Bajaj Finance JP Morgan

This document is being provided for the exclusive use of MVN RAO at JM FINANCIAL SERVICES LTD
Asia Pacific Equity Research

21 September 2015
Initiation
Neutral
Bajaj Finance Ltd BJFN.NS, BAF IN
Price: Rs4,935.90
Expensive valuations discount franchise strengths.
Price Target: Rs5,500.00
Time to pause & reflect on risks. Initiate with Neutral
Initiate on Bajaj Finance with Neutral, Mar-16 PT of Rs5,500. Post the India
increase in shares (44% YTD and nearly 100% in the past year), we believe Specialty Finance
the price already discounts the known positives around the franchise strengths Saurabh Kumar
AC
in consumer lending, high earnings growth relative to peers, and a scale-up in (91-22) 6157-3590
the earnings profile. Valuations now look challenging especially in the context saurabh.s.kumar@jpmorgan.com
of a relatively high share of unsecured lending (28% of book) against current Bloomberg JPMA KUMAR <GO>
credit costs that are below through cycle averages, in our view. Risk-reward at J.P. Morgan India Private Limited
current levels is no longer one way and we would await a better entry point Gunjan Prithyani
(10% lower, representing FY17E PB / PE of 2.8x / 17x). (91-22) 6157-3593
Multiple strengths in the franchise: BAFs business has multiple gunjan.x.prithyani@jpmorgan.com

J.P. Morgan India Private Limited
strengths especially related to: a) a diversified book across market segments
in consumer / SME business and constant product additions that have Seshadri K Sen, CFA
(91-22) 6157-3575
allowed it to grow rapidly; b) wide distribution outreach and presence at
seshadri.k.sen@jpmorgan.com
point of sale and; c) high level of technology engagement for both risk J.P. Morgan India Private Limited
assessment and lead generation. This has allowed the company, over the last
Josh Klaczek
5 years, to grow its loan book at 51% CAGR / EPS at 49% CAGR and earn (852) 2800-8534
an average ROE of 21%. josh.klaczek@jpmorgan.com
Expect margins and credit cost to normalize, offset by opex J.P. Morgan Securities (Asia Pacific) Limited
improvement: BAFs SME book faces higher competition thus potentially
Price Performance
driving down business spreads. Further loss levels in unsecured book are 6,000
likely to normalize over next 2-3 years. However, this is offset by operating 5,000
costs, which are high relative to other retail finance NBFCs; and which we Rs 4,000
think offer room for improvement and thus to some extent offset margin / 3,000
credit cost impact. Capital should not be not a concern for the next 3 years 2,000
post the recent offering. Sep-14 Dec-14 Mar-15 Jun-15 Sep-15
Expensive valuations discount high growth. Unsecured lending could be BJFN.NS share price (Rs)
NIFTY (rebased)
a source of risk: BAFs valuations are at a marked premium to peers. YTD 1m 3m 12m
Business ROEs, we note, are good but not exceptional. Valuations are thus Abs 41.0% -7.6% -8.4% 84.0%
Rel 44.7% -3.7% -3.9% 86.1%
predicated on BAF sustaining high growth for an extended period of time
over an ever increasing base. Our PT implies FY17E P/B of 3.5x and PE of
21x. Key risks: 1. High share of unsecured financing (28% of book as of
Mar15) exposes the company to potentially higher credit costs loss given
default rates, and 2. Higher competition especially in the SME book driving
down spreads.
Bajaj Finance Ltd (Reuters: BJFN.NS, Bloomberg: BAF IN)

Rs in mn, year-end Mar FY14A FY15A FY16E FY17E FY18E Company Data
Operating Profit (Rs mn) 13,500 17,414 22,275 26,795 33,433 52-week Range (Rs) 5,720.20-
Net Profit (Rs mn) 7,200 8,978 11,531 13,956 17,371 2,492.00
EPS (Rs) 144.73 179.56 213.17 257.99 321.12 Market Cap ($ mn) 4,066
DPS (Rs) 16.13 34.00 40.50 49.02 61.01 Price (Rs) 4,935.90
EPS growth (%) 25.4% 24.1% 18.7% 21.0% 24.5% Date Of Price 21 Sep 15
ROE 19.6% 20.4% 18.7% 17.4% 18.8% 3M - Avg daily vol (mn) 0.08
P/E (x) 34.1 27.5 23.2 19.1 15.4 3M - Avg daily val ($ mn) 6.5
P/BV (x) 6.2 5.1 3.6 3.1 2.7 NIFTY 7977.10
Source: Company data, Bloomberg, J.P. Morgan estimates. Exchange Rate 65.67
Price Target End Date 1-Mar-16
See page 35 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
Saurabh Kumar Asia Pacific Equity Research

(91-22) 6157-3590 21 September 2015
saurabh.s.kumar@jpmorgan.com
Table 1: Relative Valuation

