Bajaj Finance Limited - Q4FY21 Result Update - YES Securities

Result Highlights

- BAF's PPOP was 5% below our estimate due to firstly, significant interest reversals (Rs3.3bn) from higher prudential write-offs (~1% of AUM - both Covid-related stress and due to advancement of w/off policy) and secondly, materially higher opex (115% of estimate) on higher recovery commission and employee costs related to business transformation initiatives.

- AUM growth in Q4 (6.5% qoq) was mainly driven by consumer B2B (Sales Finance), rural finance, mortgages (growth was back post pricing corrections), SME loans and commercial lending.

- Gross and Net NPA declined at 1.8% and 0.75% respectively as of Q4 versus 2.9% and 1.2% respectively as of December, due to w/offs and improvement in bounce trends (both for new originations and current bucket) and higher collection efficiency across buckets and products. Consequently, the net credit cost was much lower than our expectation.

Our view - A transient soft patch; structural growth and earnings resilience intact: Barring a nationwide lockdown or extended lockdowns in larger states, BAF is confident of delivering 20%+ AUM and earnings growth in FY22. Despite the lockdowns becoming pervasive in the past 7-10 days, the co. continued to originate 50- 55% of daily volumes in B2B business, 80-85% in B2C and SME businesses and 40-50% in mortgages. Management believes that the impact of lower business volumes in first quarter could be reasonably mitigated in the balance three quarters of the year. With improved bounce rates, higher collection efficiency and overlay provisions (55-60bps of AUM), BAF is better positioned to navigate any temporary stresses on account of second COVID wave.

We estimate RoA moving closer to 5% in FY23 on the back of core cost/income improvement and normalization of credit cost. See BAF delivering 22-23% RoE with controlled leverage. With structural growth and earnings resilience intact, the threat to current high valuation is low. Retain ADD rating with 12m TP of Rs5,500.

CON-CALL HIGHLIGHTS

- Booked 5.47mn new loans in Q4 FY21 as against 6.03mn in Q4 FY20. New loans origination across businesses except auto finance is back to pre-COVID levels.

- Acquired 2.26mn new customers in Q4 FY21 versus 1.85mn in Q4 FY20. Cross sell franchise stood at 26.89mn, a growth of 11% yoy.

- Reversed interest income of Rs3bn in Q4 FY21. Interest reversal was higher in Q3 FY21 at Rs4.5bn. It should normalize by Q3 FY22.

- Cost of Funds for Q4 FY21 was 7.39% vs 8.37% in Q4 FY20. Liquidity buffer at Rs165bn as of 31 March 2021 (12.5% of total borrowing).

- Operating expenses in Q4 FY21 were higher due to higher recovery commission and employee related costs. Opex to NII was 34.5% vs 31% in Q4 FY20. As the Company starts to grow AUM over the next 2-3 quarters, operating leverage kicks in and collection costs normalises, the ratio should revert to pre-COVID levels.

- After accelerated write offs, the co. still holds a management overlay and macro provision of Rs8.4bn. Based on the current risk estimates and available management overlay, the co is covered for loan losses and provisions.

- Non-overdue one-time restructuring (OTR) book stood at Rs17bn (1.1% of AUM). This includes secured exposures of Rs9.2bn, one large B2B retailer account of Rs4bn and Rs4.2bn of unsecured assets. As a matter of prudence, the OTR book is classified as Stage-2 and the co. holds ECL provision of 19%.

- Non-OTR Stage-2 assets stood at Rs50bn (3.3% of AUM) and the co. holds ECL provision of 25%. Of this block, secured assets contribute 59% and unsecured assets contribute 41%.

- Collection Efficiency across businesses for Stage 2 and OTR accounts is significantly better versus past experience.

- The bounce rates of new origination across businesses are in line or better than pre-COVID origination. The current bucket bounce rates across portfolios is close to pre-COVID levels. The current bucket collection efficiencies across all portfolios are better than pre-COVID levels.

- With improved bounce rates, higher collection efficiency and overlay provisions, the co. believes it is well positioned to navigate any temporary stresses on account of second COVID wave.

- In the last 7-10 days, the co. has continued to originate 50-55% of daily volumes in B2B business, 80-85% in B2C and SME businesses and 40-50% in mortgages. The co. believes that a disruption in first quarter could be reasonably mitigated in the balance three quarters.

- Management believes that co. is entering FY22 on a strong footing. Barring a nationwide lockdown or extended lockdowns in large GDP contributing states, BAF is confident of delivering its long-term guidance metrics in FY22.

Shares of Bajaj Finance Limited was last trading in BSE at Rs.4873.45 as compared to the previous close of Rs. 4730.6. The total number of shares traded during the day was 95411 in over 8165 trades.

The stock hit an intraday high of Rs. 4931.35 and intraday low of 4747. The net turnover during the day was Rs. 459159212.

Source : Equity Bulls

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