Ability of Bajaj Finance to deliver growth assumes importance in order to sustain its rich multiples, which currently completely reflect recovery in its business. Volume acceleration across all businesses from September 2020 indicates growth should pick up in the second half of FY21. Bajaj Finance continues to build on its provision buffer, its standard asset provisions of 3.7% is now among the highest in NBFC coverage universe. Bajaj Finance is witnessing improving month on month disbursement traction across product segments

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BofA Securities reiterates buy rating on Bajaj Finance share, with target of Rs 4505. Bajaj Finance’s clear message in the post earnings call was that risk standards won’t be diluted to push growth. Bajaj Finance also aims to restrict all Covid-19 related hits to FY21, to create a clear path for FY22 to be a normal year for growth and credit costs, with potential loan recoveries providing upside. Decline in Q2 AUM reflects management conservative stance given high volatility. FY21 credit growth target cut to 6-7% vs expectation of 9.11%. However, volume acceleration across all businesses from September 2020 indicates growth should pick up in the second half of FY21.

Motilal Oswal maintains a neutral rating with target price of Rs 3350. Bajaj Finance’s Q2 FY21 PAT declined 36% YoY to Rs 9.6 bn (2% miss). NII beat of 2%, coupled with opex beat of 3%, led to 4% PPoP beat. With Rs 17 bn credit costs, Bajaj Finance continues to build on its provision buffer, its standard asset provisions of 3.7% is now among the highest in NBFC coverage universe. For the first half of FY21, PPoP grew 20% YoY; however, PBT declined 32% YoY due to Covid related provisioning. GNPA declined 37 bps QoQ to 1.03%, aided by high write-offs of Rs 4.7 bn and net recoveries. Adjusted for the impact of the Supreme Court order, GNPA/NNPA would have been higher by 31bp/19bp.

Motilal Oswal expects Bajaj Finance to deliver 6% YoY AUM growth in FY21, followed by 20% YoY growth thereafter. Bajaj Finance’s operating profit estimates remain largely unchanged. With the economic scenario improving, Motilal Oswal cuts FY22 credit cost estimate by 100 bps to 2.25% v/s management guidance of normalized levels of 1.7–1.8%. This has led to an upgrade in PAT estimates by 6%/15% for FY21/FY22.

Disbursements improving month-on-month

New customer additions were higher QoQ to 1.2 mn; however, they were still lower than the quarterly run rate of 2–2.5m. The company disbursed 3.6 mn loans in the quarter, down 44% YoY. It remains cautious on Retail EMI (7% of loans) and Wallet Loans (2.3% of loans), which impacted disbursement volumes by 0.6 mn.

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Bajaj Finance is witnessing improving month on month disbursement traction across product segments. It has restarted origination across businesses, except Retail EMI / Wallet Loans, which would be resumed in Jan / Mar '21. While it took a cautious stance on disbursements (as credit bureaus were not updated), it believes disbursements would pick up over the next 1–2 months as bureaus get updated with post moratorium data.

Reported AUM was largely flat QoQ and YoY at Rs 1.37 tn. Management guided to 6–7% AUM growth for the year (v/s earlier guidance of 10– 12%).

The consumer B2B book continues to see a sharp run down, especially in sales finance (i.e., consumer durables finance). The share of the sales finance book is down 300 bps from pre-COVID levels and 500bp from YoY levels to multi year lows of 6%.

(Authored by Rahul Kamdar)