EUR 120.00 For Business Accounts Only

MOSL: BAJAJ FINANCE (Buy)-Asset quality and growth show transitory pain; return ratios remain high

(BAF IN, Mkt Cap USD48b, CMP INR5938, TP INR6750, 14% Upside, Buy)

 

• Bajaj Finance (BAF)’s 1QFY22 PAT was up 4% YoY / down 26% QoQ to ~INR10b (27% miss). While NII at INR37b (5% miss) was up 12% YoY, opex was largely in-line. Provisions came in at INR17.5b v/s our estimate of INR15b. The company aggressively wrote off ~INR9.2b worth of loans and kept COVID overlay provisions at INR4.8b, leading to high provisions.
• The GNPL ratio increased from 1.8% to 2.96% QoQ. BAF wrote off ~INR9.2b (60bp of AUM). PCR declined to 51% (down ~710bp QoQ) on GS3 and 174bps on GS1&2. BAF utilized COVID-related overlay of INR3.6b in 1QFY22, with the COVID management overlay declining to INR4.8b. Net slippage was high at ~INR30b (2% of AUM) as the company did not restructure a large number of loans in one-time restructuring (OTR) 2.0.
• Barring any new COVID disruption, we expect BAF to deliver ~21% AUM growth in FY22E and a 25% CAGR thereafter. We expect margin improvement with a) lower negative carry as excess liquidity normalizes, b) decline in Cost of Funds from a borrowing mix change, and c) the asset mix shifting toward high-yielding assets. We keep our credit cost for FY22E largely unchanged at 2.6% and marginally increase it for FY23E. We cut our estimate for FY22/FY23 by 11%/5% to factor in lower NII. We estimate ~4.8% RoA / 23% RoE over the medium term. BAF’s return ratios have not only been consistent but are also the highest in our Coverage Universe (ex-gold financiers). Given the strong recovery in Jul’21 and the healthy progress made in the digital transformation program (including wallets/payments), we reiterate Buy, with Target Price of INR6,750 (7x 1HFY24 BV).