GST destocking a blessing for Bajaj Finance

AUM expanded 39% in Q1, posting the best growth in recent times

A positive June quarter (Q1) results took Bajaj Finance’s stock further up by about 2 per cent and to a fresh 52-week high. These numbers reiterate the company’s business capabilities and also allay the Street’s concern how its business would be hit due to destocking prior to the introduction of the goods and services tax (GST).

Net interest income during the quarter grew 49 per cent to ~2,087 crore, while net profit expanded 42 per cent year-on-year to ~602 crore, both ahead of the Street’s expectations.

Assets under management (AUM) at ~68,883 crore in the reporting quarter grew 39 per cent, helped by a 48 per cent growth in customer addition. Efforts to expand its consumer loans offering have helped the company withstand the pullback in loans to the automobile sector (two and three wheelers), where disbursals grew only 2 per cent. Other products such as consumer durables digital product, personal loans, and home loans grew 20-74 per cent in Q1. Broadbasing the consumer lending business has also helped Bajaj Finance benefit from the pre-GST destocking.

According to Rajeev Jain, managing director of Bajaj Finance, 50,000 customers were added in the past five days of June. “While it is not a material number, you can call this a blessing in disguise,” he adds. Jain’s remark follows his rather cautious view on GST impact a quarter ago.

Loans to small and medium enterprises and commercial loans posted an AUM growth of 17 per cent and 38 per cent year-on-year, respectively, while rural financing business more than doubled.

Gross non-performing assets (NPA) ratio rose to 1.7 per cent in the period. This is due to the adoption of tighter NPA recognition norms as required by regulations (from 120 days to 90 days of recognition). However, when computed according to old norms, NPAs are under control at 1.44 per cent, near about last year’s level. Investors should brace for a rise in NPA ratio going ahead.

Provision coverage ratio (PCR) was down to 69 per cent in Q1 from 73-74 per cent in FY17. Much of it may be attributed to consumer, commercial and rural loans. A change in consumer loans PCR may prompt investors to ask if Bajaj Finance has fully recovered from the impact of demonetisation. Not quite, says Jain. He feels the impact could linger on the consumer business for another twothree quarters, particularly for auto loans. Also, with the first 15 days of July being sluggish for disbursals, Jain expects a gradual recovery only from August. “So, FY18 performance depends on how the second quarter pans out,” he observes.

Under these circumstances, a 25-27 per cent growth in balance sheet and 20-22 per cent growth in net profit seems more likely in FY18, according to Jain. If this is the case, Bajaj Finance’s stock price may take a breather. But considering its unique positioning, investors can utilise any price correction to accumulate the stock currently trading at five times its FY19 estimated book value.