Maintain REDUCE on Bajaj Finance - Speed bumps to a fast recovery - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Bajaj Finance's (BAF) Q1FY22 results disappointed and are largely reflective of the impact of the second wave on asset quality and business momentum (in line with the company's profit warning). Earnings were 22% below our estimates due to interest reversals (INR4.5bn impact) and higher provisioning. The elevated impairment (117bps spike) was primarily driven by the auto financing segment (~19% GNPA). We trim our FY22/FY23 earnings estimates by 9% each as we expect weaker asset quality and higher cash burn (than our previous assumptions) on the app ecosystem rollout. Maintain REDUCE with a revised target price of INR 4,590 (5.4x Mar'23 ABVPS).

Muted operating performance: Bajaj Finance disappointed with NII/PPOP growth at 12%/4% YoY, despite continued funding cost tailwinds (28 bps). Opex to AUM increased to 31% and is expected to trend higher as BAF rolls out its super-app ecosystem. Loan loss provisions increased sequentially by ~14bps to ~4.7% of AUM.

Second wave impact on asset quality: BAF's GNPA/NNPA increased to 2.96%/1.46%, largely due to a sharp spike in delinquencies in auto financing (GNPA at 19.2% vs. 9.3% in Q4FY21), alongside a marginal uptick in impairment across other segments. The management attributed this spike to the stress in the 3W segment (~one-third of auto B2B portfolio). The restructured book declined to 0.8% of AUM (Q4F21: 1.1%); however, there could be a further build-up in the portfolio on account of Restructuring 2.0.

Maintain LLP estimates for FY22: With significant impairment and, consequently, higher LLPs recognised during the quarter, BAF's impairments and credit costs are likely to normalise going forward, assuming there is no impact from a "third wave" of the pandemic. We cut our FY22/FY23 estimates, as we factor in the weaker asset quality and higher cash burn (than our own previous assumptions) into our FY22 forecasts. Despite the company being an enviable franchise for its high-growth and profitability potential, we maintain REDUCE on the stock with a revised target price of INR 4,590.

Shares of Bajaj Finance Limited was last trading in BSE at Rs. 5937.9 as compared to the previous close of Rs. 6012.75. The total number of shares traded during the day was 50657 in over 7227 trades.

The stock hit an intraday high of Rs. 6028.8 and intraday low of 5868.45. The net turnover during the day was Rs. 302018233.

Source : Equity Bulls

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