Mcap Price/Book RoE P/E Earnings growth
Name US$MM FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E
Bajaj Finance 4,090 3.6 3.1 18.7 17.4 23.3 19.2 19% 21%
Auto Finance
M&M Financial Services 2,559 2.5 2.3 14.2 14.9 18.6 16.0 16% 16%
Shriram Transport 3,412 2.0 1.7 16.1 16.3 13.1 11.3 24% 16%
Sundaram Finance 2,804 5.3 4.7 17.2 18.3 32.5 27.5 11% 18%
Shriram City Union Finance 1,785 2.3 2.0 15.4 16.3 16.0 13.1 20% 22%
Cholamandalam Finance 1,645 3.1 2.6 16.8 18.1 20.3 16.0 21% 27%
Magma Fincorp 346 1.1 0.9 11.4 12.1 10.0 6.5 12% 53%
Housing Finance
HDFC 33,461 6.0 5.3 21.4 22.3 29.3 24.9 16% 17%
Indiabulls Housing Finance 3,646 3.2 2.8 34.5 34.6 9.9 8.7 19% 15%
LIC Housing Finance 3,736 2.4 2.1 19.0 18.5 14.2 12.0 17% 18%
Dewan Housing 1,052 1.2 1.1 15.8 16.6 8.3 6.8 13% 21%
Average 2.3 2.0 17.2 17.6 14.4 12.0 16% 20%
Source: J.P. Morgan estimates, Company data
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(91-22) 6157-3590 21 September 2015
Table of Contents
Investment Thesis ....................................................................5
Investment positives................................................................................................5
#1 Multi-product portfolio can drive 27% loan growth over next 2 years ...............5
#2 FY15-17E EPS CAGR of 20% higher than sector average implies premium
valuations can sustain..............................................................................................6
#3 Market leadership in consumer durable / lifestyle lending space ..........................6
#4 Cost ratios have room for improvement driven by better sourcing and higher
technology engagement ...........................................................................................7
#4 Track record of running a high yield book with low NPLs, resulting in better risk-
adjusted returns.......................................................................................................8
#5 Distribution network and point of sale presence and high cross-sell franchise ......8
Investment Risks.....................................................................................................9
#1 Risk on unsecured lending and durable financing book........................................9
#2 Expensive valuations mean limited scope for earnings disappointment ..............10
#3 Increasing competition from other NBFCs in SME / LAP space can moderate
returns in the medium term in the segment.............................................................10
#4 New product line entry can have accidents given limited experience in the past .11
#5 Regulatory risk on Zero EMI financing in digital space .....................................11
Valuations - BAF is one of the most expensive NBFCs, but
also one of the highest growth ones ....................................12
Stock has been a multi-bagger on most timeframes but time for a pause might be
coming now ..........................................................................................................13
Price Target of Rs5,500. Initiate with Neutral ........................................................14
Normalized ROE of 19% - Margin reduction / credit cost rationalization to be offset
by improving cost to asset .....................................................................................14
SWOT Analysis .......................................................................16
Business Overview.................................................................17
Strong loan growth backed by a diversified business streams allowing for growth to
be more balanced ..................................................................................................17
Wide distribution and presence at points of sale.....................................................19
Cross-selling opportunity across 11MM and growing customer base ......................20
Technology /Analytics usage for credit underwriting / cross-sell improvement and
improved pricing...................................................................................................21
Product lines have a balanced mix to ensure profitability and higher ROEs ............21
Strong franchise and early entrant in consumer lending..........................................22
SME Book Mix of LAP and unsecured loans ......................................................23
Fee income drivers are steadily building up ...........................................................24
Competition mostly from Banks in consumer lending and other NBFCs in SME/
LAP; Distribution is a key competitive advantage..................................................24
Unsecured lending is 28% of portfolio. Further consumer durable lending is against
fast depreciating collateral. Higher risk? ................................................................24
Some level of regulatory arbitrage still present in Zero EMI financing schemes......25
Financial Highlights ...............................................................26
Expect 27% loan growth CAGR over next 2 years .................................................26
Margins to downshift given mix change and higher competition in SME lending....26
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(91-22) 6157-3590 21 September 2015
Credit costs ticked up in FY15 due to infrastructure book. Consumer lending book
likely running below through cycle averages..........................................................27
Despite a high yield book, GNPLs have been kept under control............................27
Operating cost rationalization to be a key driver of medium term ROA ..................28
Borrowing mix has scope to shift towards lower cost bond borrowings opening up
room to maneuver on spreads ................................................................................28
ROEs likely to be moderate given capital raise and margin reduction .....................29
Financials................................................................................30
Corporate Structure and shareholding pattern.........................................................32
Investment Thesis, Valuation and Risks ..............................33
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(91-22) 6157-3590 21 September 2015
Investment Thesis
Investment positives
#1 Multi-product portfolio can drive 27% loan growth over
next 2 years
BAFs unique mix of multiple product lines has allowed it to scale up its loan book
quickly, growing at a 5-year / 3-year CAGR rate of 51% / 35% p.a. Starting with just
2 product lines in 2008, the company now has over 28 product lines spanning various
verticals in consumer / SME segments. It continues to add even more products to its
business. The book thus has a good mix of profitable lines in the consumer business
(high IRR though low value) and scale developers in its SME portfolio. Within each
of its specific credit lines (except 2W/3W financing), the companys market share as
a % of the overall market is low and hence each individual segment has a reasonably
large opportunity for growth.
Figure 1: Loan (AUM) growth Figure 2: Book Mix FY15

%
600,000 80% Commercial Finance, Rural Finance, 1%
10%
500,000 70%
60%
400,000
50%
300,000 40%
Consumer Finance,
30% 41%
200,000
20% SME Finance, 48%
100,000 10%
0 0%
FY12 FY13 FY14 FY15 FY16E FY17E
Assets under management Growth Source: Company data
Source: Company data and J.P. Morgan estimates.
Figure 3: Product suite
Source: Company data
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(91-22) 6157-3590 21 September 2015
#2 FY15-17E EPS CAGR of 20% higher than sector

average implies premium valuations can sustain
We forecast an EPS CAGR of 20% over FY15-17E for BAF driven by 27% CAGR
loan growth. This is higher than forecast growth for most of the peer group especially
those in retail lending. Net income growth is likely to lag loan growth given NIM
contraction and credit cost normalization. Opex rationalization is however likely to
provide some offset. Return on equity of the business is likely to remain near 18%
range partly given a higher base of equity given the capital raising done (Rs18B)
recently.
Figure 4: EPS growth Figure 5: ROE trends

%
50% 30.0%
45%
40% 25.0%
35% 20.0%
30%
25% 15.0%
20%
15% 10.0%
10% 5.0%
5%
0% 0.0%
FY12 FY13 FY14 FY15 FY16E FY17E FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company data and J.P. Morgan estimates. Source: Company data, J.P. Morgan estimates
#3 Market leadership in consumer durable / lifestyle lending

space
BAF is uniquely positioned in the underpenetrated consumer financing (digital /
lifestyle/ appliances) financing space. This segment comprises ~42% of the
companys loan book. Target customers here are the affluent middle class. BAFs
loan book in this segment has grown by 38% over the last 3 years and has limited
competition in the space. Although most of the lending is largely against a fast
depreciating asset (hence high risk of write-off in case of default), we note that BAF
has been able to control NPLs in this portfolio resulting in high risk adjusted returns
within the business.
6

(91-22) 6157-3590 21 September 2015
Figure 6: Loan (AUM) growth in consumer lending business

Rs in B
140
Thousands
120
100 CAGR 29%
80
60
40
20
-
FY11 FY12 FY13 FY14 FY15
#4 Cost ratios have room for improvement driven by better

sourcing and higher technology engagement
BAFs cost income ratio / cost to asset ratio is high especially when compared to
other retail /SME NBFCs where collection infrastructure tends to be costly. Hence
we think there is some scope for BAF to make some gains here over the next 2-3.
This has already been identified as a focus area by the company driven by more in-
sourcing and higher technology engagement especially on lead generation. Operating
leverage as loan book grows will also likely play out.
Figure 7: Cost to Asset ratio Figure 8: Operating cost break up (as of FY15)
% %
7.0%
6.0%
5.0% Recovery
costs
22%
4.0%
3.0% Others
Dealer
50%
incentive
2.0% 22%
1.0%
Marketing
0.0% commissions
FY12 FY13 FY14 FY15 FY16E FY17E 6%
Source: Company data, J.P. Morgan estimates

