

Insurance penetration (2013)


Insurance penetration refers to premiums as a percentage of GDP whereas insurance density (measured in dollars) refers to per capita premium or premium per person


Exhibit 47: General insurance industry - Snapshot

| crore FY08 FY09 FY10 FY11 FY12 FY13 FY14

Gross Direct Premium 27881.3 30351.8 34620.5 42576.5 52875.8 62976.2 70610.0

Growth (%) 11.9 8.9 14.1 23.0 24.2 19.1 12.1

Net Written Premium (NWP) 25444.5 28667.3 31262.3 37569.5 48561.1 56577.9 63775.0

Net retention ratio(%) 91.3 94.5 90.3 88.2 91.8 89.8 90.3

Net Earned Premium (NEP) 19287.5 22945.0 26000.2 31634.7 39387.6 47861.2 55896.0

Commission 617.5 1046.6 1198.8 1443.7 2028.0 1914.6 2635.0

as a % of NWP (%) 2.4 3.7 3.8 3.8 4.2 3.4 4.1

Growth (%) 144.7 69.5 14.5 20.4 40.5 -5.6 37.6

Other Opex 6322.1 7609.8 8746.0 10620.5 11172.2 13540.2 15117.9

as a % of NEP (%) 32.8 33.2 33.6 33.6 28.4 28.3 27.0

Growth (%) 16.8 20.4 14.9 21.4 5.2 21.2 11.7

Underwritting profit/(loss) -3899.5 -5323.8 -5900.7 -9943.5 -8827.4 -6984.3 -7548.9

Growth (%) -34.0 -176.9 0.3 251.8 -33.3 -159.0 61.6

Investment income 2603.8 2264.9 2770.5 9381.8 9504.9 11911.7 14004.3

Growth (%) 23.4 -13.0 22.3 238.6 1.3 25.3 17.6

PAT 2863.0 842.1 1170.6 -1018.9 24.5 3281.8 4438.9

as a % of NWP (%) 11.3 2.9 3.7 -2.7 0.1 5.8 7.0

Growth (%) -19.4 -70.6 39.0 -187.0 -102.4 13284.3 35.3

Total AUM 56280.0 58893.0 66372.0 82520.0 99268.0 122992.0 139809.0

Growth (%) 11.7 4.6 12.7 24.3 20.3 23.9 13.7


Exhibit 48: Market Share – Net earned premium (NEP) (FY14)

Bajaj Allianz6%

HDFC ERGO3% ICICI Lombard

8%

Reliance3%

SBI General1%

TATA AIG3%

Private others16%

Public Total60%



Retail business – key focus area

BAGIC has consistently grown over the last decade with gross direct premium (GWP) growing at 18.2% CAGR in FY05-14, surpassing industry growth of 15.1% during the same period. In FY15, BAGIC had GWP of | 5230 crore, growing at 14% YoY compared to 10.1% for industry and 9.7% for private players. Retail consists of ~69% of the overall business while majority comprises the motor business that remains the core strength of BAGIC.

BAGIC has lost market share among private players from 24% in FY05 to 16% in FY11 owing to preference on profitability and business retention over market share (slower growth in CV business owing to higher third party claims). Post FY12, the company has arrested this fall and maintained its market share in a broad range of 14-16% (~15% in FY15), thereby maintaining its second position in private sector non-life insurance companies. It has gained market share in motor insurance from 6.1% in FY06 to ~8% in FY14 of overall GWP.

With increasing awareness, growing penetration and medical inflation, health insurance is expected to grow at a robust pace. Rise in third party premium and introduction of a lower risk pool are expected to boost traction in motor insurance. Consequently, we expect GWP to grow at 14.5% CAGR in FY15-17E to |6856 crore. Exhibit 49: Consistent growth in GWP

24052866 2725

31293676

41094584

52305962

6856

0

1000

2000

3000

4000

5000

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7000

8000


(| c

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-10-50510152025303540

(%)

GWP YoY growth (%)


Retail consists of ~69% of overall business while majority is comprised of the motor business, which remains the core strength of BAGIC


Exhibit 50: Market share stabilises at 14-16%

22 2118 16 15 14 14 15

0

5

10

15

20

25

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(%)

Market share


BAGIC offers a wide product portfolio including fire, marine, health, motor and other insurance across corporate as well as retail customer domains. The primary focus of the company is on the retail segment with motor and health insurance forming a major pie contributing ~75% of overall business in FY14 (industry average - 70%). Motor insurance being the core strength of BAGIC contributes ~59% of the product mix, higher than industry average of 48% and private peers (~56% in FY14). Share of the motor business for private peers has increased from 53% in FY11 to 56% in FY14. BAGIC’s share, on the other hand, remained broadly stable as it had gone slow on commercial vehicle insurance owing to higher third party claims that impacted profitability. As of FY15, motor insurance contribution has come down to ~55% of product mix as the company has entered newer segments including crop insurance that contributes 7-8% of the business.

Exhibit 51: Business mix (BAGIC) – Motor and health major contributor

59 58 59 59 55 55 54

12 13 15 16 14 14 15

17 17 16 1514 14 14

12 12 10 10 17 18 18

0

20

40

60

80

100


(%)

Motor Health Property and Eng Others


Exhibit 52: Industry – Business mix (FY14)

Motor48%

Health22%

Property and Eng15%

Others15%


Public sector insurance companies were dominant players in the motor insurance business in FY06 with gross written premium (GWP) at | 6654 crore, with 76% of market share. Post liberalisation, private players have been gaining market share in the segment with GWP increasing from | 2078.9 crore in FY06 to | 18031 crore in FY14, forming 53% market share in FY14. BAGIC has focused on the motor insurance business with a CAGR of 22% in GWP to | 2700 crore in FY06-14, ahead of industry growth of 18% during the same period. BAGIC’s market share increased from 6.1% of GWP in FY06 to ~8% in FY14. However, compared to private players, BAGIC has lost market share from 25.8% in FY06 to 15%

BAGIC motor insurance business grew at 22% CAGR in

FY06-14; ahead of 18% industry growth. Hence, BAGIC’s

market share increased from 6.1% of GWP in FY06 to ~8%

in FY14


in FY14 owing to slower growth in the commercial vehicle segment wherein the claim ratio remained elevated.

Resumption of automobile sales and increased penetration could provide an impetus to the business. A rise in third party premium rates and revived focus on the CV segment on part of insurers considering the impact of a lower risk pool will act as key drivers in this segment.

Exhibit 53: BAGIC net earned premium growth higher than industry

336 493 926 1296 1255 1476 1703 2006 2356

0

5000

10000

15000

20000

25000

30000

35000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

(| c

rore

)

-20

0

20

40

60

80

100

(%)

BAGIC Industry BAGIC YoY growth (%)


The health insurance segment business in the industry has been growing at 28% CAGR in FY06-14, higher than the overall non-life business. Since FY06, private sector companies have been gaining market share with 30% of GWP in FY14 compared to 22% in FY06. The health insurance segment has been the second major contributor for BAGIC comprising ~16% of the overall product mix in FY14. With a rise in distribution strength, BAGIC’s health insurance segment has grown at 29% CAGR to | 744 crore in FY06-14, with 5% market share (ex specialised) in FY14.

Health insurance is expected to grow at a robust pace, going ahead, driven by increasing awareness, penetration in tier II and III cities, higher out of pocket expenditure (refer chart below) and medical inflation. In the overall product mix, retail (individual and family floater) health insurance is expected to grow at a faster pace compared to group sub-segment. Exhibit 54: India has highest out of pocket medical expense (FY10)

6037

12 10 17

9

1040

6

40

3053 48

84

44

0

20

40

60

80

100

120

India China USA UK South Africa

(%)

Out of pocket Private expenditure Public expenditure

Source: WHO, ICICIdirect.com Research


Distribution strength and better customer service

BAGIC has a wide distribution network with over 210 branches across 25 states, which enables it to increase its presence and customer reach. Apart from own branches, it has access to customers through other channels that includes ~13000 agents (individual and corporate), motor dealers and insurance brokers. It also has a tie-up with many public and private sector banks to service customers through their branch network. The direct business channel has been the major contributor to overall business for BAGIC (44% in FY11) followed by individual agents (26% in FY11) and brokers (14% in FY11). The contribution of banks and other corporate agents to the overall pie was lower at 11% and 5%, respectively. In FY11-14, corporate agents and brokers grew at a rapid pace, thereby contributing a larger proportion of the overall business at 15% and 34%, respectively, while direct business proportion has gone down from 44% in FY11 to 19% in FY14. Accordingly, commission expenditure rose at 49.6% CAGR in FY11-14, higher than 17.6% CAGR in net written premium over the same period. Hence, the commission ratio also increased from 1.7% in FY11 to 3.6% in FY14. The commission ratio has seen a drastic fall at 1.2% in FY15, which is one-time in nature, due to higher commission ceded on reinsurance. Going ahead, we expect the commission ratio to normalise and remain steady at ~2.5-3.0% in FY16-17E. On the other hand, the management expense ratio has been continuously trending downwards from 30% in FY11 to 23% in FY15, owing to cost rationalisation measures undertaken in previous years as well as slower traction in direct business. We expect management expense to grow at 10.3% CAGR in FY15-17E to | 1147 crore and management expense ratio to remain steady at ~22-23% in FY16-17E. Exhibit 55: BAGIC – channel mix

26 34 31 26 23

1111 8

7 7

1419 27 34 36

5

412 15 14

4432

22 19 21

0102030405060708090

100


(%)

Individual agents Banks BrokerCorporate agency Direct business


Digitisation and increased use of internet provide an opportunity to increase the customer base by leaps and bounds as well as offer cost efficiency in the longer term. BAGIC is aggressively focussing on online sales and promotion along with other virtual channels including telephonic chats, IVR and other audio visual support in order to enhance customer experience as well tap a vast customer base.

After sale service in terms of claim settlement plays a very important role in insurance to garner new business as well as retain older customers by way of renewal. BAGIC has been making continuous efforts on improvising the customer experience, which is evident from the fact that the company was among the first to introduce cashless claims in motor insurance. It has a tie-up with nearly 4000 hospitals in India to provide faster claim settlement for health insurance. In addition, the company has


an in-house team of medical professionals and in-house administration as opposed to third party administrators to facilitate faster claim settlement and reduce turnaround time.

Detariffing, motor pool losses hit insurers in the past

Though general insurance players reported healthy growth in premium over the last few years, their profitability was knocked off primarily on two counts – detariffication in 2007 and upward revision in motor pool loss.

Post detariffication by IRDA in 2007, insurers engaged in intense competition offering heavy discounts in the corporate business to gain market share, which led to poor pricing. This has substantially impacted the profitability of the corporate business.

In accordance with the direction of IRDA, the Indian Motor Third Party Insurance Pool (IMTPIP) was set up in 2007, which was an arrangement where general insurers cede premium related to third party risk of CVs and related losses are aligned to the motor pool. These are then distributed back among general insurers in proportion to the overall business market share. However, a higher claims ratio beyond 150% led to huge outflow for insurance companies. In April 2012, IRDA dismantled IMTPIP and provided insurers with the option of either recognising their share of loss altogether or defer absorption of liability in three years. BAGIC carried forward | 240 crore of transitional liability and accounted for the same in two equal parts of | 120 crore each in FY13 and FY14.

