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Returning to normalcy but uncertainties do exist

* BAF reported PAT of Rs13.5bn (+42% yoy, +17.5% qoq) in Q4FY21, aided by solid growth momentum across lending segments (except auto). However, recent lockdowns amid the second wave of Covid-19 pose a challenge for BAF due to historically loaded AUM growth in Q1 (~35-40% of full year AUM) and dependence on discretionary spending.

* Though the sharp surge in collection efficiency is positive, we remain concerned about elevated write-offs (Rs20bn in Q4, Rs23.4bn in Q3) and restructured book (Rs17.4bn) placed under stage 2 assets. We also await more ground level data to ascertain the impact of current lockdowns on collection efficiency.

* In the last quarter, management revealed a business transformation journey by creating seamless credit experience and announcing an integrated payment solution. We believe the move is intended to increase the wallet share from the existing customers. Since the process is due in Jul-Aug’21, we await more clarity over the same.

* Although we moderate our AUM growth estimates to 25%/28% for FY22/23 from 28%/30% earlier due to current lockdowns, management’s stance of open for all businesses (against shut down for months last year) provides some comfort. We introduce FY24 estimates. Maintain Hold (EW in EAP) with a TP of Rs5400 (~6.5x FY23E ABV).

* Key things to watch out for: 1) possible stress in the loan book; 2) impact on growth during lockdowns and 3) BAF’s transformation journey.

Normalcy visible in Q4FY21; better collections led to reduction in credit loss:

BAF has reported AUM growth of ~3.9% yoy (+6.5% qoq) to Rs1.53tn, mainly attributable to higher growth across segments along with increasing momentum in recoveries. The reported core AUM growth in Q4 was ~Rs95bn (across all products lines, except for Auto) as compared to Rs80bn in Q3. During FY21, the company has done accelerated write-offs at ~Rs35bn of principal outstanding on account of Covid-19-related stress and advancement of its write-off policy. BAF holds a management overlay and macro provision of Rs8.4bn as of Mar’21

New initiatives picking up speed; a journey toward transformation:

BAF management has revealed a business transformation journey by creating an omnichannel framework, which will enable customers to move between online to offline and vice versa in a frictionless manner. The company is also in process of launching an integrated payment solution viz. ‘Bajaj Pay’, comprising of UPI, PPI, EMI card and credit card for its customers.

Outlook and valuation:

Although we moderate our AUM growth estimates to 25%/28% for FY22/23 from 28%/30% previously due to current lockdowns, management’s stance of open for all businesses (vs. shutdown for months last year) provides some comfort. We introduce FY24 estimates. Maintain Hold (EW in EAP) with a TP of Rs5,400 (~6.5x FY23E ABV).

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