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Bajaj Finance (BAF)’s FY23 Annual Report provides insights into the company’s business construct and the different elements of its Long Range Strategy, including its ambition, approach, philosophy, market share, and profit share. The company plans to execute this strategy by increasing business agility, establishing a more efficient cost structure, and expanding its share of wallet within its customer base.

* During the challenging period of COVID-19, BAF seized the opportunity to transform its core identity, implementing a fully digitized Omni-channel strategy that seamlessly integrates its entire product and service portfolio.

* This was a huge structural shift for BAF, completely reinventing its operational approach. Once fully implemented, the omni-channel strategy will establish BAF as a customer-centric digital enterprise.

* The company delivered a healthy performance in FY23 through (a) effective capital management (Tier I of ~23%), (b) conservative liquidity buffers (~6% of average borrowings in FY23), (c) its strong underwriting capabilities, and (d) significant progress across various aspects of its omni-channel strategy, thereby, further strengthening its risk management capabilities.

* We estimate an AUM/PAT CAGR of ~29%/26% over FY23-FY25 and expect BAF to deliver a RoA/RoE of 4.6%/25% in FY25. We reiterate our BUY rating with a TP of INR8,800 (premised on 6.5x FY25E BVPS).

Stellar year with healthy recovery in loan volumes

* BAF’s customer additions increased to 11.5m (vs. 9m in FY22). New loans booked grew 20% YoY to ~29.6m. Consumer-facing product categories 2W, 3W, and Lifestyle financing reported an increase of 12%, 78%, and 38% YoY, respectively, to 0.71m, 0.13m, and 0.64m.

* E-commerce related loans also grew 12% YoY to 2.8m. Within retail spending finance, the company has enhanced its business model by introducing small ticket financing options in select geographies and expanding into higher-ticket spending categories that prove to be economically more viable; volumes improved to 0.8m vs. 0.65m a year ago.

* For new originations, the cross-sell ratio moderated to ~61% vs. ~64% a year ago. In the 2W category, its market share in Bajaj Motorcycles increased to 40% (vs. 37% in FY22).

Customer franchise growing from strength to strength

* Overall customer franchise grew 20% YoY to ~69m. Of the total EMI card customers, 2% were financed across all sales finance categories (a sharp decline from ~44% in FY22) and 50–60% over the three years pre-COVID. Urban B2C AUM grew 30% YoY as against 27% in FY22. Consolidated AUM witnessed a robust growth of 25% YoY to INR2.47t and the proportion of unsecured loans declined to 42% (vs. ~43-44% over the prior two years).

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