Published on 11/04/2020 12:26:35 PM | Source: Motilal Oswal Financial Securities Ltd

Neutral Bajaj Finance Ltd For Target Rs. 2625 - Motilal Oswal

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Cautiously optimistic

Bajaj Finance (BAF) hosted a concall to provide an update on the impact of Covid-19 and the recent regulatory measures on its business.

* BAF’s management presented three scenarios, based on the 21-day lockdown end date and backed by its own customer behavior and product tenures, etc., to give clarity on growth and asset quality.  As of now, BAF is completely focused on cost optimization and rationalization since its top line (backed by AUM) remains uncertain.

* We have cut our earnings estimate by 42%/25% for FY21/FY22E to factor in the lower AUM growth and sharp rise in credit cost, whose impact was partially negated by opex cut.

* While we believe stock price correction (55% from peak) and current valuations (2.9x FY22E BV) largely factor in the moderate economic growth and the resultant impact on earnings, near-term volatility may remain high as earnings have significant linkages to the prevailing COVID-19 situation. Maintain Neutral.


Diversified lending book to support AUM growth; Full recovery in 2HFY21

Depending on when the national lockdown is lifted, disbursements should return to normal any time between Sep’20 and 4QFY21. In the interim, some segments (like 2W and consumer B2B) will start operations immediately post the lockdown. Consumer B2C should also see good growth post the lockdown. On the other hand, the company is cautious on the SME as well as the commercial segment. According to management, rural business will witness the fastest recovery. However, even when business resumes normally, BAF will tighten its underwriting in the near term, for example, it will not lend to the self-employed segment in Consumer B2C. Given the above-mentioned factors, we expect AUM growth to slow down from 27% in FY20 to 8% in FY21, but revert to 20% in FY22.


Credit cost to rise 40-90% v/s FY20; 4QFY20 to see elevated provisioning

BAF witnessed improvement in its 0dpd trend over Dec’19-Feb’20. If not for the COVID-19 outbreak, the company was on track to revert to FY18-19 credit costs by July-Aug’20. Management presented a sensitivity analysis based on the duration of the lockdown. If the lockdown were to end by mid-Apr’20, one could expect disbursements to revert to run-rate levels gradually by Sep’20. In this scenario, credit costs would be 40-50% higher than those in FY20. If the lockdown were to end by end-Apr’20, one could expect disbursements to revert to run-rate levels gradually by Oct’20. In this scenario, credit costs would be 50- 60% higher than those in FY20. However, in a scenario wherein the lockdown were lifted in mid-May, disbursements would revert to run-rate levels only in 4QFY21 while credit costs would be 80-90% higher than those in FY20. In our view, segments like 2W financing, SME and LAP will witness asset quality stress in FY21E; we estimate credit costs to jump from 2.5% in FY20 to 4% in FY21 and then moderate to 3.1% by FY22E.


Cost optimization/rationalization – a key focus area to support profitability

In the base case, management targets reduction of 7-8% in operating expenses driven by (a) no incremental hiring or branch expansion, (b) 80% reduction in travel, and (c) reduction in IT spends and capex. However, in the event the lockdown is lifted in mid-May, the company would try to reduce opex by 12-15%. BAF will invest in expanding the collections infrastructure though; currently, the company has 4,000 collection executives who deal with collection agencies. The current capacity can absorb 20-30% increase in over-dues. However, in case of a sharp spike in overdues, the capacity will have to be increased.


Reported key numbers for 4QFY20; Hinting at higher credit cost in 4Q

BAF also reported key business figures for 4QFY20 (part of normal quarterly disclosures). Reported AUM grew 27% YoY (2% QoQ) to INR1.47t. Overall customer base grew 24% YoY to 42.6m. ‘New to Bajaj Customer’ added stood at 1.9m (flat YoY) and new loans added stood at 6m (+3% YoY). Excluding the impact of COVID19, BAF would have acquired 2.2m customers in 4QFY20; hence, the 10-day lockdown in the quarter impacted customer acquisition by 0.3m. Likewise, new loans booked would have come in at 7m (v/s 6m) while AUM would have been INR47.5b higher, resulting in AUM growth of 32% YoY (in line with our earlier estimates). Management also mentioned that it plans to take additional prudent provisioning in 4QFY20 for corporate loans and COVID-19 related expected stress. We have increased our credit cost estimate for FY20 from 2.1% to 2.5%.


Valuation and view

The initial trends (pre-COVID-19) of asset quality improvement in BAF are encouraging amidst the overall economic slowdown and increasing delinquencies in retail credit, system-wide. The impact of COVID-19 will now have varying degrees of impact on the company; in our view, segments like 2W/3W financing, CD/digital products financing and SME lending would be the most impacted. These segments comprise more than one-third of the total loan book. In addition, the mortgage book (which is 30% of total loans) is likely to witness hyper-competitiveness on the pricing front post the recent 75bp rate cut by SBI. In our view, AUM would deliver 17% CAGR over FY20-23E. Credit costs would jump to 4% in FY21E and then subside to 3.1% in FY22E. We cut our FY21/FY22E EPS estimates by 42%/25%. Maintain Neutral with TP of INR2,625 (3.6x BV FY22E).


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