Idr Bjfin@in 091115 105311

Initiating Coverage
September 11, 2015

Rating Matrix
Rating
Target
:
:
Buy
2102
Bajaj Finserv (BAFINS)
Target Period
Potential Upside
:
:
12-15 months
18%
| 1775
Unparalleled niche - Consumer Finance & General insurance
YoY growth (%) - Consolidated Bajaj Finserv, a financial conglomerate under the flagship Bajaj brand and
(YoY Growth) FY14 FY15 FY16E FY17E
leadership of Sanjeev Bajaj, has witnessed a sharp surge in earnings in all
Revenue 6.5 15.9 12.5 13.3
three key business segments viz. finance, life insurance (BALIC) and
PBT 7.3 11.7 19.4 19.3
Net Profit (1.6) 9.2 20.6 24.2
general insurance (BAGIC). Backed by the strong brand, in general
EPS (1.6) 9.2 20.6 24.2 insurance it is the most profitable and efficient player among competitors.
Bajaj Finance, a niche consumer durable lender, reported 4x increase in
Current & target multiple (Consolidated) loan book in FY11-15 while earnings surged at 38% CAGR. BALIC enjoys
FY14 FY15 FY16E FY17E a market share of ~6.8% in new business premium. It is consolidating
P/E 18.2 16.7 13.9 11.2 after making peak profit of | 1311 crore in FY12. Going ahead, we expect
Target P/E 21.6 19.8 16.4 13.2 consolidated Revenue, PAT to grow at CAGR of 13%, 22% to | 22977
P/BV 3.0 2.6 2.2 1.8 crore and | 2532 crore, respectively, in FY15-17E. We are initiating
Target P/BV 3.6 3.0 2.6 2.2 coverage on Bajaj Finserv with a BUY recommendation.
RoA 2.2 2.0 2.1 2.3
RoE 18.1 16.7 17.0 17.8
Niche in general insurance; superior return ratios compared to peers
A strong business model generating RoE in excess of 24%, reporting
z
Stock Data underwriting profit on <100% combined ratio and extensive retail focus
Particular Amount enable market share of ~6% in gross written premium (GWP). Prudent
Market Capitalization |28403 crore underwriting with 70% of net earned premium (NEP at | 3832 crore in
Net worth |10973 crore FY15) in retail through motor and health insurance remains a key rationale
52 week H/L (|) 1001/2160 for sustained profit and net worth growth. We expect NEP, PAT to grow at
Equity capital | 80 Crore 15.1%, 10.3% CAGR to | 5073 crore, | 684 crore, respectively.
Face value |5
DII Holding (%) 7.2
Bajaj Finance profit surges, gaining mindful share in consolidated P/L
FII Holding (%) 8.4 A distinguished business model in consumer durables portfolio boosted
its loan book (up 35% YoY to | 32410 crore in FY15) while asset quality
Comparative return matrix (%) sustained despite a weak economic environment. Margins sustained at
1M 3M 6M 12M ~10% due to higher IRR in products. PAT surged at 38% CAGR to | 897
Bajaj Finserv L (9.9) 15.9 23.1 64.9 crore in FY11-15 with bulging contribution of 42% from 25% earlier, to
HDFC Ltd (8.6) (0.2) (13.3) 13.0 consolidated PAT. Expect PAT to moderate at 28% CAGR to | 1467 crore.
Reliance Capit (11.8) (5.8) (26.7) (39.2)
Life insurance huge potential, need right strategy to take off
Price movement 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
10,000 on Ulip, etc. fading, business potential is huge. FY15-17E NBP to grow at
1,700 14% CAGR to | 3088 crore with 28% CAGR in PAT to | 1125 crore.
8,500
1,200
Expected to exhibit growth coupled with stability; initiate with BUY
7,000
Based on SoTP valuation, we ascribe a target price of | 2102 per share for
5,500 700 Bajaj Finserv, which implies a multiple of 13x on FY17E consolidated
earnings. The stock is available at reasonable P/E valuation of 11x FY17E
4,000 200 earnings even post conservative forward estimates on life, general
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Sep-13
Nov-13
Feb-15
May-15
Jul-15
Sep-15
insurance while dividend from them can be upside risk. We initiate

coverage with BUY rating and upside of 18% at the CMP of | 2102.
BJFIN IN Equity NIFTY Index Exhibit 1: Valuation Metrics Bajaj Finserv
(Year-end March) FY14 FY15 FY16E FY17E
Research Analyst Revenue (| crore) 15,554.0 18,030.9 20,279.5 22,977.3
Kajal Gandhi PBT (| crore) 2,905.0 3,246.2 3,875.3 4,624.2
kajal.gandhi@icicisecurities.com Net Profit (| crore) 1,547.7 1,689.8 2,038.3 2,532.2
Vasant Lohiya EPS (|) 97.3 106.2 128.1 159.1
vasant.lohiya@icicisecurities.com Growth (%) (1.6) 9.2 20.6 24.2
Vishal Narnolia P/E (x) 18.2 16.7 13.9 11.2
vishal.narnolia@icicisecurities.com 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
ICICI Securities Ltd | Retail Equity Research

Shareholding pattern (Q1FY16) Company background - Bajaj Finserv
Shareholder Holding (%)
Promoters 58.4 Bajaj Finserv Ltd was incorporated on April 30, 2007. As per the scheme
FII 7.2 of de-merger of the erstwhile Bajaj Auto Ltd in 2007, the shareholding of
DII 8.4 Bajaj Auto in Bajaj Finance and other financial businesses along with
Others 26.1 windmill has been vested with Bajaj Finserv, which is the financial
Source: Company, ICICIdirect.com Research services arm of the Bajaj Group. The de-merger was effective from the
appointed date on March 31, 2007.
FII & DII holding trend (%) Bajaj Finserv is now a financial conglomerate that is engaged in life
insurance, general insurance, consumer finance and other financial
10 9.0 products. Apart from financial services, the company has an operational
8.2 8.3 8.4
7.5 7.4 7.2 wind energy asset.
8 6.7
The portfolio of the company includes 74% in the two insurance
6
companies viz. Bajaj Allianz Life Insurance Company (BALIC) and Bajaj
(%)
4 Allianz General Insurance Company (BAGIC), 50% holding in Bajaj Allianz

2 Financial Distributors, 57.6% in Bajaj Finance and 100% holding in Bajaj
Financial Solutions. The company is engaged in life and general insurance
0
through their joint ventures with Allianz SE (German) viz. Bajaj Allianz Life
Q2FY15 Q3FY15 Q4FY15 Q1FY16 Insurance Company and Bajaj Allianz General Insurance. Bajaj Allianz
FII DII 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 Autos 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 Auto Limited Bajaj Finserv Limited

(49.24% stake) (58.35% stake)
Bajaj Allianz Life Bajaj General Insurance Bajaj Financial Solutions Bajaj Finance Limited
Insurance Company Company (74% stake) (100% stake) (57.3% stake)
(74% stake) Wealth Management
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
ICICI Securities Ltd | Retail Equity Research Page 2

