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October 14, 2014
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Stock Update >> Reliance Industries
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investor’s eye
stock update
Reliance Industries
Reco: Buy
Stock Update
Beats estimates with better margins; retain Buy
Key points
Company details
Price target:
Rs1,190
Market cap:
Rs310,724 cr
52 week high/low:
Rs1,143/794
NSE volume:
(no. of shares)
33.7 lakh
BSE code:
500325
NSE code:
RELIANCE
Sharekhan code:
RELIANCE
Free float:
(no. of shares)
177.0 cr
Shareholding pattern
Others
24%
Promoters
46%
DII
11%
FII
19%
1125
1050
975
900
825
Oct-14
Jul-14
Apr-14
Jan-14
750
Oct-13
The key take away from the Q2FY2015 results was that despite a softer GRM sequentially,
the spread (premium) between RIL’s GRM and the Singapore GRM expanded to $3.5/
bbl (the highest in four years). Further, the petchem margin improved sequentially led
by strength in the polymer and aromatic margins. The profitability of the retail business
continued to improve (margin improved with scale) along with a 20% revenue growth
on a low base. On the negative side, despite significant traction in the shale gas volume,
the profitability of the E&P business dropped due to declining domestic production and
higher depreciation.
RIL managed to improve its GRM spread over the regional benchmark and reported
better earnings than expected by the Street. Further, we believe the ongoing expansion
of its downstream business (a new gasification plant and a refinery off-gas cracker)
would be the next earnings driver in the next two to three years. While the progress of
the new business (telecom) and the ability of the retail business to a gain critical mass
would be monitorables, a continued lack of clarity on the gas price revision remains a
hangover for the stock. Currently, the stock is available at 13x and 12x FY2015E and
FY2016E earnings respectively and the valuations are lower than its historical average.
Therefore, we retain our Buy recommendation on the stock with a price target of
Rs1,190 (SOTP based).
Price performance
1m
3m
-5.7
-0.9
Relative -3.3
to Sensex
Rs cr
Particulars
1200
Absolute
In Q2FY2015, the stand-alone net profit of Reliance Industries Ltd (RIL) grew by 5% YoY
and 2% QoQ to Rs5,742 crore, which was ahead of our as well as the Street’s estimate.
The Y-o-Y earnings growth was driven by a better GRM ($8.3/bbl vs $7.7/bbl in Q2FY2014)
earned by its refining business while a sequentially softer GRM (at $8.7 vs $8.3 in
Q1FY2015) partially offset the gain from the improvement in the petchem margin. The
consolidated earnings grew by 2% YoY to Rs5,972 crore but remained flat QoQ.
Results
Price chart
(%)
CMP: Rs961
6m 12m
1.3
11.9
-6.3 -14.1 -14.3
Net sales
Total expenditure
Raw material consumed
Stock adjustment
Purchase of finished goods
Employee expenses
Other expenses
Operating profit
Other income
EBITDA
Interest
Depreciation
PBT
Tax
PAT
Extraordinary items
Reported PAT
EPS
OPM (%)
PATM (%)
tax rate (%)
Sharekhan
2
Q2FY15
Q2FY14
YoY %
Q1FY15
QoQ %
96,486
103,758
-7.0
0.1
78,851
(576)
1,736
932
7,306
8,237
1,441
9,678
758
2,227
7,390
1,648
5,742
88,365
(185)
116
808
6,805
7,849
2,060
9,909
805
2,233
6,871
1,381
5,490
-10.8
211.4
1396.6
15.3
7.4
4.9
-30.0
-2.3
-5.8
-0.3
7.6
19.3
4.6
5,742
17.8
8.5
6.0
22.3
5,490
17.0
7.6
5.3
20.1
4.6
4.5
97BPS
66BPS
220BPS
96,351
80,966
(2,120)
1,716
929
7,330
7,530
1,357
8,887
324
2,024
7,228
1,579
5,649
5,649
17
8
6
22
October 14, 2014
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-2.6
-72.8
1.2
0.3
-0.3
9.4
6.2
8.9
134.0
10.0
2.2
4.4
1.6
1.6
1.6
72BPS
9BPS
45BPS
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investor’s eye
stock update
Petchem business: The performance of the
petrochemical (petchem) business was flattish YoY but
improved sequentially on a better margin. While the
production volume remained flat QoQ, the PBIT margin
improved to 8.9% (up 160 basis points [BPS]
sequentially) backed by an improved polymer margin
and a rebound in Paraxylene (PX) deltas which was
partially offset by a weak polyester margin.
