Bajaj FinServ
Cluster: Marathon Runner
Recommendation: Hold
Price target: Rs700
Current market price: Rs703
Price target revised to Rs700
Result highlights
During Q4FY2012, Bajaj Finserv reported a consolidated net profit of Rs881 crore (up 1% year on year [YoY]) led by a strong growth in the lending business (Bajaj Finance) and the life insurance segment. The income from operations showed a 33% Y-o-Y growth to Rs1,752 crore while expenses grew by 57% leading to an approximately 30% Y-o-Y growth in the operating profits.
Life insurance-earnings up by 33% YoY
The life insurance business reported a profit of Rs392 crore in Q4FY2012, a growth of 33.3% YoY. The gross written premium declined by 14.4% YoY with renewal premiums declining by 21.9% YoY due to sluggish industry wide growth and higher surrenders. The assets under management grew by 10.9% quarter on quarter (QoQ) to Rs39,417 crore.
General insurance-Motor pool provisioning impacts earnings
The general insurance business reported a loss of Rs39 crore in Q4FY2012 as against a loss of Rs58 crore in Q4FY2011. The gross premiums increased by 17.8% YoY in Q4 while the combined ratio stood at 107.2% (including motor pool losses). For FY2012 the company’s reported profit was Rs124 crore (as against Rs43 crore in FY2011) despite an increased provision requirement by the Insurance Regulatory and Development Authority (IRDA) on motor pool (from 2007-2011). The company has provided for one third of the liabilities (motor pool loss) in FY2012 and will continue with it till FY2014 (~Rs150 crore per year).
Bajaj Finance-strong growth continues
Bajaj Finance showed a strong growth in profits (52.1% YoY to Rs108 crore) in Q4FY2012. The core income grew by 39% YoY while provisions increased by 10% YoY. The deployments of the company grew by 69% YoY to Rs4,208 crore during the quarter while the assets under management (AUM) grew by 10% QoQ to Rs13,107 crore.
Valuation
We have revised the target price upwards in view of improved growth in life insurance and financing businesses. The company will also start declaring the embedded value for its life insurance from FY2012. However we continue to value the company based on the average of the two scenarios (includes/excludes upside from RBI circular regarding transfer of shares to foreign investors) resulting in a target price of Rs700 per share. The stock price has risen sharply thereby factoring the upside from possible changes in the regulations which would enable it to avoid letting its foreign partner raise stake at an agreed discounted price. We maintain Hold recommendation on the stock.