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(91-22) 6157-3590 21 September 2015
#4 Track record of running a high yield book with low NPLs,

resulting in better risk-adjusted returns
Being an NBFC, BAF has limited advantages on funding costs and given retail
orientation has relatively high cost income ratios. Hence the key to maintaining high
ROEs in the business has been its ability to run a high yield business with low credit
losses. We note that in general the company has been able to tightly control its NPL
and credit cost levels. Stress, if any, in the past has been seen in 2W financing or
infrastructure financing. NPLs and credit costs in both Durable Financing and SME
business have performed well even in relatively challenging times for both these
sectors over 2011-15.
Figure 9: GNPL and Net NPL Trend Figure 10: Credit Cost to AUM
% %
1.6% 1.6%
1.4%
1.5%
1.2%
1.4%
1.0%
0.8% 1.3%
0.6%
1.2%
0.4%
1.1%
0.2%
0.0% 1.0%
FY12 FY13 FY14 FY15 FY16E FY17E FY12 FY13 FY14 FY15 FY16E FY17E
Source: Company data and J.P. Morgan estimates. Source: Company data and J.P. Morgan estimates.
#5 Distribution network and point of sale presence and high

cross-sell franchise
One of the key advantages BAF has and where it scores over competition is its wide
presence across portfolio segments / presence at the point of sale in consumer
lending and ability to manage high volume collections with over >11MM customers.
The company also has strong cross-sell franchise in both its consumer and SME
lending and hence over time has been able to leverage its customer base quite
effectively.
Table 2: Point of Sale
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(91-22) 6157-3590 21 September 2015
Figure 11: Product per customer (Retail) Figure 12: Product per customer (SME)
x x
3 4
2.5 3.5
3
2
2.5
1.5 2
1 1.5
1
0.5
0.5
0 0
Upto 12 months Upto 18 months Upto 24 months Upto 12 months Upto 18 months Upto 24 months
Loan Product Fee Product Loan Product Fee Product
Investment Risks
#1 Risk on unsecured lending and durable financing book
BAFs book both in consumer and SME lending has a high share of unsecured
lending. This exposes the book to potential high losses given the default ratio. We
note that the company has till date managed the loss ratios well by better customer
targeting (mass affluent segment) and taking advantage of advanced analytics /
CIBIL and own ratings. This has been seen in low NPL levels over 2010-15.
However, if lending standards are loosened, this could then pose a risk for future
credit costs. In our channel checks, however, we have not yet found any related
issues as yet.
Table 3: Sensitivity to imputed Credit costs and Cost of Equity

Rs / Share
ROE
550376.3% 14.0% 14.5% 15.0% 15.5% 16.0%
1.3% 9,059 7,729 6,646 5,754 5,014
1.4% 8,278 7,064 6,075 5,261 4,585
COE 1.5% 7,497 6,399 5,504 4,767 4,156
1.6% 6,716 5,734 4,933 4,274 3,727
1.7% 5,935 5,069 4,362 3,781 3,298
2.0% 3,593 3,073 2,649 2,301 2,011
Source: J.P. Morgan estimates.
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(91-22) 6157-3590 21 September 2015
#2 Expensive valuations mean limited scope for earnings

disappointment
BAFs valuations at FY16E 23.3x PE and 3.6x PB are expensive relative to its peer
group retail and SME NBFCs. This likely on account of it delivering high loan
growth over the last 5 years / good perceived corporate governance of the group and
a strong franchise in the consumer lending business. However, we note that ask rate
for EPS growth is turning demanding and hence the scope for disappointment is
relatively limited.
Figure 13: Consensus EPS estimates

Rs / Share
310
290
270
250
230
210
190
170
150
Historical Mean 3/2016 Historical Mean 3/2017
Source: Bloomberg
On our estimates, reverse DCF factors in BAFs book growing by almost 3x over the
next 10 years a CAGR growth of 17% from here. Whilst this is lower than current
growth rates of >25%, sustaining this high level of growth over an ever increasing
base amidst increasing competition (driven by higher ROAs of this segment) could
be a challenge.
#3 Increasing competition from other NBFCs in SME / LAP

space can moderate returns in the medium term in the
segment
We note that many NBFCs are tapping the LAP market to build out their SME
portfolio in a quick manner. The market is thus in a hyper competitive mode and
there is some evidence that lending standards across NBFCs have loosened. BAFs
LAP book further is high value/ ticket, which is also prone to higher default.
However, we do note that the company has off late scaled back growth in the
business on account of increased competitive activity and general flat lined to
declining real estate prices. We note that ROAs in the space have already compressed
from over 5% levels 3 years back to 3-3.5% range now.
10

(91-22) 6157-3590 21 September 2015
Figure 14: Competition increasing in LAP space

Rs in B
1400 23 PLayers
1200
1000
16 PLayers
800
600
400 6 PLayers
200
0
F10 F13 F15
Source: Crisil
#4 New product line entry can have accidents given limited

experience in the past
BAF, over the last 5 years, has added a number of product lines and has quickly
scaled up its loan portfolio over many such segments. The companys lending
portfolio in many cases hasnt likely seen a full credit cycle in many of these
(especially in SME). Increased delinquency on account of heady loan growth of the
past could be a risk. However, we would also note that with improving economic
growth, outlook for SMEs is likely better than it has been over 2010-15, when the
company did build out its book.
#5 Regulatory risk on Zero EMI financing in digital space

BAF enjoys a regulatory advantage over banks on zero EMI financing in consumer
durables especially on smartphones. RBI has disallowed banks from participating in
this market starting 2013. However, the regulation is not yet applicable for NBFCs
(given low book size). We note that Digital Financing is only 1% of the AUM and
hence risk to that extent to the business is limited even if this regulatory arbitrage is
closed.
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(91-22) 6157-3590 21 September 2015
Valuations - BAF is one of the most

expensive NBFCs, but also one of the
highest growth ones
BAF is expensive relative to other NBFCs operating in the retail financing space.
Also, relative to historical levels, the companys valuations have re-rated thanks to
stronger than peer group earnings growth. Whilst in absolute levels the valuations are
expensive, we think that these will sustain in the medium term especially as long as
earnings growth holds up. Further as the market gravitates towards finding high ROE
/ earnings growth opportunity within broader financial space, we think NBFCs
(especially private sector and ex auto financing) will relatively outperform.
Table 4: Relative Valuation

