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    Buy Bajaj Finance, target Rs 3,000: HSBC Securities (India)

    Synopsis

    Buy Bajaj Finance at a price target of Rs 3000.

    Bajaj FinanceGetty Images
    The current market price of Bajaj Finance is Rs 2,429.85.
    HSBC Securities (India) has a buy call on Bajaj Finance with a target price of Rs 3,000.

    The current market price of Bajaj Finance is Rs 2,429.85.

    Time period given by the brokerage is one year when Bajaj Finance price can reach the defined target.

    Investment rationale by HSBC Securities
    Enjoying the benefits of the ‘network effect’: In today’s hyper-competitive retail lending space, BAF has combined its established traditional lending business with opportunities for cross-selling. The company benefits from the ‘network effect’ of complementary payments (through Mobikwik e-wallet) and e-commerce (own online marketplace) businesses. These provide it with a growing customer franchise (30m as of September 2018) – in a country with rising disposable incomes – to underpin its rapid growth and maintain its profitability. While competition is fierce, we believe the space is growing at a rapid enough pace for multiple large players to thrive.

    Building on customers, data and analytics to stay ahead: While there have been significant technological developments and much innovation in the delivery of credit and financial services to the end consumer, technology is not the differentiator – data is. That is why key players are spending disproportionately on acquiring new customers. With a rapidly growing customer base, BAF has enhanced its lending scorecards and underwriting models derived from sophisticated customer data. Its stable asset quality comes from having repeat customers accounting for 60 per cent of its consumer business.

    Balancing profit and volume maximisation: BAF has consistently maintained a healthy mix of profit-maximising (consumer business at c. 40 per cent) and volume-building businesses (non-consumer at c. 60 per cent), enabling it to deliver optimal return ratios. If the share of non-consumer business rises disproportionately, hurting margins, the P&L has room for operating leverage to partially offset the damage to the top line, avoiding a substantial impact on return ratios.

    Comfortably placed in current uncertain liquidity scenario: BAF diversified its liability mix by reducing its dependence on any single source of borrowing. At end-September 2018, the share of bank borrowings had fallen to 34 per cent (from 58 per cent in FY14). Meanwhile, it has built a sizeable deposit franchise (now 15 per cent of overall liabilities). BAF maintains a minimum 60 per cent positive ALM gap across various short-term maturity buckets, which makes it comfortably placed in the current environment.

    One of the most profitable BFSI franchises doesn’t come cheaply: We initiate with a Buy rating and a PB-based target price of Rs 3,000. Management has demonstrated its execution capability, making BAF one of the fastest-growing and most profitable banking, financial services and insurance (BFSI) companies in India, commanding a valuation premium to peers. Key risks: (1) slower customer franchise growth could hurt the company’s growth and return ratios; (2) a rapid rise in its share of non-consumer business could dent return ratios, and (3) potential departure of the current CEO is a ‘key man risk’.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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