In place of IMTPIP, IRDA formed the Declined Risk Insurance Pool, effective from April 2013, for covering losses arising out of pure third party insurance related to CV. Every insurer is required to write a minimum quota of statutory third party CV business based on insurer market share in the overall business while companies falling short of their quota will share losses of the pool. In comparison to the erstwhile IMTPIP, the lower insurance pool is smaller in size while an insurer needs to share losses only in case of a shortfall of its quota.

Prudent underwriting drives profitability

With prudent underwriting practices and focus on preserving profitability, BAGIC was able to report a profit from its first year of operation. In FY08-11, underwriting losses increased from | 21 crore in FY08 to | 219 crore in FY11 on account of higher combined ratio, which increased from 98% in FY07 to 111% in FY11. A combined ratio below 100% indicates that the company is making underwriting profits led by a decline in claims and commission expenditure.

Exhibit 56: Steady improvement in combined ratio

66 67 72 74 79 77 72 72 72 73 72

41 36 32 29 30 27 26 26 23 22 23

-20

0

20

40

60

80

100

120

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

(%)

Claim ratio Commission ratio Management expense ratio


Exhibit 57: Continuous rise in business retention, expect to sustain

60 67 69 72 74 73 78 82 77 78 77

0

20

40

60

80

100

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15EFY16EFY17E

(%)

Retention ratio


Detariffication in 2007 and upward revision in motor pool

loss impacted profitability of non-life insurers in FY07-12

The combined ratio is defined as the sum of incurred losses

and operating expenses measured as a percentage of

earned premium


Exhibit 58: Lower combined ratio helps to deliver underwriting profit in FY15

25 -21

-73 -50

- --219

-178

-62

-283

-250

-200

-150

-100

-50

0

50

100

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

(| c

rore

)Underwritting surplus


Business retention increased from 60% in FY07 to 74% in FY11, which led the commission ratio to rise to 2% in FY11 (| 40 crore in FY11) compared to a commission ratio of -8% in FY07 (income of | 78.6 crore in FY07). At the same time, claim expenses grew at 32% CAGR in FY07-11 to | 1908 crore, primarily due to higher claims from the motor segment (88.9% in FY11 compared to 67% in FY07) impacting the overall combined ratio. Accordingly, the claims ratio increased from 66% in FY07 to 79% in FY11.

Post FY11, the combined ratio improved steadily from 111% in FY11 to 98% in FY15, which led to underwriting profits of | 83 crore in FY15. The decline in the combined ratio can be attributed to a decline in management expenditure ratio to 23% in FY15 compared to 41% in FY07 (9.9% CAGR in FY11-15 to | 943 crore), along with a decline in claim ratio to 72% in FY15 compared to 79% in FY11 (12.8% CAGR in FY11-15 to | 2756 crore). The commission expense traction also remained in single digits growing at 5.1% CAGR in FY11-15 to | 49 crore. With prudent underwriting standards and continuous focus on improving efficiency, we expect the claim expense to grow at 15.1% CAGR in FY16-17E to | 3653 crore and management expense to rise to | 1147 crore in FY17E, at 10.3% CAGR in FY16-17E. Accordingly, we expect the combined ratio to remain stable at 97-98% in FY16-17E, thereby leading to higher growth of 31% CAGR in FY16-17E in underwriting profit to | 142 crore.

Exhibit 59: Better combined ratio among peers…..

97 108 104121 121

102

0

40

80

120

160

BajajAllianz

HDFCErgo

ICICILombard

RelianceGeneral

SBIGeneral

TATA AIGGeneral

(%)

Combined ratio - FY15

Source: Respective Company presentations, Annual Reports,,ICICIdirect.com Research

Exhibit 60: …leads to higher RoE

25

1019

9

13

18

-20

-10

0

10

20

30

BajajAllianz

HDFCErgo

ICICILombard

RelianceGeneral

SBIGeneral

TATA AIGGeneral

(%)

RoE - FY15 (%)

Source: Respective Company presentations, Annual Reports,ICICIdirect.com Research


Robust performance on RoE

With underwriting surplus and a healthy return on investment, BAGIC has been able to deliver sustained profit growth and robust RoE of 24%+ in FY14-15. RoE has been growing in double digits over FY09-15, barring FY11 when RoE was in single digits at 5% owing to higher claims, particularly from the motor segment. It is far higher than peers generating RoE in the range of -12.5% to 19% in FY15.

Going ahead, the RoE trajectory is expected to remain healthy near ~20% over FY16-17E, with combined ratio anticipated to remain stable at 97-98% in FY16-17E. Distribution of dividend can have an upward bias on RoE.

Exhibit 61: RoE expected to remain above 20%

15 16

513

24 25 2521 19

0

5

10

15

20

25

30

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

RoE BALIC


Exhibit 62: BAGIC AUM trajectory

2010 2386 27463852

45485845

69677859

902210400

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FY08 FY09 FY10 FY11 FY12 FY13 FY14FY15EFY16EFY17E

(%)

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12000

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AUM YoY growth (%)


Exhibit 63: Net worth (FY15) – peer comparison

2225.5

1011.8

2823.5

1837.11323.1

834.8

0

1000

2000

3000

BajajAllianz

HDFCErgo

ICICILombard

RelianceGeneral

SBIGeneral

TATAAIG

General

(| c

rore

)

Net worth (FY15)

Source: Respective Company presentations, Annual Reports,, ICICIdirect.com Research

Exhibit 64: BAGIC generates better RoE compared to peers

25.3

10.4

19.0

9.0

-12.5

18.0

-20

-10

0

10

20

30

BajajAllianz

HDFCErgo

ICICILombard

RelianceGeneral

SBIGeneral

TATA AIGGeneral

(%)

RoE (FY15)

Source: Respective Company presentations, Annual Reports,,ICICIdirect.comResearch

BAGIC’s AUM has also consistently increased at 22% CAGR in FY08-15 to | 7859 crore generating strong investment yield.

Comfortable solvency ratio

BAGIC has consistently maintained a comfortable solvency ratio, higher than regulatory requirement. As of FY15, the solvency ratio was at 182% above mandatory requirement of 150%. Among private peers, BAGIC has second highest solvency ratio, auguring well for future growth prospects. As of FY15, BAGIC has net worth of | 2226 crore with no capital infused since inception owing to comfortable solvency over the years.

The RoE trajectory is expected to remain healthy near

~20% over FY16-17E, with the combined ratio expected to

remain stable at 97-98% in FY16-17E


Exhibit 65: Solvency ratio at 182% in FY15

154173

156179

196 182

0

50

100

150

200

250

FY10 FY11 FY12 FY13 FY14 FY15

(%)

Solvency ratio Regulatory requirement


Exhibit 66: Solvency better compared to peers (FY14)

182 165195

153

280

155

0

50

100

150

200

250

300

BajajAllianz

HDFCErgo

ICICILombard

RelianceGeneral

SBIGeneral

TATA AIGGeneral

(%)

Solvency ratio (FY15)



Financials Gross written premium to grow at 14.5% CAGR during FY15-17E

In FY07-15, BAGIC’s gross written premium (GWP) grew at 14.2% CAGR to | 5230 crore. Net earned premium grew at a faster pace at a CAGR of 20.9% in FY07-15 to | 3832 crore, due to an increase in business retention from 60% in FY07 to 77% in FY15. Motor insurance comprised a major proportion of the business mix with more than 50% of overall premium during the period, followed by health insurance with 13-16% contribution in the overall business. Going forward, resumption of automobile sales and increased penetration could provide impetus to the business. A rise in third party premium rates and revived focus on the CV segment by insurers considering the impact of a lower risk pool will act as key drivers in this segment. We expect GWP to grow at 14.5% CAGR to | 6856 crore in FY15-17E. With retention expected to broadly remain stable at 77%, net earned premium is expected to grow at 15.1% CAGR to | 5074 crore in FY17E. The motor insurance segment continue to remain the major contributor with GWP at | 2918 crore in FY15, forming 55% of the overall business. With introduction of newer segment like crop insurance (8.8% contribution in FY15), proportion of motor insurance has declined from 59% in FY14 to 55% in FY15. Going ahead, we expect motor insurance to contribute a major proportion at >50% in the overall business mix.

Exhibit 67: GWP traction to remain steady

24052866 2725

31293676

41094584

52305962

6856

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7000

8000


(| c

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-10-50510152025303540

(%)

GWP YoY growth (%)


PAT growth at ~10% CAGR over FY15-17E as expenses moderate

With the dismantling of the Indian Motor Third Party Insurance Pool (IMTPIP), all provisions were taken till FY12, improving the efficiency in management expenses leading to a combined ratio below 100% in FY15 resulting in underwriting surplus.

With prudent underwriting standards and continuous focus on improving efficiency, we expect claim expenses to grow at 15.1% CAGR in FY16-17E to | 3653 crore and management expense to rise to | 1147 crore in FY17E, at 10.3% CAGR in FY16-17E. Accordingly, the combined ratio is expected to remain steady at 97-98% in FY16-17E, which would lead underwriting surplus to grow at 31% CAGR in FY16-17E to | 142 crore. Supported by investment yield, PAT is expected to grow at 10.3% CAGR in FY15-17E to | 684 crore.

PAT is expected to grow at 10% CAGR over FY16-17E


Exhibit 68: PAT growth still strong after blip in FY10-12 on TP motor pool provision

106 95 12143

124

295

409

562609

684

0

100

200

300

400

500

600

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800

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(| c

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-100%

-50%

0%

50%

100%

150%

200%

250%

(%)

PAT YoY growth


Return ratios to remain steady led by healthy earnings

With robust underwriting standard and focused selection of business, BAGIC maintained a consistent track record in profitability. In FY11-12, RoE declined owing to IMTPIP’s impact on profitability. Post dismantling of IMTPIP, RoE inched up and remained steady above 20% in FY13-15.

Supported by investment yield of ~9% in FY15-17E along with below 100% combined ratio, thereby generating under writing surplus, we expect RoE to remain steady at 21% in FY16E and 19% in FY17E.

Exhibit 69: Return ratios to remain steady

15 16

5

13

24 25 2521 19

0

5

10

15

20

25

30

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

(%)

RoE BALIC


Led by investment yield of ~9% in FY15-17E along with below 100% combined ratio, we expect RoE to remain steady at 21% in FY16E and 19% in FY17E respectively.


Risks & concerns: Life and general insurance Natural catastrophe may impact earnings estimates Natural calamities like floods and earthquake can lead to damage of life and property resulting in a sharp rise in claims posing a risk to our estimates impacting profitability.

Increasing competition may create pricing pressure

Under the new Insurance Act, insurance companies offering health policies are treated as a separate vertical specialised in their area of business. On a composite basis, any corporate agents including banks can sell insurance policies of one life insurer, one non-life insurer and one health insurer. Consequently, standalone insurers could give rise to increased competition and may create pricing pressure.

Call option with Allianz to impact stock – in case exercised As per the agreement entered in 2001, Allianz SE has a Call option, which can be exercised to raise its stake in BAGIC/BALIC at | 10/| 5.42 per share plus interest at 16% per annum compounded annually till July 30, 2016, April 22, 2016. With FDI limits raised to 49% from 26%, the probability of Allianz increasing its stake in the insurance business at substantially discounted valuation exist, which is negative for the holding company. Lack of strong Bancassurance tie-up in life insurance – a concern

BALIC does not have any large bank as a bancassurance partner. Though IRDA has allowed banks to enter into partnerships with multiple insurers, business growth could be adversely impacted if BALIC is unable to tie up with a strong bank partner.

