Add Bajaj Finance Ltd For Target Rs. 5,500 - Yes Securities
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Result Highlights
* BAF’s PPOP was 5% below our estimate due to firstly, significant interest reversals (Rs3.3bn) from higher prudential write‐offs (~1% of AUM ‐ both Covid‐related stress and due to advancement of w/off policy) and secondly, materially higher opex (115% of estimate) on higher recovery commission and employee costs related to business transformation initiatives.
* AUM growth in Q4 (6.5% qoq) was mainly driven by consumer B2B (Sales Finance), rural finance, mortgages (growth was back post pricing corrections), SME loans and commercial lending.
* Gross and Net NPA declined at 1.8% and 0.75% respectively as of Q4 versus 2.9% and 1.2% respectively as of December, due to w/offs and improvement in bounce trends (both for new originations and current bucket) and higher collection efficiency across buckets and products. Consequently, the net credit cost was much lower than our expectation.
Our view –
A transient soft patch; structural growth and earnings resilience intact: Barring a nationwide lockdown or extended lockdowns in larger states, BAF is confident of delivering 20%+ AUM and earnings growth in FY22. Despite the lockdowns becoming pervasive in the past 7‐10 days, the co. continued to originate 50‐ 55% of daily volumes in B2B business, 80‐85% in B2C and SME businesses and 40‐ 50% in mortgages.
Management believes that the impact of lower business volumes in first quarter could be reasonably mitigated in the balance three quarters of the year. With improved bounce rates, higher collection efficiency and overlay provisions (55‐ 60bps of AUM), BAF is better positioned to navigate any temporary stresses on account of second COVID wave. We estimate RoA moving closer to 5% in FY23 on the back of core cost/income improvement and normalization of credit cost. See BAF delivering 22‐23% RoE with controlled leverage. With structural growth and earnings resilience intact, the threat to current high valuation is low. Retain ADD rating with 12m TP of Rs5,500.
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