Business tracking expected lines, reflected in price. Bajaj Finance’s performance seems to be broadly tracking its guidance with likely bottoming out of loan book, building adequate buffers for the year and control over expenses. The company may be well-placed for a normalised FY2022E unless slippages disappoint. All the positives, however, are already reflected in the current valuations, prompting us to await better entry points. REDUCE; FV Rs 3,000; prefer Bajaj Finserv (BUY, FV Rs 7,600).
Bajaj Finance 2QFY21 performance was no surprise with most business parameters following expected trajectory. The company has stepped up disbursements post August after getting assertive on the improving macro. Most businesses operated at about 60-70% of previous year in September except auto, which was lower at 54%; the company expects to fully get back on track by March 2021E, looking for a normalised FY2022E on the back of a near-flat FY2021E. Stage 2 (8%) loans in September are significantly higher yoy (2.3% in 2QFY20). However, the provisioning buffer being built by the firm (Rs 69 bn over 4QFY20-4QFY21E) appears high (68%), providing room for further slippages in 3Q as the impact of lifting of moratorium is reflected or some of the flexi loans borrowers report delinquencies.
We are revising our estimates by -1% to +3% to reflected lower momentum in housing, offset by higher consumer business, sharply falling cost of funds and higher expenses. We expect the firm to resume 20% RoE from FY2022E as credit cost falls back to normalised 2% from ~4% in FY2021E. About 20% loan growth will likely drive 24% yoy growth in core PBT even as reported earnings bounce back (85%) in FY2022E due to lower provisions. Bajaj’s ability to deliver on growth assumes importance to sustain its rich multiple, which currently completely reflects recovery in its business. In the earnings call, the management highlighted that they gave up market share in B2B (subvention) business to banks (about 60% from 70% earlier) as they went slow on business; expect some of the share to be recouped over the next few months. This, coupled with competition in the online marketplace, remains a monitorable.
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