Sunday, July 3, 2011

Bajaj Finance - Buy

Bajaj Finance

CMP Rs 622

Bajaj Finance is another financial services company that managed a good performance in Q4 as it did through 2010-11. Its Q4 net profit has grown by 182% (YoY) mostly due to the lower provisioning. While the loan growth also remained robust, it has shown a sign of moderation (compared to Q3 levels) due to the headwinds facing the sector now. With inflation remaining high and the RBI expected to push ahead with further interest rate hikes, the sector will have a bumpy ride over the next few quarters.

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However, the Bajaj Finance management has hinted at a continued loan growth in the coming years. To make sure that its capital adequacy ratio doesn't go below 15% in the coming years (current capital adequacy ratio is 19.5%) by this growth, the company plans to raise around Rs 750 crore by way of allotment of preferential warrants to promoters and also through issuance of shares through qualified institutional placement. This means that investors should use the current sector turmoil to invest in companies like Bajaj Finance, which are quoting at reasonable valuations.

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"Strong and sustainable earnings growth, rising return on equity (RoE) and an inexpensive valuation make Bajaj Finance an attractive play in the financial services space," says Sampat Kumar, analyst at India Infoline . Further, the improvement in asset quality (provisioning fell by 16% in Q4 (on QoQ basis); fall in NPA (net NPA fell from 3.6% in 2009-10 to 0.8% in 2010-11) should provide strong tailwinds as a counter.

Our Recommendation :

Buy around 600 levels for a target price of 750 holding period 9 months

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