Results Review For Bajaj Finance, ICICI Prudential Life, L&T Technology Services

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By Krishnan ASV

Bajaj Finance (NS: BJFN ): Bajaj Finance’s (BAF) Q3FY22 earnings were in line with our estimates, led by strong operating performance (PPoP +35% YoY), partially offset by surplus provisioning (management overlay at 60bps). Asset quality improved sharply, owing to a 140bps decline in GS-II+GS-III, driving adjusted credit costs to 2%. Business momentum picked up further with 17% YoY growth in new customer acquisitions and 24% YoY growth in new loans disbursed. Phase-I of the company’s much-anticipated digital transformation, focusing on ETB customers, was launched in a staggered manner, while Phase-II, focusing on NTB customers, is likely to go live by Sep-22. Given the early stage of the super-app launch, we will watch out for evidence of traction in NTB customer acquisitions and impact on overall growth and profitability before building it into our explicit forecasts. We revise our FY22/FY23 earnings estimates by -1%/2% to factor in higher credit costs (sustained management overlay), which are offset by improving margins. Our REDUCE stance with a revised TP of INR5,536 is based on current steep valuations (8.2x Sep-23 ABVPS).

ICICI Prudential (LON: PRU ) Life: ICICI Prudential Life (IPRU) reported slower-than-industry APE growth (+16% YoY, in-line with estimates), translating into a 20% YoY VNB growth. We like IPRU’s re-engineered business model, which is focused on a more diversified product and channel mix, industry-leading share in sum assured (9MFY22: 12.7%), and rising share of traditional products. We expect the launch of new products coupled with strong momentum from non-ICICIBC channels to aid future growth. We expect VNB to clock a 21.6% CAGR over FY21-24E. We retain our ADD rating with a DCF-derived target price of INR700 (Sep-23 EV + 24.5x Sep-23E VNB). The stock is currently trading at FY22/23E P/EV of 2.8/2.4x and P/VNB of 27.3/21.6x.

L&T Technology Services: L&T Technology Services (LTTS) reported a moderate quarter, with a slight miss on revenue growth while the margins fared well. The management has maintained its guidance of 19-20% growth for FY22E, which implies Q4 growth of ~2-4% QoQ. We believe LTTS’ growth will be led by (1) robust deal wins with TCV of USD 90mn - three wins of TCV >USD 10mn and one deal of USD 45mn from a tier-1 automotive company in the US; (2) strong client portfolio/relationships and mining capability (added one client in USD 30mn+ bucket); (3) traction in transportation vertical led by electric, connected, and autonomous; and (4) growth in plant engineering and medical devices vertical. The telecom & hi-tech vertical will face challenges in Q4 due to one client-specific issue in the media vertical. The long-term guidance of hitting USD 1bn run-rate in Q2FY23E and USD 1.5bn in FY25E remains on track. The company expects to maintain at least an 18% EBIT margin and the ongoing supply-side challenges will be offset by operational efficiencies. We acknowledge LTTS’ prowess/diversity in digital ER&D, but citing near-term challenges, we cut estimates by ~2-3%. Our target price of INR 5,750 is based on 42x Mar-24E EPS. Maintain ADD.

ICICI Securities Ltd (NS: ICCI ): ISEC printed flattish pure broking revenue in line with estimates, as the share of cash moderated in the volume mix. While the customer addition run-rate has been impressive, we continue to watch out for a potential rise in ARPUs from digitally-sourced customers. We draw comfort from ISEC’s (1) channel-agnostic client acquisition and (2) renewed focus on building digital capabilities. However, we continue to remain wary of the impact of any significant market correction on delivery volumes (~75% of broking revenue). We adjust our estimates to build in the beat on non-broking income in FY22 and the impact on the ESOP book on the back of the regulation change. Given the positive macro lead indicators (rising retail participation and turbocharged pipeline of primary issuances), we maintain our positive stance on ISEC and maintain ADD with a target price of INR920 (23x Sep-23 EPS).

Angel One: ANGELONE delivered a 10% beat on the top-line led by better-than-estimated customer activity levels (higher average revenue-generating orders per customer), higher depositary fees and stronger net interest income. We are positively surprised with the rising efficacy of the marketing spend reflected in lower customer acquisition costs (CAC) and a six-quarter high EBITDA margin of 51%, constant iteration around improving customer journeys, and a steady growth in aggregate revenue-generating orders. ANGELONE remains one of the best plays on the secular growth story in the Indian capital markets and our highest-conviction BUY. We raise our FY22/23E earnings estimates by 15/6% on better-than-expected numbers and maintain BUY with an increased target price of INR1,870 (20.5x Sep-23 EPS).

Sonata Software (NS: SOFT ): We maintain our BUY recommendation on Sonata, following strong growth of 8.6% QoQ CC (~4% organic) in the IT services segment (IITS) and continued traction in the DPS business (+33% YoY). The Microsoft (NASDAQ: MSFT ) portfolio (~50% of IITS) is driving growth (+9.6% QoQ), with the company remaining optimistic that the opportunity (digital services + dynamics 365) can deliver >20% YoY growth consistently. Travel vertical reported the second consecutive quarter of >+4% growth but the recovery trajectory might be prolonged due to the impact of the third wave (in Europe). The IITS EBITDA margin declined 80bps QoQ to 24.1%, owing to ongoing supply-side concerns, partially offset by offshoring and peak utilisation (~90%). Attrition inched up to 22-23% level and the company is expected to hike wages in Q4 and Q1FY23E to counter attrition. The target margin range for IITS is ~23-25%; however, we believe it would be closer to the lower end. DPS growth was strong, supported by growth in cloud license sales. Sonata’s growth will be driven by Microsoft account, data analytics and cloud services, and a strong DPS business. We increase our revenue estimates by ~2% but cut our EPS estimates by 2.1/1.2% for FY22/23E due to a lower margin (~100bps margin cut for IITS). Our target price of INR 1,085 is based on 22x Mar-24E EPS. The stock is trading at a P/E of 20.8/17.4x FY23/24E.

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