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MOSL : BAJAJ FINANCE: Earnings in line; digital transformation aiding momentum

BAJAJ FINANCE: Earnings in line; digital transformation aiding momentum

(BAF IN, Mkt Cap USD54.4b, CMP INR7429, TP INR8310, 12% Upside, Buy)

• PAT grew 88% YoY to ~INR27.8b (in line) in 2QFY23. This healthy operational performance was driven by robust customer additions, new loan acquisitions, and strong velocity, aided by its omnichannel strategy and the digital ecosystem.
• NII grew 29% YoY to INR55.4b. Other operating income grew 31% YoY, driven by a healthy improvement in fee income and higher treasury and investment income.
• NIM (calculated) improved by ~3bp QoQ to ~13.3%. We expect NIM to remain stable in FY23, but compress by ~30bp in FY24 due to BAF’s limited ability to pass on the increase in borrowing costs against a large fixed-rate loan book.
• We model in an AUM/PAT CAGR of ~27%/40% and expect BAF to deliver a RoA/RoE of 4.6%/24% in FY24. We remain watchful of the various developments in BAF’s payment offerings, improvement in velocity from digital transformation, and foray into the Credit Card business, subject to approval from the RBI. We reiterate our Buy rating with a TP of INR8,310 (premised on 7.7x FY24E BVPS).

Customer acquisitions run-rate to improve from here on; expect AUM growth to be better than its long-term guidance of 23-24%

• Total customer franchise rose 19% YoY to 62.9m. New loans booked grew 7% YoY to 6.8m. BAF raised its new customer acquisition guidance. It now expects 10-11m new customer acquisitions in FY23 (v/s its guidance of 9-10m announced after its 1QFY23 earnings).
• Total AUM grew 31% YoY and ~7% QoQ to INR2.18t. Receivables from IPO financing stood at INR1.05b in Sep'22. Core AUM (adjusted for IPO financing) grew by ~INR142b in 2QFY23.
• Sequential AUM growth was driven by Urban B2C (+7%), Rural B2C (+7%), SME (+9%), LAS (+14%), and Commercial excluding LAS (+11%) and Mortgages (+8%).
• Urban/Rural B2B Sales Finance (-1%/-5% QoQ) acted as a drag in 2QFY23. It is important to note that the second quarter has historically been a seasonally weak quarter in Consumer Durable financing before the festive season sets in the third quarter of a fiscal. We expect 3QFY23 to be no different for BAF.

OPEX to remain elevated in FY23, led by geography expansions and investments in technology and human capital

• Operating expenses grew 24% YoY to INR25.1b. Given the deep investments being committed to its omnichannel strategy (geography expansion, app, and web platform) and payments, the management expects OPEX –to-NII ratio to remain elevated at 35-36% in FY23.