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BAF delivered largely in-line performance with sustained delivery of high RoA/RoE (5.4%/24%) and strong balance sheet growth

Key positives were a) substantial growth improvement in Auto Finance, resilient traction in Consumer B2C products and strengthening of growth in commercial/SME lending, b) significant lift in run-rate of new customer acquisition and strong growth in total/cross-sell customer franchise, c) gradual increase in CoF (majority fixed rate borrowings) underpinning strong NII growth, d) moderation in opex growth (operating efficiencies starting to manifest) calibrating Opex/NII ratio, e) robust collection and credit metrics correcting delinquency buckets and f) management revealing their long range strategy providing clarity on franchise growth trajectory and productivity/profitability outcomes.

Key negatives were a) continued disbursements/AUM growth deceleration in Urban/Rural Sales Finance (Consumer B2B) and b) significant slowdown in approvals/disbursements in BHFL. Management expects AUM share of Urban/Rural sales finance to keep coming down gradually, and thus seasonality corresponding to Q1 and Q3 of a fiscal would diminish. Co. expects disbursement growth in Mortgages to pick-up over the next two quarters. Notwithstanding these growth headwinds, BAF remains confident of delivering Rs520-530bn of net accretion in core AUM in FY23, implying 26-27% growth for the year.

Key facets of the long range strategy are 1) to be a leading payments and financial services company in India with 100mn consumers and market share of 3% of payments GMV, 3-4% of total credit and 4-5% of retail credit, 2) each business to be amongst Top 5 in their respective market, 3) generating 50% of business from digital platforms, 4) adding presence in U.P, Bihar and North-East and simultaneously offering all products at existing locations and 5) adding new product lines of Auto, MFI, Tractor, CV, Emerging corporate financing, and 6) building presence in social, rewards and virtual consumer platforms. Key outcomes of this strategy are expected to be 1) neardoubling of customer franchise in next 4.5 years and 2) significant growth in AUM/profit per cross sell franchise.

We have marginally lowered earnings estimates for FY23/24 on trimming AUM growth. Profitability metrics is expected to remain robust supported by sustained NIM resilience, as mortgage & commercial portfolios are on floating rate and there has been significant rate transmission on fixed rate products. Opex/NII ratio could likely witness further improvement in FY24/25 with operating efficiencies coming along with increasing business volumes on App/Web consumer platforms. Post recent significant price correction, the stock valuation has come down to seven-year average of 5.6x on 1-yr rolling fwd. P/ABV. The absence of any significant earnings cuts and a better clarity on long-term franchise outcomes (after disclosure of long run strategy) underscore our BUY rating. See significant upside with 12m PT of Rs7620.

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