BALIC Life Insurance (Unlisted)
| Crore FY14 FY15E FY16E FY17E
Insurance sector exposure - key for re-rating in future
Net Premium Income 5,775.3 5,948.0 6,107.7 6,470.3 Bajaj Allianz General Insurance (BAGIC) a class apart
Payments to Policyholders 8,482.0 8,237.6 8,700.1 8,114.5
Bajaj Allianz General Insurance Company (BAGIC) is a 74:26 JV between
Transferred from PH to SH 639.1 488.1 564.3 620.0
Bajaj Finserv and Allianz SE. The company has consistently maintained its
Profit/ (Loss) before tax 1,162.2 1,006.8 1,170.3 1,294.8
strong position among private general insurance players, owing to its
Profit After Tax 1,024.6 876.4 1,018.1 1,126.5
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
BAGIC General Insurance (Unlisted) business. We expect GWP to grow at 14.5% CAGR in FY16-17E to | 6856
| Crore FY14 FY15E FY16E FY17E crore. With prudent underwriting standards and anticipated increase in
Gross Written Premium 4,584.0 5,229.8 5,962.0 6,856.3
third party insurance rates, we expect combined ratio to remain below
Net Incurred Claims 2,525.0 2,756.0 3,155.4 3,653.0
100% in FY16-17E (combined ratio at 97-98% in last two years).
Underwriting Results (1.6) 82.8 110.1 142.0
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
Income from Investments 590.8 701.9 759.6 835.1
RoEs are in the range of -12.5-19% vs. 25% reported for BAGIC in FY15.
Profit After Tax 409.0 562.3 608.8 684.0
Value BAGIC at | 429/share of Bajaj Finserv
APE market share private players - BALIC We have valued the BAGIC business at 15x FY17E PAT given consistent
growth and superior RoE, resulting in business valuation of | 10260 crore.
Bajaj Allianz With limited period left to exercise the Call option vested with Allianz, we
Others
20%
6%
HDFC Standard
value Bajaj Finservs BAGIC stake at full 74%. This translates to a target
13% valuation of | 7592 crore (74% stake) and | 429 per share of Bajaj Finserv
Kotak post 10% holding company discount.
4%
SBI
Bajaj Allianz Life Insurance Company (BALIC) Gearing for stable growth
14% Bajaj Allianz Life Insurance (BALIC), a 74:26 JV between Bajaj Finserv and
Max
8%
Allianz recorded its first profit since FY10 of | 542 crore and is now
Birla
ICICI Reliance earning higher PAT of | 876 crore after a peak of | 1311 crore. Gross
8%
19% 8% written premium (GWP) has de-grown at 20% CAGR from FY12-15 to
z
| 6017 crore, on account of a decline in linked premium led by

Source : IRDA, ICICIdirect.com research
surrenders. Traditional products have grown at 34% CAGR over the same
period. Accordingly, APE has declined and new business (NBAP) margins
NEP market share - BAGIC moderated to 11-14% by FY14 and came in at 18% for FY15. NBP is
Bajaj Allianz expected to grow at 14% CAGR to | 3088 crore while APE is seen
ICICI growing at 36% CAGR to | 1511 crore in FY15-17E. FY15 AUM was at
6% HDFC ERGO
3% Lombard | 43554 crore. PAT has turned into green since FY10, after seeing a
8%
Reliance decline in FY13-15. We expect PAT to grow at 28% CAGR to | 1127 crore.
3% Value BALIC at | 674/share of Bajaj Finserv
SBI General
We are considering the full 74% economic interest of Bajaj Finserv in the
1%
Public Total business. Valuing the life business on appraisal valuation methodology
60% TATA AIG with 1.2x EV +10x NBAP results in BALIC target valuation of | 161 billion
Private 3% on FY17E basis. This culminates to | 119 billion for 74% BALIC stake and
others
thereby | 674/share of Bajaj Finserv post 10% holding company discount.
16%
Exhibit 3: Valuation matrix - BALIC Exhibit 4: Valuation matrix - BAGIC

Basis Value (| crore) Basis Value (| crore)
PAT (FY17E) 1126 PAT (FY17E) 684
EV 11677 Networth 3518
NBAP 212 Multiple 15x
Business value 1.2x EV + 10x NBAP 16128 Business value 15x PAT 10260
Bajaj Stake (%) 74% Bajaj Stake (%) 74%
Value of Bajaj stake 11917 Value of Bajaj stake 7592
Value/ share after 10% discount (|) 674 Value/ share after 10% discount (|) 429
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Initiating Coverage
Rating Matrix Bajaj Finance (BAJAF)

Rating : Buy
Target : | 5600 | 5049
Target Period
Potential Upside
:
:
12 months
11% Unique product offering commands premium!
YoY Growth (%) Bajaj Finance (BFL), is one of the leading asset finance NBFCs. The USP of
YoY Growth FY14 FY15 FY16E FY17E BFL is its stronghold in the consumer durable (CD) & lifestyle product
NII 29.1 29.6 27.8 28.6 financing business (~15% of the AUM) wherein it does not have any major
PPP 28.2 29.0 29.1 31.3 competition (BFLs share is ~16%). These segments are under penetrated
PAT 21.6 24.9 27.5 27.3 and growing in size, thus providing a lucrative opportunity for growth. In
EPS 11.3 24.6 23.1 23.4 FY15, BFL served ~40 lakh clients in these segments. Further, it has a
diversified loan portfolio. Post induction of the new management in FY07,
Valuation Summary BFL transformed itself from merely financing a few products to a wide
FY14 FY15 FY16E FY17E range of products divided into three broad categories viz. consumer finance
P/E 34.9 28.0 22.8 18.4 (40% of loans), SME (54%) & commercial & rural category (6%). Such
Target P/E 38.8 31.1 25.3 20.5
diversity has given BFL an edge in terms of AUM growth (44% CAGR to
P/ABV 6.4 5.4 3.7 3.3
| 32410 crore in FY11-15) and asset quality (GNPA ratio steady in 1.2-1.5%
Target P/ABV 7.1 6.0 4.1 3.6
RoE 19.5 20.4 19.0 18.5
range in the past three years) despite a weak economic environment. PAT
RoA 3.4 3.1 3.0 3.0 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.
Stock Data Expect AUM traction at 27% CAGR over FY15-17E led by consumer finance
Particulars
Strong AUM traction of 44% CAGR over FY11-15 to | 32410 crore was
Bloomberg/ Reuters Code BAF IN/ BJFN.BO mainly driven by the SME category increasing 51% CAGR followed by the
Sensex 25,401 CF category, which rose at 41% CAGR. Within SME, it was the LAP (25% of
Average Volumes 56,096 overall AUM) portfolio that saw high traction of 38% CAGR over FY11-15
Market Capitalisation (| crore) 27,030 while CD financing within CF book saw 47% CAGR. Going ahead, we expect
52 week H/L (|) 5718 /2460 AUM growth at 27% CAGR to | 52686 in FY15-17E, led by CF segment
Equity capital 53.3 (31% CAGR) that will be driven by CD financing business. Enhanced
Face value | 10 competition and growing risks in the LAP segment may keep traction in the
DII Holding (%) 5.8 SME segment lower at 24.8% CAGR (refer exhibit 20).
FII Holding (%) 18.1 Steady asset quality, strong margins reflect strength of model
Comparative return matrix (%) BFLs GNPA ratio at 1.5% (| 471 crore) as on FY15, is better than some of its
Return % 1M 3M 6M 12M peers wherein the ratio is above 2.5%. The asset quality has improved
Bajaj Finance -8.3 20.6 20.6 110.4 sharply over the last five to six years. The GNPA ratio was at 16.6%, 7.6%
Shriram Transport -5.6 5.5 -30.1 -10.9 during FY09, FY10, respectively. Owing to its strong underwriting
MMFS -0.3 1.1 -3.0 -11.1 processes, focus on affluent & mass affluent clients, NPA is expected to
Shriram City Union -10.7 -1.2 -20.3 -2.3 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
Price chart
~10% as on FY15. We assume this will largely be sustained, going ahead.
9,500 6,000 Rich valuations to sustain on strong visibility in earnings
9,000 5,000
Strong performance in a weak economic scenario (healthy return ratios -
4,000
8,500 RoA at ~3%, RoE at ~20% GNPA at 1.5%) led to higher investor interest in
3,000
8,000 BFL & P/ABV multiple expanding from 1x to 3x since September 2013. We
2,000
7,500
believe its niche positioning in CD financing coupled with diversified nature
1,000
of its book that helps de-risk the portfolio hold key. BFLs premium
7,000 0
valuations are expected to sustain on better earnings visibility. We initiate
Feb-15
Aug-14
Aug-15
Nov-14
May-15
coverage with BUY rating & a TP of | 5600 valuing at 3.6x FY17E ABV.
Exhibit 5: Key Financials
Financial Performance FY13 FY14 FY15 FY16E FY17E
Bajaj Finance Nifty (L.H.S)
NII (| crore) 1717 2216 2872 3671 4721
PPP (| crore) 1053 1350 1741 2248 2953
PAT (| crore) 591 719 897 1144 1456
Research Analyst EPS(|) 130 144 180 221 273
Kajal Gandhi P/E 38.8 34.9 28.0 22.8 18.4
kajal.gandhi@icicisecurites.com P/ABV 7.5 6.4 5.4 3.7 3.3
RoA 3.8 3.4 3.1 3.0 3.0
Vasant Lohiya RoE 21.9 19.5 20.4 19.0 18.5
vasant.lohiya@icicisecurites.com
Vishal Narnolia
vishal.narnolia@icicisecurites.com
ICICI Securities Ltd | Retail Equity Research

