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ARA: Year of prudence and expediting business transformation agenda

Bajaj Finance’s (BFL) quarterly disclosures are detailed and informative. Our sneak peek into its annual report is focused on assessing a few specific parameters, namely:

1) roadmap and status of its business transformation agenda;

2) technology and analytics orientation (spends at 25-35bps of AUM);

3) impact of lower acquisition and prudence on its intensity of mining credit-tested customer franchise across product categories;

4) cost levers available to balance rising recovery costs;

5) evolving profile of fee income. FY21 being an exceptional year with respect to lower acquisition volumes, higher liquidity buffers, increased recovery costs, higher credit cost (4.1%), elevated slippages (5.3%), BFL swiftly evolved a two-pronged approach focused on: i) conservatism and prudence, and ii) expediting its business transformation plan. Stock trades at 83x FY21 earnings and 8.1x FY21 book. Read on to find out.

Conservatism & prudence amidst business disruption:

Conservation encompassed: 1) capital management (tier-1 at 25%), 2) maintaining excess liquidity (12-13% of borrowings), 3) reducing operating expenses (down 6% YoY), 4) expansion of collections and servicing capability (set up 10 dedicated collection servicing branches and trained 6.7k DRAs), 5) strengthening of underwriting norms, 6) sharp view on risk metrics, and 7) conservatism in new loan bookings. Prudence was reflected in accelerated write-offs of Rs42bn and management overlay provisions of Rs8.4bn (55bps of AUM).

Expediting business transformation agenda:

Compared to the earlier envisaged 4- year execution timeline, BFL now plans to complete this business transformation agenda in a phased manner with 2 years of conceptualisation in Nov’19. Three marketplaces – EMI store, Insurance and Investment – are in advanced stages of development. Insurance and Investment marketplace apps will go live between Jul’21 and Aug’21. It will start offering ‘Bajaj Pay’ scheme to customers in Q1FY22. Four productivity apps will go live in a phased manner by Sep’21 – Sales One by Jul’21, Collections by May’21, Partner One by Aug’21, and Merchant by Sep‘21.

Technology and analytics related capabilities deepened with further investments:

BFL invested a further Rs2.3bn (up 8% YoY) in technology in FY21 (cumulative cost of >Rs15bn on IT). The technology unit is well positioned to do the heavy lifting of its business transformation agenda. It has introduced visual designs, TechOps KPIs and advanced QA automation and is rebuilding its customer-facing mobility app. BFL uses business intelligence and analytics across all spheres – analytical tools (Big Data, cloud computing, and open source software). It has continued to deepen and widen; entire data ecosystem and analytic workloads are now hosted on the Microsoft Azure platform and risk models and loss models are now more nuanced and granular than before.

Cut in discretionary expenses offsets higher recovery cost:

Cost control encompassed freeze on advertising (down more than 50%), calibration of salaries and incentives, travel (down >70%), training, tele-calling cost (down >45%), etc. along with productivity enhancement. These together have helped absorb the enhanced recovery costs (up 20% in FY21). Also, CSR expenditure was up 30% in FY21.

Lower acquisition and prudence led to declined intensity of mining credit-tested customers:

Due to lower acquisition, absence of updated bureau information, and prudence amidst elevated levels of perceived and incurred risk, the pace of customer franchise growth somewhat moderated in FY20 (24% YoY) and FY21 (14%) compared to >30% for past many years. Volume of consumer financing was almost a third lower (8.9mn transactions), merely one-third of unique EMI card customers were finances for purchases, lifestyle financing transactions were down 47% YoY, 38% decline in ecommerce transactions of EMI card customers. Furthermore, market share in financing Bajaj motorcycles down to 34% (from 54%), 10% decline in AUM of personal loan cross sell (PLCS) business. Salaried personal loan business in fact grew 7%, 10% growth in rural portfolio to Rs147bn, commercial lending portfolio grew by 28% (to Rs83bn) and it closed LAS AUM 26% higher YoY at Rs60.5bn.

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