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Soft quarter - growth was strong, margin remained under pressure and credit cost elevates

BAF delivered a mild miss on NII/PPOP and 4% lower-than-expected earnings on account of 11 bps qoq compression in NIM and increased credit cost at 1.7%. AUM growth was strong at 7% qoq/35% yoy notwithstanding a sharp growth deceleration in Rural B2C (ex. Gold Loans) and calibration in Urban B2C product segments. Disbursement growth in B2B segments, Mortgages and 2W/3W financing continues to be robust. The SME and Commercial portfolios of BAF also continue to grow at strong pace. Overall, new loans booked in the quarter were up 26% yoy and co. added highestever 3.85mn new customers.

The decline in NIM mainly came on the back of 9 bps increase in funding cost. In the light of increase in risk weights and higher incremental cost of funds, BAF has increased rates across all portfolios by 20-30 bps. Co. augmented its distribution and resources by 4-6% in the quarter, and hence Opex grew by 5% qoq. Except for Mortgages, the Stage-2 and Stage-3 delinquencies rose meaningfully across most products. The higher delinquency flows during the quarter underpinned the increase in credit cost. Management assesses that risk metrics across all businesses were stable except for Rural B2C. Loan losses were higher in Urban B2C segment due to lower collection efficiencies, but portfolio remains in good shape.

Growth to remain strong with asset quality trends fully normalizing to pre-Covid times

With a well-diversified product portfolio, Management remains upbeat on growth while being more focused on risk and margins. In the near term, the current growth momentum is likely to continue led by B2B segment, Mortgages, 2W/3W financing and SME and Commercial loans. BAF has already calibrated business volumes in Rural and Urban B2C segments where more notable increase in delinquencies was witnessed. Market PL volumes haven’t declined in recent months and there exists robust demand with structural increase in adoption. In BAF’s core ticket segment of Rs2-4 lakhs in Urban B2C and Rs1.25-3 lakhs in Rural B2C, the delinquency increase is relatively low. Scaling-up of recently launched products like Auto Loans, MFI, Tractor Loans and Emerging Corporate would aid overall loan growth in FY25/26. Management remains confident of delivering 25-27% pa AUM growth in the long run.

With delinquency flows/GNPL level expected to normalize towards the pre-Covid trends across products, the credit cost is expected to remain at 1.6-1.8% in the coming quarters. On the regulatory embargo for e-COM loans and Insta EMI Card for deficiencies in compliance with the guidelines on Digital Lending and Key Fact Statements, BAF has implemented requisite corrective actions and would be making a final submission to RBI in next couple of weeks.

Sturdy earnings growth and RoE delivery expected; Retain BUY with 12m PT of Rs9225

There has been a cut of 2-5% in our earnings estimates for FY24-26 mainly on increased credit cost. BAF would likely deliver 27-28% AUM CAGR over the aforesaid period underpinned by distribution addition/efficiencies, product additions and solid execution. The co. has taken rate actions across products to mitigate the margin impact from increase in CoF after risk weight changes. We estimate earnings CAGR of 27% over FY23-26 with avg. RoA/RoE delivery of 4.6%/22%. The stock is trading below its long-term mean valuation and there is headroom for re-rating with persistence of robust growth and RoE delivery. BAF has exhibited resilience in growth and profitability through various phases of competition, credit cycles and liquidity.

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