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Earnings in line; reported NIM contracts 15bp QoQ

NIM compression will continue in 2HFY24 as well

* Bajaj Finance (BAF)’s 2QFY24 reported PAT grew 28% YoY to ~INR35.5b (in line).

* NII rose 30% YoY to ~INR72b. Other operating income grew 13% YoY, and net total income (NTI) jumped 26% YoY to ~INR88.4b in 2QFY24.

* BAF’s 2QFY24 NIM (calc.) contracted ~35bp QoQ to ~12.6% even as the reported NIM declined ~15bp QoQ. We model NIM compression of ~20bp in FY24 due to the expected rise in cost of borrowings and challenges in passing on any further interest rate hikes.

* We have incorporated the announced equity capital raise of ~INR100b in our estimates and model an AUM/PAT CAGR of ~29%/28% over FY23- FY26. We expect BAF to deliver an RoA/RoE of 4.8%/23% in FY26.

* Key monitorables for FY24 are: a) the evolution of its payments landscape and adoption of its payment offerings, and b) the degree to which the NIM compression can be offset with operating leverage, resulting in a contraction in cost ratios. ? Reiterate BUY with a TP of INR9,600 (premised on 5.7x Sep’25E BVPS)

AUM growth at ~33% YoY; new customer acquisitions strong

* Total customer franchise rose 22% YoY to ~77m. New loans booked grew 26% YoY to 8.5m (PY: 6.8m). The company is confident of adding 13-14m new customers in FY24E. ? Reported total AUM grew 33% YoY and ~7.5% QoQ to INR2.9t. Sequential AUM growth was driven by 2W/3W Finance (+12%), Urban B2C (+6%), SME finance (+11%), Commercial (incl. LAS) (+8%) and Mortgages (+9%). However, both Rural Sales Finance (-1% QoQ) and Rural B2C business (+3% QoQ) exhibited muted AUM growth because of various corrective measures initiated by the company.

Cost ratios broadly stable aided by operating leverage

* Operating expenses grew 20% YoY to INR30b, and the opex-to-NII ratio was stable QoQ at ~34%.

* The company added 106 new locations and ~14K distribution points in 2QFY24. BAF will continue to invest in digital initiatives and technology and expects to see operating leverage come through every quarter from hereon.

* Operating leverage from economies of scale and lower technological investments would cause the opex-to-NII ratio to moderate to 34%/ 32% in FY24/FY25 

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