Valuations
Particulars
FY12
FY13
FY14 FY15E FY16E
Net sales (Rs cr)
358,501 397,062 434,460 438,978 463,342
Operating
34,508 33,045 34,799 37,483 43,273
profit (Rs cr)
OPM (%)
9.6
8.3
8.0
8.5
9.3
Net profit (Adj.) (Rs cr) 19,724 20,879 22,493 23,855 26,637
Adj. EPS (Rs)
60.3
64.7
69.6
73.8
82.4
Change Y-o-Y (%)
2.7
7.2
7.6
6.1
11.7
PER (x)
15.9
14.8
13.8
13.0
11.6
EV/EBIDTA (x)
13.8
14.4
13.7
12.7
11.0
Dividend yield (%)
0.9
0.9
1.0
1.0
1.0
RoCE (%)
10.7
10.5
9.5
9.0
9.1
RoNW (%)
11.6
11.5
11.3
10.9
11.0
As part of its efforts to provide feedstock flexibility
and long-term supply security, RIL’s crackers would
import ethane from the USA which would give
competitiveness in sourcing feedstock.
Going forward, with the upcoming refinery off-gas
cracker at Jamnagar, RIL will have globally low cost
advantage and gain by sharply reducing its blended
ethylene cost which will reflect positively on the
petchem margin.
Segment-wise performance
Refining business: During Q2FY2015 RIL refined 17.3 million
tonne of crude oil (at 112% utilisation) which is a drop of
2.3% year on year (YoY) but an increase of 3.6% quarter on
quarter (QoQ). The revenue performance was influenced
by lower volume and weaker crude prices. However, the
profitability of the segment improved with a healthy gross
refining margin (GRM). The GRM of RIL declined sequentially
but expanded over the last year to $8.3 per barrel (bbl) in
Q2FY2015. During Q2FY2015, RIL managed to record a
premium of $3.5/bbl over the benchmark Singapore GRM
which is better on both year-on-year (Y-o-Y) and quarteron-quarter (Q-o-Q) basis. Consequently, the profit before
interest and tax (PBIT) grew by 19% YoY and remained flat
QoQ. We expect the GRM to remain firm in FY2015 led by
favourable Arab Light-Arab Heavy differentials.
Petchem performance
(Rs cr)
Particulars
Q2
Q2
YoY
Q1
QoQ
FY15 FY14
% FY15
%
Production (mn tonne)
5.7
5.7
0.0
5.4
5.6
Revenue (Rs cr)
24,932 24,892
0.2 23,715
5.1
EBIT (Rs cr)
2,403 2,504
-4.0 1,885
27.5
EBIT margin
9.6
10.1 (42.1)BPS
7.9 169.0BPS
Polymer delta trend ($/mt)
800
700
600
500
EBIT margin
4.1
3.3
87BPS
400
QoQ
%
-4.6
3.6
0.9
0.4
300
200
100
4.1 (2)BPS
8.7
8.3
9.3
7.6
7.7
8.4
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
600
500
300
3.5
2.9
3.1
3.3
2.3
1.7
1.4
3.1
0.4
0.9
(1.1)
200
100
GRMs (US$/bbl)
3
October 14, 2014
PTA -PX
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
Q3FY12
PX-Naptha
Spread (RIL GRM-Singapore GRM)
Sharekhan
Q2FY12
Q1FY12
Q4FY11
Q3FY11
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
-
Q4FY12
(0.1)
Q3FY12
1.0
Q2FY12
Q1FY12
(2.0)
700
400
1.7
2.0
PV C-Nap-EDC
800
6.0
4.0
HDPE-Naphtha
Fibre intermediates deltas trend ($/mt)
10.1
9.6
7.6
6.8
8.0
7.6
9.5
10.1
10.3
10.0
Q1FY13
PP-Propy lene
Higher GRM supported refining profitability
12.0
Q4FY12
Q3FY12
YoY
Q1
% FY15
7.8
8.7
-2.3
16.7
-5.8 90,998
19.3 3,773
Q2FY12
Q2
FY14
7.7
17.7
97,456
3,174
Q1FY12
Q2
FY15
GRM ($/bbl)
8.3
