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Dark clouds on the horizon, but BAF will come out stronger

The FY24 Annual Report of Bajaj Finance (BAF) outlined its rolling Long Range Strategy (LRS) FY24-28 and the progress it has made on the LRS of the previous year. The LRS highlights the company's ambitions, philosophy, and competitive positioning in the market, and aspirations for profit share. BAF plans to enhance its business agility, optimize its cost structure, and deepen customer relationships to capture a larger share of its customers’ financial needs. Through these strategic efforts, Bajaj Finance will aim to maintain its competitive edge and deliver long-term value creation.

* Strategic expansion and innovation: BAF's omni-channel strategy and continuous innovation drive its growth, with a presence in 4,145 locations and significant digital platform enhancements. BAF has further strengthened its search ecosystem, thereby laying a strong foundation for accommodating a one-billion-web traffic over the medium term and moving towards ‘Zero Paid’ traffic.

* Enhanced regulatory compliance and capitalization: As an upper-layer NBFC, BAF adheres to the RBI's enhanced regulatory framework, and maintained a CRAR of ~22.5% as of Mar’24. The company also raised substantial equity capital, securing INR88b through QIP and USD725m in ECB, thus ensuring robust liquidity and capitalization.

* Customer acquisition and product diversity: BAF expanded its customer base to 83.64m, and acquired 14.5m new customers in FY24. BAF’s product portfolio spans ten broad categories, including consumer lending, personal loans, SME lending, auto financing, rural lending, gold loans, commercial lending, loan against securities, deposits, and partnerships and services.

* Debt management and portfolio quality: BAF prioritizes robust debt management strategies and maintains high portfolio quality with a diversified risk profile. The company has implemented a non-intrusive debt management mechanism and follows a strict governance model, ensuring minimal delinquent debt levels and promoting fair and ethical recovery practices.

* Valuation and View: After navigating the challenges of the Covid years, BAF returned to robust operational and financial performance in FY24. The company’s omnichannel strategy and continuous innovation are likely to drive greater customer acquisition, loyalty, more profitable cross-selling, and better margins for each of its businesses in FY25, positioning BFL for sustained growth and success. However, it would have to first navigate the stress in its B2C business segments (entailing higher credit costs), which will also necessitate pruning business growth in these segments.

* Despite a healthy PAT CAGR of ~24% over FY24-FY26E and RoA/RoE of 4.2%/22% in FY26E, we see limited upside catalysts. Consequently, we reiterate our Neutral rating on the stock with a TP of INR7,500 (premised on 4.2x FY26E BVPS)

LRS: Quite a few additions and only getting better

* BAF employs a disciplined approach to long-range strategic planning, involving a rolling five-year LRS. The plan is executed over a 15-24-month horizon. The LRS 2024-28 envisages expanding BFL's product stack with new product launches, expanding product coverage, increasing the customer footprint across digital platforms, and leveraging megatrends for business growth.

Notable initiatives include:

* Product innovations: Launching assured buyback on new cars, embedded insurance, commercial vehicle financing, affordable mortgages, auto leasing, financing for industrial equipment, postpaid services, co-lending, and EV financing.

* Geographic expansion: Expanding presence in UP, Bihar, and North-East

* Digital platforms: Increasing downloads of Bajaj Finserv App, enhancing web traffic, and investing in marketplaces, social, and rewards platforms.

* Subsidiaries: Aiming for significant contributions from retail mortgages and broking accounts.

Omnichannel strategy: Reducing friction for customers across platforms

* BAF’s omnichannel strategy aims to be an omnipresent financial services company, with a customer base of 88.1m and over 70 financial products. The strategy spans physical, app, web, social, and virtual platforms. Key areas of focus include geographic expansion, the Bajaj Finserv app, the Bajaj Finserv website, payments, productivity apps, and a customer data platform (CDP). During FY24, the company made significant progress across all these domains.

* BAF has expanded its physical presence to 4,200+ locations and over 198K points of sale (POS). It has expanded its base of merchants in the Payments business with over 3.1m merchants. It has also rapidly expanded its presence across the digital space through three proprietary marketplaces — the ‘Insurance Marketplace’, the ‘Investment Marketplace’ and the ‘Bajaj Mall’.

Focus on risk management is supreme and all encompassing

* BAF’s diversified risk across millions of customers and product categories, along with a strategic shift towards secured lending, will ensure a strong portfolio quality. The company continues to expand its product offerings and geographical presence, focusing on lower-risk assets and leveraging its ‘acquire and cross-sell’ strategy.

* The company employs a robust debt management strategy to minimize delinquent debt levels. Initiatives include advance payment reminders, customer counseling, a centralized call monitoring infrastructure, dedicated debt management service desks, and online training for agents.

* BAF’s omni-channel strategy and continuous innovation are expected to drive greater customer acquisition, loyalty, and profitability, positioning BFL for sustained growth and success.

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