Exhibit 6: LI second in saving mobilisation Life insurance industry Quick snapshot
Provident
& Shares &
The life insurance industry has remained on a high growth trajectory till
Bank Life pension debentur 2008 since the entry of private players in 2001. Today, it is second only to
Year Currency deposits insurance fund es banks in terms of mobilised savings (15.6% of financial savings) and is
FY07 8.8 56.1 15.0 9.5 6.6
among the major domestic contributors to the capital markets. The life
FY08 10.5 50.4 22.0 9.3 9.6
FY09 12.7 57.5 21.0 10.1 -0.3
insurance sector has been instrumental in contributing towards
FY10 9.8 40.2 26.2 13.1 4.5 infrastructure funding and, thereby, assisting the government in nation
FY11 13.0 46.5 19.9 1.3 -0.4 building. However, the sector penetration is just 2.6% of GDP in terms of
FY12 11.4 52.7 20.9 10.2 -0.3 premium as on FY15, declining from 3.1% in FY14.
FY13 10.9 52.1 17.6 11.9 4.2
FY14 8.0 48.7 15.6 10.6 2.6
Key statistics : Annual premium of | 327539 crore in FY15, 20 lakh plus
Source: RBI, ICICIdirect.com Research, individual insurance agents, over 2.4 lakh employees based in ~11,000
Proportionate share of gross financial savings 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)
Insurance penetration refers to premiums as a
percentage of GDP whereas insurance density
(measured in dollar) refers to per capita premium or 6.0
premium per person 5.0
4.0
3.0
(%)
4.8 5.2 5.1

4.7 4.6
2.0 4.1 4.0 3.9
3.3 2.9 3.2 3.1 3.3
2.3 2.7
1.0 1.9
0.0
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

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)
Shareholding pattern (FY15) Company Background
Bajaj Finserv 74.0 Bajaj Allianz Life Insurance Company (BAGIC) is a joint venture (JV)
Allianz SE 26.0 between Bajaj Finserv and Allianz SE, undertaking life insurance business
Source: Company, ICICIdirect.com Research 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.
As of March 2015, BALIC made a profit before tax of In 2001, the erstwhile Bajaj Auto entered into a joint venture agreement
| 1007 crore and PAT of | 876 crore 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
Bajaj Allianz
8%
Others HDFC Standard

31% 16%
SBI
7%
Kotak Reliance
4% 6%
Max
7% Birla ICICI
6% 15%

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) Exhibit 12: BALIC Market share in total premium (private)shrinking
FY15
18 16.5
FY14 16 14.4
14
FY13
(| crore)
12 10.9
FY12 10 8.9 8.8
7.6
(%)
8 6.8
FY11
6
FY10 4
2
FY09
0
FY09 FY10 FY11 FY12 FY13 FY14 FY15
0 20,000 40,000 60,000 80,000 100,000 120,000
BALIC Private
Source: IRDA, Company, ICICIdirect.com Research Source: IRDA, Company, ICICIdirect.com Research
Exhibit 13: Premium growth expected at 9.7% CAGR, with renewal remaining flattish
11,420
12,000 10,625 100
9,725 9,607
10,000 80
7,480 60
8,000 6,893 6,602
5,844 6,017 6,232 40
(| crore)
6,000
(%)
20
Going ahead, premium growth is seen primarily from 4,000
0
traditional products. We expect 9.7% CAGR in FY15-17E in
2,000 -20
total premium
0 -40
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Total premium Growth
Source: IRDA, Company, ICICIdirect.com Research

Exhibit 14: Market share in NBP maintained in FY11-15 with higher group business
14%
First year premium CAGR for the insurance industry (FY09-
12%
14) was 6.6%, with private insurers witnessing a decline of
-2.9% due to a slowdown in Ulip sales 10%
8%
With traditional product in focus, LIC grew at 11.3% CAGR 13.2%
6% 11.6%
over FY09-14 9.7%
4% 8.8% 8.5% 8.8% 8.9%
2%
0%

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, BALICs 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
120
100 8
11 14 17
80 31
59
(| crore)
65 71
60
89 92 86 83
40
69
Bajaj has improved the overall product mix with traditional 20 41 35 29
(non linked) forming 71% and Ulip at 29% in FY15
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Linked FYP Non Linked FYP
Exhibit 16: BALIC - Product wise premium contribution (new business) Exhibit 17: BALIC - Product wise premium contribution (total business)
120 120
100 1 7 100 4 6 10
16 17
80 30 80 43
60 69 80 79
65 71
81 82 81 60 76 81 82
(%)
99
(%)
93 84 96 94 90
40 70 40 83
57
20 31 20 35
19 18 19 20 21 24 29 19 18
0 0
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16EFY17E FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Linked Non-linked Linked Non-linked

Exhibit 18: Category wise premium contribution - group single premium surges
120
100
80
60
(%)
40
Going ahead, premium growth is expected at 9.7% CAGR
over FY15-17E in total premium. Hence, average margins 20
are expected to stabilise at 13-14% 0
Individual Single Premium Individual Non-Single Premium

Group Single Premium Group Non-Single Premium
BALIC product-wise margin & surrender APE de-growth moderating, NBAP margins to stabilise
Product Margins vs Surrender The life Insurance industry measures revenue via annualised premium
Term Highest Nil equivalents (APE), which weigh premium income via {(100% of first year
Individual - Traditional Higher Medium premium) + (10% of single premium)}. This refers to annualised premium
Individual - Linked High High relevant to the year. APE de-grew from | 1720 crore in FY12 to | 985
Group Low Medium
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 Exhibit 20: APE - BALIC vs. industry
40000
34934
Bajaj Allianz 35000
Others 28832
6% 30000
HDFC Standard 25036
20% 23683 22780 21656
25000
13%
(| crore)
20000
Kotak
15000
4%
10000
SBI 3660 2424 2078
5000 1935 1332 986
14%
0
Max
FY10 FY11 FY12 FY13 FY14 FY15
8%
Birla Reliance
ICICI APE BALIC APE private
8% 8%
19%
Source: IRDA, ICICIdirect.com Research Source: Company, IRDA, ICICIdirect.com Research

Exhibit 21: NBAP margin moderation to stay
800 721 20
700 18
608
16
600
475 14
500 12
(| crore)
400 10
(%)
300 8
215 186 199 212
147 175 6
200
4
100 2
0 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
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.
Opex to GWP ratio at 23% in FY15 is higher for BALIC
For BALIC, bancassurance formed 7% of GWP and 84% of agency in
compared to 17% for industry led by sales overheads for
FY14 while it was 0.8% and 91%, respectively, in FY15 due to the full
agency channel
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
Chartereds 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.