Crude refined (mn tonne) 17.3
Revenue (Rs cr)
91,781
EBIT (Rs cr)
3,788
Q4FY11
Particulars
(Rs cr)
Q3FY11
Refining performance
MEG-Naptha
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KG-D6 production trend
POY -PTA -MEG
PSF-PTA -MEG
45
41
29
28
Q2FY15
Q1FY15
Q1FY14
15.3 13.9
12.5 13.7 13.1 12.5
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
Q3FY12
19
Q4FY14
32
Q3FY14
36
Q2FY14
49
Q1FY12
Q2FY15
Q1FY15
Q4FY14
10
Q3FY14
Q2FY14
20
Q1FY14
100
Q4FY13
30
Q3FY13
200
Q2FY13
40
Q1FY13
300
Q4FY12
50
Q3FY12
400
Q2FY12
60
Q1FY12
500
Q4FY11
70
Q3FY11
600
Q2FY12
Polyester delta trend ($/mt)
Gas mms c md
PET-PTA -MEG
Panna-Mukta production trend
Chemical and elastomer delta trend ($/MT)
7.0
5 .5
5.4
5.6
5.6 5.6
5.7
5.5
5.3
5 .3 5 .2
5.7
5.3
5.1
B e nz en e - Na p hth a
PB R- B u tad ie n e
B uta die n e- LPG
LA B-KB
Cr ude o il prod uc tio n (mn bbl)
Q2FY15
Q4FY14
Q3FY14
1.7
2.1
Q2FY14
1.8
1.8
Q1FY14
Q4FY13
1.7
Q3FY13
Q2FY13
2.1
2.2
Q1FY13
Q4FY12
2.2
2.4
Q3FY12
2.6
2.5
Q2FY12
2.7
Q1FY12
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
0.0
Q3FY12
1.0
Q2FY12
2.0
500
Q1FY12
3.0
1 ,0 0 0
Q4FY11
4.0
1 ,5 0 0
Q3FY11
2 ,0 0 0
1.8
4.6
5.0
2 ,5 0 0
Q1FY15
6.0
3 ,0 0 0
2.0
3 ,5 0 0
Ga s mms c md
Tapti production trend
EBIT margin
Sharekhan
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.2
0.2
0.2
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q3FY12
Q4FY12
41.5
Q1FY15
Q2FY15
37.5
Q4FY14
42.9
36.7
32.4
Q1FY14
Q3FY14
30.8
Q4FY13
31.4
27.8
Q3FY13
Q2FY14
23.8
Q2FY13
(722)BPS
18.3
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
-
Q1FY13
31.3
0.2
US shale gas volume trend-RIL’s share
15.6
(26)BPS
G a s mms c md
Q4FY12
24.3
Q2FY12
Q1FY12
Cr u d e o il p r o d u c tio n ( mn b b l)
13.3
24.1
1 .4 1 .2
0 .0
Q3FY12
QoQ
%
-28.1
2.5
-4.4
-11.4
-31.8
0.3
1 .0
9.4
Q1
FY15
7.1
3.8
13.1
1,557
487
3 .2
2 .4 2 .4 2 .2
2 .0 1 .9
Q2FY12
YoY
%
-2.4
36.4
-10.4
-5.7
-6.7
3 .8
2 .0
5.6
PMT (mmscmd)
Shale (mmscmd)
KG-D6 (mmscmd)
Revenue (Rs cr)
EBIT (Rs cr)
Q2
FY14
5.2
2.8
13.9
1,464
356
4 .3
3 .0
(Rs cr)
Q2
FY15
5.1
3.9
12.5
1,380
332
5 .3
4 .0
Q1FY12
Particulars
5 .3
5 .0
It is important to note that the company could manage to
generate positive cash from operations at the Pioneer joint
venture and Carrizo joint ventures. The Chevron joint
venture accounts for a substantial part of the ongoing
capital expenditure (capex) programme and funding needs.
Exploration and production performance
6 .3 6 .0
6 .0
0.1
7 .0
0.1
Exploration & production business: The declining
trend of gas production from the Krishna-Godavari (KG)
D6 basin continued in Q2FY2015 with production
reaching 40.6 billion cubic feet (BCF; around
12.8mmscmd). The US shale gas business continued to
show traction, recording a 36% Y-o-Y and 2.5%
sequential volume growth. Hence, the Y-o-Y earnings
jumped to 59% but sequentially the earnings were flat
due to the softening of gas prices and high differentials,
which are now the key challenges for the company.
