Buy Bajaj Finance Ltd For Target Rs.1,200 By Axis Securities Ltd
Recommendation Rationale
* Festive Cheer Spurs Growth: BAF reported a robust festive season (Navratri – Diwali) business growth driven by a strong consumption-led growth. This was supported by the structural reforms in income tax and GST, lifting consumer sentiment and spurring consumption. The company disbursed a record 6.3 Mn consumer loans, recording a growth of 27% YoY in volume and 29% YoY in value terms. Overall disbursement volume during this period was 7.4 Mn loans, recording a growth of 26% YoY, compared to the previous festive period. During the same period, the company added 2.3 Mn new customers, with ~52% being NTC. BAF not only witnessed a surge in disbursements, but also a premiumization trend with consumers shifting to higher-quality products.
* Growth Guidance Cut Due to Captive 2/3Wheeler and MSME: BAF has been witnessing stress in the SME and Captive 2/3 Wheeler business (book running down). Taking corrective measures, BAF has cut 25% of its unsecured MSME volumes in the SME business and expects growth to settle at 10-12% in FY26. The management has guided for the worst to be behind by Q4FY26/Q1FY27, post which the company will look to resume growth in the segment. Resultantly, driven by slower growth guidance in the Mortgage business (BHFL) and the SME segment (collectively contributing 42% of the portfolio), the management has cut its growth guidance to 22-23% for FY26. However, the strong traction in the newer segments of Gold, New Car Financing, LAP, and Tractor loans should partially offset the impact of slowdown from these 2 segments.
* Asset Quality to Improve: BAF indicated that the increase in GNPA is a seasonal phenomenon; however, a higher contribution was from MSME (+6bps) and Captive business (+12bps). However, BAF has taken significant credit actions in the MSME business and expects credit costs to gradually taper over H2. The captive 2/3 Wheeler business has been running down and expects the contribution to credit costs to be meaningfully lower in H2 (vs 9% currently) and further lower in FY27. The portfolio quality in the other segments continues to remain pristine. The management has maintained its credit costs guidance of 185- 195bps for FY26, with credit costs settling at the upper end of the guidance. However, with improvement in the troubled portfolios, BAF expects FY27 credit costs to be materially lower.
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