Sharekhan has recommended a buy of Bajaj Holdings and Investment Limited for the price target of Rs. 3844.
Holding strength; Maintain Buy with a revised PT of Rs. 3,844
ŠŠ Bajaj Holdings and Investment Limited (BHIL) holds the Bajaj Group’s investments in two flagship companies - Bajaj Auto Limited (BAL - 31.54% stake) and Bajaj Finserv (BFS - 39.29% stake).
BHIL also has an investment portfolio with a market value of ~Rs. 7,534 crore in other equity and fixed income securities.
ŠŠ BFS - Impressive Q1FY2019 numbers; lending business maintains traction; insurance business improving steadily: BFS reported strong results for Q1FY2019, with healthy performance across all its businesses.
Bajaj Finance Limited (BFL), the lending subsidiary, posted mixed numbers as its profit after tax (PAT) and networth was slightly affected due to implementation of Indian Accounting Standards IND-AS. However, performance remained satisfactory on the operational front. Net interest income (NII) of BFL jumped by 42% y-o-y to Rs. 2,904 crore, helped by healthy advances growth and a 60 bps y-o-y expansion in calculated NIM to 13%.
BFS is present in the insurance industry via Bajaj Allianz Life Insurance (BALIC) and Bajaj Alliance General Insurance business (BAGIC). The general insurance business reported strong numbers as gross written premium (GWP) increased by 23% y-o-y and net earned premium increased by 21% y-o-y. In the life insurance space, GWP reported decent growth of 18% y-o-y.
We believe the BAGIC and BFL businesses have excellent operating metrics in their respective segments and are likely to continue the growth trend going forward.
ŠŠ BAL targets market share gains domestically, resorts to aggressive pricing; strategy to impact earnings: BAL’s Q1YF2019 results were a negative surprise, missing ours as well as the consensus expectations. The company reported the lowest margins since FY2009. Going ahead, the management has surprisingly changed its strategy with market share gains assuming priority over margins in the domestic motorcycle segment.
With increasing competition, BAL has been consistently losing market share. Its share in the motorcycles segment fell steeply from 24.4% in FY2013 to 15.7% in FY2018. In its management call, BAL highlighted that bulk of its market share gains would come from aggressive discounting, providing feature rich products in the entry-level motorcycle space. BAL gained about 850 bps market share in entry level space to 34% in Q1FY2019 and is aiming to reach about 50% market share in next two years. BAL makes EBIDTA level loss in entry segment bikes currently and as such increasing proportion of entry bikes would impact profitability.
We expect BAL’s margins to fall 210 basis points (bps) to 16.9% in FY2019. We expect earnings growth to be flattish for BAL in FY2019.
ŠŠ Valuation: Maintain Buy with a revised PT of Rs. 3,844: G iven t he s trategic n ature o f B HIL’s investments (BAL and BFS), we have given a holding company discount of 50% to its equity investments. Liquid investments have been valued at cost.
The price target for BFS has been raised to Rs. 7,834 from Rs. 6,725 earlier, given the strong performance in Q1FY2019. The price target of BAL has been slashed from Rs 3,526 to Rs 2,905 post dismal Q1FY2019 results and pressure on profitability due to aggressive pursuance of market share.
Consequently, we arrive at a PT of Rs. 3,844 for BHIL (earlier PT of Rs. 3,590). We maintain our Buy recommendation on the stock.
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