Buy Bajaj Finance serv
Published on Wednesday, November 11th, 2009 at 12:30 PMAuthor: insightt95in (169 Articles)
Bajaj Finance serv
Buy
Price: Rs 302 Target Price (Nov 10): Rs 390
‘Insuring’ Profitable growth
Bajaj Finserv is Bajaj group’s holding company with focus on life insurance,
general insurance and consumer finance. These businesses are expected to
generate strong profits going ahead with life and general insurance business
likely to generate healthy return ratios in excess of 20% over FY10-13E. We
believe its life insurance business would be the most significant value driver
going ahead as it is expected to erase its accumulated losses by FY12E and
generate strong ROE of c.25% over FY10-20E.
* Focus on profitability rather than growth, life insurance APE to grow at 10%
CAGR over FY09-13E: Bajaj Allianz Life Insurance (BALIC) is the 3rd largest private
life insurer with market share of 13.1% amongst private players. After having
witnessed a strong 134% CAGR in new business premiums (APE basis) over FY05-08,
BALIC suffered a 30% decline in APE during FY09 due to a) overall slowdown in the
industry on account of capital market weakness b) conscious decision by the company
to focus on profitability rather than growth. Going ahead we expect BALIC to have a
market share of c.12.5% which would lead to 10% CAGR in new business premiums
(APE basis) over FY09-13E.
* Life insurance to generate healthy return ratios: We expect earnings CAGR of
54% over FY10-13E which would erase BALIC’s accumulated losses by FY12E. BALIC
is expected to generate healthy return ratios of c.25% over FY10-13E driven by
declining operating expense and commission pay-out ratio. We value BALIC at Rs
144bn using a combination of appraisal and DCF based valuation. At this valuation,
BALIC would be trading at c.40% discount to Chinese peers on NBAP multiple basis.
* Most profitable private general insurance player: Bajaj Allianz General Insurance
(BAGIC) is the second largest private general insurance company with market share of
8.6%. Premiums for BAGIC have grown at a CAGR of 33% over FY05-09 vs. 15% for
the industry and 37% for private players. The company has been profitable since
inception and currently it is the most profitable private general insurance company. It
has generated healthy return ratios of c. 20 % over FY06-09. We forecast earnings
CAGR of 32% and ROE of 21% over FY09-13E. We value BAGIC at Rs16.4bn using
cross-cycle ROE of 19.8%.
* Initiate with Buy, TP of Rs390: We value Bajaj FinServ at Rs390 per share, based
on sum of its parts: Rs259 per share for its 26% effective stake in the life insurance
venture; Rs57 per share for the 50% effective stake in general insurance; Rs45 per
share for investments and windmill business; and Rs29 per share for Bajaj FinServ’s
42% stake in Bajaj Auto Finance. However, the economic interest in the life insurance
venture could go upto 51% which would raise SOTP by 64%.
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