Bajaj Finserv is entering a new phase of growth in which insurance profitability and emerging financial-services businesses could increasingly contribute to consolidated earnings, according to brokerage firm Motilal Oswal.
The brokerage has kept the buy rating on Bajaj Finserv and set a target price of ₹2,490 per share, which has been maintained for the company after management discussions in Singapore and Hong Kong.
The brokerage says the company’s growth strategy is gradually moving beyond simply expanding market share. Instead, the focus is more and more on growing higher-quality and more profitable growth across its businesses.
Although Bajaj Finance is the core earnings and growth engine for the business, Motilal Oswal believes insurance and new businesses could become even more important contributors in the future.
Business focuses on profits for insurance
One of the reasons for the brokerage's positive outlook is the performance of Bajaj Finserv's insurance businesses.
Bajaj General Insurance has been able to defend its market share and keep a good combined ratio, which is a measure of profitability in general insurers.
But the company has also exhibited more discipline on pricing. Rather than aggressively pursuing volumes at uneconomical prices, it has said it has been willing to avoid business where returns do not justify the risks.
This approach could also keep sustainable profitability if it is not profitable to grow market share in a short time.
Bajaj Life Insurance is about a better product mix.
Life insurance is also undergoing a strategic shift
According to Motilal Oswal, Bajaj Life Insurance is reducing reliance on lower-margin ULIP products and turning to protection products, guaranteed-return plans, and annuities.
The change in the product mix would improve the quality of earnings and support an expansion in Value of New Business (VNB) margins.
This could re-accelerate as the company benefits from a more favorable product mix, the brokerage says.
This transition is important because higher-margin protection and other products can potentially provide better economics than products that generate lower margins.
New businesses would be earnings contributors
Aside from lending and insurance, Bajaj Finserv has also been establishing new businesses.
Its health, markets, and asset management are expanding, and losses, too, are shrinking.
Motilal Oswal will see scale to increase operating efficiency and move toward profitability for those businesses.
If these businesses grow to scale, they could eventually move away from the investment based on group support to an effective contribution to consolidated earnings as well.
This could provide Bajaj Finserv with even more growth beyond its lending and insurance activities.
Wealth management and pensions are also included in expansion plans.
Bajaj Finserv is also expanding its financial-services business
The firm will also enter wealth management and pensions to offer additional connections to customers at all stages of their financial life.
The wealth management opportunity is particularly significant at present as there is an increasing demand for investment and financial planning services in India.
The company is also preparing to enter the reinsurance business after the Board has approved the proposal.
The reinsurance operations will be focused on the Indian market for the first time. The business could be able to expand to international markets eventually if it is big enough and gets a credit rating.
Strong balance sheet supports new opportunities
Motilal Oswal thinks Bajaj Finserv's strong balance sheet provides the financial flexibility to invest in these new opportunities.
At the same time, Bajaj Finance continues to be the core earnings growth driver of the group.
The combination of a large lending franchise, improving insurance profitability, and scaling digital and financial-services businesses could provide more diversification to Bajaj Finserv's earnings profile.
Such diversification may be important over the long run as the company expands beyond a lending-based growth model.
₹2,490 target price retained
Motilal Oswal has maintained its Buy recommendation and ₹2,490 target price for Bajaj Finserv.
The brokerage's investment thesis is that the company’s various businesses will become more and more productive and generate more and more good earnings.
Key growth drivers identified are:
- Continued growth at Bajaj Finance.
- Greater profitability in general insurance.
- Better product mix at Bajaj Life Insurance—possible expansion of VNB margins.
- Health, markets, and asset management improving performance.
- Entry into wealth management and pensions.
- Reinsurance business development.
- Solid balance sheet for future investments.
The brokerage thinks lending growth, higher-margin insurance operations, and improving newer businesses could provide better visibility into Bajaj Finserv’s consolidated earnings.
But investors should also monitor execution risks, competitive pressures, regulatory changes, and the pace at which newer businesses become profitable.
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