Bajaj Finance: Analysts bullish on accelerated growth, digital initiatives

At the bourses, shares of Bajaj Finance jumped 9.4 per cent on Thursday to Rs 6,999 apiece on the BSE in the intra-day trade. In comparison, the BSE Sensex was up 1.4 per cent at 11:25 AM.

Bajaj Finance Q1 review: The prospects of Bajaj Finance turning into an "adaptable new age fin-tech" company is keeping analysts bullish on the stock. Moreover, the non-bank finance company's (NBFC's) strong asset under management (AUM) growth via digital channels will support its premium valuations, they said. 
 

On Wednesday, the consumer financier consolidated reported the highest-ever quarterly net profit of Rs 2,596 crore for the April–June quarter of fiscal 2022-23 (Q1FY23), beating Street estimates. It jumped 159 per cent year-on-year, aided by strong net interest income (NII) growth and lower loan losses and provisions.

Bajaj Finance's overall AUM increased by 28.3 per cent YoY and 3.3 per cent quarter-on-quarter (QoQ) led by sharp recovery in rural (up 10 per cent QoQ/ 38 per cent YoY), and small and medium enterprises (SME; up 6 per cent QoQ/31 per cent YoY). However, Auto Finance continued to see weakness and was down 2 per cent QoQ/12 per cent YoY.

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The management has guided for doubling of AUM over fiscal 2022-25 (FY22-25) and expects to deliver return on asset (RoA) higher than the guidance of 4.5 per cent in FY23.

Motilal Oswal Financial Services highlights that customer acquisitions and new loans trajectory will get stronger from here on with the digital ecosystem in place.

The company expects to make live its web platform phase 1 by October, 2022, while phase 2 is expected to go live by March, 2023. Further, phase 1 of app platform is live, and phase 2 is expected to be launched in a staggered manner over August, 2022, to January, 2023. 

On the payments front, the company has partnered with Worldline, a global leader in payments services, to develop point-of-sale (PoS) payments acquiring solutions for merchants. 

Given this, MOFSL expects BAF to deliver a healthy AUM CAGR of nearly 26 per cent over FY22-24.
 

Meanwhile, total new customer acquisition in Q1FY23 stood at 2.7 million, up 45 per cent on year. This puts the company on an annualized run-rate of over 10 million for FY23 compared to its own guidance of 9-10 million new customer acquisition annually.

However, analysts at Jefferies pointed out that incremental addition to cross-sell franchise has been lower - hence share of cross-sell client has declined from 59 per cent to 57 per cent - as share of cross-sell clients in new additions was lower at 55 per cent.

"While this would include some readjustment during Covid, we would still track over next 12-18 months," they said in a note.

"BAF has re-created one-of-its-kind customer franchise in its digital journey and we believe this new journey will be better than the previous ones. However, operating costs (opex to NII ratio) has been guided at 35-36 per cent in FY23, and we expect operating leverage benefit to start flowing from next year onwards," said Antique Broking. It maintains 'HOLD' with a target price of Rs 6,295.

Word of caution

Kotak Institutional Equities believes that intense competition, especially in the consumer business-to-business (B2B) and business-to-consumer (B2C) segments, will put pressure on Bajaj's medium-term profitability.

Private banks are focusing on buy now pay later (BNPL; consumer durable) financing, intensifying competition, especially in top 40-50 cities (about half the overall market). Banks shifting focus to personal loans will also keep pressure on yields in the B2C book.

"Bajaj Finance continues to benefit from decline in cost of funds (6.64 per cent from 6.71 per cent in Q4FY22), which will likely start to inch up from the second half of the current fiscal (H2FY23). Rate transmission will likely be easier in SME and home loans even as we find net interest margin (NIM) pressure on B2B and B2C segments," it said.

While the current growth and return matrices remain strong, competitive and macro headlines may not support Bajaj's rich valuations. The recent stock rally provides an opportunity to cut exposure. We downgrade the stock to SELL with fair value of Rs 5,400, it added.

At the bourses, shares of Bajaj Finance jumped 11 per cent on Thursday to Rs 7,107 apiece on the BSE in the intra-day trade. It ended 10.6 per cent higher at Rs 7,076 per share, as against the BSE Sensex's 1.87 per cent gain.