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In line performance; strengthening itself for a stronger FY23

 BAF’s 4QFY22 earnings were in line, with a reported PAT of INR24.2b, led by healthy core AUM growth of 26% YoY and a pristine asset quality (GS3/NS3 stood at 1.6%/0.7% and credit cost moderated by ~150bp, despite having to provide INR1b on a large commercial account). Key things to watch out for in FY23 include: a) evolution of its Payments landscape and traction therein, b) velocity on the already launched app and the envisaged new web platform, c) potential foray into the Credit Cards business from its own Balance Sheet, d) TwoWheeler marketplace and diversification to other non-captive OEMs, and e) margin trajectory in the face of aggressive competition, leading to a pressure on NIM. We maintain our Buy rating with a TP of INR8,350/share (based on 8x FY24E P/BV).

BAF delivered an in line performance, despite a 7% miss on our NII estimate. PAT grew 80% YoY and 14% QoQ to INR24.2b in 4QFY22.

NIM is likely to compress in FY23, driven by a pressure on yields, absence of large IPO financing (under new RBI guidelines), and expectations of an increase in borrowing cost. Part of the NIM compression in 4QFY22 was mitigated by a decline in surplus liquidity on its Balance Sheet.

GNPA/NNPA ratio improved by ~13bp/~10bp QoQ to 1.6%/0.68%. OTR book classified under Stage 2 stood at INR14.53b (~36bp of AUM). BAF carried ECL provision of INR1.4b (~20%) in this book. Credit costs included provisions of INR1b on a large commercial account (gross exposure of INR3.83b), which slipped into NPA.

We model an AUM/PAT CAGR of ~25%/35% and expect BAF to deliver a RoA/RoE of 4.2-4.4%/21-22% over FY23-24. We remain watchful of various developments in its Payments offerings and potential foray into the Credit Card business. We reiterate our Buy rating with a TP of INR8,350 per share (8x FY24E BVPS).

Confident of a healthy run-rate in customer acquisitions; AUM growth will track its long-term guidance

Its customer franchise rose to 57.6m (up 4% QoQ and 19% YoY). New loans booked grew 15% YoY to 6.3m (a seasonal decline relative to 3QFY22). The same should be viewed in the context of the strategic decision of BAF to originate a lower quantum of REMI and short-term wallet loans. The management guided at a new customer acquisition run-rate of 8-9m in FY23.

AUM grew 29% YoY and 9% QoQ to INR1.97t. On a QoQ basis, growth was driven by Consumer B2C (+7%), Rural (+6%), SME (+8%), LAS including IPO financing (+74%), and Commercial (+10%). Mortgages grew 6%.

Consumer B2B – Auto Finance (-4% QoQ) and Sales Finance (flat QoQ) – continued to remain a drag in 4QFY22.

OPEX to stay elevated in FY23 due to investments in technology and human capital

The management guided at an OPEX-to NII ratio of 34.5-35.5% in FY23, led by investments in technology and aggressive onboarding of the talent pool across multiple domains (particularly in Payments).

The OPEX-to-NII ratio stood ~35% in 4QFY22. The ratio will remain elevated in FY23 and FY24 as BAF invests in building capabilities for its Payments ecosystem and associated sales promotion/customer acquisition expenses (in the form of rewards/cashbacks).

Potential foray into the Credit Card business in late FY23 or early FY24

The management did not rule out launching its own Credit Cards. This comes in light of RBI’s master circular on Credit Cards, which allows NBFCs to issue the same on their balance sheet with prior approval from the regulator.

BAF said it would seek clarification from the RBI and then evaluate whether it wants to launch its own Credit Cards. It categorically reiterated its commitment to the Credit Card co-branding arrangement that it has with RBK and DBS Bank.

Highlights from the management commentary

Conversion to a bank is also not on the horizon for the next two-to-three years. The management’s focus is on building a Payments and Financial Services business, with an expected customer franchise of 100m over the next five years.

BAF is creating a brand called Bajaj Mall, which will house the EMI Store and will be launched on 1st Jul'22.

A large B2B account in the Consumer Durable loan business, with an exposure of INR3.83b, slipped into NPA and contributed to the deterioration in asset quality.

Valuation and view

4QFY22 was a healthy quarter for BAF, with all-round momentum across key business parameters. Customer acquisitions and trajectory in new loans remain strong. This momentum will only get stronger with its digital ecosystem: app, web platform, and full-stack payment offerings.

We expect BAF to deliver a healthy AUM CAGR of ~25% over the next two years. We expect it to contain credit costs ~1.7% in FY23. Even though the management has guided that it will prioritize margin over loan growth, NIM compression is likely in FY23, as levers like normalization in excess liquidity and borrowing costs have largely played out. The competitive landscape also continues to remain aggressive.

We cut our FY23/FY24 PAT estimate by 4% each to factor in potential NIM compression and a higher OPEX ratio of ~35% over the next two years. BAF should deliver a RoA/RoE of 4.2-4.4%/21-22% over the medium term. We maintain our Buy rating with a TP of INR8,350 per share (8x FY24E BVPS).

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