Increase in tax rate for life insurance remains a risk

The current tax rate for life insurance companies is 14%. Any increase in the existing tax rate will adversely impact margins and profitability of the insurer.


General insurance valuation Driven by a large distribution network, retail strength and customer centric business approach, we expect BAGIC’s GWP to grow at 14.5% CAGR in FY15-17E. With prudent underwriting standard and anticipated increase in third party insurance, we expect the combined ratio to remain below 100% over FY15-17E, enabling underwriting surplus. Supported by an investment yield of ~9%, we expect PAT to grow at 10.3% CAGR over FY15-17E with RoE to remain around 20%.

We have valued BAGIC’s business at 15x FY17E P/E given the consistent growth and superior RoE, resulting in business valuation of | 10260 crore. With limited period left to exercise the Call option vested with Allianz, we value Bajaj Finserv’s stake at 74%, translating to target valuation of | 7592 crore for the 74% stake and | 429 per share of Bajaj Finserv post a 10% holding company discount.

Exhibit 70: Peer comparison matrix

Insurers (FY15) Bajaj Allianz HDFC Ergo ICICI LombardReliance General SBI General

TATA AIG General

Combined ratio (%) 96.7 108.3 104.0 121.0 120.9 102.0

Underwritting surplus (| crore) 82.8 -170.2 -219.6 -402.8 -311.9 -86.0

AUM (| crore) 7858.8 3766.7 10199.7 5048.3 2667.7 3028.2

RoE (%) 25.3 10.4 19.0 9.0 -12.5 18.0

Solvency ratio (%) 182.0 165.0 195.0 153.0 280.0 155.0

Source: Respective Company presentations, Annual Reports,, ICICIdirect.com Research

Exhibit 71: Peer valuation matrix

(FY17E) Bajaj Allianz HDFC Ergo ICICI Lombard Reliance General

PAT 674.2 317.1 535.6 209.3

NW 3518.3 1710.5 4348.5 1390.8

Valuation 10260.0 2565.7 8616.0 2093.1

P/E 15.2 8.1 10.8 10.0

P/B 2.9 1.5 2.0 1.5

Source: Respective Company presentations, Annual Reports, ICICIdirect.com Research

As per the agreed agreement, Allianz has a Call, which can be exercised to raise its stake in BAGIC at | 10 per share plus interest at 16% per annum compounded annually from April 23, 2001 to the date of payment. This is applicable if the Call option is exercised within 15 years from the subscription date i.e. up to April 22, 2016.

With FDI limits raised to 49% from 26%, Allianz has the right to get the enhanced stake at a substantially discounted valuation, which is negative for the holding company. However, based on the recent guidelines of RBI and IRDA (as discussed above), it is possible that the transfers would happen at a fair market price.

We value the BAGIC business at 15x FY17E P/E and arrive

at a target price of | 401/share (considering Bajaj Finserv’s

stake at 74%), post a 10% holding company discount


Financial Summary (BAGIC) Exhibit 72: Profit & loss account | Crore(Year-end March) FY14 FY15E FY16E FY17E

Gross Written Premium 4584.0 5229.8 5962.0 6856.3

Net Written Premium 3760.8 4008.9 4650.4 5279.4

Net Earned Premium 3493.0 3831.9 4352.3 5073.7

growth (%) 19.4 9.7 13.6 16.6

Net Incurred Claims 2525.0 2756.0 3155.4 3653.0

Net Commissions 135.2 49.2 116.3 132.0

Management Expenses 836.2 943.3 970.6 1146.7

Underwriting Results -1.6 82.8 110.1 142.0

Income from Investments 590.8 701.9 759.6 835.1

Profit Before Tax 587.0 777.0 869.7 977.1

Tax 178.0 214.7 260.9 293.1

Profit After Tax 409.0 562.3 608.8 684.0

growth (%) 42.7 37.0 8.3 12.4


Exhibit 73: Balance sheet | Crore(Year-end March) FY14 FY15E FY16E FY17E

Sources of Funds

Share capital 110.2 110.2 110.2 110.2

Reserves and surplus 1554.1 2115.3 2724.0 3408.0

Borrowings 0.0 0.0 0.0 0.0

Current liabilities 4024.2 4427.2 4727.0 5261.6

Provisions 2110.3 2249.2 2547.3 2753.0

Total liabilities 7,798.8 8,901.9 10,108.5 11,532.8

Applications of Funds

Investments 6017.9 7006.9 8101.7 9406.8

Fixed assets 288.7 282.5 288.2 293.9

DTA 31.8 45.2 47.4 49.8

Current asset 1460.4 1567.2 1671.1 1782.3

Total assets 7,798.8 8,901.8 10,108.5 11,532.8



Exhibit 74: Ratio analysis (%)(Year-end March) FY14 FY15E FY16E FY17E

Retention ratio 82.0 76.7 78.0 77.0

NEP/GWP 76.2 73.3 73.0 74.0

Claim ratio 72.3 71.9 72.5 72.0

Commission ratio 3.6 1.2 2.5 2.5

Management Exp ratio 26.0 23.0 22.3 22.6

Combined ratio 98.1 96.7 97.3 97.1

Underwriting surplus 0.0 2.2 2.5 2.8

Tax rate 30.3 27.6 30.0 30.0

Investment yield 11.0 9.0 8.8 8.8

RoE 24.6 25.3 21.5 19.4


Exhibit 75: Key growth rates (% growth)(Year-end March) FY14 FY15E FY16E FY17E

Net worth 16.3 52.5 27.4 24.1

AUM 19.2 12.8 14.8 15.3

Gross Written Premium 11.6 14.1 14.0 15.0

Net Written Premium 17.4 6.6 16.0 13.5

Net Incurred Claims 19.2 9.1 14.5 15.8

Underwriting Results 97.4 NA 32.9 29.0

Profit Before Tax 39.3 32.4 11.9 12.4

Profit After Tax 38.6 37.5 8.3 12.4



Company background – Bajaj Finance Limited Bajaj Finance (BFL) is one of the leading non banking financial companies (NBFC) in India and is part of the illustrious Bajaj group. The company was incorporated in 1987 essentially as the captive financier to Bajaj Auto’s vehicles. In 1995, it came out with an initial public offering (IPO). Initially, BFL was promoted by the erstwhile Bajaj Auto and Bajaj Auto Holdings. However, as per the scheme of de-merger of erstwhile Bajaj Auto in 2007, the shareholding of Bajaj Auto in the company has been vested with Bajaj Finserv, which is the financial services arm of the Bajaj Group. As outlined above, BFL started as the captive financier to two and three wheelers manufactured by Bajaj Auto. However, since then, the company entered various other lending segments and became one of the significant players in the retail asset-financing industry. BFL’s diversified product suite now comprises >10 product lines divided broadly into four categories like consumer, SME, commercial and rural. The company is the largest financier of two-wheelers and consumer durables in India. The company has an AUM of ~| 32410 crore as on FY15 and witnessed strong growth at 35% CAGR in the past three years. The liability mix is mainly skewed towards banks, followed by NCD/CPs and fixed deposits. BFL has a stable and deep management structure with 100 management team members having experience with leading multi national companies and transnational companies. The company’s reach and distribution channels are strong with a presence in 160 locations in urban areas and 50 branches in rural areas. Further, for various product lines, BFL has tie-ups with all major manufacturers and dealers in consumer durables, lifestyle financing, digital products etc.

Exhibit 76: Geographic presence Business Line FY15

Urban 161

Of which Consumer Lending branches 161

Of which SME Lending branches 119

Rural 232

Of which Rural branches 50

Of which Rural ASSC* 182

Source: Company, ICICIdirect.com Research; ASSC - Authorised Sales and Service Centres

Exhibit 77: Distribution Product Line FY15

Consumer durable product stores 7,000+

Lifestyle product stores 1,150+

Digital product stores 2,650+

2W–3W Dealer/ASCs(3)/Sub-dealers 3,000+

SME – Direct sales agents 700+

Rural consumer durable product stores 1,500+


Shareholding pattern (Q1FY16)

Shareholding Pattern Holdings (%)Promoters 57.6 Institutional investors 23.9 Others 18.5

Source: BSE, ICICIdirect.com Research

Institutional holding trend (%)

12.2 12.6 13.1 13.6

18.1

7.1 6.9 6.3 5.6 5.8

0

5

10

15

20

Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

(%)

FII DII

Source: BSE, ICICIdirect.com Research


Investment Rationale Bajaj FInance Bajaj Finance is an “asset finance” NBFC. The lending book can be broadly diversified into four categories viz. consumer finance, SME finance, commercial finance and rural finance. This book is funded through diversified resources like bank loans, bond or debentures, commercial papers, fixed deposits and funds raised via QIPs.

However, the key strength or highlight of BFL’s business model is its consumer finance (CF) business and in that, particularly, the consumer durable (CD) financing & lifestyle product financing business. These businesses provide uniqueness to BFL as other financing business like SME and commercial lending are covered by other NBFCs and banks. The edge in the consumer financing business acts as a competitive advantage and has allowed BFL to command a valuation premium compared to other NBFCs (see exhibit 20).

Stronghold in CD financing & lifestyle product finance business….

In the four broad categories, CF book as on FY15 was at | 13127 crore, comprising 40.5% of total AUM of | 32410 crore. Within the CF book, CD financing and lifestyle product financing book were at | 4163 crore and | 498 crore, respectively. Apart from these, the CF book includes two & three wheeler finance, personal loans and home loans to salaried individuals. Exhibit 78: Break-up of consumer finance (CF) book AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17E2W & 3W finance 1953 3593 3324 3315 3526 4215Consumer durable finance 893 2531 4163 5147 6430 8640Lifestyle finance - 174 498 565 871 1264 Digital Product - NA 312 354 549 797 Non Digital Product - NA 186 211 322 468Personal loans 511 2577 4303 4972 5517 7007 Personal loans Cross Sell NA NA 2412 2741 3145 3994 Salaried Personal Loans NA NA 1891 2231 2373 3013Home Loans (Salaried) - 453 839 938 1079 1370Total CF AUM 3,357 9,328 13,127 14,937 17,424 22,497


Exhibit 79: Detailed profile of products offered under consumer finance (CF) category Particulars Auto Financing Consumer Durable Lifestyle Financing Personal LoansYear started 1987 1995 2012 2012

Product profile 2 -3 wheeler TV, AC, LED etc

Digital - Mobiles, Laptops etc & Non Digital - Furnitiure,

Home Furnishing PL to existing

customers Target Segment Mass clients Mass Affluent Mass Affluent Existing ClientsTicket size (| Lacs) 2W - 0.45 lacs 0.28 lacs 0.35 lacs 5 lacs

3W - 1-1.5 lacsLoan to Value ratio (%) 2W - 65 to 70% 65 to 75% Unsecured

3W - 75 to 80%Duration/tenure 2-3 years 9 months ~12 months 30-36 months

Distribution network/presence

3000+ via Bajaj Auto dealers, Sub dealers, Authorised service centres

7000+ product stores

3800+ product stores

Yields range 22-25% 24-26% 25-26% 16-18% Proportion of Total AUM as on FY15 10.3 12.8 1.5 13.3 Amount (FY15- | crore) 3,324 4,163 498 4,303


The key strength or highlight of BFL’s business model is its

consumer finance (CF) business and in that, particularly,

the consumer durable (CD) financing & lifestyle product

financing business.

