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Below are Views On Bajaj Finance Q3 FY21 First Take By Rajiv Mehta, Yes Securities

Bajaj Finance Q3 FY21 First Take
Results Positive - Stress flows as expected, but Credit Cost estimates upgraded

Q3 Results v/s our expectations

* NII 4% below estimates - NII growth tepid due to higher reversal of interest income at Rs4.5bn and higher cost of liquidity surplus at Rs2.1bn

* Opex 5% higher than expectations – thus PPOP 8% below our estimate

* Net Credit cost at Rs13.5bn was lower than estimate of Rs15bn – however, the co. dipped into the Covid buffer (Stage 1 & 2 ECL, including Management Overlay) to one-time write-off principal and interest aggregating Rs23.5bn related to potentially unrecoverable loans.

* Now the co. holds a management overlay of just Rs8bn (55 bps of AUM) as at 31 December 2020

* Company's Proforma Gross and Net NPA stood at 2.9% and 1.2% respectively as against 1.34% and 0.56% respectively as of 30 September 2020 – this was despite writing off 1.5% of AUM during the quarter

* Earnings was lower by 8-9% v/s our estimate 

Reassuring Management Commentary

* Company expects core AUM growth to resume to pre-COVID levels by Q4 FY21

* Most businesses have started disbursing 85-100% of last year’s volumes with incremental growth being observed every month.

* In Q3, urban consumption businesses (B2B) were at 86%, rural consumption business (B2B) at 100%, credit card origination at 102%, ecommerce at 107% and auto finance business at 62% of last year’s volume

* Mortgages disbursement was at 90% of Q3 FY20 level. AUM accretion in the quarter impacted by significant portfolio attrition caused by pricing pressures. Company has taken pricing actions to revert to pre-COVID growth levels by Q4 or Q1 FY22.

* Margin profile in all lines of businesses was steady at pre-COVID levels other than mortgages.

* Risk metrics of new volumes originated across businesses are tracking significantly better than pre-COVID origination.

* In Q3, Collection efficiencies in bucket 0 was back to pre-COVID levels and in early buckets (1 and 2), it was significantly better than pre-COVID levels.

* Company estimates residual credit costs in Q4 at Rs12-12.5bn. Thus, an overall credit cost of Rs59-60bn in FY21 on account of COVID-19. However, if the collection efficiencies remain better through Q4, there could be a further reduction in credit cost estimates.

* FY22 onwards, Company expects loan losses and provisions to revert to pre-COVID-19 levels of 160-170 bps of average assets. If recoveries are better in FY22, we may experience lower net loan loss to average assets.

* In the last 45 days, as part of its strategy to reduce liquidity buffer and optimize cost of funds, the Company has made prepayments of approximately. Cost of Funds was 7,8% in Q3 and is expected to decline to 7.5% by March 2021.

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