Bajaj Finance Q2FY21 - Retain ADD - 12m PT of Rs. 3,600 - YES SECURITIES

Mr. Rajiv Mehta, Lead Analyst - Institutional Equities at YES SECURITIES

Take comfort in management's credit cost guidance despite the spike in Stage-2 assets

Our earnings estimates for FY21/22 remain largely unchanged as the impact of calibration in AUM growth gets neutralized by lower cost growth and provisioning estimates (particularly for FY22). While the disclosure on Stage-2 assets (8% of AUM v/s usual 2-3%) could look perturbing, BAF has already built a strong provisioning cover of 32% on it. Additionally, management has retained its full-year absolute credit cost guidance implying that flow forward post moratorium and resolution experience are in-line with company's expectations. BAF's earnings performance in ensuing quarters is likely to be strong as growth momentum accelerates and charge-off rate declines. With growth and credit cost tracking back to long-term trajectory in FY22, we estimate BAF to deliver 4.3-4.5% RoA. Stock trades at 22x P/E and 4.5x P/ABV on FY22 estimates. With worst behind, valuation is expected to re-rate as confidence on growth comes back.

Call Highlights & Management Commentary

Current traction v/s Sept 2019

From September, BAF has started to accelerate volumes across products. With credit bureau information expected to be fully onstream by November, growth momentum will get further catalyzed.

September loan disbursements were at 62% of last year's volume - urban consumption businesses (B2B) was at 72%, rural consumption business (B2B) at 91%, credit card origination at 73%, ecommerce at 75% and auto finance at 54%

AUM growth expectations for FY21 toned down

Management estimates AUM growth for FY21 at 6-7% (versus 9-11% earlier). The current estimate has a potential upside from a stronger-than-expected momentum in Q4 FY21.

The company plans to achieve Feb 2020 (pre-COVID) loan originations by March/April 2021, thus positioning it to take advantage of a strong economic upturn in FY22.

Flexi Loans at 31% of AUM

In Q2 FY21, BAF converted Rs17.5bn of term loans into flexi loans (Rs86bn converted in Q1 FY21) to provide customers the flexibility of lower repayment and higher prepayment.

Outstanding flexi loans at Rs430bn across various products

Liquidity position - Reduction of surplus will aid NIM

BAF has consolidated liquidity buffer of Rs248bn and SLR investments of Rs26bn. This represents 21.9% of its total borrowing. The company will slowly dial down its liquidity buffer over the next six months.

This will ensure that cost of excess liquidity (Rs2.2bn in Q2 FY21) normalizes by Q4 FY21, which will benefit NIM.

Cost Management - Opex/NII will structurally remain lower

Management chose to cut cost over pursuing risky growth. Opex/NII improved to 27.8% in Q2 FY21 as against 34.6% in Q2 FY20.

BAF has started to gradually roll back some of its actions of operating expense management. However, as there are cost cuts which are structural, the Opex/NII ratio will remain much lower than pre-Covid times (33-34%).

Management expects to achieve Opex/NII ratio of 28-29% in FY23.

Credit Cost - Normalization expected in FY22

Against 15.7% of moratorium book in June 2020, Stage-2 as of Sept 30, 2020 stood at 8.0% (2.3% year ago)

Management is holding its credit costs estimate at Rs60-63bn for FY21. This leaves residual loan loss of Rs26-29bn in H2 FY21.

Loan loss estimates for FY21 are based on lifetime loss estimates on account of COVID-19. This means that company is accounting for additional losses that may otherwise occur in FY22.

FY22 onwards, credit cost should revert to pre-COVID-19 levels of 160-180 bps. If recoveries are better next year against provisions taken in FY21, BAF may even experience lower net credit cost.

Pursuant to the RBI resolution framework for COVID-19 related stress, the company has restructured assets worth Rs2.5bn.

Shares of Bajaj Finance Limited was last trading in BSE at Rs.3233.25 as compared to the previous close of Rs. 3262.1. The total number of shares traded during the day was 237773 in over 21519 trades.

The stock hit an intraday high of Rs. 3295 and intraday low of 3101.6. The net turnover during the day was Rs. 763032000.

Source : Equity Bulls

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