The new clients acquired each year in the CD financing

business have increased at 39% CAGR from 971000 in

FY11 to 3623000 new customers in FY15.

The edge in the consumer financing business acts as a

competitive advantage and has allowed BFL to command a

valuation premium compared to other NBFCs


In the past five years, BFL has witnessed strong accretion in new customer acquisition as can be seen in the exhibit below. The new clients acquired each year in the CD financing business have increased at 39% CAGR from 971000 in FY11 to 3623000 new customers in FY15. Even lifestyle product finance (that includes digital products financing i.e. mobile phones, laptops, etc and non-digital i.e. furniture, watches etc) started in FY13 saw a robust increase from 36000 customers served in FY13 to 373000 in FY15. Exhibit 80: Number of new loans disbursed each year Business Line FY11 FY12 FY13 FY14 FY15 Q1FY16Consumer Durable Finance 971000 1466000 1909000 2452000 3623000 1298000Life style Finance (Digital + Non digital) - - 36000 108000 373000 124000Personal Loans 67000 89000 116000 137000 207000 680002W 522000 654000 736000 651000 560000 141000Rural Finance - - - 22000 131000 79000SME/commercial 9000 12000 11000 20000 31000 10000Total 1569000 2221000 2808000 3390000 4925000 1720000


Currently, BFL is among the largest new client acquirers in India. This increase is owing to BFL’s large distribution network and reach. It is present in more than 114 cities with 7000+ point of sales or distribution franchise in consumer durable finance. Further, it has 3800+ dealer network in lifestyle products (2650+ in digital financing and 1150+ in non digital financing). Exhibit 81: Distribution franchise Business Line FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16Sales Finance or Consumer electronics –Dealer 2,000+ 2,500+ 2,800+ 3500+ 4900+ 7000+ 7900+Life style Fianance/ Non Digital - - - 1150+ 1300+Digital Product stores - - - 850+ 1600+ 2650+ 2900+2W–Dealer/ASCs 1,275+ 1,500+ 2200+ 2600+ 2600+ 3000+ 3000+Small/SME Businesses 225+ 250+ 250+ 400+ 700+ 700+ 700+Rural Consumer durable product stores - - - - - 1500+ 1800+


BFL capitalised strongly on its “0% financing” product, which enabled it to enjoy widespread popularity in the CD financing space among customers. Almost the entire CD financing and lifestyle product financing business is through “0% financing”. Under this scheme, the sale proposition is that the customer will not have to pay any interest. The customer pays ~30% as down payment and the balance amount in EMI of seven to eight months. BFL gets 1-1.5% processing fees and ~6-8% of the product value as subvention from manufacturers. Further, the company offers EMI (Existing membership card) cards to its existing customers. This card enables the holder to purchase consumer durables & lifestyle products, by availing a loan from BFL without any documents thus providing quick & hassle-free finance. Customers simply have to Swipe & Sign to buy using an EMI card. As of Q1FY16, about 3.5 million EMI cards have been offered.

…..leads BFL to command valuation premium over peers

BFL’s stronghold in the CD financing business is on the back of its large reach, formidable relationships with dealers and manufacturers, strong brand, expertise of several years and database of such large customers. These factors act as entry barriers in the CD financing business and give BFL a competitive advantage. Further, we believe the competition will remain low as banks are largely focused on housing finance or auto financing within retail loans while other NBFCs are in niche areas like auto finance, housing finance, gold finance or infrastructure finance.

Almost the entire CD financing and lifestyle product

financing business is through “0% financing”.


In the past few years, a major reason for BFL to command a higher valuation multiple vs. its peers is owing to its edge in the CF business and within that, particularly in the consumer durable & life style financing business. Going ahead, we expect BFL to maintain this premium owing to its leadership position in the under penetrated CD financing and lifestyle financing business with no major competitors.

Sizeable financing market in consumer category products to offer great opportunity

As per BCG-CII report, the overall consumption expenditure of India is likely to increase 3.6 times to US $ 3.6 trillion by 2020 from US $ 991 billion in 2010 (see Exhibit below). In that, Housing & Consumer durables is expected to jump 4 fold to US $ 752 billion from 2010 levels. In 2000-2010 decade also we observe that this segment quadrupled. The proportion of Housing & Consumer durables in overall consumption expenditure increased to 18.8% in 2010 from 15.7% in 2000. This is expected to further rise to 21% by 2020. Exhibit 82: Housing & consumer durables is expected to increase 4.0x by 2020

(in $ billion) 2000 2010 2020E

Food 135 328 895

Housing & Consumer durables 47 186 752

Transport & Communication 43 168 664

Education & Leisure 17 71 296

Apparel 18 59 225

Health 14 49 183

Others 25 129 570

Total 299 990 3585

2.4x

4.0x

3.9x

4.2x

3.3x

3.5x

5.2x

3.3x

2.7x

4.0x

3.9x

4.2x

3.8x

3.8x

4.4x

3.6x Source: BCG – CII Report, ICICIdirect.com Research

We have tried to gauge the market size in terms of sales of some of the major products financed by Bajaj Finance.

The market size of major consumer durable products like TV, washing machines, refrigerator and ACs is ~| 51000 crore as on FY15. This segment has increased at 13% CAGR in past five years. Over FY15-20, it is expected to increase at 16% CAGR to | 106000 crore. This is on the back of expected revival in the economy, increased disposable income, easy access to credit, increase in electrification of rural areas, higher investments by major global companies in India etc. Further, consumer electronics (that includes DVD players, home theatre systems, MP3 players, audio equipment, digital cameras, etc) that has a market size of ~| 60000 crore is estimated to reach | 176000 crore as per a report by Ernst & Young – FICCI.

In India, smart phone sales have increased strongly in the past few years. In FY13, ~4.4 crore smart phones were sold. This number is estimated to be ~11-12 crores in FY15. BY FY20, ~18 crore smart phones are expected to be sold annually. BFL is one of the largest financiers of Samsung’s smart phones that has ~23% market share. Further, BFL also finances Apple’s smart phones, which recorded sales of more than 1 million smart phones last year.

The furniture market in India, which is highly unorganised (~90% of the market) is currently at ~| 70000 crore. With expenditure on Housing estimated to rise four fold as observed in the above exhibit, the furniture market is estimated to increase to ~| 270000 crore by FY20.

The total market size of the segments discussed above such as consumer durables, consumer electronics, smart phones and furniture is estimated at about | 300000 crore and is expected to increase to around ~ | 700000

Housing & Consumer durables is expected to jump 4 fold to

US $ 752 billion from 2010 levels as per BCG – CII report


crore by FY20. Further, the company has indicated that in the CF space it is also working on a new product segment that is expected to have a financing market size of ~| 125000 crore. Entering the e-commerce financing market can be an added advantage over time.

Two wheeler, three wheeler financing business – captive financing model

BFL has been present in two wheeler financing since its inception in the early 1990s. This business has a captive financing model wherein BFL finances two-wheelers produced by its group company Bajaj Auto. Until FY08, two-wheeler financing comprised the bulk (~66%) of the overall AUM, which has now dipped to 10.3% (| 3324 crore as on FY15) of AUM. This is due to enhanced focus on the CD finance book, de-risking of the book by diversifying to SME & commercial financing and also due to increased asset quality stress seen in the two-wheeler book and 15% CAGR decline in two-wheeler sale volumes of Bajaj Auto over FY13-15.

Though there has been a decline in the two-wheeler financing proportion in BFL’s overall AUM, the company is the still the largest two-wheeler lender in India focused on the semi-urban & rural markets. BFL has a market share of 18% in the two-wheeler financing space. Currently, the company finances 30% of Bajaj Auto’s domestic two-wheeler sales through 3000+ dealers and authorised service centres. BFL also finances about 15% of Bajaj Auto’s three-wheeler sales. This business is currently operating in 16 states covering 216 key dealers of Bajaj Auto. Exhibit 83: Slowing traction in two-wheeler finance book during FY14 & FY15 Two Wheeler Finance FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16Number of new loans disbursed 397000 239000 442000 522000 655000 736000 652000 560000 141000Amount Disbursed (| crore) 1484 783 1364 2034 2671 NA 3149 NA NAAUM (| crore) 1647 1175 1393 1953 2725 NA 3593 3324 3315

Source: Company, ICICIdirect.com Research; NA = Not available

Going ahead, we expect two-wheeler volumes financed by BFL to increase as domestic sale volumes of Bajaj Auto are expected to increase at 13% CAGR over FY15-17E to 2255296 units. This will also lead to an improvement in absolute AUM to | 4215 crore by FY17E. However, the proportion in overall AUM may continue to dip to 8% from 10.3% of AUM as on FY15.

Cross-sales of products to existing large customer base

The large number of customers acquired through the CD financing business (~40 lakh new customers in FY15) allows BFL to cross-sell various other products to customers with a healthy credit history. These products include personal loans, life/general insurance, etc. Total personal loans as on FY15 were at | 4303 crore (14% of AUM), which were largely to existing customers. Further, home loans to salaried individuals are also covered in CF financing. It had a book of | 839 crore as on FY15 and comprised 2.6% of total AUM. During Q1FY16, | 633 crore of personal loans were disbursed while | 116 crore worth of life insurance and | 67 crore worth of general insurance policies were sold through cross sales.

We expect the share of the CF division in total AUM mix to increase to 42.7% (| 22497 crore) by FY17E from 40.5% as on FY15. It will be mainly led by CD financing & lifestyle financing segment, which is expected to witness strong AUM CAGR of 44% and 59%, respectively in FY15-17E (refer exhibit 20). We expect such an increase on the back of a rise in sales of consumer durable, increased finance penetration and jump in the

The large number of customers acquired through the CD

financing business (~40 lakh new customers in FY15)

allows BFL to cross-sell various other products to

customers with a healthy credit history.

Currently, the company finances 30% of Bajaj Auto’s

domestic two-wheeler sales through 3000+ dealers and

authorised service centres.


share of BFL in the overall financing market from 18% currently to ~23% by FY17E.

SME financing – Mortgage heavy book; traction to moderate; share to decline but continue to remain highest in overall AUM

BFL’s SME category is the largest of the four broad categories and comprises ~53% of the total AUM. It stood at | 17198 crore as on FY15. It includes small business loans, loan against property (LAP), home loans to self employed & loan against securities (LAS). LAP comprises the highest part in SME financing as well as in the overall AUM at 25.4% as on FY15. LAP is followed by small business loans (9.8%), home loans (9.5% of overall loans) and LAS (4.5%). Exhibit 84: Break-up of SME book AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17ELoans 727 2033 3084 3795 4356 5637 Business Loans NA NA 2461 3058 3572 4623 Professional Loans NA NA 623 737 784 1015Loan against property 2251 6907 8232 8424 9583 11933Home loans (Self Employed) 0 2351 3071 3063 3858 4847Loan against securities 321 841 1578 1516 1950 2397SME cross sell 0 718 1233 1360 1576 1976Total SME AUM 3,299 12,850 17,198 18,158 21,323 26,791


In the SME segment, the focus is on high net worth SMEs with average annual sales of | 25 crore with established financials and a proven borrowing track record. In it, BFL offers a range of working capital and growth capital products.