Mcap Price/Book RoE P/E Earnings growth
Name US$MM FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E
Bajaj Finance 4,090 3.6 3.1 18.7 17.4 23.3 19.2 19% 21%
Auto Finance
M&M Financial Services* 2,559 2.5 2.3 14.2 14.9 18.6 16.0 16% 16%
Shriram Transport* 3,412 2.0 1.7 16.1 16.3 13.1 11.3 24% 16%
Sundaram Finance 2,804 5.3 4.7 17.2 18.3 32.5 27.5 11% 18%
Shriram City Union Finance 1,785 2.3 2.0 15.4 16.3 16.0 13.1 20% 22%
Cholamandalam Finance 1,645 3.1 2.6 16.8 18.1 20.3 16.0 21% 27%
Magma Fincorp 346 1.1 0.9 11.4 12.1 10.0 6.5 12% 53%
Housing Finance
HDFC* 33,461 6.0 5.3 21.4 22.3 29.3 24.9 16% 17%
Indiabulls Housing Finance 3,646 3.2 2.8 34.5 34.6 9.9 8.7 19% 15%
LIC Housing Finance* 3,736 2.4 2.1 19.0 18.5 14.2 12.0 17% 18%
Dewan Housing 1,052 1.2 1.1 15.8 16.6 8.3 6.8 13% 21%
Infrastructure
L&T Finance Holding* 1,976 1.6 1.4 12.8 14.2 14.9 11.5 26% 29%
REC 4,548 1.0 0.8 22.5 21.1 4.6 4.2 9% 12%
POWF 5,553 0.9 0.8 19.3 18.8 5.1 4.6 10% 12%
Gold Finance
Manapuram Finance 380 0.8 0.8 11.6 12.2 7.3 6.4 16% 13%
Muthoot Finance 1,295 1.4 1.3 15.4 16.6 9.9 8.3 18% 19%
Average 2.3 2.0 17.2 17.6 14.4 12.0 16% 20%

Source: J.P. Morgan estimates*, Company data. Valuations are as of 18 September 2015.
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(91-22) 6157-3590 21 September 2015
Figure 15: Price to Book (Average and 1SD valuations) Figure 16: Price to Earnings (Average and 1SD valuations)
x x
4.0 20.0
3.5 18.0
16.0
3.0 14.0
2.5 12.0
2.0 10.0
8.0
1.5
6.0
1.0 4.0
0.5 2.0
- -
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Stock has been a multi-bagger on most timeframes but time

for a pause might be coming now
BAFs stock price have delivered 6x in the last 5 years vs. Sensex total return of 41%
implying an annual CAGR of 49% , resulting in substantial PE and PB re-rating
relative to history. In that sense, valuations both from a historic perspective are in
uncharted territory. We note that even before the re-rating of 2014, the stock was
expensive relative to peer group but the premium has continued to expand
consistently. From here on, whilst we are not arguing for any PE / PB re-rating, even
if the stock gives its EPS growth (20% CAGR over the next 2 years), decent returns
can be made.
Figure 18: BAF stock price Figure 19: BAF stock price returns
Rs / Share %
6000 600%
5000
500%
4000
400%
3000
2000
300%
1000 200%
0 100%
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
0%
1 Year 2 Year 3 Year 5 Year
Source: Company data Source: Company data
13

(91-22) 6157-3590 21 September 2015
Price Target of Rs5,500. Initiate with Neutral

We have valued BAF using a 3 stage Dividend discount model, standard for all
valuations across NBFCs. Our assumed Cost of Equity is 15%. Long term growth is
kept at 6%. However, we use a high 10 growth period, assuming 15% CAGR loan
growth.
Table 5: Price Target Calculation

Rs / share
Price Target F16
Cost of Equity 15%
Intermediate growth 15%
Long Term Growth 6%
Price Target 5,500
Implied P to Book
FY16E 4.0
FY17E 3.5
Implied P to Earnings
FY16E 25.8
FY17E 21.3
Normalized ROE of 19% - Margin reduction / credit cost

rationalization to be offset by improving cost to asset
Our PT is based on a normalized ROE of 19%. This is lower than the average ROE
generated over the last 5 years (21%). We estimate the company will bring down
operating costs in the longer term and also model margin compression (with
increasing competition) and likely higher normalized credit costs given the unsecured
nature of the book.
Table 6: Normalized ROE Table

%
ROE Progression F15 F16E Normalized
NIM 11.2% 10.9% 10.6%
Operating Costs 5.1% 4.9% 4.6%
Provisioning 1.4% 1.3% 1.5%
Tax 1.6% 1.6% 1.6%
ROA 3.1% 3.1% 3.0%
Leverage 6.4 6.0 6.4
ROE 20.2% 18.8% 19.0%

Source: J.P. Morgan estimates, Company data.
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(91-22) 6157-3590 21 September 2015
Table 7: Sensitivity to imputed Credit costs and Cost of Equity

Rs / Share
ROE
550376.3% 14.0% 14.5% 15.0% 15.5% 16.0%
1.3% 9,059 7,729 6,646 5,754 5,014
1.4% 8,278 7,064 6,075 5,261 4,585
COE 1.5% 7,497 6,399 5,504 4,767 4,156
1.6% 6,716 5,734 4,933 4,274 3,727
1.7% 5,935 5,069 4,362 3,781 3,298
2.0% 3,593 3,073 2,649 2,301 2,011
Source: J.P. Morgan estimates.
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(91-22) 6157-3590 21 September 2015
SWOT Analysis
Strengths Weaknesses
1. Franchise in consumer and SME lending both 1. High share of unsecured lending exposing the
high growth areas portfolio to potential high loss given default rates
2. Ability to enter new segments of financing, 2. High operating cost model though we note that
capturing early bird advantage company is taking steps to improve this
3. Ability to run a high yield and low NPL book 3. Banks ability to participate in zero EMI financing
translating into high risk adjusted returns schemes is limited post RBIs directive on the same
4. Multiple segments driving growth. Thus a 4. Target affluent consumers in consumer / SME
slowdown in one specific area does not impact lending are also high value customers for Banks and
overall growth materially hence can face increasing competition given low
growth elsewhere in the system
5. Wide distribution network and point of sale
presence 5. Wholesale financing reliance being an NBFC
6. Portfolio has both IRR generators and scale

builders
Opportunities Threats
1. New lending verticals (furniture /rural financing) 1. Regulatory threat of removal of Zero EMI financing
and fee drivers which are relatively less for NBFCs
penetrated by competition
2. Increased competition thus lower yields in Loan
2. SME book growth driven by LAP as NBFCs are against property segment
starting to disintermediate Banks in this segment
3. High share of unsecured lending and hence prone to
3. Increased cross-sell opportunity within existing high loss in case of defaults
customer base
4. Bank license award if it comes through

eventually
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(91-22) 6157-3590 21 September 2015
Business Overview
Strong loan growth backed by a diversified business
streams allowing for growth to be more balanced
Bajaj Finances diversified lending model spanning consumer / SME / Commercial
portfolios has allowed the company to sustain both high loan growth and return on
equity over the last 5 years.
In FY08 starting with largely a captive 2W financing business, the company now has
over 28 product lines spanning different niche areas of the market. In many of these
segments, BAF has been an early entrant (notably consumer lending) and many are
relatively underserved by the financial industry in India. In some of its key target
segments, the company we note has a leadership financing position.
Below table lists out key lending segments of BAF and target risk adjusted Internal
Rate of Return (IRRs) that management expects to generate on these segments.
Figure 20: Product mix and IRR range

Rs in B, %
Source: Company data, Ticket Size in Rs Lacs , Rs10Lacs = Rs 1MM)
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(91-22) 6157-3590 21 September 2015
Figure 21: Bajaj Finance Business / Product launch journey
Source: Corporate presentation
Figure 22: AUM Mix Trends

