Bajaj Finance Rating: SELL Sailing through good times

Bajaj Finance reported strong Q2 performance, leveraging well from underlying tailwinds in the business environment. Secular growth across most product lines, tweaking up rates to maintain NIM, coupled with benign credit cost and recovery from written-off loans were key drivers. The macro supports a stronger near term even as we expect a high base to moderate medium-term growth. Post the recent sharp rally and rich valuations, we looks elsewhere in the BFSI space. Retain SELL; FV Rs 5,800

Strong PAT growth; 5% core PBT outperformance

Riding the rally

Bajaj has capitalised well on the underlying buoyancy in the market. It has maintained NIM by passing on rate hikes, offsetting impact of 40 bps sequential rise in funding costs, even as seasonally Q2 is a weak quarter. Reflecting from current trends, we expect growth to remain strong in 2H as well, across products. The company has been going slow in two-wheelers; this segment has started to inch up though management remains cautious. Growth in consumer durable finance remains strong, largely supported by momentum in interior India. Bajaj continues to face competition in urban areas – management highlighted that there are 17 lenders in the consumer durable market as compared to four lenders a few years ago. Mortgage is a focus segment and the company has started to offer loans below prime banks in select cohorts. Aggressive expansion to acquire customers and improving customer engagement through the digital strategy will aid medium-term growth.

Retain SELL; FV Rs 5,800

We are revising up core estimates by 3-5% as we tweak up growth, margins and non-interest income (including recovery from written-off loans). High near-term loan growth and 20%+ RoE are priced in at current rich levels of 34X earnings and 6.85X book FY2024E. We retain SELL with RGM-based FV of Rs 5,800.

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Bajaj Finance reported 7% q-o-q and 31% y-o-y AUM growth in Q2FY23 to Rs 2.18 tn, lower than pre-Covid levels of 8-9% q-o-q growth. All three key segments, viz. B2C, SME and mortgage continued to grow; commercial business picked up sequentially. Decline in B2B segments was a drag.

Consumer B2B segment was flat q-o-q: Q2 is typically weak for the consumer durables business compared to summer sales in Q1 and festive sales in Q3. The seasonality has led to marginal q-o-q decline in sales finance AUMs. Auto finance has shown growth of 2% q-o-q compared to 0-6% decline over the past 10 quarters .

Consumer B2C up 7% q-o-q: This segment is driven by cross-selling of personal loans to the B2B segment customers. Seasonality affects customer acquisition. New customer acquisitions were 2.6 mn. Overall new loans booked during the quarter stood at 6.8 mn, up 7% y-o-y.

BAF expects the mortgage business to be a high growth driver over the medium term. We, however, believe that BAF will balance growth and profitability in this business to maintain overall RoE at ~20%. The near term anyway looks good. We are modeling 24% loan growth, followed by about 24% growth in the subsequent years. Growing base will pose risk to its high growth momentum over the medium term.