Exhibit 22: Commission expenses moderate after Ulip regime
18
16
14
12
10
(%)
8 15.4
6
9.9
4 8.4
6.4
2 5.2 4.1 4.0 4.5
2.5 3.4
0
Exhibit 23: Share of agency in GWP rising for BALIC post no bank tie-up Exhibit 24: FY15 - Insurer wise distribution channel BALIC
350 100 5.3 10.3 10.0 1.2 2.7 9.5

0.8
300 80 18.5
53.8 37.5 35.0 31.4 28.1 51.7
250 60
67.4 63.6 63.0 57.5 56.1
64.8 67.2 67.0
(%)
200 40 91.7
(%)
53.8 51.7 53.0 49.8 45.8 67.2

150 45.8
20.1 17.0 16.3 16.5 20 28.4
100 30.8 31.2 25.4 25.4 16.5
45.1 38.0
42.6 0
50 66.0 76.2 84.0 91.7
Standrad
SBI Life
Sunlife
Max Life
BALIC
Prudential
54.9
Birla
HDFC
0
ICICI
FY11 FY12 FY13 FY14 FY15
BALIC ICICI Prudential HDFC Standrad SBI Life Birla Sunlife Max L Individual Agents Banks Corporate Agents
Brokers Direct Selling
Exhibit 25: Commission expenses lower than peers
10 9.3 9.4
8
5.7 5.7 5.8
6 5.0 4.9 5.2 4.9
4.1 4.2
(%)
4
2.5
2
0
BALIC ICICI HDFC SBI Life Birla Sunlife Max Life
Prudential Standrad
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
250000 8
7
200000
6
(Number of agent)
150000 5
(| lakh)
4
100000 3
2
50000
1
0 0
Agent Productivity (FYP) Productivity (TP)
Exhibit 27: Management expenses Opex ratio (including commission), quite high in industry
120
91.7 92.8 95.5 91.1
90.7 88.1
100 86.0
72.1 73.8
80
60
(%)
40 27.6 23.9 24.0 27.3 27.7 23.7 26.0 25.5

23.1
20
0
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
Surrenders include policies surrendered by policyholders remaining sluggish for BALIC as well as industry.
anytime before maturity though generally it is in the initial Linked AUMs have grown at 74% CAGR in FY09-13 while AUM of
few years 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.

Exhibit 28: Thirteenth month persistency improving, sixtieth month declining on high surrenders
100
90
80
70
60
50
(%)
Persistency ratio is the number of life insurance policies 40
30
remaining in force
20
10
0
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
60000
50000
40000
(| crore)
30000
20000
10000
0

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.
After witnessing a decline in profitability in FY13-15, we Exhibit 30: Profit seen stabilising at | 1000 crore over next two years
expect PAT to grow at 28% CAGR to | 1125 crore in FY16-
17E 1,400 200
1,200
0
1,000
800 (200)
(| crore)
(%)
600
(400)
400
200 (600)
0
(800)
(200) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
(400) (1,000)
PAT Growth

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 Exhibit 32: RoE and RoEV BALIC
8000 6749 50 25
6000 4863 40 20
(| crores)
3974
4000 30 15
2592 2170
(%)
2014
(%)
2000 20 10
0 10 5
BALIC ICICI HDFC SBI Life Birla Max Life 0 0
Prudential Standrad Sunlife FY12 FY13 FY14 FY15 FY16E FY17E
FY14 FY15 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 ratio is determined by division of available solvency margin (ASM) by the RSM. BALIC has high networth, purely
solvency margin (ASM) against the required solvency generated from profit as no major equity issuance has happened since
margin 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 Exhibit 34: Solvency ratio for peers (FY14)
8
10
8 6
6
4 7.6
(%)
(%)
4 8.4 8.6
7.3 7.6
6.3
5.2 2
2 3.3
2.9
2.0 2.2
1.5
0
0
FY11 FY12 FY13 FY14 FY15 FY16E FY17E
BALIC HDFC Standard ICICI Prudential SBI Life LIC

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. BALICs 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
Tatas buyback of Docomos 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
BALICs 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 FY17E
EV 7653 7601 9323 10589 11677
NBAP 186 147 199 175 212
Multiple Assigned (x)
NBAP (x) 10 10
EV (x) 1.2 1.2
BALIC Valuation (EV x 1.2 + NBAP x10) 14452 16128
Bajaj Finserv stake 74% 74%
BALIC for SOTP 10695 11917
Value per share of Bajaj Finserv (|) 672 749
Value 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

HDFC Birla
Insurer (FY15) BALIC ICICI Prudential Standard SBI Life 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
*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)
NBAP Multiple (x)
8 10 12 14 16
10 617 635 653 672 690
Margin (%)
13 639 662 686 710 734

14 646 672 697 723 749
NBAP
16 661 690 719 749 778

RBI rejects Tata offer for Docomos 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 Tatas 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

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
*PH Policyholder account, SH Shareholder account
Exhibit 40: Balance sheet | crore

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
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)

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

Shareholding pattern (FY15) Bajaj Allianz General Insurance Company
Bajaj Finserv 74.0 Company Background
Allianz SE 26.0
Company, ICICIdirect.com Research 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.
As of March 2015, BAGIC made a profit before tax of | 777 The Indian general insurance sector, which had four public sector
crore and PAT of | 562 crore 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
BAGIC
Retail Corporate Miscellaneous
Motor Health Travel Rural Asset Commercial Vehicle Workmens 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

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
30 79934 90000
71203 80000
25
59820 70000
20 60000
48213
(| crore)
39226 50000
15
(%)
33565 40000
27135 30480
10 19522 22472 30000
20000
5
10000
0 0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Gross direct premium YoY growth (%)
Insurance penetration refers to premiums as a percentage While the Indian general insurance industry has evolved significantly over
of GDP whereas insurance density (measured in dollars)
the last decade, insurance density (($10 in FY13) and insurance
refers to per capita premium or premium per person
penetration (0.7% of GDP in FY13) levels remain significantly lower
compared to other developed as well as developing nations across the
globe. Lack of overall financial awareness and propensity to buy
insurance products based on regulatory requirement or tax incentive can
be attributed as the primary reasons for under-penetration of general
insurance, offering long term growth prospects for the industry.
Exhibit 45: General insurance density Exhibit 46: General insurance penetration
2400
5
2100 4.5
1800 4
1500 3.5
3
1200 2.5
($ )
2130
(% )
4.5
900 2 3.6
1578
600 1188 1.5 2.7 3.1
1 2.3
300 1.2 1.5
295 0.5 0.7
64 189 215
0 10 0
India China Brazil South Russia Germany UK USA India China Brazil South Russia Germany UK USA
Africa Africa
Insurance density (2013) Insurance penetration (2013)
Source: IRDA, ICICIdirect.com Research Source: IRDA, ICICIdirect.com Research

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 Allianz HDFC ERGO
6% 3% ICICI Lombard
8%
Reliance
3%
SBI General
1%
TATA AIG
3%
Public Total
60%
Private others
16%

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
Retail consists of ~69% of overall business while over market share (slower growth in CV business owing to higher third
majority is comprised of the motor business, which party claims). Post FY12, the company has arrested this fall and
remains the core strength of BAGIC 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
8000 40
6856
7000 35
5962 30
6000 5230
25
5000 4584
4109 20
(| crore)
3676
4000 15
(%)
2866 3129
2725 10
3000 2405
5
2000
0
1000 -5
0 -10
GWP YoY growth (%)

Exhibit 50: Market share stabilises at 14-16%
25
20
15
(%)
22 21
10
18
16 15 15
14 14
5
0
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. BAGICs 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 Exhibit 52: Industry Business mix (FY14)
Others
100
12 12 10 10 17 18 18 15%
80 17 17 16 15
14 14 14
12 13 15 16
60 14 14 15
Property and
Eng
(%)
40 Motor
59 58 59 59 55 55 54 15% 48%
20
0
Health
Motor Health Property and Eng Others
22%
Source: Company, ICICIdirect.com Research Source: IRDA, ICICIdirect.com Research
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
BAGIC motor insurance business grew at 22% CAGR in share in FY14. BAGIC has focused on the motor insurance business with a
FY06-14; ahead of 18% industry growth. Hence, BAGICs CAGR of 22% in GWP to | 2700 crore in FY06-14, ahead of industry
market share increased from 6.1% of GWP in FY06 to ~8% growth of 18% during the same period. BAGICs market share increased
in FY14 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%

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
35000 100
30000 80
25000
60
20000
(| crore)
40
(%)
15000
20
10000
5000 1703 2006 2356 0
336 493 926 1296 1255 1476
0 -20
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
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,
BAGICs 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)
120
100
80 30
48 44
53
9
60 84
(%)
40 10
40
60 40
20 37
6 17
12 10
0
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
100
90 22 19 21
32
80 44
12 15 14
70
4
60
5 19 27
50 34
(%)
14 36
40 11
11 8
30 7 7
20 34
26 31 26
10 23
0
Individual agents Banks Broker

