Demonetisation pain slows down Bajaj Finance

In terms asset quality, 8.6% of the company's loan book has been impacted by demonetisation

Demonetisation is not sparing even one of the renowned and fastest growing non-banking financial services (NBFC) companies in India - Bajaj Finance. 

The company, in an investor call on Monday, highlighted the key areas of impact on its portfolio post Diwali, which essentially highlights the demonetisation impact. The company has provided loan deployment and growth for the 30-day period post Diwali for last year (13 November 2015 to 12 December 2015) as well as for 2016 (1 November to 30 November) to indicate the impact of demonetisation. 

While lower growth in disbursement could restrict the increase in company's top line, lower collections could have a bearing on its asset quality. In fact, in terms asset quality, 8.6% of the company's loan book (mostly rural) has been impacted by demonetisation with the rest being largely stable.

The majority of its segments namely two/three wheeler finance, consumer durables finance, lifestyle product finance, amongst others witnessed slowdown in the pace of disbursement post demonetisation when compared to the September 2016 quarter. 

Two and three wheeler finance has been the most hit for the company (due to higher dependence on cash) and grew 13% compared to 50% growth in September 2016 quarter (Q2), even as gold loans (a smaller book) have virtually stopped. 

For the consumer business (except two and three wheeler and rural lending) under electronic/PDC payment mode, the company's cash collections have fallen 43% in November as compared to October though cheque collections have grown a whopping 1,171% though from a very low base. 

Representation and online mode of collections have also seen sharp increases; their combined share has increased to 30% of total from 12% in October. The share of cash collection has fallen from 87% to about half.

The company had indicated earlier that it will slow down growth in the consumer durables segment due to rising asset quality pressures. Management articulated on Monday that it has cut this business by 18% in the on-going quarter. 

Digital product finance business too has been cut 35% this quarter. Segments such as loan against property, rural lending and salaried personal loans have witnessed slowdown in disbursements due to demonetisation. 

The slowdown in segments such as loan against property is also due to the company's efforts to not grow it further. Thus, Bajaj Finance's performance is likely to be impacted in the current and next quarter.

Management though remains positive. "Growth in our consumer durables portfolio is witnessing some improvement and we believe growth should be back March onwards," said the management in Monday's call. It is not surprising that the Bajaj Finance scrip fell nearly six per cent on Monday to Rs 844.8 apiece. 

Even after this fall, it trades at 4 times FY18 estimated book value which is not cheap. Analysts though continue to be positive on the scrip, even as some of them may lower their earnings estimate for the company.