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Management confident of protecting profitability despite NIM compression

* BAF’s reported PAT grew 31% YoY to ~INR31.6b (in line) in 4QFY23. The good operational performance was driven by 1) a healthy run-rate in customer additions/new loans disbursed, 2) pristine asset quality driving a ~7bp QoQ moderation in credit costs, and 3) a moderation in opex ratios. FY23 PAT grew ~64% YoY to ~INR115b (PY: INR70b).

* NII grew 30% YoY to INR62.5b. Other operating income grew 20% YoY, and net total income (NTI) increased 28% YoY to INR77.7b.

* 4QFY23 NIM (calc.) declined ~25bp QoQ to ~13%. Driven by its liability strength, BAF was able to tide over FY23 without margin compression. However, we model NIM compression of ~40bp in FY24, due to the expected rise in the cost of borrowings and the difficulty in passing on interest rate hikes in unsecured business loans/personal loans.

* We estimate an AUM/PAT CAGR of ~26%/24% over FY23-FY25 and expect BAF to deliver a RoA/RoE of 4.6%/24% in FY25.

* Key factors to watch out for in FY24: 1) the evolution of its payments landscape and adoption of its payments offerings; 2) traction/ momentum in the web platform, and 3) the degree to which the NIM compression can be offset with lower cost ratios and credit costs.

* Maintain BUY with a TP of INR7,080 (premised on 5.3x FY25E BVPS).

Strong customer acquisition run rate; core AUM growth of ~29% YoY

* Total customer franchise rose 20% YoY to ~69m. New loans booked grew 21% YoY to 7.6m (PY: 6.3m). The company delivered the highest customer acquisitions in FY23 of ~11.6m and is confident of adding 11- 12m new customers in FY24.

* Reported total AUM grew 25% YoY and ~7% QoQ to INR2.47t. Sequential AUM growth was driven by Auto Finance (+10%), Urban B2C (+7%), SME (+9%) and Commercial (incl. LAS) (+10%).

 Focus on customer acquisition through multiple channels, diversified product suite and expansion of distribution in Tier II and Tier III cities have been the key drivers of its AUM growth in recent years.

Cost ratios should moderate despite investments in distribution

* The company added 19 new locations and 10,800 distribution points in 4QFY23. It added ~230 new locations in FY23. It plans to add 150 new locations and over 300 standalone gold branches in 1QFY24.

* Operating expenses grew 26% YoY to INR26.5b and the opex-to-NII declined ~60bp QoQ to ~34%.

* Operating leverage driven by economies of scale and relatively lower investments on the technology side will drive a moderation in the opex-to-NII ratio to ~34%/33% in FY24/FY25.

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