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Growth pickup and strong commentary gives confidence

Led by standstill status from supreme court, GNPA ratio declined to 0.55% from 1.03% QoQ and NNPA ratio came at 0.19% from 0.37% on consolidated basis. However, proforma GNPA and NNPA surged to 2.86% and 1.22% respectively. Restructuring is at 1.4% of loans and has provisions of |397 crore on it. The Company expects to revert to pre-Covid NNPA by 1HFY22, except auto finance business which may take longer due to underlying collateral value.

During the quarter, the Company has also done one-time principal write-off of ₹1,970 crore, on account of Covid related stress. The Company holds management overlay provision of ₹800 crore as of 31 December 2020 for Covid related stress. Consolidated AUM witnessed QoQ growth of 4% YoY to | 143550 crore, declining 1% YoY. The Company expects core AUM growth to resume to pre-Covid levels by Q4FY21. Consumer B2B declined 16% YoY but improved 10% QoQ to | 22893 crore.

NII declined 4% YoY to | 4296 crore, in line with estimates. NII for the quarter was lower by ₹239 crore, compared to Q3FY20 led by interest reversal of ₹450 crore versus ₹ 83 crore in Q3FY20 and cost of surplus liquidity of ₹ 213 crore, against ₹ 83 crore in Q3 FY20. Operating profit declined 3% YoY to | 2906 crore, in line with estimates. Overall provisions at |1351 crore were marginally lower QoQ. Profit after tax for Q3FY21 thereby came at | 1146 crore, down 25% YoY and up 19% QoQ.

Management commentary remain strong and consistent

Management has revised guidance lower for provisions for FY21E and maintained normalcy from Q4FY21. We expect AUM CAGR of 21% to | 210734 crore in FY21-23E. NII is expected to gain strength and provisions to moderate from FY22. Our PAT estimates are at 36% CAGR (FY21-23E) to | 7644 crore by FY23E. RoE is seen returning to ~15% and RoA at 2.2% in FY22E. We factor fund raising in FY23E as growth surges. Post March, April 2021 when normalcy is likely to be achieved: 1) growth is expected to accelerate to 25-27% (we factor in 20% growth in FY22) and 2) credit costs for FY22 to be lower at 160-180 bps of average loans (we factor in 210 bps). The management commentary to consider the banking licence if it is favourable bodes well for the long term view of the stock.

Valuation & Outlook

Bajaj Finance has sailed through the headwinds and emerged stronger with a leaner operating model and robust growth guidance. Growth guidance of ~25% for FY22E and opportunity to apply for banking licence have resulted in renewed interest of investors in the stock. We believe premium multiples are returning for Bajaj Finance. We maintain valuation at multiple at 7x FY23E ABV and target price at |5900. Maintain BUY recommendation on the stock.

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