Corporate 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
Detariffication in 2007 and upward revision in motor pool
the profitability of the corporate business.
loss impacted profitability of non-life insurers in FY07-12
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-
The combined ratio is defined as the sum of incurred losses
11, underwriting losses increased from | 21 crore in FY08 to | 219 crore
and operating expenses measured as a percentage of
in FY11 on account of higher combined ratio, which increased from 98%
earned premium
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 Exhibit 57: Continuous rise in business retention, expect to sustain
120 100
100 30 80
32 29 27 26 26
41 36 23 22 23
80
60
60
(%)
(%)
40 40 74 73 78 82 77 78 77
72 74 79 77 72 72 72 73 72 67 69 72
66 67 60
20 20
0
0
-20 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15EFY16EFY17E
Claim ratio Commission ratio Management expense ratio Retention ratio

Exhibit 58: Lower combined ratio helps to deliver underwriting profit in FY15
100
50 83
-2
0 25 -21
-50
FY07 FY08 FY09-73 FY10 FY11 FY12 FY13-62 FY14 FY15
-50
(| crore)
-100
-150 -178
-200 - --219
-250
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.. Exhibit 60: leads to higher RoE
30
160
121 121 20
108 104 102
120 97
25
(%)
10 19 18
80
10 9
(%)
40 0
Bajaj HDFC ICICI Reliance 13 SBI TATA AIG
0 -10 Allianz Ergo Lombard General General General
Bajaj HDFC ICICI Reliance SBI TATA AIG
Allianz Ergo Lombard General General General -20
Combined ratio - FY15 RoE - FY15 (%)
Source: Respective Company presentations, Annual Reports,,ICICIdirect.com Source: Respective Company presentations, Annual Reports,ICICIdirect.com Research
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
The RoE trajectory is expected to remain healthy near FY14-15. RoE has been growing in double digits over FY09-15, barring
~20% over FY16-17E, with the combined ratio expected to FY11 when RoE was in single digits at 5% owing to higher claims,
remain stable at 97-98% in FY16-17E 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% Exhibit 62: BAGIC AUM trajectory
30 50 10400 12000
25 9022 10000
40 7859
20 6967 8000
(| crore)
30 5845
15 4548 6000
(%)
24 25 25 20 3852
10 21 19 (%) 2746 4000
15 16 2010 2386
13 10 2000
5
5
0 0 0
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E FY08 FY09 FY10 FY11 FY12 FY13 FY14FY15EFY16EFY17E
RoE BALIC AUM YoY growth (%)
Exhibit 63: Net worth (FY15) peer comparison Exhibit 64: BAGIC generates better RoE compared to peers
2823.5
3000 30 25.3
2225.5
1837.1 19.0 18.0
2000 20
(| crore)
1323.1 10.4
1011.8 9.0
834.8 10
1000
(%)
0
0
Bajaj HDFC ICICI Reliance SBI TATA AIG
Bajaj HDFC ICICI Reliance SBI TATA -10 Allianz Ergo Lombard General General General
Allianz Ergo Lombard General General AIG
-12.5
General -20
Net worth (FY15) RoE (FY15)
Source: Respective Company presentations, Annual Reports,, ICICIdirect.com Source: Respective Company presentations, Annual Reports,,ICICIdirect.com
Research Research
BAGICs 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.

Exhibit 65: Solvency ratio at 182% in FY15 Exhibit 66: Solvency better compared to peers (FY14)
250 300 280

196
200 173 179 182 250
154 156 182 195
200 165 153 155
150
150
(%)
(%)
100
100
50 50
0 0
FY10 FY11 FY12 FY13 FY14 FY15 Bajaj HDFC ICICI Reliance SBI TATA AIG
Allianz Ergo Lombard General General General
Solvency ratio Regulatory requirement Solvency ratio (FY15)

Financials
Gross written premium to grow at 14.5% CAGR during FY15-17E
In FY07-15, BAGICs 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
8000 40
6856
7000 35
5962 30
6000 5230
25
5000 4584
4109 20
(| crore)
3676
4000 15
(%)
2866 3129
2725 10
3000 2405
5
2000
0
1000 -5
0 -10
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.
PAT is expected to grow at 10% CAGR over FY16-17E 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.

Exhibit 68: PAT growth still strong after blip in FY10-12 on TP motor pool provision
800 250%
684
700 609 200%
562
600 150%
500 409 100%
(| crore)
(%)
400
295 50%
300
200 0%
106 95 121 124
100 43 -50%
0 -100%
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
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 IMTPIPs 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.
Led by investment yield of ~9% in FY15-17E along with Exhibit 69: Return ratios to remain steady
below 100% combined ratio, we expect RoE to remain
steady at 21% in FY16E and 19% in FY17E respectively.
30
25
20
15
(%)
24 25 25
10 21 19
15 16
13
5
5
0
FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
RoE BALIC

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
We value the BAGIC business at 15x FY17E P/E and arrive Driven by a large distribution network, retail strength and customer
at a target price of | 401/share (considering Bajaj Finservs centric business approach, we expect BAGICs GWP to grow at 14.5%
stake at 74%), post a 10% holding company discount 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 BAGICs 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 Finservs 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

Reliance TATA AIG
Insurers (FY15) Bajaj Allianz HDFC Ergo ICICI Lombard General SBI General 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.

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

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 (%)
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)

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

Shareholding pattern (Q1FY16) Company background Bajaj Finance Limited
Shareholding Pattern Holdings (%) Bajaj Finance (BFL) is one of the leading non banking financial companies
Promoters 57.6 (NBFC) in India and is part of the illustrious Bajaj group. The company was
Institutional investors 23.9 incorporated in 1987 essentially as the captive financier to Bajaj Autos
Others 18.5 vehicles. In 1995, it came out with an initial public offering (IPO). Initially,
Source: BSE, ICICIdirect.com Research 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,
Institutional holding trend (%) the shareholding of Bajaj Auto in the company has been vested with Bajaj
Finserv, which is the financial services arm of the Bajaj Group.
20 18.1
15 12.2 12.6 13.1 13.6 As outlined above, BFL started as the captive financier to two and three
wheelers manufactured by Bajaj Auto. However, since then, the company
10 7.1 6.9
(%)
6.3 5.6 5.8 entered various other lending segments and became one of the
5 significant players in the retail asset-financing industry. BFLs diversified
product suite now comprises >10 product lines divided broadly into four
0
categories like consumer, SME, commercial and rural. The company is
Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16
the largest financier of two-wheelers and consumer durables in India.
FII DII
Source: BSE, ICICIdirect.com Research 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 companys 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 Exhibit 77: Distribution

Business Line FY15 Product Line FY15
Urban 161 Consumer durable product stores 7,000+
Of which Consumer Lending branches 161 Lifestyle product stores 1,150+
Of which SME Lending branches 119 Digital product stores 2,650+
Rural 232 2W3W Dealer/ASCs(3)/Sub-dealers 3,000+
Of which Rural branches 50 SME Direct sales agents 700+
Of which Rural ASSC* 182 Rural consumer durable product stores 1,500+
Source: Company, ICICIdirect.com Research; ASSC - Authorised Sales and Service Source: Company, ICICIdirect.com Research
Centres

