Downgrade to REDUCE on Bajaj Finance - Mid-quarter profit warning calls for a reality check - HDFC Securities

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

Bajaj Finance (BAF) issued mid-quarter business guidance around the likely impact of the second wave on the company's AUM growth (lower by INR40-50bn) and credit costs (higher by INR11-13bn). The net impact of this update is neutral on our AUM growth estimates (we were conservative on AUM accretion compared to the management's earlier guidance) while we raise our above-consensus provisioning forecasts further. The >20% run-up in the stock since its Q4FY21 earnings appears to be pricing in unrealistic consensus expectations around growth and profitability, which warrants a reality check in light of this profit warning. We revise our FY22/FY23 earnings downward by 9.1%/2.0% on account of higher credit costs and downgrade the stock to REDUCE from ADD with a revised TP of INR 4,832 from INR 4,928 (implied 5.5x Mar'23 ABV), implying a 19% downside.

Mid-quarter update highlights business risks: BAF released a mid-quarter update on the likely impact of the ongoing second wave of the pandemic on the company's AUM growth (lower by INR40-50bn) and credit costs (higher by INR11-13bn). Disbursement volumes were down to ~70%/40% of normalised levels in B2B and Auto Finance and ~85%/60% in other segments in Apr'21 and May'21 respectively, as per management. EMI bounce rates, which had reached pre-COVID levels in Q4FY21, were up by ~8% in Q1FY22 and are likely to lead to higher GNPL/NNPL in H1FY22. While the AUM growth guidance aligns the management guidance with our already-conservative forecasts, the revised credit cost guidance implies FY22 credit costs of 2.4% (on our conservative AUM growth forecasts).

What does this mean for our numbers? As against the management's most recent guidance of net AUM accretion of over INR90bn every quarter, our forecasts were conservatively building in net quarterly accretion of INR80bn. We believe the revised management guidance around growth is now conservative and reflects the underlying economic reality. Hence, we make no changes to our AUM growth forecasts. On the other hand, we raise our FY22 credit cost estimates to 2.7% (from 2% earlier) to reflect the downside risks from income shocks and a sub-par collection environment.

Downgrade to REDUCE: Despite our downward revision to FY22 earnings by 9.1%, BAF remains an enviably profitable franchise with high growth (average ROA/AUM growth of 4.3%/22.7% over FY22-23). However, >20% run-up in the stock since its Q4FY21 earnings is building in ambitious expectations around growth and profitability, which calls for a reality check in light of the company's profit warning. We downgrade to REDUCE with a target price of INR 4,832.

Shares of Bajaj Finance Limited was last trading in BSE at Rs.5728.2 as compared to the previous close of Rs. 5993.55. The total number of shares traded during the day was 162237 in over 24121 trades.

The stock hit an intraday high of Rs. 5847.35 and intraday low of 5681.2. The net turnover during the day was Rs. 930402203.

Source : Equity Bulls

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