Further, BFL offers a full range of mortgage products like LAP, lease rental discounting & home loans to SME and self employed professionals.

Exhibit 85: Detailed profile of products offered under SME financing category Particulars Small Business Loans LAP Home Loans Loan against securities SME Cross sellYear started 2009 2009 2010 2009 2012

Target Segment SME clients Affluent - i.e HNIs and Ultra

HNIs Self employed Affluent - i.e HNIs and Ultra

HNIs SME Clients Ticket size |10 lacs to 30 lacs | 1 crore to | 5 crore | 75 lacs to | 2 crore | 1 to | 2 crore ~ | 50 lacs Loan to Value ratio (%) Unsecured 40-60% 50-70% 40-50%Duration/tenure 2-3 years 15-20 years 15-20 years 1 year Yields range 18-20% 11.5 to 13% 10.3-12% 12-13.8% 10.3-20%Proportion of AUM as on FY15 9.8 25.3 9.5 4.5 3.6 Amount (FY15 - | crore) 3,084 8,232 3,071 1,578 1,233


Since FY11, the LAP book has witnessed robust growth of 38% CAGR to | 8232 crore. Though yields in the mortgage business are much lower than other products, at the profitability level it is not much dilutive with RoEs at 16-17%. Of late, traction in the LAP portfolio has slowed (proportion dipped to 23.7% as on Q1FY16 from 28.7% in FY14) owing to enhanced competitive pressures and higher commission payouts. This led RoEs of the LAP business to fall below the comfortable range of 16-17%. The company indicated that it is developing a ‘direct to customer model’, which will help reduce commission payouts and lead to an improvement in product profitability. However, owing to enhanced competition in the business from other NBFCs and banks, going ahead, we expect the LAP portfolio traction to moderate (20% CAGR till FY17E) and its proportion to shrink to 22.7% of AUM as on FY17E.

Small business loans have also witnessed strong traction of 43% CAGR since FY11 to | 3084 crore. The share in overall AUM has increased

LAP comprises the highest part in SME financing as well

as in the overall AUM at 25.4% as on FY15

Since FY11, the LAP book has witnessed robust growth of

38% CAGR to | 8232 crore.


continuously and is at 9.5% as on FY15. As per the management, healthy traction in this segment should continue, going ahead, as profitability of this business is improving. Small business loans include professional loans that amount to | 623 crore of | 3084 crore. These loans are largely to doctors.

Going ahead, we expect the proportion of small business loans to rise to 10.7% by FY17E from 9.5% as on FY15.

Under LAS, BFL offers loans to promoters and HNIs to enable them to meet their working capital and other business purpose needs. Securities in this case could be equity shares, bonds and mutual funds. During Q1FY16, the company indicated that it is ready to execute its strategy wherein it will partner with leading brokerages/banks with the objective of leveraging the funding opportunity to their HNI & ultra HNI customer base.

A dedicated SME relationship management channel has also been created to provide a wide range of cross-sales of products to BFL’s SME franchise.

We expect the share of the SME category in the total loan mix to dip to 50.9% by FY17E from 53.1% in FY15 mainly led by shrinkage in the LAP portfolio (refer exhibit 20).

Commercial financing – traction dependent on underlying economic trend

In the commercial category, it provides finance in the construction equipment (CE) and infrastructure space. Apart from these, BFL also offers wholesale lending products covering short, medium and long term needs of auto component vendors in India. The proportion of the overall commercial segment has reduced from 18% of total AUM in FY12 to 5.4% in FY15 owing to a run down in the book related to CE and infra financing. These segments witnessed asset quality pressures. Hence, BFL reduced its exposure as can be seen in the below exhibit. Exhibit 86: Break-up of commercial lending category AUM (| Crore) FY11 FY14 FY15 Q1FY16 FY16E FY17EConstruction equip. finance 591 448 188 134 145 132Vendor Financing 324 862 1146 1333 1452 1765Infrastructure lending 0 523 418 473 415 448Total Commercial AUM 915 1,833 1,752 1,940 2,012 2,345


Exhibit 87: Detailed profile of products offered under commercial category Particulars Vendor Financing CE Financing Infra LendingYear started 2,009 2,010 2,010 Target Segment Bajaj Auto's vendors Strategic & Retail AffluentTicket size NA | 1.0 crore to | 3 crore NALoan to Value ratio (%) NA 70 to 80% 70 to 80%Duration/tenure NA 3 years 1-15 yearsYields range NA 10.5% - 12.5% 12-14%Proportion of AUM as on FY15 ( 3.5 0.6 1.3 Amount (FY15 - | crore) 1,146 188 418


The company has indicated its intention to increase the proportion of the commercial segment in the overall AUM to ~10% over the next four or five years, mainly via CE financing and infrastructure lending. However, it will depend on the how the economic scenario pans out and mainly on the revival in the infrastructure space. Currently, the infrastructure space is in doldrums owing to stalled projects and flow of lower fresh investments due to which this space is not lucrative for further lending by banks and other financial institutions. Over FY15-17E, we expect the

In rural areas, BFL is currently present in CD financing,

asset backed financing, gold loans, personal loans, etc.

Owing to its small size, the segment has witnessed sharp

traction with the loan book increasing to | 333 crore in

FY15 from | 50 crore in FY14

The proportion of the commercial segment has reduced

from 18% in FY12 to 5.4% in FY15 owing to a run down of

the book in the construction equipment and infra financing

due to stress in these segments


commercial category share to fall further to 4.5% of the total AUM as we believe any significant improvement in the infrastructure financing space will take time. Rural financing to maintain strong growth on lower base, increasing reach

In the rural eco system, BFL is a highly diversified lender. The company is currently present in CD financing, asset backed financing, gold loans, personal loans, etc. BFL functions through a hub & spoke model. The company operates its rural business in Maharashtra, Gujarat and Karnataka. BFL is expected to open branches in rural areas of Madhya Pradesh in Q2FY16 followed by Tamil Nadu. The company has a presence across 232 towns and villages and a retail presence in 1800+ stores. Exhibit 88: Rural proportion to rise, going ahead, but still stay a small part of the AUM AUM (| Crore) FY14 FY15 Q1FY16 FY16E FY17ERural financing 50 333 522 726 1054% of Total AUM 0.21 1.03 1.47 1.75 2.00


As business commenced recently i.e. in FY13, the book size is small and witnessed sharp traction. AUM increased to | 333 crore in FY15 from | 50 crore in FY14. Recently, the company also launched its MSME lending business in rural areas. We expect the rural portfolio to continue to witness sharp traction, going ahead. We have factored in that its share will rise to 2% of total AUM at | 1054 crore as on FY17E.

Overall book expected to grow at 27% CAGR over FY15-17E

BFL has a diversified loan portfolio. Further, the company has a leadership position in under penetrated & growing segments like CD financing, lifestyle product financing, two-wheeler financing, LAP, etc. which accounts for ~50% of its portfolio. These factors have allowed BFL to clock strong AUM CAGR of 44% over FY11-15 to | 32410 crore. This has been despite a weak economic environment in the past few years.

The traction in AUM in the past four years has been led by the SME category, which increased at 51% CAGR to | 17136 crore as on FY15 followed by the CF category, which rose at 41% CAGR to | 13202 crore. The LAP portfolio in the SME category, which accounts for highest proportion in overall AUM at 25.4%, grew at 38% CAGR in FY11-15 to | 8232 crore. CD financing in the CF book has seen 47% CAGR to | 4163 crore as on FY15.

Of the total AUM, BFL places about 4-5% for securitisation for better asset-liability management. As on FY15, of the total AUM of | 32410 crore, about | 1211 crore was the off book or securitised amount. The balance | 31199 crore is actual advances outstanding in the balance sheet as on FY15.

Going ahead, we expect overall advances traction at 27% CAGR in FY15-17E to | 50718 crore driven by CF segment.

Going ahead, we expect overall advances traction for BFL

at 27% CAGR in FY15-17E to | 50718 crore driven by the

CF segment


Exhibit 89: Credit growth to stay healthy at 27% CAGR in next two years

2893 2370 40327272

1228316744

22971

31199

39935

50718

70.180.4

68.9

36.3 37.2 35.828.0 27.0

-18.1

0

10000

20000

30000

40000

50000

60000


(| c

rore

)

-40

-20

0

20

40

60

80

100

(%)

Loan Loan Growth (RHS)


Exhibit 90: AUM break-up

AUM (| Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17EConsumer Finance 3,357 9,328 13,127 17,424 22,497 40.6 30.9 SME Business 3,299 12,850 17,198 21,323 26,791 51.1 24.8 Commercial 915 1,833 1,752 2,012 2,345 17.6 15.7 Rural - 50 333 726 1,054 77.9 Total AUM 7,571 24,061 32,410 41,485 52,686 43.8 27.5

AUM (Mix %) FY11 FY14 FY15 FY16E FY17EConsumer Finance 44.3 38.8 40.5 42.0 42.7SME Business 43.6 53.4 53.1 51.4 50.9Commercial 12.1 7.6 5.4 4.9 4.5Rural - 0.2 1.0 1.8 2.0Total AUM 100 100 100 100 100

CAGR



Well diversified funding; strong parentage, credit rating enable lower CoF The borrowings of BFL as on FY15 stood at | 26690 crore. The borrowings are well diversified with banks proportion being the highest at 54% followed by NCDs at 37% and CPs/FDs at 9%. Owing to strong parentage and credit rating (consistently holding AA+/stable and LAA+ stable rating from Crisil and Icra over the last seven years, with a positive outlook. Further, the fixed deposit scheme has been rated FAAA/Stable by Crisil and MAAA/Stable by Icra) the company is able to raise funds at competitive rates from various sources as reflected in CoF being better than peers as seen in below exhibit. Exhibit 91: BFL manages to keep CoF lower than peers

8.1

10.49.4

10.5 11

0

2

4

6

8

10

12

Bajaj Finance Chola Mandalam Mahindra Finance Shriam TransportFinance

Shriram City Union

(%)

CoF (FY15)


Further, at regular intervals, the company was able to raise funds via QIP, which also helps in reducing its cost of borrowings. Recently, BFL raised ~| 1800 crore via allotment of warrants to promoters and equity to QIBs. Going ahead, the mix of borrowings is expected to change depending on market rates. However, we believe bank borrowings will continue to dominate.

