More steam left in Bajaj Finance stock's rally, 20% uptick likely: Analysts

Lender could clock 40% annual profit growth between FY22-24

The market response to the April-June quarter for the 2022-23 financial year (Q1FY23) results of Bajaj Finance (BAF) has driven both the Bajaj Finance stock and that of its holding company Bajaj Finserv sharply higher by 20 per cent and 26 per cent, respectively, since late July this year. BAF, in which Bajaj Finserv holds a little over 52 per cent stake, has continued with its digital thrust and managed to maintain customer acquisition momentum, while normalising credit costs which are down to pre-Covid-19 levels.

There was strong consolidated AUM (assets under management) growth of 28 per cent year-on-year (YoY) and 3 per cent quarter-on-quarter (QoQ) in Q1FY23. Net interest margins (NIMs) seem to have improved, while provisions (excluding one account) have dropped. Among segments, auto-financing declined 2 per cent QoQ, mortgages grew 6 per cent QoQ and rural volumes grew 10 per cent QoQ. Gross NPAs (non-performing assets) declined to 1.25 per cent of AUM, from 1.6 per cent, and provisions were held at Rs 755 crore, including one big write-off of Rs 190 crore, versus Rs 702 crore in Q422.

Net interest income was at Rs 5,275 crore, up 10 per cent QoQ versus Rs 4,803 crore. Fee income grew by 16 per cent QoQ led by credit cards. Opex or operating expenses were higher by 13 per cent, resulting in a cost/income ratio of 36 per cent. Management expects the cost/income ratio to moderate in the second half of FY23. The guidance is that credit costs for FY23 will be between 1.35-1.45 per cent. The profit after tax (PAT) grew at 7 per cent QoQ to Rs 2,596 crore versus Rs 2,420 crore. NIM is said to have improved by around 35 basis points QoQ to 10.5 per cent, while the return on assets (RoA) was at around 5 per cent and the management remains confident about margins. Loans booked rose to 7.3 million versus 6.3 million in Q4FY22, while new customers added stood at 2.7 million.

Given a rising rate regime, the company has hiked rates from June onwards by 25-40 basis points (bps) across different products. The hikes should not affect volumes at least in the SME and Mortgage segments. NIM should remain around 10 per cent in the long-term even if there’s compression. Cost of financing has obviously increased, with the company raising its deposit rates by 55-70 bps. It is focussed on retail deposits. Among new products, the firm is looking to grow used vehicle finance and its gold loan business with a rollout of more standalone gold loan branches. It is also launching its non-captive two-wheeler financing products.

The partnership with DBS Bank and RBL, to launch co-branded credit cards, continues. It’s targeting a monthly run-rate of booking 30,000-plus credit card accounts by the end of the fiscal with current bookings of around 9,000-10,000 per month. The digital strategy seems to be paying off with BAF also looking at the payments business. Opex should start tapering down in the second half.

The target of approximately doubling AUM over the next three years (roughly 25 per cent compounded annual growth rate or CAGR may be achievable. The company will be fully digital across all products and services (on app by January 2023 and web by March 2023) according to its estimates and this should lead to better productivity and boost margins.

BAF seems capable of delivering growth while maintaining healthy profitability and steadily reducing its NPAs. It is a sector leader already and it could generate PAT CAGR of over 40 per cent between 2021-22 and 2023-24 given the low base. The ROA and return on equity (ROE) are expected to be 4.8 per cent and 24 per cent, respectively, in FY24. The stock closed at Rs 7,510 on Wednesday, up 3 per cent. Valuation targets from various analysts are at Rs  8,140, Rs 8,250, Rs 9,000.