100%
80%
60%
40%
20%
0%
F12 F13 F14 F15
Consumer Finance SME Finance Commercial Finance Rural Finance
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(91-22) 6157-3590 21 September 2015
Figure 23: AUM Mix F15

Commercial Finance, Rural Finance, 1%
10%
Consumer Finance,
41%
SME Finance, 48%
Wide distribution and presence at points of sale

Presence at points of sale and quick decision making is key in retail lending, and
BAF scores over competition on both. As of March 15, the company has presence in
2011 branches in over 24 states and UTs. Apart from this, it also disburses loans via
nearly 8000 consumer durable stores and ~3000 digital stores.
The company has a wide distribution network and has a demonstrable track record in
collection across a large number of consumers.
Figure 24: Branch Presence
Table 8: Point of Sale
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(91-22) 6157-3590 21 September 2015
Figure 25: Growth in new loans disbursed (000)

6000
5000 30%
4000
3000
2000
1000
0
FY12 FY13 FY14 FY15
Cross-selling opportunity across 11MM and growing

customer base
BAF has a customer base of over 11MM customers (as of March 15) across business
verticals. These relationships can be leveraged across different business segments to
ensure loan availability to customers with timely payment track record. BAF has also
developed an internal data analytics platform, which analyses customer information
and helps in new loan originations. The company also has a pool of dedicated
relationship managers that meet customers in person or via video conference &
internet. The company plans to have these relationship managers rolled out in top 20
locations by end 2016 to improve its fee income. Besides these the BAF also has
extensive tie ups with independent financial advisors to enable cross-selling.
Figure 26: Product per customer (Retail) Figure 27: Product per customer (SME)
x x
3 4
2.5 3.5
3
2
2.5
1.5 2
1 1.5
1
0.5
0.5
0 0
Upto 12 months Upto 18 months Upto 24 months Upto 12 months Upto 18 months Upto 24 months
Loan Product Fee Product Loan Product Fee Product
Source: Company data and J.P. Morgan estimates. Source: Company dta and J.P. Morgan estimates.
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(91-22) 6157-3590 21 September 2015
Technology /Analytics usage for credit underwriting /

cross-sell improvement and improved pricing
BAF has a customized platform for loan origination and credit under writing, which
allows the credit team to generate scorecards and assess creditworthiness of
individuals. The platform generates scores after considering individuals credit rating
/ external credit rating (CIBIL), salary details, etc. Fast turnaround of the system
allows credit officers to approve loans within minutes and is a key advantage that the
company has over banks.
Apart from this the company has a Center of analytics wherein it has developed
tools for marketing and pricing analytics, generation of pre-approved limits and
creating statistical models for assessing behavior and risk over a customer lifecycle.
Figure 28: Illustrative technology flow through
Source: Company data.
Product lines have a balanced mix to ensure profitability

and higher ROEs
BAFs multiple product lines as noted below have a mix of high yield business in
consumer financing, working capital loans to SMEs / 2W financing etc. These are
well complemented by lower yield and risk lending in salaried loans / loan against
property / vendor financing. Further there is also mix of ROE generators in cross-sell
/ fee generating opportunities in EMI cards /Property Fitness reports and insurance
sales, etc.
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Strong franchise and early entrant in consumer lending

Consumer lending accounts for 41% of BAFs AUM (Mar-15). This vertical
provides loans to:
1. 2W/3W loans manufactured by Bajaj Auto. The company is one of the
largest 2/3W financing companies in India as it is able to leverage off the
parents sales
2. Consumer durable loans for purchase of televisions / ACs / Refrigerators
and other household electronics
3. Lifestyle loans for purchase of Furniture /modular kitchens / luxury watches
4. Digital product loans for purchase of laptops /mobile phones and other
electronic devices
5. EMI Cards - Given to existing customers with pre-approved loan limit
which allows them to purchase an item directly at a point of sale
6. Personal loans to existing customers (based on repayment track record)
7. Salaried personal loans to affluent salaried customers
8. Home loans for salaried individuals
These segments, we note, present a large and reasonably attractive opportunity for
loan growth albeit with some risks given most are against consumption and fast
depreciating items thus running the risk of potentially high losses given the default
rates.
Some of the key success criteria in running a successful franchise in this business, we
note, are:
Presence at point of sale (hence distribution) in both small and large retailers
Quick disbursal of loans ( under 5-10 minutes) to capture consumer purchase
Fast and working credit scoring models along with background CIBIL checks to
enable the financing decision
Tie up with manufacturers and schemes especially around festive seasons / new
launches
Analytics and ability to cross sell to customers thus driving up value per customer
Drive penetration of EMI cards to existing customers thereby keeping good
customers within the companys ecosystem
Ability to deal with a large number of customers since average ticket value is
lower and number of customers are very high. Collection efforts also can be high
in this business. Low ticket high velocity collections
BAFs further initiatives on its EMI card allow for higher cross-selling to existing
customers. It has around 3.5million customers under this card scheme, with
buyers having pre-approved eligibility for purchasing durable / lifestyle financing
products.
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SME Book Mix of LAP and unsecured loans

SME business of BAF was 53% of its total AUM (Mar-15). This business comprises:
1. Loans against property- BAF does high ticket loans (which can be risky)
and gives loans against collateral of both residential and commercial
property
2. Unsecured working capital loans to SMEs for their short term working
capital demand
3. Loans to professionals i.e., Doctors etc.
4. Loan against securities to both retail customers and promoters to enable
them meet working capital requirements
5. Home loans (self employed segment)
6. SME cross-sell to existing customers
7. Vendor financing Loans given to Bajaj Auto vendors
8. Large lease rental discounting providing a term loan against rental receipts
of large corporate customers
9. Infrastructure finance- Loans given to mid-size infra companies. However,
the company has not sanctioned any loan here since 2012
10. Construction equipment finance Currently in winding down mode given
challenges faced by the sector. No new loan has been sanctioned here since
2014
Some of the key success factors in running a proper SME business are:
Ability to properly assess SMEs cash flows as data from tax and other
documents may be limited
Loans that are flexible in nature and take into account the SMEs cash flows with
flexibility around prepayments / withdrawals
Fast approval turnaround time vs. other banks
Focus on improving lending to existing good quality customers
Ability to cross-sell products such as Crisil Ratings / Financial fitness reports,
property fitness report etc. These fee based activities tend to be ROE enhancers as
well
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(91-22) 6157-3590 21 September 2015
Fee income drivers are steadily building up

BAFs fee income is derived from: (a) distribution of insurance products, (b)
company branded credit cards with Standard Chartered, (c) SME rating that the
company provides along with Crisil; (d) property fitness report which provides
details on property against which loans are disbursed, and (d) financial fitness report
wherein it has a partnership with Credit Vidya a local firm specializing in financial
counselling.
Figure 29: Fee Income