Exhibit 92: Trend in borrowings

10,22613,133

19,750

26,691

33,465

42,12152.6

28.4

50.4

25.4 25.935.1

0

10,000

20,000

30,000

40,000

50,000

FY12 FY13 FY14 FY15 FY16E FY17E

(| c

rore

)

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60

(%)

Borrowings Growth (RHS)

Source: Company, ICICIdirect.com, Research

Exhibit 93: Resource mix expected to be tilted towards banking

64.4

38.9 33.4 39.128.2

37.1 37.6 38.2

35.6

53.2 57.6 52.957.6

53.8 53.7 53.3

0.0 7.9 9.0 8.1 14.1 9.0 8.7 8.5

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FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

(%)

Deposits/CPsB k

Source: Company, ICICIdirect.com, Research

Borrowings are well diversified with bank’s proportion

highest at 54% followed by NCDs at 37%, CPs/FDs at 9%


Margins one of the highest; to moderate a bit, going ahead The margins of Bajaj Finance are one of the highest among its peers. Its margins during FY15 were at 10.3%. Such high margins were on the back of strong blended yields of 18.9% and competitive CoF, which helps the company to earn overall spread of 9.2%. Yields in the consumer financing category are high as outlined in the above exhibit. In the past few years, margins witnessed a slide owing to a change in loan mix towards lower yielding segments as BFL’s strategy was to go for scale and secured products like in the SME category (like LAP), which impacted the yield, to some extent, but also helped maintain steady asset quality. LAP portfolio where yields are ~13% increased at 38% CAGR over FY11-15. Exhibit 94: BFL earns highest margins among peers in FY15

10.3

7.18.7

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4

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12


(%)

NIM (FY15)


With banks reducing their base rates and owing to the recent fund raising, the company could benefit, going ahead, on the CoF front. However, it would be arrested by an increase in exposure towards relatively lower yielding assets like SME. We expect margins to moderate a bit around 30 bps and stay at ~ 10% in FY16E, which is still healthy compared to peers. Exhibit 95: Margins to stay at strong levels

14.6 12.2 11.6 10.8 10.3 10.0 10.1

22.720.4 20.1 19.1 18.9 18.3 18.2

7.58.8

10.3 9.6 9.7 9.5 9.4

0.0

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25.0


(%)

NIM YoA CoD


The margins of BFL are one of the highest among its peers.

Its margins during FY15 were at 10.3%. Such high margins

were on the back of its strong blended yields of 18.9% and

competitive CoF, which helps the company to earn overall

spread of 9.2%


Asset quality remains at acceptable levels; expect to stay steady Bajaj Finance’s gross NPA ratio at 1.5% (| 484 crore) as on FY15 is relatively better than some of its peers and also considering the weak economic environment of the past two or three years. The asset quality has improved sharply over the last five or six years. GNPA ratio was at 16.6%, 7.6% during FY09, FY10, respectively. This was owing to high stress witnessed in the two-wheeler financing and computer financing business then. Post such a setback in asset quality, BFL focused on improving its risk management process and framework. This included product rationalisation like exiting the computer financing business, focusing on safer products like LAP and mortgages during the weak economy of FY11-14, increased use of Cibil scores, focusing on repeat customers with good repayment pattern and on affluent & mass affluent customers. These efforts yielded large gains with improvement in asset quality as the absolute GNPA declined from | 416 crore in FY09 to | 148 crore by FY12 before increasing to | 484 crore by FY15. However, the loan book size is much larger now than in FY09 (>13x of FY09 loan book).

Exhibit 96: Asset quality witnesses sharp improvement; expect to stay at acceptable levels

253

416318

220148 189

280

484

668

908

181283

14360 16 33 66

143189

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7.6

3.01.2 1.1 1.2 1.5 1.7 1.8

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re)

024681012141618

(%)

GNPA NNPA GNPA (%) NNPA (%)


Exhibit 97: BFL in better position in terms of asset quality compared to peers

1.54

2.8

6.0

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2.7

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Shriram CityUnion

(%)

GNPA (FY15)


The credit cost (i.e. provisions as percentage of loans) also declined from 8.1% of advances in FY10 to 1.2% by FY13 and 1.4% levels as on FY15.

BFL’s asset quality has improved sharply over the last five

or six years. The GNPA ratio was at 16.6%, 7.6% during

FY09, FY10, respectively. As on FY15, the GNPA ratio was

at 1.5%

The credit cost (i.e. provisions as percentage of loans) also

declined from 8.1% of advances in FY10 to 1.2% by FY13

and 1.4% levels as on FY15.


Exhibit 98: Trend in credit cost

3.9

6.2

8.1

3.6

1.6 1.2 1.3 1.4 1.5 1.7

0123456789


(%)

Credit cost (%)


Concerns were raised about the company’s entry into the CE financing and infra financing when BFL entered these spaces in FY09 as the company lacked experience in these business. During the downturn, the company did face certain NPL issues in this exposure along with falling RoEs in the segment. Post this realisation, BFL consciously started reducing its exposure to both these segments that fared well on the asset quality front. The commercial category proportion has reduced to 5.4% in FY15 from 18.5% in FY12. Going ahead, we expect the GNPA ratio to increase a bit in FY15-17E to 1.8% by FY17E. However, these levels are still acceptable and better than peers.

Well capitalised to clock strong growth, going ahead BFL is in a comfortable position on the capital front especially after the recent capital raising of ~| 1800 crore. In June 2015, the company allotted warrants to the promoter i.e. Bajaj Finserv at | 4412/share amounting to | 408 crore. Further, BFL raised | 1400 crore via allotment of equity shares to QIBs at | 4275/share. The total capital adequacy ratio as on Q1FY16 is 20.7 with Tier I ratio at 17.4% (up from 14.2% as on FY15 owing to recent capital raising). We expect the current capital to be sufficient to meet growth requirements for the next two or three years. Exhibit 99: Comfortable on capital adequacy front

16.8 15.018.7

16.17 14.1517.41

3.22.5

3.32.97

3.82

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25

FY11 FY12 FY13 FY14 FY15 Q1FY16

(%)

Tier I Tier II


We expect the current capital to be sufficient to meet the

growth requirements for the next two or three years


Financials (Bajaj Finance) Net Interest Income growth to moderate from past, but still remain sturdy

BFL’s NII has witnessed robust traction in the past on the back of strong margins and loan growth. In the past five years, the NII CAGR has been 36% while in the past three years it has been maintained above >30% at 32% to | 2872 crore as on FY15. The margins, on an average, have been above 10% over the past three to five years. Strong traction on the advances front of 51% CAGR in the past five years and 36% CAGR in the past three years has helped maintain NII traction.

Going ahead, as we factor in a slight moderation in margins and a drop in the pace of loan growth, NII traction is accordingly expected to decline to 28% CAGR over FY15-17E. Exhibit 100: Healthy credit growth + strong margins to support healthy NII traction ahead

239 345608

9131250

17172216

2872

3671

4721

44.2

76.1

50.2

36.9 37.429.1 29.6 27.8 28.6

0

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NII NII growth


Operational efficiency to kick in, going ahead

BFL’s cost-to-income ratio in the past six years has been steady at 45% while opex as a percentage of average assets has witnessed an improvement as seen in the exhibit below. This is owing to higher growth in assets vs. income growth. Further, the staff cost increases largely in tandem with the rising book size. However, we believe that, to a large extent, fixed costs have been incurred and BFL should see some operating leverage, going ahead. We expect cost to income ratio to decline to 42.5% by FY17E from 45% currently while opex to assets should decline from 5% to 4.6% over next two years. Exhibit 101: Operating efficiency to improve, going ahead

58.150.7 44.7 44.5 47.0 44.7 46.0 45.1 44.1 42.5

5.2

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7.06.2

5.5 5.45.0 4.7 4.6

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Cost to Income ratio Cost to assets ratio (RHS)


In the past five years, the NII CAGR has been 36% while in

the past three years it has been maintained above >30%

at 32% to | 2872 crore as on FY15

The cost-to-income ratio has been steady for BFL in the

past few years. We expect BFL to witness some operating

leverage, going ahead


Expect strong traction in profitability, healthy return ratios to stay

On the back of strong traction in NII growth, steady cost to income ratio and declining credit costs, BFL was able to clock strong PAT CAGR of 59% in FY10-15 and a CAGR of 30% over the past three year to | 898 crore in FY15. Accordingly, return ratios improved sharply in FY10-12 (RoE increased to 24% from 8% while RoA improved to 3.8% from 2.3% in FY10). However, post FY12, due to a decline in margins owing to a change in the loan mix, RoA declined to 3.1% by FY15. Accordingly, RoE dipped to 20% in FY15.

We expect PAT growth to remain strong at 27% CAGR over FY15-17E to | 1456 crore with return ratios staying healthy. RoEs are expected to dip from current levels owing to ~| 1800 crore fund raised via QIP in FY16. Any major improvement in the economic scenario would be an upside risk to our estimates. Exhibit 102: Profitability to be maintained at benign levels

33.9 89.4247.0

406.2591.0

718.5897.4

1,143.7

1,456.3

64.7

163.5176.3

64.445.5

21.6 24.9 27.5 27.3

0

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PAT Growth (RHS)


Exhibit 103: Healthy return ratios

8.0

19.724.0 21.9 19.5 20.4 19.0 18.5

2.0 3.20.61.0

2.3

3.8 3.8 3.83.4

3.1 3.0 3.0

0

5

10

15

20

25

30


(%)

0.00.51.01.52.02.53.03.54.04.5

(%)

RoE RoA (RHS)


We expect PAT growth to remain strong at 27% CAGR

over FY15-17E to | 1456 crore with return ratios expected

to stay healthy


Risk & concerns Fresh competition may impact edge in consumer financing business BFL’s key strength against its peers is in its stronghold in the CD financing business and lifestyle product financing business. As such, currently there are no major players in this business who can pose a challenge to BFL but there are no entry barriers too. With demand for corporate loans and SME loans expected to remain weak, other financial institutions like banks and NBFCs may look towards this under penetrated CD financing business. This may reduce BFL’s strong positioning or compel it to resort to risky ways of going about its business. This may lead to a reduction in the premium multiple it gets currently.

Higher concentration in certain segments Though BFL’s loan book is well diversified, certain products like LAP, home loans, CD financing and personal loans have a higher share of 25.4%, 12.1%, 13% and 13.3%, respectively. The mortgage related book accounts for ~40% of the AUM as on FY15. In case of LAP and home loans, the book has grown at a brisk pace in recent times and is not seasoned. Hence, any large decline in property price could lead to asset quality stress cropping up from this book. The unsecured loans i.e. the proportion of personal loans has also increased recently. This portfolio could pose a risk.

Lower-than-expected rise in Seventh Pay Commission Demand for consumer durables depends on various factors like state of the economy, employment opportunities etc. The Seventh Pay Commission report, which deals with pay scales of central bank employees, is expected to be announced on September 20, 2015. Any letdown can also impact demand for consumer durables and other lifestyle products. In turn, this could impact the advances growth of BFL and, consequently, its profitability.

Recent ‘marginal cost’ basis lending rate calculation may flow to NBFCs too Recently, RBI released draft guidelines for calculation of base rates by banks on a “marginal cost” basis vs. the “average cost” basis followed earlier. The same will be implemented from April 1, 2016 once the final guidelines are announced. These guidelines will impact bank’s margins as under marginal cost method once the deposit rates are revised lower the entire calculation of cost of funds need to be done on the basis of this new lower rate. This is despite the fact that most of the borrowings still are at the higher deposit rate. As has been witnessed in the past, the RBI has gradually subjected NBFCs to the same NPA provisioning guidelines as applicable to banks. Similar, instance can also happen in lending rate calculation for NBFCs which can have negative implications NBFC’s margins.


Bajaj Finance Valuation In the past two years, investors have taken keen interest in BFL as reflected in the 357% rise in its stock price since September, 2013. The stock performance has surpassed its peers. It is currently trading at 3.3x FY17E ABV for a RoA of 3% and RoE of 19%. The two year forward multiple increased from 1x to >3x currently post September 2013. We believe the reason for such strong interest is owing to its leadership position in the short duration, lower ticket sized, CD financing and lifestyle product financing business along with the diversified nature of its loan portfolio. This has allowed BFL to register strong AUM growth of 44% CAGR in the past four years to | 32410 crore as on FY15 with asset quality staying under control (GNPA ratio at 1.5%). PAT over FY11-15 period rose at a robust pace of 38% CAGR to | 897 crore as on FY15.

