Analysts Raise Concerns Over Bajaj Finance’s Asset Quality, Higher Credit Costs
Analysts were optimistic of Bajaj Finance Ltd.’s digital initiatives but raised concerns over its asset quality and higher credit costs.
The non-bank lender’s profit and net interest income rose during the quarter ended June but asset quality worsened as local lockdowns to curb the severe second wave of Covid-19 infections hurt collections.
Its gross non-performing assets ratio stood at 2.96% compared with 1.79% as on March 31. Net NPA rose to 1.46% of total advances from 0.75% in the preceding quarter.
“It was a muted quarter impacted by severe second wave of pandemic. Both businesses and debt management efficiencies were affected due to strict lockdowns across most parts of India,” the company said. Digital business transformation, however, “remains on track for phase-1 to go live in October 2021”.
Shares of Bajaj Finance, however, rose as much as 4.31% in early trade on Thursday. Of the 30 analysts tracking the company, 14 have a ‘buy’ rating, nine suggest a ‘hold’ and seven recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 4%.
Here's what brokerages made of Bajaj Finance's first-quarter results:
Maintains ‘sell’ rating at a target price of Rs 4,630, implying a potential downside of 22%.
There was a big miss in profit after tax and non-performing loans in the quarter. A sharp 73% quarter-on-quarter rise in NPLs led to a miss in net interest income and credit cost.
In the revised guidance on June 4, management had increased credit cost guidance by 80 basis points to around 2.5%. Now the management has guided a credit cost of Rs 4,200-4,300 crore, which is only around 17 basis points higher.
Retains rating and target price due to Bajaj Finance’s expensive valuation, miss on earnings and higher credit costs.
The recent rerating of the stock has been triggered by Bajaj Finance’s digital initiatives. While the digital transformation will add value to the franchise in the long term, unlikely to see a meaningful jump in loan or earnings growth from this in the next two years.
Cuts earnings per share estimate for FY22 only marginally because the brokerage had already cut it by 15% for FY22 and 10% for FY23 on June 4 when the mid-quarter guidance was released.
Maintains ‘neutral’ rating, raises target price to Rs 6,000 apiece.
The quarter was muted. Bajaj Finance’s payments business launch could increase multiples.
Asset quality had a negative print, primarily driven by the auto finance business.
Bounce rates have normalized in July (0.96 of March levels) and disbursements have improved, and barring any major impact from the Covid third wave, Bajaj expects to return to normal growth levels in forward quarters.
Bajaj Finance has announced a strategy to get into the payments business via rollout of wallets and merchants acquiring business over Q3 and Q4 of FY21. The strategy is credible and that this, along with the relaunch of its main consumer app from Oct 31, will increase consumer engagement with the platform.
While core payments are unlikely to make money, Bajaj Finance’s profit engine can easily sustain the investments needed and loan distribution origination on the platform could offset investments needed. “Our analysis app data shows a marked increase over last year levels on active users and downloads this year.”
Bajaj Finance has seen normalization in bounce rates in July and this bodes well for forward quarter credit costs.
Resumption in consumer activity post ease of lockdowns as well as rollout of digital initiatives in the second half of the fiscal should drive an acceleration in asset growth. The company can return to normalized pace of Rs 9,000-9,500 crore accretion per quarter, translating into 20% full-year loan growth.
Maintains ‘buy’ with a target price of Rs 6,950, implying a potential upside of 16.6%.
Slow consumer loans limit asset growth, excluding IPO financing of Rs 2,900 crore. Urban consumer loans were the slowest at 5% — lockdowns have had the most severe impact on this.
Tech strategy will leverage existing network. It will be less ‘burn to grow’ and more cross-sell to existing customers, aiming to increase engagement.
Bajaj plans to have a comprehensive payments product set, among others. Launch timeline includes October-November 2021 for the consumer app and insurance and investments marketplace. January 2022 for the merchants app and February-March 2022 for partner app.
Downgrades to ‘hold’, cuts target price to Rs 6,390 from Rs 6,500, still implying a potential upside of 7.5%.
Earnings missed estimates, asset quality performance was weaker than expected.
Higher delinquencies led to elevated provisions and interest reversals. The inability to collect during the Covid-19 related lockdown contributed to the surge in NPAs.
Slippages were mainly driven by the three-wheeler segment within auto finance, which comprises about 30% of overall auto loans. Requests for restructuring were lower than before.
Other drivers of earnings cuts apart from lower asset growth are a reduction in net interest margin and income estimates to build in the rising proportion of mortgages (which is facing competitive pressure on yields and is inherently a low spread business) and -2.6% credit costs in FY21.
Moderating asset growth outlook, net interest margin pressure due to changing loan mix and overhang on asset quality due to Covid-19-related disruptions are likely to remain headwinds to a re-rating from here.
Value creation from digital transformation is not quantifiable. Near-term upside should be limited.
Lowers estimates by around 8% for both FY22 and FY23 to factor in lower asset growth and pressure on net interest income.
Maintains ‘buy’ with a target price of Rs 6,750 apiece.
Despite the transitory deterioration in asset quality and resultant high credit costs, Q1 was a decent quarter for Bajaj Finance.
Customer acquisitions and new loans booked were healthy even in a pandemic-disrupted quarter. Covid-related disruptions are known unknowns, and the quantum of impact on disbursements / asset quality is difficult to ascertain.
In the context of the strong recovery seen in July 2021, the company should be able to deliver pre-Covid levels of quarterly run-rate in asset growth for the remainder of FY22.
Provided there is no new Covid wave, the NBFC is expected to contain credit costs at around 2.6% in FY22.
Margins are likely to see a sharp improvement in FY22 on lower cost of funds, reduced liquidity, and a favourable base due to interest reversals.