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Calibrating growth and risk

Bajaj Finance's 3QFY24 PAT at INR 36.4bn, grew +22% YoY, a tad below our estimates of INR37.7bn. Revenue momentum remained strong (despite regulatory embargo on certain products post Nov’23) with NII at INR 76.7bn, +29% YoY and overall Net revenues grew +25% YoY to INR 93bn. Credit costs inched up from low levels seen in 1HFY24 led by issues in Rural B2C and marginal dip in collection efficiencies in Urban B2C products - mgmt has guided to credit costs of 175-185bps for FY24e (which still remains around pre-Covid levels). Management has indicated that while overall credit environment remains benign, certain segments impacted credit costs and they remain cautious given BAF's focus on risk. As a proactive measure, BAF has slowed down growth in these products. Overall AUM growth remained strong (+7.1% QoQ, +35% YoY) and broad based with both B2B, B2C, Commercial and Housing segments growing at brisk rates of 51% YoY, 28% YoY, 39% YoY, 31% YoY respectively. Efficiency metrics remained strong - cost/income ratio at 33.9% (vs 34 % QoQ) and cost/AUM at 4.2% (vs 4.3% QoQ). Digital usage/penetration metrics were impacted by regulatory embargo in 3QFY24 - BAF has indicated it remains well-placed to comply with regulatory directions. BAF has appointed Mr. Anup Saha as Deputy Managing Director and elevated 3 other senior management personnel to COO positions. We believe that despite minor inch up in credit costs in 3QFY24, BAF remains the best play on diversified consumption opportunity with strong risk mechanisms, high growth and superior return ratios. We see BAF, being a strong incumbent with long-standing credible track record in consumer lending, only emerging stronger as the concerns around unsecured loans settle over the next 2-3 quarters. BAF's current valuations at 23x FY25e/18x FY26e EPS are attractive given its strong RoA/RoE profile and ability to growth across cycles. In our view, easing of regulatory restrictions should act as a trigger for the stock. Maintain BUY with unchanged TP of INR10,000 (valuing at 25x FY26E P/E).

Broad-based growth trends: In 3Q24, AUM growth remained strong at +35% YoY/+7.1% QoQ and majorly driven by rural B2B (+32% YoY, 11.4% QoQ), consumer B2B auto finance (+65%YoY, +17%QoQ), securities lending (+45% YoY, +13% QoQ), SME business (+34%YoY, +7% QoQ) and Consumer B2B sales finance (+47%, +6.6% QoQ). Growth from other segments was also strong with Mortgages (+31% YoY, +6% QoQ), Consumer B2C (+32% YoY, +6.1% QoQ) and commercial lending at (+39% YoY, 5.7% QoQ). We estimate 29% AUM CAGR over FY23-26E with continued momentum across existing product categories and opportunity in newer segments like non- Bajaj auto two wheeler, LAP, new car financing and MFI. BAF witnessed strong traction in customer addition, as the customer franchise climbed to 80.4mn (+22% YoY/ +5% QoQ) and cross-sell franchise at 49.3m (+28% YoY/ +6% QoQ), as of 3QFY24. New loans booked stood at 9.9m (+26% YoY) and new to Bajaj (NTB) customers grew by 3.8mn (+22% YoY/ +8% QoQ). Notably, 9MFY24 new customer addition already reached to 11.3mn exceeding last year’s 9MFY23 additions by 2.82mn and well within mgmt guidance to cross 13-14mn in FY24.

Asset quality - more of "belt tightening" than real "concerns": GS3 moved up +4bps QoQ at 0.95% and NS3 up +6bps QoQ at 0.37% largely from urban sales finance (0.71% GS3 vs 0.59% QoQ), Urban B2C (1.3% GS3 vs 1.19% QoQ), rural sales finance (0.69% GS3 vs 0.6% QoQ) and rural B2C (1.31% GS3 vs 1.26% QoQ). PCR declined - 435bps QoQ at 61.7% though the mgmt continues to carry additional management overlay of 1.79% as at Q3FY24. Credit cost during the quarter inched up to 1.64% vs 1.54% QoQ while mgmt remains confident to maintain credit costs of 175-185bps for FY24E.

NIMs taper off, do not see downside from current levels: NIMs declined -26bps QoQ as reported cost of funds moved up +9bps QoQ and yields (calc.) declined -9bps QoQ leading to NII growth of INR 77bn (+29% YoY, 6.4% QoQ). Management guided for the NIMs to remain stable from here on. Other income remained stable at INR 16.4bn on account of lower fee income while marginal improvement in efficiency ratios (cost/income ratio at 33.9% vs 34 % QoQ and cost/AUM at 4.2% vs 4.3% QoQ) led to a PPoP of INR 61.4bn (+27% YoY, +5.3% QoQ). Slightly elevated credit costs (1.64% of total AUM) led to a PAT of INR 36.4bn (+22% YoY, +2.4% QoQ). We build in earnings CAGR of 29% over FY23-26E.

Valuations and view: We believe that BAF remains the best play on diversified consumption opportunity with strong risk mechanisms, high growth and superior return ratios. BAF holds a long-standing credible track record in consumer lending and we believe that the concerns around unsecured loans would settle over the next 2-3 quarters as it emerges as a stronger player going ahead. BAF's current valuations at 23x FY25e/18x FY26e EPS are attractive given its strong RoA/RoE profile and ability to growth across cycles. In our view, easing of regulatory restrictions should act as a trigger for the stock. Maintain BUY with unchanged TP of INR10,000 (valuing at 25x FY26E P/E).

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