Bajaj Finance: Seizing opportunity amid market correction

The share price of Bajaj Finance has dropped by over 7 per cent after the company delivered its October–december quarter (Q3) results for 2023–24 (FY24) on January 29, after market hours. This decline coincided with the introduction of new Reserve Bank of India (RBI) regulations on risk-weight norms and embargoes on EMI cards, e-commerce loans, etc. However, it remains an analyst favourite with many ‘buy’ calls and few ‘sell’/’reduce’ recommendations.

According to Bloomberg, 24 of the 30 analysts polled in the past month have a ‘buy’/‘add’/‘outperform’/ ‘overweight’ rating, three have a ‘sell’, two are ‘neutral’, and one is not rated.

Their average one-year target price is ~8,762.3, indicating a potential upside of over 30 per cent from Thursday’s closing of ~6,673.95. Bajaj Finance reported mixed numbers for Q3FY24. While provisioning remained elevated, there was strong growth in net interest income (NII) and assets under management (AUM).

NII rose by 29.3 per cent year-on-year (Y-O-Y), 6.4 per cent quarter-on-quarter (Q-OQ), despite downward pressure on net interest margin (NIM), which dropped 10 basis points (bps) Q-O-Q to 10.2 per cent. NIM continued to see the lagged effect of the cost of finance increase, which was at 7.76 per cent, up from 7.67 per cent Q-O-Q.

The cost-to-income ratio remained almost flat Q-O-Q at 34 per cent. The pre-provision operating profit grew by 5.3 per cent Q-O-Q (versus 5.2 per cent Q-O-Q in the second quarter of FY24).

Credit cost increased to 1.7 per cent (versus 1.5 per cent Q-O-Q) due to higher slippages in the business-to-consumer (B2C) segment. The company reported a 22 per cent Y-O-Y (2.5 per cent Q-OQ) expansion in profit after tax to ~3,639 crore.

The company estimates that the RBI’S action of increasing risk weight on consumer credit exposure for the industry, from 100 per cent to 125 per cent, had an impact of 290 bps on Bajaj Finance’s capital to risk (weighted) assets ratio. AUM grew by 35 per cent Y-O-Y (7 per cent QO-Q) on pick-up in twowheeler finance (12.3 per cent Q-O-Q), small and mediumsized enterprise lending (10.6 per cent Q-O-Q), and mortgage (9.4 per cent Q-O-Q).

New loans booked rose by 26 per cent Y-O-Y to 9.9 million, and the customer base rose to 80.4 million from 66 million Y-O-Y. The third quarter saw the highest-ever customer addition of 3.85 million. The management guided for a credit cost of 1.75–1.85 per cent and said the trajectory should normalise towards pre-pandemic levels.

Bajaj Finance has deliberately cut back B2C growth over the past three quarters as a precautionary measure. The management, however, is optimistic about growth prospects. The current focus is on maintaining margins and curtailing risks.

The 2024–25 guidance is for a new customer addition of 13–14 million over FY24.

The gross stage 3 and net stage 3 ratios increased to 0.95 per cent and 0.37 per cent, respectively (versus 0.91 per cent and 0.31 per cent Q-O-Q), due to higher slippages in the B2C segments. The provision coverage ratio on stage 3 assets was reduced to 62 per cent (versus 66 per cent Q-O-Q).

Non-banking financial companies like Bajaj Finance have outpaced banks due to their better understanding of regional dynamics and clever customisation of products and services. Their characteristics include lower transaction costs, innovative products, quick decisions, and good service standards. They have leveraged the digital public infrastructure better.

Bajaj Finance has a big, diversified loan portfolio, a wide distribution network, and effective execution. The lender has focused on strengthening its digital platforms and product offerings. The investment cycle for this digital transformation is nearly complete. But there is intense competition, and the bad loan risk in retail unsecured loans (where the growth and yield are high) is significant, as the Q3 results indicate. The attitude of the RBI could also be a cause for concern. However, the share price correction could have brought valuations to attractive levels; the stock was being recommended even at much higher levels.