Bajaj Finance Shares Fall As Analysts See Extended Lockdowns, Third Covid-19 Wave As Risks

Here's what brokerages made of Bajaj Finance's mid-quarter business update:

Kotak Institutional Equities

• Maintains ‘sell’ rating with a target price of Rs 4,200 apiece.

• On expected lines, Bajaj Finance has provided a cautious guidance on Q1 FY22 performance in light of the second Covid wave versus guidance of a normal year in April 2021.

• Its revised guidance on operating parameters broadly translates to about a 12% downgrade in FY22 expected earnings.

• Large expected credit losses buffers on the balance sheet and expectation of quick revival reduces the impact.

• Longer-than-expected lockdown poses risk of further downgrades.

• Unsecured, consumer and two-wheeler loans tend to be the most affected segment compared to other asset classes like car or home loans; as such Bajaj’s cautious guidance is not a surprise.

• Bajaj has not commented on its policy of potential restructuring or incremental ECLGS loans (negligible last year) in its guidance.

• “While Bajaj has a promisable swathe of apps, we need clarity on the company’s strategy to engage customers and generate volumes, to get more assertive on the same.”

Elara Capital

• Rates ‘sell’ with a target price of Rs 4,630 apiece, indicating a downside of 23%.

• In the earnings call of April 27, Bajaj Finance’s guidance was more bullish than peers HDFC Bank Ltd., ICICI Bank Ltd., Axis Bank Ltd., but it has now lowered it due to strict lockdowns in many states and impact on employee health.

• Based on the revised growth guidance, the brokerage lowers its growth forecast from 21% to 17.6% and cuts earnings for FY22 by 15%.

• Bajaj Finance has entered FY22 on a strong footing with Rs 840 crore of Covid provisions and a well-invested collections portfolio capable of catering to 25-30% higher collections

• Bajaj Finance is the most expensive financial stock and its valuation limits upside.

HDFC Securities

• Downgrades to ‘reduce’ from add with a revised target price of Rs 4,832 from Rs 4,928, implying a 19% downside.

• The net impact of the company’s update in which it lowered its AUM growth and raised credit costs is neutral on Housing Development Finance Corp.’s AUM growth estimates, while it raises above consensus provisioning forecasts further.

• The more than 20% run-up in the stock since its Q4FY21 earnings appears to be pricing in unrealistic consensus expectations around growth and profitability, which warrants a reality check in light of this profit warning.

Emkay Financial

• Maintains ‘hold’ rating with an unchanged target price of Rs 5,400.

• Bajaj Finance’s B2B and auto finance businesses were most affected due to strict lockdowns in majority of states. It leveraged its digital capabilities to remain largely functional in May 2021 and delivered 60% of planned disbursements.

• “We have been highlighting our concerns over Bajaj Finance’s retail business model, which remains more vulnerable due to its higher dependence on consumer loans and a seasonally strong first quarter.”

• Remains equally concerned over elevated write-offs (Rs 2,000 crore in Q4, Rs 2,340 crore in Q3) and restructured book (Rs 1,740 crore) placed under stage 2 assets last year.

• Maintains estimates for now and continues with cautious stance on the company, considering persistency of lockdowns in few large states as well as likely fear of a third wave in coming months.

Motilal Oswal

• Maintains ‘buy’ with a target price of Rs 6,200 apiece.

• Despite an earnings cut of about 11% for FY22, RoEs are likely to be strong at 20%, and the impact is likely to be transient.

• The company has seen sharp moderation in high-volume, low ticket size, and strong customer acquisition related businesses such as auto financing and B2B financing.

• Sees temporary moderation in these businesses and expects some part of the lost demand to be compensated by start of the unlocking.

• With good pent-up demand, sees a positive surprise in the second half — provided there is no impact in the form of a third Covid wave or the wave is less intense in nature.

• The severity of earnings impact of the Covid second wave has been much lower than the first wave. The management is well-prepared to deal with this and compensate the lost business with the start of the unlocking process.

• Digital initiatives have been upfronted and are likely to provide significant benefit on the cost and growth fronts.

Morgan Stanley

• Maintains ‘overweight’ on the stock with an unchanged target price of Rs 6,000 apiece.

• The second Covid wave has had a sharper than-expected impact on asset quality.

• Expected some risk to earnings; however, the increase in credit cost guidance is much sharper. Given recent strength, the stock is more likely to be weak in the near term, with likely read-across to other lenders.

• Stock performance of Bajaj Finance and most lenders has been strong recently, the research firm expects a pause or weakness in the near term for these stocks.

• The focus will ultimately shift to economic recovery and other idiosyncratic factors — for instance, in the case of Bajaj, the business transformation initiatives. Likely to see better entry opportunities in stocks of lenders following 1Q results.

JPMorgan

• Maintains ‘neutral’, revises March 2022 price target to Rs 5,100 from Rs 4,500 apiece.

• The company can make up for lost growth in the second half, but this assumes vaccination roll-out happens per plan.

• Usually amid disruptions historically such as FY21 and demonetization, Bajaj Finance’s management sets conservative expectations and then proceeds to meet/exceed those targets. This in turn keeps the stock well supported. A similar situation could play out here.

• Bajaj Finance’s monthly download velocity has nearly doubled over the last one year and monthly active user rate has moved up by 70% and is now higher than many of the large private banks.