Despite tough operating climate, Bajaj Finance's Q3 net profit jumps 54%

At a time when the market conditions are just not conducive for non-banking financial companies, Bajaj Finance seems to stand out. Its net interest income (NII) grew 46 per cent in the December quarter (Q3), and net profit expanded by 54 per cent to Rs 1,060 crore. Aided by a late push in festive season demand, consolidated assets under management (AUMs) grew by 41 per cent year-on-year in Q3. This allowed results to exceed expectations on all parameters.  

More importantly, cost of funds rose by only six basis points (bps) sequentially, to 8.2 per cent, and net interest margin was maintained at 10 per cent in the third quarter. With concerns on funding costs put to rest, Bajaj Finance stocks rose over 2 per cent on Tuesday.  However, in the context of being the most expensive NBFC stock, the question is whether the Q3 show will be sustainable. 

Being the market leader in the consumer durables finance sector, AUM growth or increase in the number of customers may not be much of a challenge. But what needs to be seen is whether it can continue to operate at such a low-cost funds structure.

Rajeev Jain, managing director of Bajaj Finance said at 8.2 bps, cost of funds was at a historical low. “While it’s foolish to predict rates now, considering our past five years’ average cost of funds of 9 – 9.5 per cent, we may be headed towards higher rates,” he ascertained. 

While segments that offer cross-selling opportunities such as personal loans and gold loans may give some headway for passing costs, the wholesale part of the consumer durables lending business may not see a price hike.

The segment accounts for about 15 per cent of the total AUMs, and usually operates on predetermined contracts with original equipment manufacturers such as Sony, LG and Samsung. 

Asset quality will also be closely monitored, given its Rs 225-crore exposure to the troubled infrastructure major, IL&FS. With the loan turning bad in Q3, gross non-performing assets (NPAs) ratio rose to 1.55 per cent versus 1.49 per cent in Q2, while net NPA ratio also increased to 0.62 per cent. Provisioning costs almost doubled YoY to Rs 453 crore. While Bajaj Finance has provided for about 20 per cent of its IL&FS exposure, it needs to be seen if IL&FS remains a drag on Bajaj Finance’s asset quality for long. Also, with sub-60 per cent provision coverage for newer segments such as rural finance, how this book matures is extremely important for Bajaj Finance’s AUM growth and asset quality. 

Barring this blip, analysts continue to remain bullish on the stock.