Bajaj Finance Ltd. sees the financial impact of the second Covid-19 wave to be much milder than the first one, with the company remaining open for business across categories. That prompted BofA Securities to reiterate its bullish investment recommendation on the consumer lender.
“While May 2021 bore the full impact of local lockdowns with business volumes declining to 40-60% of planned levels, the pick-up in early June (especially in high frequency B2B segment) has been strong with the company hoping to reach 75-80% of March 2021 levels post June 14 with full normalisation by early July,” Bofa Securities said in a report quoting Rajeev Jain, managing director at Bajaj Finance, as saying during an investor call hosted by the research firm.
This comes days after Bajaj Finance, in a mid-quarter business update, indicated at worsening of its asset quality in Q1 and Q2 on account of strict lockdowns across most parts of India to prevent the renewed surge in coronavirus cases. The non-bank financial company also estimated its credit costs to rise and assets under management to drop in the fiscal ending March 2022.
Analysts at Kotak Institutional Equities and Elara Capital, among others, had termed the company’s guidance as “cautious” as they flagged extended lockdowns and third wave of infections as key risks to its business.
Bajaj Finance, during the investor call with BofA Securities, however, said the Rs 1,100-1,300 crore of incremental credit cost guidance for FY22 is driven primarily by higher stress in two-wheeler and three-wheeler portfolio. Credit performance of its flexi portfolio is in line with the rest of the portfolio.
Bajaj Finance is working on a “business transformation project”, which is expected to go live by early October.
The tech platform, according to the BofA Securities report co-authored by research analysts Anuj Singla and Bharat Subramanian, will help the company capture a larger wallet share of 2.69 crore cross-sell customers and target more than 9 crore prospective customers with high approval rates.
“We believe that the technology platform will further accelerate Bajaj Finance’s growth trajectory and market share gains, with strong positive operating leverage,” the research firm said. The transformation project remains important from a strategic perspective and would help the company to reduce reliance on physical infrastructure and branches, it said.
BofA Securities’ Take On Bajaj Finance
It maintained ‘buy’ rating on Bajaj Finance stock, with a price target of Rs 6,290.
Its rating premises on the company’s large cross-sell opportunity with lower acquisition costs and superior credit underwriting.
It also cited Bajaj Finance’s conservative provisioning, demonstrated cost flexibility and strong risk management as reasons for the ‘buy’ rating.
Downside Risks To BofA Securities’ Price Objective
Higher-than-expected competitive intensity — Bajaj Finance’s consumer lending business is uniquely positioned with greater competitive advantage. ”However, we see higher competitive intensity in personal and mortgage loans, including intense competition from banks.” This combined with an expected decline in lending rates by banks could weigh on the company.
A shift in consumer trend towards online vis-à-vis offline retail could result in a structural decline in demand for Bajaj Finance’s consumer B2B offerings.
Upside Risks To BofA Securities’ Price Objective
A quick improvement in macro conditions, such as consumer confidence, unemployment and overall economic growth rates, could boost consumer spending pattern and demand for credit.
Shares of Bajaj Finance closed 7.67% higher on Thursday compared with a 0.65% gain in the Nifty 50. The stock was also the best performer on the Sensex and Nifty 50.
(Updates earlier version to correct Bajaj Finance MD's surname.)
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