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MOSL: BAJAJ FINANCE (Neutral)-Strong performance amidst tough macros

Bajaj Finance: Strong performance amidst tough macros

(BAF IN, Mkt Cap USD37.3b, CMP INR4422, TP INR4850, 10% Upside, Neutral)

 

• BAF’s PAT increased 52% YoY to INR16.1b (in-line) in 3QFY20. Better-than-expected margin performance led to PPoP (+44% YoY) beat of 5%. Higher-than-expected provisions led to in-line PAT (+52% YoY).
• Other highlights: (a) AUM increased 35% YoY, helped by Auto finance (+51% YoY) and Mortgages (+44% YoY). (b) Spreads improved 50bp YoY. (c) GS3 % was flat QoQ at ~1.6%, but write-offs were elevated at INR5.3b. (d) Overall customer base increased 24% YoY to 40.4m.
• We estimate ~30% PAT CAGR on the back of ~25% AUM CAGR over FY20-22. We largely maintain our earnings estimates and expect BAF to deliver healthy RoA/RoE of ~4.3%/22%. Maintain Neutral given rich valuations. 

Consumer durables growth slowing down, other segments’ growth robust

• AUM growth in consumer durables finance slowed down to 7% YoY, mirroring the consumption slowdown. However, in auto finance, BAF continues its robust growth (+51% YoY in 3Q), despite increasing delinquencies (14.2% 0dpd+ v/s 10.3% YoY). It financed 63% of Bajaj Auto’s 2W v/s 52% YoY. We believe this is a key risk to asset quality.
• Mortgages have been another key driver of growth (+44% YoY/9% QoQ) and its share in overall AUM grew 200bp YoY to 30.5%. It has contributed around one third of incremental outstanding AUM in last one year. 

Fees continues to drive RoA higher; pressure on asset quality

• Fee income increased 47% YoY to INR6.9b. For 9MFY20, it is up 59% YoY to INR19b. Fees have been the key contributor to RoA over the last two years. After improving from 1.6% in FY18 to 2% in FY19, fees to asset is expected to be 2.3% in FY20.
• GNPL ratio was flat QoQ at 1.6%, while PCR declined 300bp QoQ to 57%. Note that the stock broker exposure (INR3.03b) is not classified as NPL yet. While BAF has taken INR850m provisions against it in 3Q, it will take a final call on balance provisions in 4Q.
• The two large LAP NPLs include IL&FS (INR2.34b exposure) and a coffee conglomerate (INR910m). The company reiterated its cautious stance on auto finance, unsecured loans and business loans.