Rs MM
2,500
2,000
1,500
1,000
500
-
FY10 FY11 FY12 FY13 FY14 FY15
Competition mostly from Banks in consumer lending and

other NBFCs in SME/ LAP; Distribution is a key competitive
advantage
BAF faces competition in consumer durables from private sector banks and in SME
lending from NBFCs (especially on LAP). BAF was a relative early entrant into
these businesses and hence enjoys distribution advantage / early learnings.
However, with growth in the system getting constrained in other sectors and retail
credit data improving, and with more analytics coming in other banks/ NBFCs we
think there will likely be higher competition in these segments resulting in some
moderation in spreads going forward. LAP is already now a highly competitive
segment. Consumer durable lending too faces some risk especially given high IRRs/
zero EMI financing and underlying customer profile that is relatively less prone to
default.
Unsecured lending is 28% of portfolio. Further consumer

durable lending is against fast depreciating collateral.
Higher risk?
As of Mar15, 28% of BAFs AUM (Rs 87B) was unsecured. This is a relatively
higher risk portfolio with high loss given default rates. Further consumer lending
business is generally against depreciating assets and hence also has a potential loss
risk.
We note that the target for most of the consumer lending business portfolio for BAF
is the affluent class, which presumably are not prone to default. Also, with
improved analytics/ CIBIL scoring and point of purchase behavior monitoring
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(91-22) 6157-3590 21 September 2015
scoring of retail lending has markedly improved for BAF and has been reflected in
low historical GNPL numbers.
Some level of regulatory arbitrage still present in Zero EMI

financing schemes
BAF enjoys a regulatory advantage over banks on zero EMI financing in consumer
durables especially on smartphones. RBI has disallowed banks from participating in
this market starting 2013. However, the regulation is not yet applicable for NBFCs
(given low book size). We note that Digital financing is only 1% of the AUM and
hence risk to that extent to the business is limited even if this gap is closed.
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(91-22) 6157-3590 21 September 2015
Financial Highlights
Expect 27% loan growth CAGR over next 2 years
BAFs loan growth over the last 5 years has been 51% (3 year 35%), substantially
outperforming peer group NBFCs. Even with Rs324B AUM, BAFs market share in
individual segments is rather low and hence we think that it can grow substantially
even from here. We expect 27% loan growth CAGR over the next 2 years from the
business. Within the mix, growth in the SME business is likely to be higher than
consumer vertical, in our view.
Figure 30: AUM and AUM growth Trends

%
600,000 80%
500,000 70%
60%
400,000
50%
300,000 40%
30%
200,000
20%
100,000
10%
0 0%
Assets under management Growth
Margins to downshift given mix change and higher

competition in SME lending
Lending spreads have substantially moderated over the last 3 years for the business
driven by entry into lower yield segments and increased competition in parts of SME
book (especially LAP). As the book mix shifts towards SME (higher growth but
lower yield segment) and higher competition, spreads in our view should moderate
going ahead.
Figure 31: Lending spreads

%
12.5%
12.0%
11.5%
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
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(91-22) 6157-3590 21 September 2015
Credit costs ticked up in FY15 due to infrastructure book.

Consumer lending book likely running below through cycle
averages
Gross NPL levels have largely been under control for BAF despite the company
running a high yield book. In FY15, there was an increase due to slippage in
infrastructure book. We dont think there should be any material credit pressures
either on SME book. Consumer lending credit costs, we note, are likely running
below through cycle averages. However, as of now, we note that we dont see any
on ground signs that seems to suggest that default here may increase near term.
Figure 32: GNPL / Net NPL and Provision coverage

%
1.6% 95%
1.4%
90%
1.2%
1.0% 85%
0.8%
0.6% 80%
0.4%
75%
0.2%
0.0% 70%
Despite a high yield book, GNPLs have been kept under

control
As noted above, most of BAFs target lending is high yield in nature. This has
inherent risks built into it especially around borrowers cash flows in SME and
potential fraud / default cases in consumer lending.
However, we note that despite this the company has been able to run relatively low
GNPL levels on its book and has been able to manage credit costs at relatively low
levels. We note that this has been under relatively trying economic conditions for
SMEs over the last few years and depressed consumer sentiment. Despite this both
growth and credit cost of the company have held up relatively well.
Brief note on provisioning norms

BAFs provisioning norms are stricter than that mandated by RBI. The company
already provides 40bps on standard assets vs 25bps mandated by RBI. For individual
product lines lending, the companys provisioning norms are generally tighter. We
note that the company reports credit costs on 90-day NPL basis (though GNPLs are
stated on 150 day basis). Hence transition of NPL reporting from 180 day to 90 days
over the next 3 years is unlikely to affect earnings for the company given
provisioning is already on a 90 day basis.
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(91-22) 6157-3590 21 September 2015
Operating cost rationalization to be a key driver of medium

term ROA
Operating cost rationalization, in our view, will be the biggest ROE driver over the
next 2-3 years. At its 1Q analyst call, the company mentioned that it has numerous
initiatives lined up to target rationalization of this number. With increasing loan
book, some operating leverage anyway is likely to start kicking in. We note that opex
levels for BAF are higher than other retail lending NBFCs and hence there is scope
for improvement there. We model in reduction of 200bps from here over the next 2
years (60bps on cost to asset).
Figure 33: Cost to Asset ratio Figure 34: Operating cost break up (as of F15)
% %
7.0%
6.0%
5.0% Recovery
costs
22%
4.0%
3.0% Others
Dealer
50%
incentive
2.0% 22%
1.0%
Marketing
0.0% commissions
FY12 FY13 FY14 FY15 FY16E FY17E 6%

Borrowing mix has scope to shift towards lower cost bond

borrowings opening up room to maneuver on spreads
BAFs borrowing mix is heavily dominated by bank lending that accounted for 54%
of the companys mix. Given a sharp discount to between bond market rates and
bank loan rates, we think there is scope for this mix to improve over time. As of now,
we have not factored any improvement due to this on our estimates. Any borrowing
cost reduction should likely get passed on and hence we arent factoring in any
spread improvement due to this.
Figure 35: Borrowing mix

%
Others, 9%
Subordinated debt
and Tier II, 4%
NCDs and
debentures, 33%
Bank Loans, 54%
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(91-22) 6157-3590 21 September 2015
ROEs likely to be moderate given capital raise and margin

reduction
BAF has historically delivered 20-25% ROEs driven by its high yield book and tight
credit cost control. FY16 ROEs are likely to be depressed a bit on account of capital
raise done (Rs18B). We model in ~19% ROE generation over the next 2 years as
NIM compression may eat up some of the benefits on operating and provisioning
costs.
Figure 36: ROE historical and forward

%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Source: Company data, J.P. Morgan estimates.
Capital raise in 1Q16 means growth can be funded over next 3 years
Capital position for BAF, in our view, is comfortable and especially after the recent
secondary offering / warrant issuance (Rs18B total) the company can fund its growth
over the next 3 years and is unlikely to hit the market anytime soon.
Figure 37: Tier 1 capital