The key strength or highlight of BFLs business model is its Investment Rationale Bajaj FInance
consumer finance (CF) business and in that, particularly,
the consumer durable (CD) financing & lifestyle product
Bajaj Finance is an asset finance NBFC. The lending book can be
financing business.
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 BFLs business model is its
consumer finance (CF) business and in that, particularly, the consumer
durable (CD) financing & lifestyle product financing business. These
The new clients acquired each year in the CD financing
businesses provide uniqueness to BFL as other financing business like
business have increased at 39% CAGR from 971000 in
SME and commercial lending are covered by other NBFCs and banks. The
FY11 to 3623000 new customers in FY15.
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 FY17E
2W & 3W finance 1953 3593 3324 3315 3526 4215
Consumer durable finance 893 2531 4163 5147 6430 8640
Lifestyle finance - 174 498 565 871 1264
Digital Product - NA 312 354 549 797
Non Digital Product - NA 186 211 322 468
Personal 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 3013
Home Loans (Salaried) - 453 839 938 1079 1370
The edge in the consumer financing business acts as a Total CF AUM 3,357 9,328 13,127 14,937 17,424 22,497
competitive advantage and has allowed BFL to command a Source: Company, ICICIdirect.com Research
valuation premium compared to other NBFCs
Exhibit 79: Detailed profile of products offered under consumer finance (CF) category
Particulars Auto Financing Consumer Durable Lifestyle Financing Personal Loans
Year started 1987 1995 2012 2012
Digital - Mobiles,
Laptops etc & Non
Digital - Furnitiure, PL to existing
Product profile 2 -3 wheeler TV, AC, LED etc Home Furnishing customers
Target Segment Mass clients Mass Affluent Mass Affluent Existing Clients
Ticket size (| Lacs) 2W - 0.45 lacs 0.28 lacs 0.35 lacs 5 lacs
3W - 1-1.5 lacs
Loan 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
3000+ via Bajaj Auto
Distribution dealers, Sub dealers, 7000+ product 3800+ product
network/presence Authorised service centres stores 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

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 Q1FY16
Consumer Durable Finance 971000 1466000 1909000 2452000 3623000 1298000
Life style Finance (Digital + Non digital) - - 36000 108000 373000 124000
Personal Loans 67000 89000 116000 137000 207000 68000
2W 522000 654000 736000 651000 560000 141000
Rural Finance - - - 22000 131000 79000
SME/commercial 9000 12000 11000 20000 31000 10000
Total 1569000 2221000 2808000 3390000 4925000 1720000
Currently, BFL is among the largest new client acquirers in India. This
increase is owing to BFLs 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 Q1FY16
Sales 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+
2WDealer/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.
Almost the entire CD financing and lifestyle product

..leads BFL to command valuation premium over peers
financing business is through 0% financing.
BFLs 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.

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.
Housing & Consumer durables is expected to jump 4 fold to Exhibit 82: Housing & consumer durables is expected to increase 4.0x by 2020
US $ 752 billion from 2010 levels as per BCG CII report (in $ billion) 2000 2010 2020E
Food 135 2.4x 328 2.7x 895
Housing & Consumer durables 47 4.0x 186 4.0x 752
Transport & Communication 43 3.9x 168 3.9x 664
Education & Leisure 17 4.2x 71 4.2x 296
Apparel 18 3.3x 59 3.8x 225
Health 14 3.5x 49 3.8x 183
Others 25 5.2x 129 4.4x 570
Total 299 3.3x 990 3.6x 3585
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
Samsungs smart phones that has ~23% market share. Further, BFL also
finances Apples 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

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
Currently, the company finances 30% of Bajaj Autos
BFL has been present in two wheeler financing since its inception in the
domestic two-wheeler sales through 3000+ dealers and
early 1990s. This business has a captive financing model wherein BFL
authorised service centres.
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.
The large number of customers acquired through the CD
financing business (~40 lakh new customers in FY15)
Though there has been a decline in the two-wheeler financing proportion
allows BFL to cross-sell various other products to
in BFLs overall AUM, the company is the still the largest two-wheeler
customers with a healthy credit history.
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 Autos domestic two-wheeler sales
through 3000+ dealers and authorised service centres. BFL also finances
about 15% of Bajaj Autos 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 Q1FY16
Number of new loans disbursed 397000 239000 442000 522000 655000 736000 652000 560000 141000
Amount Disbursed (| crore) 1484 783 1364 2034 2671 NA 3149 NA NA
AUM (| 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

share of BFL in the overall financing market from 18% currently to ~23%
by FY17E.
LAP comprises the highest part in SME financing as well
as in the overall AUM at 25.4% as on FY15 SME financing Mortgage heavy book; traction to moderate; share to
decline but continue to remain highest in overall AUM
BFLs 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
Loans 727 2033 3084 3795 4356 5637
Business Loans NA NA 2461 3058 3572 4623
Professional Loans NA NA 623 737 784 1015
Loan against property 2251 6907 8232 8424 9583 11933
Home loans (Self Employed) 0 2351 3071 3063 3858 4847
Loan against securities 321 841 1578 1516 1950 2397
SME cross sell 0 718 1233 1360 1576 1976
Total 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 sell
Year started 2009 2009 2010 2009 2012
Affluent - i.e HNIs and Ultra Affluent - i.e HNIs and Ultra
Target Segment SME clients HNIs Self employed 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

Since FY11, the LAP book has witnessed robust growth of 38% CAGR to
38% CAGR to | 8232 crore.
| 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

continuously and is at 9.5% as on FY15. As per the management, healthy
The proportion of the commercial segment has reduced traction in this segment should continue, going ahead, as profitability of
from 18% in FY12 to 5.4% in FY15 owing to a run down of this business is improving. Small business loans include professional
the book in the construction equipment and infra financing loans that amount to | 623 crore of | 3084 crore. These loans are largely
due to stress in these segments 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
In rural areas, BFL is currently present in CD financing,
wherein it will partner with leading brokerages/banks with the objective of
asset backed financing, gold loans, personal loans, etc.
leveraging the funding opportunity to their HNI & ultra HNI customer base.
Owing to its small size, the segment has witnessed sharp
traction with the loan book increasing to | 333 crore in A dedicated SME relationship management channel has also been
FY15 from | 50 crore in FY14 created to provide a wide range of cross-sales of products to BFLs 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
Construction equip. finance 591 448 188 134 145 132
Vendor Financing 324 862 1146 1333 1452 1765
Infrastructure lending 0 523 418 473 415 448
Total 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 Lending
Year started 2,009 2,010 2,010
Target Segment Bajaj Auto's vendors Strategic & Retail Affluent
Ticket size NA | 1.0 crore to | 3 crore NA
Loan to Value ratio (%) NA 70 to 80% 70 to 80%
Duration/tenure NA 3 years 1-15 years
Yields 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

commercial category share to fall further to 4.5% of the total AUM as we
believe any significant improvement in the infrastructure financing space
Going ahead, we expect overall advances traction for BFL will take time.
at 27% CAGR in FY15-17E to | 50718 crore driven by the Rural financing to maintain strong growth on lower base, increasing reach
CF segment
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 FY17E
Rural 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.

Exhibit 89: Credit growth to stay healthy at 27% CAGR in next two years
60000 100
50718
50000 80.4 80
70.1 68.9 39935
60
40000
31199 40
(| crore)
36.3 37.2 35.8
30000 22971 28.0 27.0
(%)
20
20000 16744
12283 0
-18.1 7272
10000 2893 2370 4032 -20
0 -40
Loan Loan Growth (RHS)
Exhibit 90: AUM break-up

CAGR
AUM (| Crore) FY11 FY14 FY15 FY16E FY17E FY11-15 FY15-17E
Consumer 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 FY17E

Consumer Finance 44.3 38.8 40.5 42.0 42.7
SME Business 43.6 53.4 53.1 51.4 50.9
Commercial 12.1 7.6 5.4 4.9 4.5
Rural - 0.2 1.0 1.8 2.0
Total AUM 100 100 100 100 100

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
Borrowings are well diversified with banks proportion competitive rates from various sources as reflected in CoF being better
highest at 54% followed by NCDs at 37%, CPs/FDs at 9% than peers as seen in below exhibit.
Exhibit 91: BFL manages to keep CoF lower than peers
12 11
10.4 10.5
9.4
10
8.1
8
6
(%)
0
Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport Shriram City Union
Finance
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 Exhibit 93: Resource mix expected to be tilted towards banking
50,000 60 100 0.0

7.9 9.0 8.1 14.1 9.0 8.7 8.5
42,121
52.6 50.4
40,000 50 80 35.6
33,465
40 53.2 52.9 53.8 53.7 53.3
30,000 26,691 60 57.6
57.6
(| crore)
35.1
(%)
28.4 19,750 30
25.9
(%)
20,000 25.4 40
13,133 20 64.4
10,226
10,000 10 20 38.9 39.1 37.1 37.6 38.2
33.4 28.2
0 0 0
FY12 FY13 FY14 FY15 FY16E FY17E FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Borrowings Growth (RHS) Deposits/CPs

