IGI Logo

Strong beat driven by all-round healthy business momentum

* BAF delivered an all-round healthy performance in all its key business parameters. PAT grew 85% YoY and 44% QoQ to INR21.3b (17% beat) in 3QFY22.

* While NII rose 41% YoY to INR47.3b (6% beat), due to higher interest income from IPO financing and lower negative carry, it was slightly mitigated by higher opex (up 50% YoY and 9% above our estimate). Credit costs stood at INR10.5b (est. INR11.5b), which included an additional management overlay of INR2.5b in 3QFY22.

* GNPA/NNPA ratio improved by ~72bp/~32bp QoQ to 1.73%/0.78%. OTR book classified under Stage 2 stood at INR14.53b (~80bp of AUM). BAF carried ECL provision of INR3.17b (21.8%) in this book.

* Traction in the omnichannel strategy continued to remain strong, both for acquisition of EMI card customers (~492k) as well as for loans at the EMI store (~393k; 5% of new loans in 3QFY22). Stimulation of customers at the point of sale (POS) by leveraging its integrated offline to online framework led to originations of INR6b in personal loans and ~91k Credit Cards.

* Currently, ~10% of customers have access to the latest sprint of BAF’s consumer app, while the rest will get access to the latest version (which has all the features rolled out under Phase I of its business transformation program) between 24th Jan’22 and 26th Jan’22. In particular, we will be looking forward to understand the Insurance and investment marketplaces, Health RX, and the 6-in1 payment checkout offerings. The rewards/loyalty programs feature is yet to be rolled out, but they will be broadly similar (in terms of earnings/redemptions) to the rewards program already live on Finserv Markets.

* The payments stack could be exciting as BAF plans to leverage PPI, UPI, EMI cards, Credit Cards, and QR-based payments, including its presence at POS terminals and eventually to a payment gateway (under Phase II). The management also articulated that under Phase II of the app, it will roll out a two-wheeler marketplace, doctor RX, shortterm wallet loans, loans against securities (LAS), and loans against FD (Check out the exhaustive feature list in Exhibits 1 and 2 on page 4).

* Barring any major disruptions caused by the current COVID wave, we now expect BAF to deliver ~26% AUM growth in FY22E and ~25% CAGR thereafter. We expect margin to sustain driven by a reduction in the negative carry, as excess liquidity normalizes, and a decline in interest income reversals. Broadly in line with the management’s guidance, we now estimate credit costs at 2.9% (unchanged) in FY22E.

* We expect BAF to deliver a RoA/RoE of 4.3-4.6%/21-23% over FY23- 24E. Given the expected strength in asset quality in 2HFY22 and the sustained milestones-driven progress made by it in its digital transformation program, we reiterate our Buy rating with a TP of INR9,080 (8.5x FY24E BVPS).

Healthy run-rate of customer acquisitions; AUM growth reverts back to preCOVID levels and was in line with its long-term guidance

* Total customer franchise rose to 55.4m (up 4.9% QoQ and 19.6% YoY). New loans booked grew 17% QoQ to 7.44m (v/s 6.04m YoY) and was just shy of levels seen during 3QFY20 (pre-COVID). The number of new loans booked should be seen in the context of the strategic decision of BAF to originate a lower quantum of REMI and short-term wallet loans.

* AUM grew 26% YoY and 8.6% QoQ to INR1.81t. On a QoQ basis, AUM growth was driven by Urban B2B Sales Finance (+19%), Urban B2C (+8%), Rural businesses (+10%), and LAS (+22%). SME business/Mortgages rose 6%/8% QoQ. Auto Finance (-1%) continued to remain a drag in 3QFY22 as well.

OPEX remained elevated driven by investments in teams and technology

* Operating expenses continued to remain elevated, despite an improvement in collection efficiencies and relatively lower collection costs. This was primarily driven by investments in technology and aggressive onboarding of the talent pool across multiple domains (perhaps particularly in payments).

* OPEX-to-NII ratio stood ~35% in 3QFY22. With a normalization in collection costs and an increase in NII as a result of Balance Sheet growth, OPEX-to-NII ratio should normalize to 33-34% in 4QFY22. This, despite the company continuing to invest in teams and technology to transform the business.

Highlights from the management commentary

* Bounce rate for Jan'22 across products was in line with Dec'21 levels. The management raised its FY22 credit cost guidance to INR48-50b (from INR43-44b earlier). This is a rather conservative stance to build management overlay and could see provision write-backs if there is no impact from the third COVID wave.

* With the adoption of the new app, the management has guided at an annual customer acquisition run-rate of 8-9m (from 7-8m earlier).

* Interest income reversals stood at INR2.41b in 3QFY22 (v/s INR4.5b in 3QFY21). The management said it should normalize to the quarterly run-rate of INR1.8-2b over the next few quarters.

* It expects the liquidity buffer to fall to INR100-110b by 4QFY22.

Valuation and view

3QFY22 was a strong quarter for BAF with an all-round momentum across key business parameters. Customer acquisitions and new loans booked have reached pre-COVID levels and will soon breach historical highs in subsequent quarters. We expect BAF to be able to deliver a healthy AUM CAGR of ~25% over the next two years. We estimate BAF to contain credit costs ~2.9% in FY22E. Margin is likely to sustain on: a) lower cost of funds, b) reduced liquidity, and c) normalization in interest reversals. We increase our FY22E PAT estimate by 7% to factor in higher loan growth, NII, and non-interest income. BAF should deliver a RoA/RoE of 4.3- 4.6%/21-23% over the medium term. Given the positive outlook, we maintain our Buy rating with a TP of INR9,080 per share (8.5x FY24E BVPS).

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer