Bajaj Finance: Growth, asset quality issues resurface after a long hiatus

Management is tightening its underwriting practices in select segments of lending as a measure of prudence, which may dent growth in the coming quarters

Even as the liquidity crisis broke out last September, the conviction on Bajaj Finance stock remained high. Despite its expensive valuations, investors were willing to pay as the company assured squeaky clean asset quality and strong growth. That faith was put to test in June quarter (Q1), which brought the Bajaj Finance stock down by 4 per cent post results on Thursday. This is the worst post-results reaction displayed by the stock after the demonetisation phase.

On broad parameters such as net interest income (NII) or net profit growth, the consumer financier didn't falter much. Consolidated NII and net profit grew by 43 per cent each to Rs 3,695 crore and Rs 1,195 crore in Q1; though NII met expectations, net profit was shy of estimates.

But the pain lies beneath the surface. Provisioning cost (for bad loans) in Q1 rose by about 70 per cent year-on-year to Rs 551 crore - the sharpest increase in recent times. Slippages (loans that turned bad) rose 85 per cent year-on-year to Rs 702 crore. With this, gross non-performing assets (NPA) ratio increased to 1.6 per cent from 1.39 per cent a year-ago, while net NPA ratio marginally rose by 20 basis points (bps) to 0.64 per cent in Q1. Though not alarming yet, these point to increasing asset quality stress and need monitoring.

The larger question, though, is that of growth. Given the visible increase of stress in digital product financing, lending to small businesses and even consumer durable loans, Bajaj Finance has decided to go cautious. Fresh disbursement growth targets have been moderated to 10–18 per cent in these segments.

Known for its ability to sustain 40 per cent plus growth in assets under management (AUM), how much a likely moderation in disbursement will affect AUM growth needs to be seen. “Incoming data on risk will tell us what our growth target should be,” says a cautious Rajeev Jain, MD, Bajaj Finance.

That said, other aspects such as cost of capital at 8.5 per cent and net interest margins at nine per cent remain in a comfortable zone.

Going ahead, loan growth and asset quality (a factor which may weaken if loan growth melts a bit) will be the key guiding aspects for the Street. Whether investors will continue to pay top dollars for the stock if these come under pressure, needs to be seen. Indications of this will come after the analysts call on Friday; whether brokerages tweak their earnings estimates and recommendations, and by how much.

Trading at 8x FY20 estimated book, it remains the most expensive non-banking finance stock.