Sales V olumes -Relianc e Share (bc f e)
4
October 14, 2014
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Stand-alone segment-wise results
Particulars
Revenues
Petrochemicals
Refining
Oil & gas
Others
Total (gross)
Less: Segment transfer
Turn over
Less: excise duty
Net sales
EBIT
Petrochemicals
Refining
Oil & gas
Others
Total
EBIT margins (%)
Petrochemicals
Refining
Oil & gas
Others
Q2FY15
Q2FY14
YoY %
Q1FY15
QoQ %
H1FY15
H1FY14
YoY %
24,932
91,781
1,380
221
118,314
18,544
99,770
3,284
96,486
24,892
97,456
1,464
330
124,142
17,619
106,523
2,765
103,758
0.2
-5.8
-5.7
-33.0
-4.7
5.3
-6.3
18.8
-7.0
23,715
90,998
1,557
193
116,463
17,079
99,384
3,033
96,351
5.1
0.9
-11.4
14.5
1.6
8.6
0.4
8.3
0.1
48,647
182,779
2,937
414
234,777
35,623
199,154
6,317
192,837
46,842
178,914
2,918
946
229,620
32,508
197,112
5,709
191,403
3.9
2.2
0.7
-56.2
2.2
9.6
1.0
10.6
0.7
2,403
3,788
332
66
6,589
6.8
9.6
4.1
24.1
29.9
2,504
3,174
356
42
6,076
5.9
10.1
3.3
24.3
12.7
-4.0
19.3
-6.7
57.1
8.4
97 BPS
(42) BPS
87 BPS
(26) BPS
NA
1,885
3,773
487
52
6,197
6.4
7.9
4.1
31.3
26.9
27.5
0.4
-31.8
26.9
6.3
40 BPS
169 BPS
(2) BPS
(722)BPS
292 BPS
4,288
7,561
819
118
12,786
6.6
8.8
4.1
27.9
28.5
4,392
6,125
708
126
11,351
5.9
9.4
3.4
24.3
13.3
-2.4
23.4
15.7
-6.3
12.6
70 BPS
(56) BPS
71 BPS
362 BPS
NA
Broad-band business: Reliance Jio Infocomm Ltd (RJIL) plans to
provide faster Internet connectivity and services on a pan-India
basis. RJIL is the only private player with Broad-band Wireless
Access (BWA) in all the 22 telecommunications (telecom) circles.
RJIL finalised the key vendor and entered into various agreements
with Reliance Communications, Bharti Airtel, Bharti Infratel and
Viom Networks last year for rolling out 4G services in India. During
the quarter under review RJIL signed agreement with Indus Towers
and GTL Infrastructure in order to widen tower access.
Retail business: During Q2FY2015 the revenues from the
retail business grew by 20% YoY and 4% QoQ to Rs4,149
crore mainly due to a growth in the jewellery and value
format. Incremental store addition was one of the key
growth drivers; the number of operational stores stood
at around 2,000 at the end of the quarter.
Importantly, the overall margin improved to 4.5% in
Q2FY2015 which supported a high growth in the EBITDA
(which doubled YoY and grew by 9% QoQ) in the retail
business. We believe the benefit enhanced inventory
management and higher penetration of own brand resulted
in a better gross profit margin across the format. Moreover,
the benefit of operating leverage with scale should reflect
positively on the margin going forward. The RIL
management expects the retail business to continue its
profitable growth trajectory in the future.
Other highlights
On consolidated and stand-alone bases the outstanding debt
stood at Rs142,084 crore and Rs79,725 crore while the cash
balance stood at Rs83,456 and Rs26,162 crore respectively
at the end of Q2FY2015. During the quarter, the net addition
of fixed assets was Rs44,895 crore including exchange rate
difference capitalisation. The capex was primarily on
account of the ongoing expansion project in the petchem
and refining businesses at Jamnagar, Dahej and Hazira, and
the broadband and US shale gas businesses.
Retail--revenue break-up in Q2FY2015
Fashion &
LifeStyle
14%
Jew ellery
6%
Digital
23%
Brands
2%
The new refinery off-gas cracker (ROGC) project is on
track and will help RIL sharply reduce its blended ethylene
cost. Activities in the D1-D3 and MA fields to augment
production are also as per schedule. R-cluster development
activity is also on stream while the phase-1 development
in case of coal bed methane is more than 60% complete
and on track. The company expects to extract gas from
the Coal Bed Methane block by H2FY2015.
Value Format &
Others
55%
Sharekhan
In August 2014, Reliance Haryana SEZ returned 1383.68
acre of land which was taken for setting up special
economic zones due to revision of strategic priorities.
