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Performance surpasses expectations and allays emerging concerns; commentary encouraging too BAF not only delivered 4-7% beat on NII/PPOP/PAT, but its performance and commentary also doused emerging concerns pertaining to growth/competition in B2B business, slowdown in housing portfolio, growth trajectory in new loan bookings/cross-sell, and the impact of inevitable NIM moderation on RoA. Factors that drove earnings beat in Q4 FY23 were resilient NIM (supported by lending rate hikes taken so far) and restrained opex growth (manifesting early benefits of digital platforms). Management remains reasonably confident about strong customer additions, loan bookings, AUM growth, cost metric improvement and benign credit cost in FY24.

We have marginally upped our AUM growth forecast and pruned credit cost estimates which has led to FY24/25 earnings being upgraded by 4-5%. Addition of new product lines like Gold Loans, Auto loans, CV finance, Tractor loans, Microfinance and Emerging Corporate loans would support long-term growth and profitability of the franchise. BAF currently trades near its seven-year average 1-yr rolling fwd. P/ABV of 5.6x. With expectations of 25% AUM CAGR and average 4.7%/23.7% RoA/RoE delivery over FY23-25, we reiterate BUY on the stock with an upgraded 12m PT of Rs7,865.

Well-rounded growth and robust asset quality

BAF’s asset growth in the quarter was well-rounded with significant growth seen even in B2B and Housing Finance businesses where the traction had materially slowed down in preceding quarter. In both these segments, the disbursement growth was
reasonably strong at 21% yoy. Growth remained robust in commercial segment, resilient in Consumer B2C financing business and on recovery path in 2w/3w financing. BAF’s competitive position/market share in each business remains strong on
incremental basis.

Stage-3 loans declined by 12% qoq and there was a small increase in Stage-2 loans. The improvement in GNPL ratio was seen in all products. While credit cost was slightly higher than estimated, it mainly represented enhanced coverage on Stage-2 assets
and clean-up of Stage-3 assets.

Moderation of Opex/NII ratio and sustenance of low credit cost likely
Notwithstanding 25 bps increase in CoF, BAF delivered resilient NIMs (NII grew 6% qoq/28% yoy) underpinned by rate hikes taken in both floating and fixed rate products. Almost entire portfolio of BHFL is on floating rate, and the co. had transmitted 50 70bps of CoF increase in fixed-rate loan segments earlier. Assuming one more policy rate hike, BAF expects its NIM to compress by 40-50 bps in FY24. Notably, the co. has not taken further lending rate hikes in any product during recent months. The impact of the envisaged NIM decline on RoA/RoE profile would largely get mitigated by moderation of Opex/NII ratio and sustenance of low credit cost. Besides the moderation in cost growth due to lower recovery commissions from benign delinquency trends, the productivity/efficiency gains from rising business volumes on App/Web consumer platforms would cause a gradual decline in Opex/NII ratio.

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