IGI Logo

Soft landing while navigating challenges

In-line earnings; credit costs, regulatory forbearance, key drags

Bajaj Finance (BAF IN) posted in-line Q3 earnings, led by decent NII traction (5% QoQ/25% YoY), steady opex (cost-income steady 34% QoQ), albeit with tad lower NIM (down 26bps QoQ) and higher provisions (up 16% QoQ) restricting the beat. NIMs were strained, attributable to 9bps QoQ spike in cost of funds and given the increased risk weightages. Considering 25bps asset repricing across, NIMs may settle at average 12.6%: FY24E-26E. Despite continued tech investments for operational excellence, cost-income should be 34% for FY24E-26E. But BAF has been experiencing dual headwinds impacting its: (a) B2B sales finance business (27% of overall AUMs) on account of hit from regulatory forbearance on EMI cards issuances (refer report dated 29 December 2023, Slow and steady wins the race). We bake in 3.5% dent in fees for FY24E and (b) rural B2C business (7% of AUM) due to higher risk build-up, and thus the rise in credit cost estimate to 1.8% from 1.7% earlier. BAF expects corrections on deficiencies in a few weeks, in line with regulatory requirements. Therefore, although near-term headwinds persist, long-term story is constructive, promising 26% core profit CAGR in FY24E-26E.

Growth trajectory healthy but rural/consumer segments on alert

AUM grew a robust 35% YoY/7% QoQ to INR 3,110bn, led by robust 3.9mn customer addition and 9.86mn incremental loan cases in Q3. Q3 saw growth in Auto Finance (up 17% QoQ), Rural B2B (up 11% QoQ), SME (up 7% QoQ) and Mortgages (up 6% QoQ), and rural B2C grew just 2.6% QoQ. But small-ticket loan segment’s exposure to rural B2C portfolio is targeted largely at existing customer base with negligible exposure in

Risk metrics tightened; credit costs

to climb Q3 saw headline asset quality remain steady, with GNPA spiking to 0.95% from 0.91% in Q2. While credit costs have increased to 1.7% from 1.5% in Q2, we tweak credit cost estimates to average at 1.8% from 1.7% earlier, in FY24E-26E, factoring in concerns in key portfolios (rural/unsecured). Similarly, expect GNPAs to spike to 1.3% by FY26E.

Valuations: Maintain BUY, TP unchanged at INR 9,000

These hurdles at best may hit FY24E growth and fees 2-4% each. And despite near-term hurdle, expect 100mn+ customers by FY26E and 29% AUM CAGR (from 31%). AUM may still rise 1.8x by FY26E at 29% CAGR. Margin may see an average of 12.2-12.6%. BAF may restrict cost-income to 34% and GNPA/credit cost to 1.4%/1.8% with ROAs at 4.7%/RoEs at 21%+. Clarity on management changes further reinforces our confidence. We maintain our TP at INR 9,000 as we value the stock at 5.8x FY25E P/ABV.

Please refer disclaimer at Report
SEBI Registration number is INH000000933