5
October 14, 2014
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Consolidated Q2FY2015 results
Particulars
Q2FY15
Q2FY14
YoY %
Q1FY15
QoQ %
H1FY15
H1FY14
YoY %
Net sales
Total expenditure
Raw material cost
Employee expenses
Other expenses
Operating profit
Other income
EBITDA
Interest
Depreciation
PBT
Exceptional item
Tax
PAT
Extraordinary items
Minority interest
Share of Associates
Reported PAT
EPS
OPM (%)
PATM (%)
tax rate (%)
109,797
99,979
88,744
1,575
9,660
9,818
2,009
11,827
997
3,024
7,806
1,882
5,924
52
(4)
5,972
18.5
8.9
5.4
24.1
115,491
106,626
97,154
1,409
8,063
8,865
2,346
11,211
959
2,796
7,456
1,607
5,849
37
(13)
5,873
18.2
7.7
5.1
21.6
-4.9
-6.2
-8.7
11.8
19.8
10.8
-14.4
5.5
4.0
8.2
4.7
104,640
95,651
85,137
1,480
9,034
8,989
1,974
10,963
505
2,782
7,676
1,765
5,911
53
(7)
5,957
18.4
8.6
5.7
23.0
4.9
4.5
4.2
6.4
6.9
9.2
1.8
7.9
97.4
8.7
1.7
214,437
195,630
173,881
3,055
18,694
18,807
3,983
22,790
1,502
5,806
15,482
3,647
11,835
105
(11)
11,929
36.9
8.8
5.6
23.6
212,994
196,272
177,999
2,824
15,449
16,722
4,738
21,460
1,897
5,515
14,048
2,962
11,086
62
(38)
11,110
34.4
7.9
5.2
21.1
0.7
-0.3
-2.3
8.2
21.0
12.5
-15.9
6.2
-20.8
5.3
10.2
17.1
1.3
40.5
-69.2
1.7
1.7
127BPS
35BPS
256BPS
6.6
0.2
-1.9
-42.9
0.3
0.3
35BPS
(25)BPS
112BPS
23.1
6.8
69.4
-71.1
7.4
7.4
92 BPS
35 BPS
247 BPS
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Bajaj Finance
Reco: Buy
Stock Update
Price target revised to Rs3,060, maintain Buy
Key points
Company details
Price target:
Rs3,060
Market cap:
Rs13,688 cr
52-week high/low: Rs2,812/1,251
NSE volume:
(No of shares)
0.4 lakh
BSE code:
500034
NSE code:
BAJFINANCE
Sharekhan code:
BAJFINANCE
Free float:
(No of shares)
1.9 cr
Public &
others
19%
Promoter
62%
Foreign
12%
Bajaj Finance reported a healthy set of numbers for Q2FY2015 as the net profit
grew by 18% YoY to Rs197 crore. The core net interest income growth was even
better (up 27% YoY) led by a strong growth in the AUM (up 41% YoY). The provisions
increased by 52% partly contributed by loan book expansion.
The asset quality deteriorated quarter on quarter due to the slippage of an
infrastructure account into NPA. On a proactive basis, the company has already
paused infrastructure and construction equipment lending while in the other
segments it does not foresee any meaningful stress. The strong risk management
practices and conservative provisioning enhance comfort on the asset quality.
Bajaj Finance has deepened its presence in the consumer segment and
investment in the new business is beginning to yield returns. We expect the
company to maintain a healthy asset quality and strong return ratios (RoA of
3.2% and RoE of 21%) till FY2017. While the stock has appreciated by 52% since
our initiation on May 2014, we maintain a positive view on the stock with a
revised price target of Rs3,060 from a medium-term perspective.
Shareholding pattern
MF & FI
7%
CMP: Rs2,730
Results
Rs cr
Particulars
Q2FY15
Q2FY14
YoY %
Q1FY15
QoQ %
1,170.3
874.2
33.9
1,180.1
-0.8
Interest expense
544.5
382.1
42.5
499.6
9.0
Net interest income
625.8
492.1
27.2
680.5
-8.0
Non-interest income
71.6
89.8
-20.3
65.9
8.7
697.4
581.9
19.8
746.3
-6.6
Interest income
Price chart
3000
Net total income
2500
Operating expenses
318.6
276.9
15.1
342.8
-7.1
2000
Pre-provisioning profit
378.8
305.0
24.2
403.5
-6.1
1500
Provisions
Oct-14
Jul-14
Apr-14
Oct-13
Jan-14
1000
80.0
52.3
52.9
82.9
-3.5
Profit before tax
298.7
252.7
18.2
320.6
-6.8
Tax
101.6
85.7
18.6
109.2
-7.0
Profit after tax
197.2
167.0
18.0
211.4
-6.7
Asset quality (%)
Price performance
(%)
1m
3m
6m 12m
Absolute
2.5
26.4
53.6 114.7
Relative
to Sensex
5.1
19.4
30.2
64.4
Gross NPA
1.41
1.14
27 bps
1.13
28 bps
Net NPA
0.48
0.26
22 bps
0.27
21 bps
Provision coverage ratio
67.0
78.0
26,751
18,982
40.9
25,642
4.3
7,816
5,199
50.3
9,266
-15.6
28,004.0
19,829.0
41.2
26,943.0
3.9
76.0
Key items
Advances
Disbursements
AUM
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Loan growth remains strong led by SME, consumer
segments: Bajaj Finance continued to report a strong
growth in the assets under management (AUMs; up 41%)
mainly contributed by the small and medium enterprises
(SME; up 51% year on year [YoY]) and consumer segments
(up 37% YoY). Consequently, the overall loan book expanded by 40% YoY to Rs26,751 crore of which the consumer and SME segments constitute 40% and 54% respectively. The newly started rural financing and lifestyle financing segments showed a robust growth in AUMs while
the rural financing segment turned profitable. On the
other hand, the two-wheeler and three-wheeler loan
books contracted due to a subdued growth in the industry. The management has seen some pick-up in the consumer segment from August onwards and is optimistic
about growth in the festive season.
