Maintain ADD on Bajaj Finance - Prudent provisioning hits profits - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

While BAF's 2QFY21 operating performance was in line with estimates, earnings were lower on account of higher than expected provisions. The management was prudent in its approach to growth and provisioning. Even as we build higher provisions, our earnings estimates remain largely unchanged as we factor in a slight improvement in cost metrics. Our outlook on the company's long-term prospects remains positive. We continue to believe that current valuations do not fully capture BAF's high RoAE potential (refer to our recent IC). We maintain ADD with a target price of Rs 3,647.

Provisions jump: Non-tax provisions remained elevated (+186% YoY) at ~Rs 17bn as management's intended to 'front-load' credit costs. Stage I/II/III coverage was 1.3/32.3/58.8%. The management guided for provisions of ~Rs 26-29bn in 2HFY21. Our estimates factor in LLPs of 4.3% in FY21E, and we expect a sharp reduction to 2.4% over FY22-23E (vs. guidance of 1.6% in FY22).

Asset quality trends: Stage II assets were ~8% while ~15.7% of the portfolio under moratorium as of 1QFY21. Adjusted for the impact of the SC order, GNPAs would have been ~1.3% (vs. 1.6/1.4% YoY/QoQ). The 2/3-wheeler (25.2%) and digital product (11.1%) portfolios had the highest ratio of Stage II loans. Outstanding loans worth ~Rs 17.5bn were converted into flexi loans (vs. Rs 85bn in 1Q). The company had applied the COVID-19 stress resolution framework to just ~20bps of its portfolio until 2Q. We expect GNPAs of ~3.9% by 4QFY21E, and this is supported by the significant rise in Stage II assets.

Growth: Business volumes were significantly lower, YoY. In September, disbursals reached 62% of the previous year's volumes. BAF added 1.22mn new customers (vs. 1.92mn customers in 2QFY20). The management cited the prevalence of the moratorium and absence of necessary bureau data as reasons for its conservative stance on this front. While the management guides for ~6-7% AUM growth in FY21E, we build ~-2%.

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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