Bajaj Fin needs expansion to pay off


Bajaj Finance Ltd has managed to keep its investors satisfied with its December quarter (Q3FY23) performance. Its profit after tax saw a robust 40% year-on-year (y-o-y) growth. This was aided by strong net interest income (NII), up 24% y-o-y. Despite the rising cost of funds, net interest margin (NIM) remained stable as the company passed on the burden of interest rate hikes to customers across segments. Assets under management (AUM) rose by 27% y-o-y, but growth has moderated slightly from 31% seen at the end of H1FY23, given the rising competitive intensity especially in the mortgage business.

Graphic: Mint

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Graphic: Mint

Nonetheless, investors were excited, with the stock rising 4.5% on Monday. What also buoyed sentiment towards the stock was the management’s Long-Range Strategy (LRS)—an annual five-year rolling strategy planning process with an execution plan of 12-24 months.

The good part is that to beat competition and sustain its market share in existing segments, the company is already boosting its digitization efforts. For that, it has been continuously investing in technology for business transformation. This could result in higher operating costs in the near term, but the management is expecting to maintain the crucial opex to NII ratio at around 35% in Q4 as well.

In this backdrop, the company’s aim to provide a roadmap on its future operations till 2027 via the LRS, bodes well for investors’ sentiment towards the stock. Under the LRS plan, Bajaj Finance is looking to launch new auto loans in Q2FY24, microfinance in Q4FY24 and tractor financing in Q1FY25. Further, it also plans to ramp up its gold loan business segment.

“The company already has a large customer base, and it makes it easier for it to enter new segments such as micro finance and gold loan business. And growth depends on increasing stickiness of new to franchise customers,” says Akshay Ashok, research analyst at Prabhudas Lilladher.

In an earnings call, the management said it is not looking to transform into a bank anytime soon. The company is awaiting the Reserve Bank of India’s approval to launch its own credit card. According to Shweta Daptardar, VP – institutional equity research, Elara Securities, India, this business could see a smooth pick-up due to Bajaj Finance’s existing affluent customer base and would aid the growth, particularly on the merchant acquisition side.

Since the company has a strong leadership, execution of this strategy is not anticipated to be a big challenge. However, there are concerns on the quality of earnings from its entry into newer verticals. Venturing into microfinance and pre-owned CV financing are uncharted areas of Bajaj Finance as it predominantly caters to affluent and mass-affluent customers, said Dnyanada Vaidya, research analyst, Axis Securities. So, there could be some risk. “Considering the company’s pedigree and history, it may be easy to penetrate into these segments, but we have to monitor how it pans out,” she added.

The stock has been under pressure in the last one year, falling nearly 12%, hit by the moderation in y-o-y AUM growth, said analysts. Consequently, the stock’s valuations have also cooled off. At FY24, price-to-book, the stock trades at 5.5 times, showed Bloomberg data.

“Despite the correction, the stock appears expensive, and it is likely to trade at a premium. Because there is visibility in earnings for the coming quarters, while there could be a slight NIM compression, it is expected to be largely stable. We expect around 25/23% compound annual growth rate in terms of AUM/Earnings going forward and as such, the stock has also gone up,” added Vaidya.

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Article Source:Money Control

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