delinquencies from the three-wheeler loans. In our view,
strong risk management practices and conservative provisioning offer comfort on the asset quality.
Asset quality
1.6
1.2
300,000
269,430
250,000
200,000
224,610
1.14
1.18
1.15
1.13
1
0.8
0.48
0.6
0.4
0.26
0.23
Q2FY 14
Q3FY 14
0.28
0.27
0.2
0
Q4FY 14
GNPA %
Loan growth
A UM (Rs. Mn)
1.41
1.4
Q1FY 15
Q2FY 15
NNPA %
Focus continues on reducing beta, margins may stabilise
around 10%: The net interest margin moderated sequentially to 10.3% (calculated) due to a higher growth in the
SME mortgages. The company continues to readjust the
portfolio mix to reduce the beta in the business model
(increasing the proportion of stable secured loans, viz
mortgages). While this should result in a moderation in
the margins, it should improve the risk profile of assets
and result in a stable return on asset (RoA; +3%) in the
coming period.
280,040
240,610
198,290
150,000
100,000
50,000
0
Q2FY 14
Q3FY 14
Q4FY 14
Q1FY 15
Price target revised to Rs3,060, maintain Buy: Bajaj
Finance has deepened its presence in the consumer segment and the investment made in the new business has
begun to yield returns. We expect the company’s earnings to grow at a compounded annual growth rate of 24%
over FY2014-17 resulting in an RoA of +3% and a return on
equity (RoE) of +20%. We value the company at 2.2%
FY2017E book value (BV; 2.6x FY2016E BV) resulting in a
price target of Rs3,060. Currently, the stock is trading at
2x FY2017E BV. We maintain our Buy rating on the stock.
Q2FY 15
Asset quality deteriorates due to slippage of an infra
account: While the management has already paused infrastructure and construction equipment lending, one of
the old infrastructure accounts turned a non-performing
asset (NPA; a Rs50-crore exposure) which affected the
asset quality. Apart from some pressure in the threewheeler segment, the company does not foresee any impact on the asset quality. The provisions increased by 52%
YoY partly contributed by a growth in the advances and
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Financials
Profit & Loss account
Ratio analysis
Rs cr
Particulars
FY13
FY14
FY15
FY16E
FY17E
Interest income
2,887
3,789
4,892
6,130
7,752
Per share data (Rs)
Interest expense
1,206
1,573
2,164
2,681
3,394
Net interest income
1,681
2,215
2,728
3,449
4,358
Non-interest income
223
285
243
265
296
Net total income
Operating expenses
Pre-provisioning profit
Provisions
1,904
2,500
2,971
3,714
4,654
851
1,151
1,328
1,653
2,071
1,053
1,349
1,643
2,061
2,583
182
258
344
422
531
Profit before tax
872
1,091
1,299
1,639
2,052
Tax
280
372
429
541
677
Profit after tax
591
719
870
1,098
1,375
Particulars
FY13
FY14
FY15
FY16E
FY17E
Earnings
119.4
144.5
174.9
220.7
276.3
Dividend
15.1
16.0
22.7
28.7
35.9
Book value
676.6
802.2
950.5
1,137.7 1,371.9
Adj. book value
670.0
788.8
939.1
1,122.3 1,351.2
Yield on assets
19.9
19.1
19.0
Cost of funds
10.3
9.6
9.8
9.6
9.5
Net interest margins
11.6
11.1
10.6
10.5
10.5
Spreads (%)
Rs cr
Particulars
FY13
FY14
FY15
FY16E
FY17E
44.7
46.0
44.7
44.5
44.5
Provisions to loans
1.1
1.1
1.2
1.2
1.2
Non interest income/
Total income
7.2
7.0
4.7
4.1
3.7
Assets/Equity (x)
5.3
6.2
6.4
6.8
7.0
RoAE
22.0
19.6
20.0
21.1
22.0
RoAA
3.8
3.4
3.2
3.2
3.2
Gross NPA
1.1
1.2
1.3
1.4
1.5
Net NPA
0.2
0.3
0.2
0.2
0.2
Net interest income
36.6
31.8
23.1
26.4
26.4
Pre-provisioning profit
39.2
28.1
21.8
25.5
25.3
Profit after tax
45.5
21.6
21.1
26.2
25.2
Advances
36.3
37.2
24.7
28.2
25.7
Borrowings
28.4
50.4
24.1
28.9
25.7
22.9
18.9
15.6
12.4
9.9
Return ratios (%)
Liabilities
Share capital
50
50
50
50
50
Reserves
3,302
3,941
4,679
5,610
6,776
Shareholders funds
3,352
3,991
4,729
5,660
6,825
Total borrowings
13,133
19,750
24,500
31,589
39,716
Current liabilities
