BAGIC's Quality Underwriting And Digital Expansion Will Drive Future Success

Key Takeaways

• Bajaj Allianz's shift to a long-term profitability focus and product mix adjustment indicates potential stability in margins and earnings.
  
• Expansions in digital platforms and anticipated pricing improvements in insurance are expected to boost customer acquisition and profitability.
  
• Strategic uncertainties and regulatory changes could impact Bajaj Finserv's revenue stability, profit margins, and market competitiveness amidst competitive and volatile dynamics.

Catalysts

Through its subsidiaries, engages in the provision of financial services in India.

• Bajaj Finserv's diversified insurance growth strategy, particularly with Bajaj Allianz's move to shift its product mix and focus on long-term profitability over short-term volume, suggests potential stability and improvement in net margins and earnings in the future.
  
• The introduction of the 1/n regulation, despite causing short-term distortions in topline comparisons, is expected to yield a more stable revenue stream for Bajaj Allianz, positively impacting long-term revenue growth.
  
• BAGIC’s continuous focus on maintaining a quality insurance book with superior risk selection and a balanced business mix anticipates enhancing underwriting results, likely benefiting net margins and overall profitability.
  
• Bajaj Finserv's expansion in digital platforms with Bajaj Finserv Health and Bajaj Markets is expected to drive customer acquisition and enhance cross-sell opportunities, potentially impacting revenue growth positively.
  
• The anticipated improvement in pricing within the commercial lines of insurance due to regulatory and market pressures is likely to improve BAGIC's profitability, thereby enhancing net margins.

Bajaj Finserv Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bajaj Finserv's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 8.5% in 3 years time.
• Analysts expect earnings to reach ₹173.6 billion (and earnings per share of ₹106.58) by about April 2028, up from ₹85.7 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2028 earnings, down from 36.6x today. This future PE is greater than the current PE for the IN Diversified Financial industry at 25.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.03%, as per the Simply Wall St company report.

Bajaj Finserv Future Earnings Per Share Growth

Risks

• There is uncertainty regarding the exit of Allianz from the JV agreement, which could impact the strategic direction and international alliances, potentially affecting revenue stability.
  
• The implementation of new IRDAI regulations, such as premium deferral and commission payout caps, may impact revenue recognition and operational margins in the insurance business.
  
• The ongoing market volatility, as seen in the ecosystem of Bajaj Finserv, can affect the valuations and returns on investments held by the firm, impacting earnings.
  
• The muted growth due to changes in product mix and internal strategies may affect the short-term revenue projections and market competitiveness.
  
• The competitive intensity in segments like health insurance and life insurance, alongside regulatory challenges, can pressure profit margins and sustain or grow market share, impacting long-term earnings.
  

Valuation

• The analysts have a consensus price target of ₹1997.143 for Bajaj Finserv based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2350.0, and the most bearish reporting a price target of just ₹1350.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹2035.9 billion, earnings will come to ₹173.6 billion, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹1969.2, the analyst price target of ₹1997.14 is 1.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.