Bajaj Finance investors feel heat of 2nd Covid wave, stock falls over 4%

The NBFC anticipates Rs 1,100 cr- Rs 1,300 cr increase in credit costs and estimates both gross NPAand net NPA will be higher through the first two quarters of FY22

Bajaj Finance (BAF), one of the largest and most diversified of NBFCs, has produced a mid-quarter update that takes the second Covid wave into account. The data and projections are interesting, not only for the company but also for the NBFC industry in general, given the breadth of Bajaj’s footprint.

The company says it will see between Rs 4,000 crore–Rs 5,000 crore reduction in FY22 AUM due to the lockdown. April was bad, May was worse and June is expected to be somewhat better as lockdowns ease. It anticipates Rs 1,100 crore–Rs 1,300 crore increase in credit costs and estimates both gross NPA (non-performing asset) and net NPA will be higher through the first two quarters. Given its accounting methods it will take the maximum hit in provisioning in the Q1. It already has Rs 840 crore of special Covid provisioning on the balance sheet.

The Q4FY21 results showed 42 per cent year-on-year rise in consolidated net profit at Rs 1,347 crore compared to Rs 948 crore a year ago. The consolidated figures include wholly-owned subsidiaries Bajaj Housing Finance and Bajaj Financial Securities.

For FY21, PAT dropped 16 per cent to Rs 4,420 crore against Rs 5,264 crore in 2019-20. Total income rose 1 per cent to Rs 26,683 crore as against Rs 26,385 crore. The gross NPA and net NPA stood at 1.79 per cent and 0.75 per cent respectively by March 2021. Loan losses and provisions for FY21 was Rs 5,969 crore as against Rs 3,929 crore in FY20.

HDFC Securities revised its FY22/FY23 earnings projections downward by 9.1 per cent /2 per cent respectively after the mid quarter update from the company. It downgraded the stock to 'Reduce' from 'Add' with a new target price of Rs 4,832, down from Rs 4,928. HDFC Securities flagged the recent run up of over 20 per cent on ambitious expectations and expects a price correction.

Motilal Oswal Securities has cut EPS estimates by 11 per cent for FY22, factoring in lower AUM growth (by 5 per cent) to 19 per cent. It sees higher provisioning, and PAT down by 11 per cent. However, it says return on equity (RoE) will still be at an excellent 20 per cent for 2021-22 (lower than earlier projections of about 22 per cent RoE). Other return ratios will still be healthy.

The stock dropped by over 4 per cent on Monday once the update and the recommendations came through. At the current price of Rs 5,728, it is still well above the HDFC Securities target price. It is below the Motilal Oswal Securities target of Rs 6,200. Technically, it has excellent support in the Rs 5,200-5,300 zone and its coming off a high of Rs 6,010 last Friday.

The company has a diversified footprint, a strong balance sheet and good collection facilities. Its cost of financing, NPAs, and growth rates for AUM, are all better than the peer group. It has excellent return ratios both in terms of RoE and also in terms of return on assets. Other NBFCs, which have more stressed balanced sheets and lower return ratios will get hit harder in Q1.