1,321
878
1,005
1,166
1,352
Total liabilities
18.7
Operating ratios (%)
Cost to income
Balance Sheet
18.8
17,806
24,618
30,234
38,414
Asset quality ratios (%)
Growth ratios (%)
47,893
Assets
Fixed assets
176
Investments
Receivable under
finance
220
237
261
287
5
28
32
36
42
16,744
22,971
28,655
36,731
46,181
Cash & deposits
416
777
823
881
943
Valuation ratios (x)
Other current assets
374
483
347
365
301
P/E
Deferred tax assets
90
139
139
139
139
P/BV
4.0
3.4
2.9
2.4
2.0
17,806
24,618
30,234
38,414
47,893
P/ABV
4.1
3.5
2.9
2.4
2.0
Total assets
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Bajaj FinServ
Reco: Hold
Stock Update
Price target revised to Rs 1,160, downgrade to Hold
Key points
Company details
Price target:
Rs1,160
Market cap:
Rs17,628 cr
52 week high/low:
Rs617/1164
NSE volume:
(no. of shares)
CMP: Rs1,108
0.4 lakh
BSE code:
532978
NSE code:
BAJAJFINSV
Sharekhan code:
BAJAJFINSV
Free float:
(no. of shares)
6.5 cr
Shareholding pattern
Bajaj Finserv reported steady numbers for Q2FY2015 as the consolidated PAT
increased by 14.2% YoY to Rs315.9 crore. The lending business (Bajaj Finance)
and the general insurance business both reported a strong performance showing
growth of 18% and 28% respectively in the earnings. The operating profit margin
(consolidated) has also increased by a 25% YoY.
The life insurance business continues to witness slowdown due to impact of
new regulations on margins, and decline in premiums (down 7.4% YoY) The
profits (shareholder surplus +policyholders surplus declined by 3.6% YoY
We have revised our SOTP based price target for Bajaj Finserv to Rs1,160 (largely
to factor the price target revision for Bajaj Finance and assuming 51% economic
interest in insurance business). However, we revise our rating to Hold due to a
slowdown in the life insurance business which is likely to increase in the
insurance FDI to 49% which is perceived as a negative for Bajaj Finserv due to
its agreement with JV partner on transfer of stake.
Public &
others
26%
Results
MF & FI
4%
Promoter
59%
Foreign
11%
Rs cr
Particulars
Q2FY15
Q2FY14
Income from operations
Q1FY15
QoQ %
1,647.7
1,308.6
25.9
1,629.1
1.1
Other income
0.8
0.8
(4.9)
0.9
(10.5)
Total income
1,648.5
1,309.4
25.9
1,629.9
1.1
464.9
365.7
27.1
477.0
(2.5)
1,183.6
943.8
25.4
1,153.0
2.7
544.5
379.9
43.3
494.9
10.0
-
(7.2)
(100.0)
-
-
639.1
556.7
14.8
658.1
(2.9)
Expenses
Price chart
YoY %
Operating profit
1200
Interest
1100
Exceptional item : pre pmt of sales tax
1000
Profit before tax
14.8
658.1
(2.9)
159.6
14.5
193.8
(5.7)
700
Profit from ordinary activities
456.3
397.1
14.9
464.3
(1.7)
600
Less minority interest
140.4
120.5
16.5
145.0
(3.2)
Net profit
315.9
276.5
14.2
319.4
(1.1)
Oct-13
Oct-14
556.7
182.8
Jul-14
639.1
Tax
Apr-14
PBT from ordianry activties
800
Jan-14
900
Price performance
(%)
1m
3m
6m 12m
Absolute
2.9
18.5
42.6
73.8
Relative
to Sensex
5.5
12.0
20.9
33.0
Performance of key subsidiaries
Earnings performance
Rs cr
Q2FY15
Q2FY14
YoY %
Q1FY15
QoQ %
Bajaj Finance
197.2
167.0
18.0
211.4
-6.7
Bajaj Allainz General Insurance
145.0
113.0
28.3
130.0
11.5
Bajaj Allianz Life Insurance
243.0
252.0
-3.6
286.0
-15.0
Bajaj Finserve (consolidated)
315.9
276.5
14.2
319.4
-1.1
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Life insurance—slowdown persists
Strong growth in assets under management (AUMs)
drives profit growth
The life insurance segment, which witnessed a slowdown
in the past several quarters saw a flattish gross written
premium (GWP) (down by 2% year-on-year basis [Y-o-Y]
vs decline of 10% in Q2FY2014). While the pressure
continues on new business premium growth (down by 7%
YoY), the favourable trends in the industry and improved
distribution should drive growth in premiums.