B k
Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research

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.
The margins of BFL are one of the highest among its peers. In the past few years, margins witnessed a slide owing to a change in loan
Its margins during FY15 were at 10.3%. Such high margins mix towards lower yielding segments as BFLs strategy was to go for
were on the back of its strong blended yields of 18.9% and scale and secured products like in the SME category (like LAP), which
competitive CoF, which helps the company to earn overall impacted the yield, to some extent, but also helped maintain steady asset
spread of 9.2% quality. LAP portfolio where yields are ~13% increased at 38% CAGR
over FY11-15.
Exhibit 94: BFL earns highest margins among peers in FY15
12 10.3
10 8.7
8 7.1 6.7
6
(%)
4
2
0
Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport
Finance
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
25.0
22.7
20.0 20.4 20.1
19.1 18.9 18.3 18.2
15.0
(%)
10.0 10.3 9.6 9.7 9.5 9.4

8.8
7.5
5.0
14.6 12.2 11.6 10.8 10.3 10.0 10.1
0.0
NIM YoA CoD

Asset quality remains at acceptable levels; expect to stay steady
Bajaj Finances 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.
BFLs asset quality has improved sharply over the last five Post such a setback in asset quality, BFL focused on improving its risk
or six years. The GNPA ratio was at 16.6%, 7.6% during management process and framework. This included product
FY09, FY10, respectively. As on FY15, the GNPA ratio was rationalisation like exiting the computer financing business, focusing on
at 1.5% 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
The credit cost (i.e. provisions as percentage of loans) also
declined from 8.1% of advances in FY10 to 1.2% by FY13 1000 908 18
16.6 16
and 1.4% levels as on FY15.
800 14
668
11.9 12
600 484 10
(crore)
416
(%)
7.4 283 318 7.6 8
400 280 298
253 220 6
1815.4 189 189
1433.6 148 143 4
200
603.0 33 66
2
16 1.5 1.7 1.8
0.8 1.2 1.1 1.2 0.5 0.5 0.6 0
0 0.1 0.2 0.3
GNPA NNPA GNPA (%) NNPA (%)
Exhibit 97: BFL in better position in terms of asset quality compared to peers
7.0 6.0
6.0
5.0
3.8
4.0
2.8 2.7
(%)
3.0
2.0 1.54
1.0
0.0
Bajaj Finance Chola Mandalam Mahindra Finance Shriam Transport Shriram City
Finance Union
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.

Exhibit 98: Trend in credit cost
9 8.1
8
7 6.2
6
5 3.9 3.6
(%)
4
3
1.6 1.4 1.5 1.7
2 1.2 1.3
1
0
Credit cost (%)
Concerns were raised about the companys 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.
We expect the current capital to be sufficient to meet the Exhibit 99: Comfortable on capital adequacy front
growth requirements for the next two or three years
25
20 3.3
3.2 3.31
2.97
2.5 3.82
15
(%)
10 18.7
16.8 16.17 17.41
15.0 14.15
5
0
FY11 FY12 FY13 FY14 FY15 Q1FY16
Tier I Tier II

Financials (Bajaj Finance)
Net Interest Income growth to moderate from past, but still remain sturdy
BFLs 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.
In the past five years, the NII CAGR has been 36% while in
Going ahead, as we factor in a slight moderation in margins and a drop in
the past three years it has been maintained above >30%
the pace of loan growth, NII traction is accordingly expected to decline to
at 32% to | 2872 crore as on FY15
28% CAGR over FY15-17E.
Exhibit 100: Healthy credit growth + strong margins to support healthy NII traction ahead
5000 4721 80
76.1
70
4000 3671
60
2872
3000 50.2 50
(| crore)
44.2 2216
36.9171737.4 40
(%)
2000
1250 29.1 29.6 27.8 28.630
913 20
1000 608
239 345 10
0 0
NII NII growth
Operational efficiency to kick in, going ahead

BFLs cost-to-income ratio in the past six years has been steady at 45%
The cost-to-income ratio has been steady for BFL in the
while opex as a percentage of average assets has witnessed an
past few years. We expect BFL to witness some operating
improvement as seen in the exhibit below. This is owing to higher growth
leverage, going ahead
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
70 9
8.4
60 8
7.0 7
50 6.4 6.2 6
5.5 5.4
40 5.2 5.0 5
4.7 4.6
(%)
30 58.1 4
(%)
50.7 47.0 46.0 45.1 3

20 44.7 44.5 44.7 44.1 42.5
2
10 1
0 0
Cost to Income ratio Cost to assets ratio (RHS)

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

We expect PAT growth to remain strong at 27% CAGR over FY15-17E to
over FY15-17E to | 1456 crore with return ratios expected
| 1456 crore with return ratios staying healthy. RoEs are expected to dip
to stay healthy
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
1,600 1,456.3 200

1,400 176.3
163.5 1,143.7
1,200 150
1,000 897.4
(| crore)
718.5
800 591.0 100
600
(%)
64.7 406.264.4
400 247.0 45.5 50
200 33.9 89.4 24.9 27.5 27.3
21.6
0 0
PAT Growth (RHS)
Exhibit 103: Healthy return ratios
30 4.5
3.8 4.0
25 3.8 3.8
3.4 3.5
20 3.1 3.0 3.0 3.0
2.3 2.5
15
(%)
(%)
2.0
24.0 21.9
10 19.7 19.5 20.4 19.0 18.5 1.5
1.0 1.0
5 8.0
2.0 0.6 3.2 0.5
0 0.0
RoE RoA (RHS)

Risk & concerns
Fresh competition may impact edge in consumer financing business
BFLs 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 BFLs 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 BFLs 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 banks 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 NBFCs margins.

Bajaj Finance Valuation
Bajaj Finance can be truly described as a successful
In the past two years, investors have taken keen interest in BFL as
transformation story in the past eight years. Post induction
reflected in the 357% rise in its stock price since September, 2013. The
of a new management in 2007, BFL got transformed from a
stock performance has surpassed its peers. It is currently trading at 3.3x
predominantly two & three wheeler finance company to a
FY17E ABV for a RoA of 3% and RoE of 19%. The two year forward
financier of large spectrum of loans in the consumer, SME
multiple increased from 1x to >3x currently post September 2013. We
and commercial categories with >10 product lines
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
We expect return ratios to stay steady over next two years steady operating performance, strong growth & margins and controlled
with RoA of 3% and RoE of ~19%. We believe the asset quality & credit cost. We expect return ratios to stay healthy over the
opportunity size in consumer and SME space remains next two years with RoA of 3% and RoE of ~19%. We believe the
buoyant and BFL is well placed to capture it. 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
RoA (%) RoE (%) ABV
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 18.5
STFC 845 19179 59108 3.8 2.1 2.2 13.4 14.6 407.0 442.0 1.9 12.1
MMFS 240 13662 36878 6.0 2.5 2.6 15.6 17.0 100.4 114.5 2.1 12.0
SCUF 1770 11665 16717 2.7 3.3 3.2 14.9 16.0 675.0 760.0 2.3 14.9
CIFC 609 8756 25452 2.8 2.1 2.2 17.4 17.8 203.0 235.0 2.6 13.5
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

7000
6000
5000
4000
(|)
3000
2000
1000
0
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
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.

