Bajaj Finance Rating: Buy — BAF will cement its dominance once the dust settles

FY21/22e earnings cut by ~8% due to present crisis; TP lowered to Rs 3,500; growth story is intact; ‘Buy’ retained

BAF’s headline earnings of Rs 9.48 bn (-19% y-o-y/-41% q-o-q) were lower than expected on the back of higher provisions towards COVID-19 and select identified stressed accounts, while the operating performance was much better than expected.

Key trends:
Strengthening balance sheet with aggressive provisioning: Although BAF’s headline NPLs remained stable q-o-q at 1.6%, annualised credit costs rose to 5.3% vs an average of 2% during 9MFY20 on account of: (i) COVID-19 related provisions of Rs 9 bn (246bp annualised); (ii) specific provisions of Rs 3.9 bn (107bp annualised) towards two large identified stressed assets; and (iii) provision of Rs 1.29 bn (35bp annualised) towards ECL model recalibration. Provision cover on Stage 3 assets improved to 60% from 57% in Q3 and on Stage 1 & 2 assets it now stands at 159bp vs 101bp in Q3.

Loans under moratorium in line with private banks: As of end-April, the AUMs under moratorium for BAF stood at 27%, broadly in line with the trend seen for large private banks. The Rs 9-bn COVID-19 related provisions formed 2.3% of outstanding loans under moratorium.

Tight leash on opex: In Q4, opex declined 5% q-o-q to Rs 14.5 bn aided by a sharp decline in employee expenses, down 14% q-o-q. Management has guided for further reductions in fixed cost. Cost-to-income ratio of 31% and opex-to-AUM ratio of 4% are at the lowest levels seen for BAF.

Strong top-line performance: Net operating income grew 38% y-o-y, as against AUM growth of 27% y-o-y on account of: (i) a 50bp y-o-y expansion in its net interest margin; and (ii) strong growth in fee income (+45% y-o-y).

Outlook: We lower our FY21/22e earnings estimates an average 8% to factor in slower growth in loans and fee income due to extension of the lockdown and higher credit costs. We expect fresh delinquencies and credit costs to rise in the near term before normalising at lower levels. While near-term uncertainty related to the lockdown will likely persist, we believe BAF has all the characteristics to emerge even stronger and cement its dominance in the consumer financing space once the dust settles. Downside risks: (i) longer-than expected lockdown; (ii) large scale job losses; and (iii) slower than expected return of demand.