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Credit cost key monitorable

NIM decline and elevated credit cost exert pressure on RoA; cost growth has been well-regulated

BAF’s 2% miss on PAT versus our estimate was essentially driven by higher-thananticipated credit cost, as the co.’s NII/PPOP was better than our expectation. Credit cost was elevated at annualized 2% owing to lower collection efficiencies in the regular and initial delinquency buckets, which drove significant flows into Stage-2 assets (increased 21.5% qoq, and the rise was across products). GNPL/NNPL ratios were stable qoq and yoy. NIM compression in Q1 FY25 over Q4 FY24 was 23 bps, with 13 bps contributed by cost of funds and 10 bps by AUM composition (higher growth in secured consumer and SME/commercial lending).

Consolidated AUM growth stood at 7.1% qoq/31.1% yoy. Except in Rural B2C segment (grew 2.5% qoq/5.3% yoy), the growth was strong in all other products including Urban B2C (grew 8.4% qoq/30.6% yoy). More recently introduced secured products like Gold Loans and Car Loans have been witnessing significant scale-up. Though RBI lifted restrictions on sanction/disbursal of loans under ‘eCOM’ and ‘Insta EMI Card’ on 2nd May, BAF resumed disbursal of loans in these segments and issuance of EMI cards in a staggered manner. BHL AUM grew 31% yoy with much stronger growth in LRD (41% yoy) and Developer Finance (75% yoy). Overall disbursements of BHL grew by 16% yoy.

Consolidated PPOP for BAF grew by robust 25% yoy, notwithstanding the NIM compression, aided by a well-regulated opex growth (has been in early twenties v/s AUM growth in early thirties). Annualized RoA/RoE for Q1 FY25 were 4.6%/20%.

Commentary on growth and margins on expected lines; credit cost expected to moderate in H2

Basis trends in asset quality, demand, competition, and execution (distribution), BAF continues to expect AUM growth at 26-28% for FY25. Even the Rural B2C portfolio is estimated to grow by double digits during the year. With expectations of CoF peaking by August and AUM composition pivot towards secured assets stabilizing by Sept-Oct, the management expects NIM to stabilize from H2 FY25. BAF has retained credit cost estimate of 1.75%-1.85% for the year as of now while acknowledging the presence of upside risks. Underlying expectation here is that credit cost in H2 FY25 can meaningfully come-off with Bounce Rates in June-July having improved and with augmentation of collection infrastructure.

Retain BUY on supportive valuation and expectations of earnings growth improving from H2 FY25

We have pruned FY25/26 estimates largely on assuming slightly higher credit cost. We expect BAF to deliver 24% earnings growth on 26% AUM growth over FY24-26 with avg RoA/RoE of 4.1%/21%. The stock is trading below its long-term mean valuation and there stands a possibility for re-rating over the next 6-12 months with persistence of strong growth, improvement in credit cost and turnaround in NIM cycle. BAF has exhibited resilience in growth and profitability through various phases of competition, credit cycles and liquidity conditions.

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