Financial Summary Bajaj Finance
Exhibit 106: Income Statement (| crore)
Interest Earned 2923.1 3789.6 5120.0 6513.4 8257.7
Interest Expended 1205.7 1573.2 2248.3 2842.5 3536.3
Net Interest Income 1717.4 2216.3 2871.7 3670.9 4721.4
Growth (%) 37.4 29.1 29.6 27.8 28.6
Non Interest Income 186.6 284.8 298.3 351.9 411.8
Operating Income 1904.0 2501.1 3169.9 4022.8 5133.2
Employee cost 245.2 340.8 450.7 572.4 715.5
Other operating Exp. 605.8 810.8 978.2 1202.1 1464.9
Operating Profit 1053.1 1349.5 1741.0 2248.3 2952.8
Provisions 181.8 258.9 384.6 533.5 747.9
PBT 871.3 1090.7 1356.4 1714.8 2204.9
Taxes 280.3 372.2 459.1 571.0 748.6
Net Profit 591.0 718.5 897.4 1,143.7 1,456.3
Growth (%) 45.5 21.6 24.9 27.5 27.3
EPS (|) 129.8 144.4 179.9 221.5 273.4
Exhibit 107: Balance sheet (| crore)

Sources of Funds
Capital 49.8 49.8 50.0 53.3 53.3
Reserves and Surplus 3317.3 3941.1 4749.7 7171.7 8503.4
Networth 3367.0 3990.9 4799.7 7225.0 8556.7
Borrowings 13133.2 19749.6 26690.8 33464.9 42120.8
Other Liabilities & Provisions 1320.9 877.5 1321.3 1889.4 2436.9
Total 17,821.2 24,618.0 32,811.8 42,579.3 53,114.4
Application of Funds
Fixed Assets 587.7 763.3 894.0 920.8 948.4
Investments 5.3 28.2 332.3 355.6 373.3
Advances 16743.6 22971.0 31199.5 39935.3 50717.8
Other Assets 68.2 78.7 165.8 174.1 181.1
Cash 416.4 776.8 219.7 1193.6 893.7
Total 17,821.1 24,618.0 32,811.2 42,579.3 53,114.4

Exhibit 108: Key ratios
Valuation
No. of shares (crore) 5.0 5.0 5.0 5.3 5.3
EPS (|) 129.8 144.4 179.9 221.5 273.4
DPS (|) 15.0 15.9 18.0 19.0 20.0
BV (|) 676.4 802.2 959.9 1399.2 1606.1
ABV (|) 669.8 788.8 931.4 1363.7 1550.2
P/E 38.8 34.9 28.0 22.8 18.4
P/BV 7.5 6.3 5.3 3.6 3.1
P/ABV 7.5 6.4 5.4 3.7 3.3
Yields & Margins (%)
Net Interest Margins 11.6 10.8 10.3 10.0 10.1
Yield on assets 19.8 18.5 18.4 17.8 17.7
Avg. cost on funds 8.4 7.8 8.1 7.9 7.7
Yield on average advances 20.1 19.1 18.9 18.3 18.2
Avg. Cost of Borrowings 10.3 9.6 9.7 9.5 9.4
Quality and Efficiency (%)
Cost to income ratio 44.7 46.0 45.1 44.1 42.5
Cost to assets ratio 5.5 5.4 5.0 4.7 4.6
GNPA 1.1 1.2 1.5 1.7 1.8
NNPA 0.2 0.3 0.5 0.5 0.6
ROE 21.9 19.5 20.4 19.0 18.5
ROA 3.8 3.4 3.1 3.0 3.0
Exhibit 109: Growth ratios

Total assets 37.9 38.1 33.3 29.8 24.7
Advances 36.3 37.2 35.8 28.0 27.0
Borrowings 28.4 50.4 35.1 25.4 25.9
Net interest income 37.4 29.1 29.6 27.8 28.6
Operating Income 33.5 31.4 26.7 26.9 27.6
Operating expenses 27.1 35.3 24.1 24.2 22.9
Operating profit 39.2 28.2 29.0 29.1 31.3
Net profit 45.5 21.6 24.9 27.5 27.3
Net worth 65.6 18.5 20.3 50.5 18.4
EPS 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
25000
20000
15000
| crore
10000
5000
0
-5000
Insurance Inv income Finance Other
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
5000
4000
3000
| crore
2000
1000
0
Insurance Inv income Finance Other

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.
PAT is expected to grow at 27% CAGR over FY15-17E Exhibit 112: PAT moderates in FY13-15, to see pick-up with higher insurance PBT
4,000 1000
3,500 800
3,000 600
2,500
400
(%)
(| crore)
2,000
200
1,500
1,000 0
500 -200
0 -400
PAT Growth
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.
RoEs are expected to improve gradually to 17.8% in FY17E. Exhibit 113: Consolidated return ratios moderate from peaks - stabilising now
RoA is expected to stay consistently above 2% over FY15-
17E 50 3.0
40 2.5
2.0
30
1.5
(%)
20
(%)
1.0
10
0.5
0 0.0
(10) (0.5)
RoE (LHS) RoEV

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 Bajajs 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
Value of Value/
Business stake (| share after 10%
Business Basis Stake (%) Value crore) discount (|)
Bajaj Allianz Life Insurance 1.2x EV + 10x NBAP 74 16128 11917 674
Bajaj Allianz General Insurance 15x PAT 74 10260 7592 429
Bajaj Finance 3.6x BV 57.8 29797 17223 974
Windmill |6 per mw 100 390 390 25
Total 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 (|) RoE (%) P/E (x) P/B (x)
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
Source: Company, Bloomberg, ICICIdirect.com Research
Exhibit 116: Price/BV trend
2500
2000
1500
(|)
1000
500
0
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
May-08
May-09
May-10
May-11
May-12
May-13
May-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
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 auditors 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 Auditors 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 pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No. 7, MIDC,
Andheri (East)
Mumbai 400 093
research@icicidirect.com

ANALYST CERTIFICATION
We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s)
or view(s) in this report.
Terms & conditions and other disclosures:

ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH000000990. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia,
engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is Indias largest private sector bank and has its various
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The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
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Initiating Coverage

September 11, 2015

insurance while dividend from them can be upside risk. We initiate

ICICI Securities Ltd | Retail Equity Research

4 Allianz General Insurance Company (BAGIC), 50% holding in Bajaj Allianz

Bajaj Holding Investment

Bajaj Auto Limited Bajaj Finserv Limited

Source: Company, ICICIdirect.com Research

Report is compiling three businesses discussed in detail with Valuations

ICICI Securities Ltd | Retail Equity Research Page 2

| 6017 crore, on account of a decline in linked premium led by

Exhibit 3: Valuation matrix - BALIC Exhibit 4: Valuation matrix - BAGIC

ICICI Securities Ltd | Retail Equity Research Page 3

Rating Matrix Bajaj Finance (BAJAF)

ICICI Securities Ltd | Retail Equity Research

Insurance industry penetration, density still away from peaks

4.8 5.2 5.1

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

Source: IRDA, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 5

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

ICICI Securities Ltd | Retail Equity Research Page 6

Post nationalisation of the insurance sector in 1956, Life Insurance

Others HDFC Standard

Source: IRDA, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 7

Total premium Growth

Source: IRDA, Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 8

Source: IRDA, Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 9

Linked FYP Non Linked FYP

Source: IRDA, ICICIdirect.com Research

Linked Non-linked Linked Non-linked

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Individual Single Premium Individual Non-Single Premium

Source: IRDA, Company, ICICIdirect.com Research

Source: IRDA, ICICIdirect.com Research Source: Company, IRDA, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 11

NBAP NBAP Margin

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

Source: Company, ICICIdirect.com Research

350 100 5.3 10.3 10.0 1.2 2.7 9.5

53.8 51.7 53.0 49.8 45.8 67.2

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Exhibit 25: Commission expenses lower than peers

Commission ratio - FY13 FY14

Source: Company, ICICIdirect.com Research

FY14 was an aberration for BALIC due to write-back in Ulip commission

ICICI Securities Ltd | Retail Equity Research Page 13

Agent Productivity (FYP) Productivity (TP)

Source: Company, ICICIdirect.com Research

40 27.6 23.9 24.0 27.3 27.7 23.7 26.0 25.5

Management Expense Ratio Opex/ APE

Source: Company, ICICIdirect.com Research

Higher surrenders, decline in persistency hit AUM growth

ICICI Securities Ltd | Retail Equity Research Page 14

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 15

Source: Company, ICICIdirect.com Research

BALIC ICICI Prudential HDFC Standard Max Life