Senior investment analyst

Pallavi Deshpande

Equity Bottom-Up

Bharat Financial Inclusion / Equity Bottom-Up

<p>We initiate coverage on <a href="https://www.smartkarma.com/entities/251" target="_blank" data-smartkarma-citation="entities:251:1">Bharat Financial Inclusion Limited (BHAFIN IN)</a> (BFIL ), the largest micro finance institution (MFI) and the third largest player in the sector in India, with a Hold rating. With the stock up 26% over 2 months, we believe BFILs strong return ratios and the end of the first phase of loan waivers are already reflected in the stock price. We believe the industry will be entering phase 2 (excludes demonetization) of loan waivers, starting with the Gujarat elections in December and think credit costs may come under additional pressure. We would like to see BFIL further lower its exposure to the North, a region known for poor rule of law. BFILs penchant for growth led to its asset quality performance (gross NPL of 6%) being much weaker-than closest peer Bandhan Bank (gross NPL of 0.8%) in the first phase. However, we see BFILs assets under management (AUM) growth relatively resilient as it plans to add 200 branches in FY18. At the current share price, BFIL trades at 3.3x FY19 book value for a tax-adjusted ROA of 3.5% and is in line with its large NBFC peers at 3.3x and a discount to private banks at 3.6x. We believe the in line valuation to NBFCs is justified, by the strong growth prospects and its 2019 estimated ROE of 21%.</p>

We initiate coverage on Bharat Financial Inclusion Limited (BHAFIN IN) (BFIL ), the largest micro finance institution (MFI) and the third largest player in the sector in India, with a Hold rating. With the stock up 26% over 2 months, we believe BFILs strong return ratios and the end of the first phase of loan waivers are already reflected in the stock price. We believe the industry will be entering phase 2 (excludes demonetization) of loan waivers, starting with the Gujarat elections in December and think credit costs may come under additional pressure. We would like to see BFIL further lower its exposure to the North, a region known for poor rule of law. BFILs penchant for growth led to its asset quality performance (gross NPL of 6%) being much weaker-than closest peer Bandhan Bank (gross NPL of 0.8%) in the first phase. However, we see BFILs assets under management (AUM) growth relatively resilient as it plans to add 200 branches in FY18. At the current share price, BFIL trades at 3.3x FY19 book value for a tax-adjusted ROA of 3.5% and is in line with its large NBFC peers at 3.3x and a discount to private banks at 3.6x. We believe the in line valuation to NBFCs is justified, by the strong growth prospects and its 2019 estimated ROE of 21%.

Bharat Financial Inclusion: Loan Waivers to Remain an Overhang