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Below are Quote on Bajaj Finance Q1FY22RU - First cut by Mr. Rajiv Mehta, Lead Analyst – Institutional Equities, YES SECURITIES.

Bajaj Finance Q1 FY22 First Cut - ‘Q1 a large miss, but strong comeback expected in ensuing quarters’

Performance v/s Expectations

BAF delivers a 30% PAT miss on our estimates, on the back of 10% NII/PPOP miss and 20% higher loan impairment provisions

NII grew by 8% yoy v/s expectation of 18-20% yoy - interest income reversal stood higher at Rs4.5bn due to increase in GNPL (3% v/s 1.8% as of March with 2w/3w Financing segment being the key contributor) - BAF wrote-off potentially unrecoverable loans worth Rs1.4bn incl. capitalized interest

The deterioration in asset quality is not surprising given it was a Covid quarter without any regulatory moratorium and that Management had alluded to higher forward flows across overdue buckets due to collection constraints.

Additional provision/Management overlay reduced from Rs8.4bn as of March to Rs4.8bn (30 bps of AUM) as of June.

While the elevated credit cost of 110 bps (non-annualized) implies accelerated provisions on the 90+ flow (130bps) during the quarter, the decline in PCR to 50% from 58% in preceding quarter is a bit perplexing.

Non-delinquent customer base grew by 2% qoq, reflecting nearly stable EMI bounce rates in Q1 FY22

AUM grew 4% qoq and 15% yoy – the point of sale (POS) businesses which is Auto Finance and Consumer B2B Sales Finance witnessed sequential portfolio decline of 3-6% - Rural, Housing and Consumer B2C portfolios grew by healthy 3-6% qoq.

Key Points from the Investor Presentatio

Bounce rate for July has improved to 0.96X of Q4 FY21 from being at 1.08x for Q1 FY22

Of the Rs20bn increase in GNPA during the quarter, Auto Finance business contributed Rs12bn

Non overdue one-time restructuring (OTR) book came down to Rs13bn as of June v/s Rs17bn as of March. However, Non OTR Stage-2 assets stood rose to Rs61bn v/s Rs50bn as of March.

In absence of a severe third wave, BAF expects to bring down its GNPA to 1.7-1.8% & NNPA to 0.7-0.8% by end FY22. Accordingly, estimates its overall credit cost for FY22 at Rs42-43bn (implying <Rs10bn credit cost run-rate for remining three quarters)

New customer addition in Q1 was in-line with general guidance of 7-8mn new customer addition annually.

In absence of a third wave, Management expects quarterly AUM growth rate for balance of the year to be at pre-COVID levels.

CoF declined by 30bps qoq to 7.1%. BAF expects further reduction as liquidity buffer has been reinstated to pre-COVID levels.

Our View

Since Q1 has been a large miss on expectations and provisioning buffer has declined, incremental bounce, collections and roll-back trends would be key monitorables. The management’s credit cost and growth guidance for rest of the year is primarily anchored on these metrics staying healthy. With valuation at the upper end of the historic range (7x FY23 P/ABV), the stock may underperform in the near-term as investors evaluate asset quality trends and the risk of a third wave.

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