Over FY15-17E, we expect PAT CAGR to moderate compared to the past but still stay healthy at 27% CAGR to | 1456 crore by FY17E driven by a steady operating performance, strong growth & margins and controlled asset quality & credit cost. We expect return ratios to stay healthy over the next two years with RoA of 3% and RoE of ~19%. We believe the opportunity size in the consumer and SME space remains lucrative and BFL is well placed to capture it.

BFL is trading at premium valuations to its peers (see exhibit below) in the NBFC space due to better visibility in earnings. We initiate coverage on BFL with a BUY recommendation & a TP of | 5600 valuing at 3.6x FY17E ABV.

Exhibit 104: Peer Comparison – Bajaj Finance commands premium multiples as it is well placed among peers

CMP (|) Mcap (| crore) AUM (| crore) GNPA (FY15 - %) FY16E FY17E FY16E FY17E FY16E FY17E P/ABV (FY17E) P/E (FY17E)Bajaj Finance 5049 27030 32410 1.5 3.0 3.0 19.0 18.5 1363.7 1550.2 3.3 18.5STFC 845 19179 59108 3.8 2.1 2.2 13.4 14.6 407.0 442.0 1.9 12.1MMFS 240 13662 36878 6.0 2.5 2.6 15.6 17.0 100.4 114.5 2.1 12.0SCUF 1770 11665 16717 2.7 3.3 3.2 14.9 16.0 675.0 760.0 2.3 14.9CIFC 609 8756 25452 2.8 2.1 2.2 17.4 17.8 203.0 235.0 2.6 13.5

RoA (%) RoE (%) ABV

Source: Company, Bloomberg, ICICIdirect.com Research; STFC = Shriram Transport Finance; MMFS = Mahindra Finance; SCUF = Shriram City Union Finance; CIFC = Cholamandalam

Exhibit 105: Trend in P/ABV multiple

0

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(|)

Price (|) 4.5x 3.5x 2.5x 1.5x 0.5x


BFL has recently tied up with major e-commerce players. Any positive fallout of such a deal on growth could be an upside risk to our call. Further, higher-than-expected growth in the economy would lead to higher-than expected loan book growth and, consequently, lead to higher-than-expected traction in profitability. This, in turn, could lead to a further re-rating of the stock and, hence, remains an upside risk to our call.

We expect return ratios to stay steady over next two years

with RoA of 3% and RoE of ~19%. We believe the

opportunity size in consumer and SME space remains

buoyant and BFL is well placed to capture it.

Bajaj Finance can be truly described as a successful

transformation story in the past eight years. Post induction

of a new management in 2007, BFL got transformed from a

predominantly two & three wheeler finance company to a

financier of large spectrum of loans in the consumer, SME

and commercial categories with >10 product lines


Financial Summary – Bajaj Finance Exhibit 106: Income Statement (| crore)(Year-end March) FY13 FY14 FY15 FY16E FY17EInterest Earned 2923.1 3789.6 5120.0 6513.4 8257.7Interest Expended 1205.7 1573.2 2248.3 2842.5 3536.3Net Interest Income 1717.4 2216.3 2871.7 3670.9 4721.4Growth (%) 37.4 29.1 29.6 27.8 28.6Non Interest Income 186.6 284.8 298.3 351.9 411.8Operating Income 1904.0 2501.1 3169.9 4022.8 5133.2Employee cost 245.2 340.8 450.7 572.4 715.5Other operating Exp. 605.8 810.8 978.2 1202.1 1464.9Operating Profit 1053.1 1349.5 1741.0 2248.3 2952.8Provisions 181.8 258.9 384.6 533.5 747.9PBT 871.3 1090.7 1356.4 1714.8 2204.9Taxes 280.3 372.2 459.1 571.0 748.6Net Profit 591.0 718.5 897.4 1,143.7 1,456.3 Growth (%) 45.5 21.6 24.9 27.5 27.3EPS (|) 129.8 144.4 179.9 221.5 273.4


Exhibit 107: Balance sheet (| crore)(Year-end March) FY13 FY14 FY15 FY16E FY17ESources of FundsCapital 49.8 49.8 50.0 53.3 53.3Reserves and Surplus 3317.3 3941.1 4749.7 7171.7 8503.4Networth 3367.0 3990.9 4799.7 7225.0 8556.7Borrowings 13133.2 19749.6 26690.8 33464.9 42120.8Other Liabilities & Provisions 1320.9 877.5 1321.3 1889.4 2436.9Total 17,821.2 24,618.0 32,811.8 42,579.3 53,114.4

Application of FundsFixed Assets 587.7 763.3 894.0 920.8 948.4Investments 5.3 28.2 332.3 355.6 373.3Advances 16743.6 22971.0 31199.5 39935.3 50717.8Other Assets 68.2 78.7 165.8 174.1 181.1Cash 416.4 776.8 219.7 1193.6 893.7Total 17,821.1 24,618.0 32,811.2 42,579.3 53,114.4



Exhibit 108: Key ratios (Year-end March) FY13 FY14 FY15 FY16E FY17EValuationNo. of shares (crore) 5.0 5.0 5.0 5.3 5.3EPS (|) 129.8 144.4 179.9 221.5 273.4DPS (|) 15.0 15.9 18.0 19.0 20.0BV (|) 676.4 802.2 959.9 1399.2 1606.1ABV (|) 669.8 788.8 931.4 1363.7 1550.2P/E 38.8 34.9 28.0 22.8 18.4P/BV 7.5 6.3 5.3 3.6 3.1P/ABV 7.5 6.4 5.4 3.7 3.3Yields & Margins (%)Net Interest Margins 11.6 10.8 10.3 10.0 10.1Yield on assets 19.8 18.5 18.4 17.8 17.7Avg. cost on funds 8.4 7.8 8.1 7.9 7.7Yield on average advances 20.1 19.1 18.9 18.3 18.2Avg. Cost of Borrowings 10.3 9.6 9.7 9.5 9.4Quality and Efficiency (%)Cost to income ratio 44.7 46.0 45.1 44.1 42.5Cost to assets ratio 5.5 5.4 5.0 4.7 4.6GNPA 1.1 1.2 1.5 1.7 1.8NNPA 0.2 0.3 0.5 0.5 0.6ROE 21.9 19.5 20.4 19.0 18.5ROA 3.8 3.4 3.1 3.0 3.0


Exhibit 109: Growth ratios (Year-end March) FY13 FY14 FY15 FY16E FY17ETotal assets 37.9 38.1 33.3 29.8 24.7Advances 36.3 37.2 35.8 28.0 27.0Borrowings 28.4 50.4 35.1 25.4 25.9Net interest income 37.4 29.1 29.6 27.8 28.6Operating Income 33.5 31.4 26.7 26.9 27.6Operating expenses 27.1 35.3 24.1 24.2 22.9Operating profit 39.2 28.2 29.0 29.1 31.3Net profit 45.5 21.6 24.9 27.5 27.3Net worth 65.6 18.5 20.3 50.5 18.4EPS 24.5 11.3 24.6 23.1 23.4



Consolidated financials Consolidated revenue segment wise and PBIT

In FY10-15, consolidated revenues grew at 5% CAGR from | 13997 crore to | 18030 crore. Within the same, the contribution of insurance was 54% while that of Bajaj Finance was 30% in FY15. Bajaj Finance witnessed a strong CAGR of 49% in FY11-15 and is expected to grow at 27% CAGR in FY15-17E led by 27% growth in the loan book. We estimate consolidated revenues to grow at 13% CAGR in FY15-17E to | 22977 crore. Exhibit 110: Break-up of revenues for Bajaj Finserv

-5000

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On a PBT basis, the contribution of Bajaj Finance has surged and now forms 42% of total PBT while for insurance it is at 54% in FY15. We expect total PBT to grow at 19%CAGR to | 4624 crore in FY15-17E.

Exhibit 111: Break-up of PBT for Bajaj Finserv

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Consolidated PAT to grow at ~22% CAGR in FY15-17E

Improving profitability from the life insurance segment, from a loss in FY08 of | 213 crore to PBT of | 1349 crore in FY12, led PBT to surge to | 2226 crore. With new IRDA guidelines, from FY13, the life insurance segment deteriorated while the Bajaj Finance business, which picked up from FY11 (10x rise in PBT from | 38 crore to | 310 crore) started contributing more to PBT. General insurance also normalised from FY13. We expect the bottomline to grow at ~22% CAGR in FY15-17E to | 2532 crore.

Exhibit 112: PAT moderates in FY13-15, to see pick-up with higher insurance PBT

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Consolidated return ratios moderate to 16-18% range

The RoE moderated to 16.7% in FY15 vs. the highs of 30% and 24%, in FY12 and FY13, respectively, owing to the slowdown in the life insurance business and motor pool provisions in general insurance.

With earnings expected to pick up, we factor in an improvement in return ratios. Consequently, RoEs are expected to improve gradually to 17.8% in FY17E. RoA is expected to stay consistently above 2% over FY15-17E.

Exhibit 113: Consolidated return ratios moderate from peaks - stabilising now

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PAT is expected to grow at 27% CAGR over FY15-17E

RoEs are expected to improve gradually to 17.8% in FY17E.

RoA is expected to stay consistently above 2% over FY15-

17E


Wind energy making its limited contribution in consolidated entity… The company operates 138 wind mills in Maharashtra with an installed capacity of 65.2 MW. The wind energy generated is predominantly sold to Bajaj Auto, to cater to power consumption requirements of its establishments at Akurdi, Chakan and Waluj. Surplus units were sold to third parties. It generated revenue of |81.4 crore in FY15 and PBT of |31.7 crore which we expect to rise to |107 crore in revenue and |39.8 crore in PAT by FY17E.


Bajaj Finserv consolidated entity valuation Given Bajaj’s strong leadership in the domestic market and presence in growing business verticals, we expect the entity to continue its focus on improvement in earnings growth and sustenance of a healthy balance sheet. Both insurance companies are yet to pay dividend. In case of payouts, consolidated profits can see further upside not factored in estimates. The same can improve the return ratios further for the consolidated entity. We expect 22% CAGR in PAT to | 2532 crore and RoE at 17.8% without factoring in the dividend.

Based on our SoTP valuation, we ascribe a target of | 2102 per share for Bajaj Finserv, which implies a multiple of 13x on FY17E consolidated earnings. This reiterates the fact that the stock is available at reasonable P/E valuation of 11x FY17E earnings even post conservative forward estimates. We initiate coverage on the stock with a BUY recommendation with an upside of 18% at the current market price of | 2102.

