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Stabilization of credit cost in H2 FY25 would be key.

A marginal miss in PAT driven by elevation of credit cost

BAF delivered a small miss on our consolidated PAT estimate mainly due to increase in the credit cost run-rate. Higher provionsing (2.1% v/s 2% in Q1) was driven by significant increase in Stage 3 assets across products, which needs to be seen in the context of material increase in Stage 2 assets during Q1 FY25 which was partially driven by macro disruptions (elections, heatwave, etc.). In Q2 FY25, the Stage 2 assets have witnessed a meaningful decline across most products implying that bounce rates are stabilizing. Unlike in the preceding quarter, there was only a marginal decline in NIM in Q2 FY25. Cost of funds rose by only 3 bps and the AUM yield was largely stable despite the composition shift towards secured consumer and SME/commercial lending. Consolidated AUM growth stood at 5.6% qoq/28.8% yoy. Except in Rural B2C segment (grew 10% yoy), the growth was healthy-to-strong in all other products including Urban B2C (33% yoy). More recently introduced secured products like Gold Loans and Car Loans have been witnessing significant scale-up. BHL AUM grew 27% yoy with much stronger growth in Developer Finance (56% yoy) and LRD (28% yoy). Overall disbursements of BHL were marginally lower yoy. Consolidated PPOP for BAF grew by robust 25% yoy, aided by a well-regulated opex growth. Annualized RoA/RoE for Q1 FY25 were 4.5%/19%.

BAF expects stabilization of credit cost and NIM and continuance of growth in H2 FY25

Management expects credit cost to have peaked and estimates it to gradually moderate from Q4 FY25. This belief is underpinned by 1) stabilization of bounce rates (reflected in Stage 2 recovery), 2) augmentation of collection capacity to stem forward flow, 3) risk/underwriting actions taken and pruning of exposures and 4) pivoting of AUM composition towards secured products. In the mainstay product of Personal Loans, the disbursement contribution of the customers having 3 or more live unsecured loans has been brought down to 9-10% (was 12-14% a few quarters before and 8-9% pre-Covid). With no material change in overall growth approach, BAF expects to deliver 27-28% AUM growth in current year. Growth in Rural B2C segment is expected to further normalize to 12-14% over coming quarters. NIM is estimated to be stable in the near term and marginally improve in the medium term as the rate cut cycle plays out.

Retain BUY on supportive valuation and expectations of earnings growth improving from FY26

We cut FY25/26 earnings by 2%/5% mainly on increasing the credit cost assumption. Given that flows into the early buckets have stabilized, incremental risk on current credit cost and growth expectations appears low. On consolidated basis, we expect BAF to deliver 22-24% earnings growth on 24-25% AUM growth over FY24-27 with avg RoA/RoE of 4%/21%. BAF has exhibited resilience in growth and profitability through various phases of competition, credit cycles and liquidity conditions. Stock is trading at palatable valuation (16x PE and 3.1x P/BV on FY27) and further indications of credit cost stabilization would re-rate BAF.

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