The earnings grew by 18% YoY to Rs197.2 crore mainly
driven by a strong uptick in the net interest income, as it
grew by 18.7% YoY to Rs687.8 crore. The deployments of
the company grew by 50% YoY to Rs7,816 crore during
Q2FY2015 whereas its AUMs grew by 41.2%% YoY to 28004
crore. The small and medium enterprises (SME) and
consumer segments, which grew by 51% and 37%
respectively, were the key growth drivers in AUMs.
The total surplus declined by 3.5% year on year (YoY) to
Rs243 crore led by a drop (of 3.7% YoY) in surplus to Rs103
crore. This was largely due to the decline in margins (new
regulations on traditional insurance products) and
premiums. The solvency ratio of the life insurance
company stands at 802% as against the regulatory
requirement of 150%. The company has revamped its
distribution network and is likely to report a healthy
growth in FY2015.
Bajaj Allianz Life Insurance
Particulars
AUM
Particulars
Total income
Interest and
finance charges
Net interest income
Expenses
Profit before tax
Profit after tax
AUM
Rs cr
Q2
FY15
1,401
610
791
140
103
243
Q2
FY14
1,434
659
775
145
107
252
40,943.0
36,961
Gross written premium
New business premium
Renewal premium
Policyholders surplus
Shareholders surplus
Profit / (Loss) for
the year
Bajaj Finance
YoY
%
-2.3
-7.4
2.1
-3.4
-3.7
-3.6
Q1 QoQ
FY15
%
796 76.0
394 54.8
402 96.8
171 -18.1
115 -10.4
286 -15.0
10.8 40,592
Deployments
0.9
Gross Written Premium
Net Earned Premium
Interest and
dividend income
Profit before tax
Profit after tax
Q2
FY14
1,143
881
144
YoY
%
29.1
8.2
18.1
Q1
FY15
1,177
921
158
QoQ
%
25.3
3.5
7.6
193
145
166
113
16.3
28.3
182
130
6.0
11.5
580
329
250
167
19,829
7,816
5,199
Q1
FY15
1,244
500
QoQ
%
(0.9)
9.0
18.7
744
21.1
426
15.5
318
18.0
211
41.2 26,943
(7.6)
(6.4)
(9.2)
(6.7)
3.9
50.3
9,266 (15.6)
Valuation matrix
Particulars
Life Insurance (appraisal value)
General Insurance (2.2x FY16 BV)
Bajaj Finance (2.5x FY16 BV)
Stake (%) Value per share (Rs)
51
479
51
208
61.5
454
Investments & Windmill
Rs cr
Q2
FY15
1,475
953
170
688
399
289
197
28,004
YoY
%
28.1
42.5
We maintain our positive stance on Bajaj Finserv due to (a)
a strong sustained performance by its lending and general
insurance businesses; and (b) revival in its life insurance
sector. We have revised our sum-of-the-parts (SOTP) based
price target for Bajaj Finserv to Rs1,160 (largely to factor
the price target revision for Bajaj Finance).
The general insurance business reported a profit of Rs145
crore for Q2FY2015 (up by 30% YoY) with an underwriting
profit of Rs23 crore. The GWP grew by 29% to Rs1,475 crore
in Q2FY2015, while the net premium grew by 8% YoY. The
combined ratio including the motor-pool loss stood at 96.3%.
The growth in profits remained strong despite an increase
in claims ratio (75.3% vs 66.7% in Q2FY2014).
Particulars
Q2
FY14
962
382
Valuation and outlook
General insurance—robust performance
Bajaj Allainz General Insurance
Rs cr
Q2
FY15
1,232
544
18
Total
1,160
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