Exhibit 114: SOTP valuation

Business Basis Stake (%)Business Value

Value of stake (| crore)

Value/share after 10% discount (|)

Bajaj Allianz Life Insurance 1.2x EV + 10x NBAP 74 16128 11917 674Bajaj Allianz General Insurance 15x PAT 74 10260 7592 429Bajaj Finance 3.6x BV 57.8 29797 17223 974Windmill |6 per mw 100 390 390 25Total 2102

Source: Company, Bloomberg, ICICIdirect.com Research, Refer page 18 for Life Insurance, page 36 for General Insurance and page 55 for Finance valuation in detail

Exhibit 115: Bajaj Finserv - Relative analysis FY15 CMP (|)

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

Bajaj Finserv Ltd 1865 16.7 17.0 17.8 16.7 13.9 11.2 2.6 2.2 1.8

HDFC Ltd 1165 20.5 21.8 22.4 30.6 26.1 22.8 6.0 5.4 4.9

Max India Ltd 504 11.2 11.3 12.9 85.0 78.7 63.0 9.5 8.9 8.1

Reliance Capital Ltd 335 7.9 6.6 7.6 8.2 9.7 8.0 0.8 0.7 0.7

RoE (%) P/E (x) P/B (x)

Source: Company, Bloomberg, ICICIdirect.com Research

Exhibit 116: Price/BV trend

0

500

1000

1500

2000

2500

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Nov

-12

May

-13

Nov

-13

May

-14

Nov

-14

May

-15

(|)

Price (|) 0.5 X 1.0 X 1.5 X 2.0 X 2.5 X

Source: Company, Bloomberg, ICICIdirect.com Research

The insurance IPO of peers in the near term remains an upside risk for expansion of insurance valuation multiples.


Financial Summary – Consolidated Bajaj Finserv Exhibit 117: Profit & loss account (Year-end March) FY13 FY14 FY15 FY16E FY17E

Revenue

General Insurance 6893 5843 6017 6232 6602

Life Insurance 4109 4584 5230 5962 6856

Total 11002.1 10427.0 11247.0 12194.361 13458.7

Less: Reinsurance ceded 964 890 1361 1436 1709

Reserve for unexpired risk 279 268 177 298 206

Net Insurance Premium Earned 9759.4 9269.1 9709.0 10460 11544.0

Investment and other income 1510.1 2028.0 2625.0 2650 2432.0

Total Insurance Income 11269.4 11297.1 12334.0 13110 13976.0

Investment and others 156.8 188.6 278.7 293 307.2

Retail financing 3111.4 4073.3 5418.3 6865 8669.5

Windmill 73.4 60.4 81.4 94 107.7

Total 14611.0 15619.5 18112.3 20362 23060.4

Less: Inter-segment revenue 4.0 65.5 81.5 82 83.1

Total revenue 14607 15554 18031 20279 22977

Pre-tax profit

General Insurance 422 589 777 870 977

Life Insurance 1344 1162 1007 1170 1295

Total Insurance 1765 1751 1784 2040 2272

Retail financing 842 1087 1368 1715 2205

Investments & others 45 30 63 88 108

Windmill 55 37 32 33 40

Total PBIT 842 1087 1368 1715 2205

Less: Interest 45 30 63 88 108

Profit before tax 2708 2905 3246 3875 4624

Tax -495 -710 -837 -984 -1032

Net profit before minority 2213 2195 2409 2891 3592

Minority and deferred tax adjustments 641 647 719 853 1060

Net profit 1572 1548 1690 2038 2532



Exhibit 118: Balance sheet (Year-end March) FY13 FY14 FY15E FY16E FY17E

Sources of Funds

Shareholders' Funds 780 931 1097 1298 1549

- Share capital 80 80 80 80 80

- Reserves & Surplus 7724 9232 10894 12904 15408

Policy liabilities 8769 11708 14606 17026 19441

Provision for linked liabilities 24497 21288 21645 21615 20166

Funds for future appropriation in policyholders' account 174 184 124 341 358

Minority interest 2899 3542 4261 5114 6173

Loan funds 9441 15773 26691 33465 42121

Defered tax liability (net) 9 10 11 11 11

Current liabilities 12431 12397 13017 13668 14351

Provisions 127 180 187 195 203

Total liabilities 66147 74393 91515 104418 118312

Applications of Funds

Fixed assets 781 835 1404 1443 1481

Goodwill on investments in associates 429 429 429 429 429

Investments 9249 11457 14526 16778 19243

Policyholders' Investments 8769 11536 14438 16685 19052

Assets held to cover linked liabilities 24497 21288 21645 21615 20166

Deferred Tax Assets (net) 131 171 188 198 207

Current assets 5547 5707 7686 7335 7017

- Receivable under financing activity 16744 22971 31199 39935 50718

Misc Expenditure 736 1034 0 0 0

Total Assets 66147 74393 91515 104418 118312


Exhibit 119: Ratio analysis (Year-end March) FY13 FY14 FY15E FY16E FY17E

CMP 1775.0 1775.0 1775.0 1775.0 1775.0

EPS 98.8 97.3 106.2 128.1 159.1

BV 490.4 585.2 689.6 816.0 973.3

RoA 2.5 2.2 2.0 2.1 2.3

RoE 24.4 18.1 16.7 17.0 17.8

P/BV 3.6 3.0 2.6 2.2 1.8

P/E 18.0 18.2 16.7 13.9 11.2

(Year-end March) - Growth ratios FY13 FY14 FY15E FY16E FY17E

- Life -7.9 -15.2 3.0 3.6 5.9

- General 11.8 11.5 14.1 14.0 15.0

Loan book Bajaj Finance 36 37 36 28 27

Consol Networth 53 19 18 18 19

Consol Revenues 8 6 16 12 13

Consol PAT 18 -2 9 21 24

Consol Effective Tax rate 18 24 26 25 22



Glossary of Terms – Life Insurance

Individual business premium Insurance contracts that cover the life of an individual and premium earned from the same Group business premium Insurance contracts that cover a defined group of people and premium earned from the same

Single premium Those contracts that require only a single lump sum payment from the policyholder. Single premium include top up premium, which refers to additional amounts of premium over and above the contractual basic premium received during the term of unit linked insurance contract.

Unit linked business Non participating insurance contracts that are investment cum protection plans that provide returns directly linked to the market performance. New business premium (NBP) The premium earned on new insurance policies written in a financial year.

Net premium earned The difference between total premium and benefits paid (gross of reinsurance). Renewal premium Premium received or receivable on regular premium paying contracts in the years subsequent to the first year of the contract. New business margin (NBM) A measure of profitability computed as the present value of future profits on the business sourced in a particular period and denoted as a percentage of APE. Non participating business Insurance contracts that do not participate in profits of the company. Participating business Insurance contracts that participate in the profit of the participating business of the insurance company during the term of the contract.

Annualised premium equivalent (APE) Sum of annualised first year premium and 10% weighted single premiums including top-up premiums. Annuity benefits A series of payments payable at regular intervals in return for a certain sum paid upfront, under an annuity contract. Asset-liability management (ALM) Practice of matching assets of an insurance company with specific reference to the characteristics of its liabilities. ALM is critical for the sound financial management of an insurance company to meet its future cash flow needs and capital requirements.

Assets under management (AUM) Total value of investment of shareholders & policyholders that is managed by the insurance company as prescribed by Insurance Regulatory and Development Authority of India (IRDA) under investment regulations. AUM includes investments disclosed in the balance sheet under Schedule 8, 8A, 8B and loans in the nature of investments included in Schedule 9.

Conservation ratio Ratio of renewal premium of the current financial year to sum of first year premium and renewal premium of the previous financial year.


Contribution from shareholders’ account The amount transferred from shareholders’ account to policyholders’ account to make good the deficit arising in non participating funds as per requirement of the Insurance Regulatory and Development Authority of India (preparation of Financial statements and auditor’s report of insurance companies) Regulations, 2002. Death benefit The contractual amount as specified in policy document, payable on occurrence of death of the life assured. Fair value change account Unrealised gains/losses (net) on mark to market securities pertaining to shareholders and non-linked policyholders’ funds, as required by the Insurance Regulatory and Development Authority of India (Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.

First year premium Premium received or receivable on regular premium paying contracts in the first year of the contract.

Free-look period A period of 15 days or 30 days, allowed to a new policyholder, from the date of receipt of policy documents, to enable him to review the terms and conditions of the policy and cancel the policy, if it does not meet his requirement. Funds for discontinued policies The liability of the discontinued unit linked policies, which are within the lock in period of five years from the date of issue, is held in this fund. Funds for future appropriations (FFA) The FFA for participating business represents the surplus, which is not allocated to the policyholders or shareholders’ funds as at the balance sheet date. The FFA for the linked segment represents surplus on lapsed policies unlikely to be revived. This surplus is required to be held within the policyholders’ funds till policyholders are eligible for revival of their policies. Interim bonus Bonus that is paid in the event of a claim (maturity, death or surrender) of a participating policy, for the period from the last declared bonus date. This is paid to provide for the fact that the policy will not be eligible for bonus at the next bonus declaration. Investment yield The income earned/received from an investment based on the price paid for the investment. Investment yield is disclosed as a percentage. Market consistent embedded value (MCEV) The present value of shareholders’ interests in insurance business, using market consistent methodology, where explicit allowance is made for risk in business. Maturity benefit The contractual amount, as specified in the policy documents, which is payable at the end of the term of policy. Mortality and morbidity risk Mortality is the term used for the number of people who died within a population. Mortality risk means the fluctuations in the timing, frequency and severity of death insured, relative to that expected at the time of underwriting (at the inception of the contract). Morbidity refers to the state of being diseased or unhealthy within a population. Morbidity risk means fluctuations in timing, frequency and severity of health claims, relative to that expected at the time of underwriting (at the inception of the contract). Net asset value (NAV) The market value of each unit of a fund. NAV is declared on all business days, reflecting the combined market value of the investments/securities (as reduced by allowable expenses and charges) held by a fund on any particular day.


Persistency ratio The proportion of business retained from the business underwritten. The ratio is measured in terms of number of policies and premiums underwritten. Policy liabilities The amount held by the insurance company for meeting the expected future obligation on existing policies. Reinsurance claims Claim amount received or receivable by the insurance company from a reinsurance company on occurrence of a reinsured event. Reinsurance premium ceded Premium paid or payable by the insurance company to a reinsurance company in lieu of reinsurance protection. Return on invested capital The ratio of profit after tax to share capital including share premium. Reversionary bonus The non guaranteed bonuses added to the sum assured of a participating insurance policy on an annual basis i.e. at the end of each financial year. Once allocated, these bonuses along with the initial sum assured are guaranteed to be paid on maturity or on earlier death. Rider The additional benefits that can be added on to basic insurance policy for which coverage is provided for with payment of additional premium. Risk reinsured The proportion of risk underwritten by an insurance company, which it transfers to a reinsurance company in return for a stated risk premium. Risk retained The proportion of risk underwritten by an insurance company that is retained by an insurance company in its own books after ceding a portion of risk to the reinsurance company. Solvency ratio The ratio of available solvency margin (ASM) to the required solvency margin (RSM). ASM is defined as the available assets in excess of liabilities in the Shareholders’ and Policyholders’ funds and RSM is the required solvency margin that an insurance company is required to hold as per the guidelines prescribed by the IRDAI. Sum assured The benefit amount, which is guaranteed to become payable on a specified event of the life assured as per the terms and conditions specified in the policy. Surrenders Termination of the policy at the request of the policyholder before maturity of policy. Terminal bonus An additional bonus payable to participating policyholders on maturity and may also be payable on death or surrender, provided the policies have completed the minimum duration at death/surrender. Transfer to shareholders’ account The amount of surplus transferred from policyholders’ account to shareholders’ account based on the recommendation by the appointed actuary. Weighted received premium (WRP) The sum of first year premium received during the year and 10% weighted single premiums including top-up premiums.


RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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