%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
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(91-22) 6157-3590 21 September 2015
Financials
Table 9: P&L Summary
Rs in MM
Interest income 21,719 31,097 40,744 54,182 69,461 86,166
Interest expense 7,593 12,207 15,732 22,483 29,266 37,317
NII 14,126 18,889 25,011 31,699 40,195 48,849
Total income 14,126 18,889 25,011 31,699 40,195 48,849
Y/Y 38% 34% 32% 27% 27% 22%
Cost
Employees 1,904 2,452 3,408 4,507 5,589 6,819
Opex 4,539 5,904 7,811 9,422 11,939 14,784
Depericiation 118 196 292 356 392 450
Total 6,560 8,551 11,511 14,285 17,920 22,053
Cost to income 46.4% 45.3% 46.0% 45.1% 44.6% 45.1%
PPOP 20,686 27,441 36,522 45,984 58,115 70,902
Provisions 1,544 1,818 2,578 3,846 4,803 5,650
PBT 6,022 8,521 10,922 13,569 17,472 21,145
Tax 1,958 2,803 3,722 4,591 5,940 7,189

Tax Rate 33% 33% 34% 34% 34% 34%
PAT 4,065 5,718 7,200 8,978 11,531 13,956

Shares 41 50 50 50 54 54
EPS 98.4 115.4 144.7 179.6 213.2 258.0

Y/Y 46% 17% 25% 24% 19% 21%
Payout 12% 13% 11% 19% 19% 19%

DPS 12.0 15.1 16.1 34.0 40.5 49.0
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(91-22) 6157-3590 21 September 2015
Table 10: Balance Sheet

Rs in MM
Balance Sheet FY12 FY13 FY14 FY15 FY16E FY17E
Net Fixed Assets 1,388 1,762 2,199 2,525 2,783 2,983
Investments 55 53 282 1,792 1,792 1,792
Loans and Advances 122,831 167,436 229,710 311,995 414,848 526,857
Cash 598 4,164 7,768 2,209 4,827 6,260

Other Assets 4,395 4,797 6,222 9,594 11,088 12,881
Total Assets 129,267 178,212 246,180 328,113 435,338 550,772
Current Liabilities 6,084 2,109 6,411 10,023 6,000 6,600

Provisions 955 1,575 2,365 3,193 700 700
Others 23,090 23,090 27,649 24,190 31,827 27,457
Debt 101,894 140,860 197,496 266,900 353,632 457,613
Share Capital 413 495 498 500 541 541

Reserves 19,921 33,173 39,411 47,497 74,465 85,318
Shareholder equity 20,334 33,668 39,909 47,997 75,006 85,859
Total liabilities 129,267 178,212 246,180 328,113 435,338 550,772
Source: J.P. Morgan estimates, Bloomberg.
Table 11: ROA Breakdown

%
F12 F13 F14 F15 F16E F17E
NIM 13.7% 12.3% 12.0% 11.2% 10.9% 10.4%
Employees 1.8% 1.6% 1.6% 1.6% 1.5% 1.4%

Operating costs 4.5% 3.9% 3.9% 3.5% 3.3% 3.2%
Total 6.3% 5.5% 5.5% 5.1% 4.9% 4.7%
PPOP 7.3% 6.9% 6.5% 6.2% 6.0% 5.7%
Provisions 1.5% 1.2% 1.2% 1.4% 1.3% 1.2%
PBT 5.8% 5.7% 5.3% 4.8% 4.7% 4.5%

Tax 1.9% 1.8% 1.8% 1.6% 1.6% 1.5%
ROA 3.9% 3.9% 3.5% 3.2% 3.1% 3.0%

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(91-22) 6157-3590 21 September 2015
Corporate Structure and shareholding pattern
Figure 38: Shareholding Pattern

%
Others, 12.0
Corp bodies, 6.5
MF, 5.8
FII, 18.1 Promoters, 57.6
Source: Company data.
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(91-22) 6157-3590 21 September 2015
Investment Thesis, Valuation and Risks

Bajaj Finance Ltd (Neutral; Price Target: Rs5,500.00)
Investment Thesis
BAFs share price, in our view, discounts the known positives around franchise
strength in consumer lending / high earnings growth relative to peers and scale
up in earnings profile. However, valuations now look challenging especially in
the context of a relatively higher share of unsecured lending (28% of book)
wherein current loss levels are likely much below through cycle averages. Risk
reward hereon, in our view, is more balanced and we would await a better entry
point on the stock (10% lower).
Valuations
Our Mar16 PT of Rs5,500 is based on a 3 stage DDM with ROE of 19% ,
intermediate growth of 15% and terminal growth of 6%. Assumed COE is 15%.
Price Target Calculation

Rs / share
Price Target F16
Cost of Equity 15%
Intermediate growth 15%
Long Term Growth 6%
Price Target 5,500
Implied P to Book
FY16E 4.0
FY17E 3.5
Implied P to Earnings
FY16E 25.8
FY17E 21.3
Risks to Rating and Price Target

Downside risks: Increase in credit cost especially on consumer book and increasing
competition in SME.
Upside Risks: Continued strong loan growth and better than expected improvement
in operating costs
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(91-22) 6157-3590 21 September 2015
Bajaj Finance Ltd: Summary of Financials

