Bajaj Finserv: Retain ‘buy’ with fair value of Rs 7,000

Bajaj General Insurance's management will continue to focus on long-term profitability and unlike ICICI Lombard, is willing to ride volatility - a key reason for its higher exposure to crop leading to higher claims ratio and combined ratio over the past two years.

Bajaj Life continues to steadily improve its business by diversifying its product and channel mix; focusing on persistency and expense management; lockdown-related challenges will however disrupt this journey in FY21E. On the other hand, Bajaj General will continue to ride more volatility but focus on long-term growth and profitability over consistent P&L performance; FY21E will provide it an opportunity to grow its health business even as motor will likely remain weak. Both the businesses will add value over the long-term. Bajaj Finserv, in the interim, remains a play on Bajaj Finance. Retain ‘buy’ with FV of Rs 7,000.

Bajaj Life Insurance, on expected lines, reported 8% operating RoEV in FY 2020. High overruns led to post-overrun VNB of 10% compared to pre-overrun VNB margin of 19%. The business has been sub-optimal with high over-runs and we expect FY21E to be a weak year due to lower appetite for saving policies. The company is however on the right track with rising share of high-margin non-par (savings and protection policies), diversifying its channel mix by adding three new banks (including Axis Bank) and improving persistency across buckets.

Bajaj General Insurance’s management will continue to focus on long-term profitability and unlike ICICI Lombard, is willing to ride volatility – a key reason for its higher exposure to crop leading to higher claims ratio and combined ratio over the past two years; its Q4 performance was a clear beneficiary of lower losses in crop business. We are tweaking our FV of Bajaj Finserv to Rs 7,000 from Rs 7,150 to reflect marginal reduction in FV of Bajaj Finance.