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Our view ‐ 

Q1 earnings negatively surprised; Management commentary and Business Transformation holds promise

Though BAF’s asset quality deterioration in Q1 FY22 did not come as a shock in the context of an adverse external environment, absence of moratorium and management’s mid‐quarter warning, the earnings performance still disappointed with a large interest reversal (Rs4.5bn on Rs20bn+ slippages) and higher credit cost (110 bps non‐ annualized) from accelerated provisions and write‐offs. Accordingly, the NII & PPOP were 10% lower than our estimate and profit was lower by 30%. Resilient AUM growth (4% qoq and 15% yoy) was supported by nearly stable bounce trends (non‐delinquent customer base grew by 2% qoq) and sharp recovery in business segments of Consumer B2C, Rural Finance and Mortgages in the month of June.  

Sans a severe third Covid wave, BAF expects a strong recovery in business and delinquent buckets in the rest of the year. Since growth start for FY22 has been much better than FY21, we reckon that BAF can deliver 15‐20% AUM growth for the year. Management has guided for annual credit cost of Rs42‐43bn notwithstanding Rs17.5bn incurred in Q1 FY22. Bounce rates and collection trends in July are better than Q4 FY21, and this underpins credit cost and growth guidance for the year. Earnings will likely recover sharply over the next three quarters.

We largely retain AUM growth assumptions, but still our earnings and ABV estimates through FY22‐24 undergo material cuts on adverse adjustments to NIM and credit cost. BAF’s business transformation strategy (app/platform based customer engagement offering high convenience to purchase, finance, pay, invest, insure, etc.) holds a lot of promise in terms of augmenting growth and structurally improving the cost metric. While it is difficult to build its potential in numbers, it could definitely support stock’s current high valuation multiple (7x FY23 P/ABV). Retain ADD rating with 12m PT of Rs5800.

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