Income Statement Growth Rates
Rs in millions, year end Mar FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E
Interest income 40,744 54,182 69,461 86,166 Loans 37.2% 35.8% 33.0% 27.0%
interest expense (15,732) (22,483) (29,266) (37,317) AUM - - - -
NIM (%) - - - - Assets 38.1% 33.3% 32.7% 26.5%
Equity 18.5% 20.3% 56.3% 14.5%
Employees (3,408) (4,507) (5,589) (6,819) RWA 41.0% 33.3% 30.0% 26.5%
Opex (7,811) (9,422) (11,939) (14,784) Net Interest Income 32.4% 26.7% 26.8% 21.5%
Depreciation (292) (356) (392) (450) Revenues 32.4% 26.7% 26.8% 21.5%
Total Cost (11,511) (14,285) (17,920) (22,053) Costs 34.6% 24.1% 25.4% 23.1%
Pre-Provision Profits 30.6% 29.0% 27.9% 20.3%
Pre-Prov. Profits 13,500 17,414 22,275 26,795 Provisions 41.8% 49.2% 24.9% 17.6%
Provisions (2,578) (3,846) (4,803) (5,650) Pre-Tax 28.2% 24.2% 28.8% 21.0%
PBT 10,922 13,569 17,472 21,145 Attributable Income 25.9% 24.7% 28.4% 21.0%
Tax (3,722) (4,591) (5,940) (7,189) Balance Sheet Gearing FY14 FY15 FY16E FY17E
PAT 7,200 8,978 11,531 13,956 Investment/assets 0.1% 0.4% 0.5% 0.4%
Per Share Data FY14 FY15 FY16E FY17E Loan/Assets - - - -
EPS 144.73 179.56 213.17 257.99 Asset Quality/Capital FY14 FY15 FY16E FY17E
DPS 16.13 34.00 40.50 49.02 Loan loss reserves/loans (1.2%) (1.5%) (1.5%) (1.6%)
Payout 11.1% 18.9% 19.0% 19.0% NPLs/loans - - - -
Book value 802.18 959.94 1,386.56 1,587.20 Loan loss reserves/NPLs - - - -
PPOP per share 271.35 348.29 411.77 495.34 Growth in NPLs - - - -
Tier 1 Ratio 15.8% 14.0% 17.1% 15.5%
Key Balance sheet FY14 FY15 FY16E FY17E Total CAR - - - -
Net Fixed Assets 2,199 2,525 2,783 2,983 Du-Pont Analysis FY14 FY15 FY16E FY17E
Investments 282 1,792 1,792 1,792 NIM (as % of Avg. Assets) - - - -
Loans and Advances 229,710 311,995 414,848 526,857 Cost/Income 46.0% 45.1% 44.6% 45.1%
Cash 7,768 2,209 4,827 6,260 Cost/Assets 5.4% 5.0% 4.7% 4.5%
Other Assets - - - - Pre-Provision ROA 6.4% 6.1% 5.8% 5.4%
Total Assets 246,180 328,113 435,338 550,772 LLP/Advances - - - -
Loan/Assets 93.6% 94.3% 95.2% 95.5%
Current Liabilities - - - - Pre-Tax ROA 6.4% 6.1% 5.8% 5.4%
Provisions 2,365 3,193 700 700 Tax rate 34.1% 33.8% 34.0% 34.0%
Debt 197,496 266,900 353,632 457,613 ROA 3.4% 3.1% 3.0% 2.8%
Shareholder Equity 39,909 47,997 75,006 85,859 Equity/Assets 16.2% 14.6% 17.2% 15.6%
ROE 19.6% 20.4% 18.7% 17.4%
Source: Company reports and J.P. Morgan estimates.
34

(91-22) 6157-3590 21 September 2015
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Bajaj Finance Ltd.
Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: Bajaj Finance Ltd.
Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from Bajaj Finance Ltd.
Debt position: J.P. Morgan may own a position in the debt securities of Bajaj Finance Ltd.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
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Bajaj Finance Ltd (BJFN.NS, BAF IN) Price Chart
9,066
7,555
6,044
Price(Rs)
4,533
3,022
1,511
0
Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug
12 12 13 13 13 13 14 14 14 14 15 15 15
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
35

(91-22) 6157-3590 21 September 2015
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Kumar, Saurabh S: Ascendas India Trust (AINT.SI), Ballarpur Industries Ltd. (BILT.BO), CESC Ltd (CESC.NS),
DLF Limited (DLF.BO), Dish TV (DSTV.BO), Godrej Properties (GODR.NS), HT Media Ltd. (HTML.BO), Housing Development and
Infrastructure Ltd. (HDIL) (HDIL.BO), Indiabulls Real Estate (INRL.BO), Indian Hotels (IHTL.BO), L&T Finance Holdings Ltd
(LTFH.NS), LIC Housing Finance (LICHF.BO), Mahindra & Mahindra Financial Services (MMFS.NS), Oberoi Realty (OEBO.BO),
Phoenix Mills (PHOE.BO), Prestige Estate Projects Limited (PREG.BO), Shriram Transport Finance (SRTR.BO), Sobha Developers
(SOBH.BO)
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2015

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 44% 43% 13%
IB clients* 51% 48% 38%
JPMS Equity Research Coverage 45% 47% 9%
IB clients* 71% 66% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.
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Asia Pacific Equity Research

Multiple strengths in the franchise: BAFs business has multiple gunjan.x.prithyani@jpmorgan.com

Bajaj Finance Ltd (Reuters: BJFN.NS, Bloomberg: BAF IN)

Saurabh Kumar Asia Pacific Equity Research

Table 1: Relative Valuation

Saurabh Kumar Asia Pacific Equity Research

Saurabh Kumar Asia Pacific Equity Research

Saurabh Kumar Asia Pacific Equity Research

Figure 1: Loan (AUM) growth Figure 2: Book Mix FY15

Source: Company data and J.P. Morgan estimates.

Figure 3: Product suite

Source: Company data

Saurabh Kumar Asia Pacific Equity Research

#2 FY15-17E EPS CAGR of 20% higher than sector

Figure 4: EPS growth Figure 5: ROE trends

#3 Market leadership in consumer durable / lifestyle lending

Saurabh Kumar Asia Pacific Equity Research

Figure 6: Loan (AUM) growth in consumer lending business

Source: Company data

#4 Cost ratios have room for improvement driven by better

Source: Company data, J.P. Morgan estimates

Saurabh Kumar Asia Pacific Equity Research

#4 Track record of running a high yield book with low NPLs,

#5 Distribution network and point of sale presence and high

Table 2: Point of Sale

Source: Company data

Saurabh Kumar Asia Pacific Equity Research

Table 3: Sensitivity to imputed Credit costs and Cost of Equity

Saurabh Kumar Asia Pacific Equity Research

#2 Expensive valuations mean limited scope for earnings

Figure 13: Consensus EPS estimates

Historical Mean 3/2016 Historical Mean 3/2017

#3 Increasing competition from other NBFCs in SME / LAP

Saurabh Kumar Asia Pacific Equity Research

Figure 14: Competition increasing in LAP space

#4 New product line entry can have accidents given limited

#5 Regulatory risk on Zero EMI financing in digital space

Saurabh Kumar Asia Pacific Equity Research

Valuations - BAF is one of the most

Table 4: Relative Valuation

Average 2.3 2.0 17.2 17.6 14.4 12.0 16% 20%

Saurabh Kumar Asia Pacific Equity Research

Stock has been a multi-bagger on most timeframes but time

Source: Company data Source: Company data

Saurabh Kumar Asia Pacific Equity Research

Price Target of Rs5,500. Initiate with Neutral

Table 5: Price Target Calculation

Normalized ROE of 19% - Margin reduction / credit cost

Table 6: Normalized ROE Table

Operating Costs 5.1% 4.9% 4.6%

Provisioning 1.4% 1.3% 1.5%

Tax 1.6% 1.6% 1.6%

ROA 3.1% 3.1% 3.0%

Leverage 6.4 6.0 6.4

ROE 20.2% 18.8% 19.0%

Saurabh Kumar Asia Pacific Equity Research

Table 7: Sensitivity to imputed Credit costs and Cost of Equity

Saurabh Kumar Asia Pacific Equity Research

6. Portfolio has both IRR generators and scale

4. Bank license award if it comes through

Saurabh Kumar Asia Pacific Equity Research

Figure 20: Product mix and IRR range