Analysts cut Bajaj Finance's FY22 earnings estimate as it warns of NPA hit

Shares of Bajaj Finance (BAF) tumbled 5 per cent to Rs 5,681 apiece on the BSE in Monday's intra-day trade as the consumer financier voiced concerns over asset quality issues due to localised lockdowns following a second wave of Covid-19. 

After reporting a healthy performance in Q4FY21, the management of Bajaj Finance, in a mid-quarter update, indicated that its B2B and Auto Finance businesses were most affected due to strict lockdowns in majority of states. "These businesses delivered 70 per cent of their planned volumes in April, 2021 and their volumes dropped to 40 per cent in May. As a result, the company estimates an impact of Rs 4,000-5,000 crore to its asset under management (AUM) for FY22," the management said.

Following the update, most analysts have turned cautious on Bajaj Finance and have revised its FY22 earnings estimates downward as the company remains more vulnerable than peers due to its higher dependence on consumer loans and a seasonally strong first quarter (Q1). B2B and Auto Financing contribute nearly 16 per cent to the overall AUM for the company; however, their contribution to overall customer acquisitions is very high. Considering the short duration of the high-volume products, they also contribute meaningfully to fee income for the quarter.

HDFC Securities, for instance, has revised its FY22/FY23 earnings downward by 9.1 per cent/2 per cent on account of higher credit costs and has downgraded the stock to 'Reduce' from 'Add' with a revised target price of Rs 4,832 from Rs 4,928 as it believes an over 20 per cent run-up in the stock since its Q4FY21 earnings on ambitious expectations around growth and profitability calls for a reality check in light of the company's profit warning. Those at Kotak Institutional Equities, on the other hand, have trimmed their FY22 earnings estimates by 12 per cent.

"We are cutting our estimates by 12 per cent for FY22, followed by 3 per cent in the subsequent two years (FY23 and FY24). We expect the company to report 18 per cent return on equity (RoE) in FY22E, followed by ~20 per cent in the medium-term. We retain REDUCE with target price of Rs 4,200," said analysts at the brokerage. 

KIE's earnings cut factors 15 per cent loan growth for FY22E versus 18 per cent expected earlier and increase in credit costs to 2.5 per cent of AUM, up from 1.8 per cent (its normalized guidance of 1.5-1.6 per cent). 

"Bajaj Finance reported 6 per cent sequential decline in loan book in Q1FY21, 1 per cent decline in Q2FY21 followed by 5-6 per cent QoQ growth in Q3FY21 and Q4FY21. We expect 1QFY22 loan book to decline on similar lines before picking up from 2Q. The company enjoyed the benefit of moratorium last year i.e. interest accruals supported its loan growth; there is no such proposal as of now and hence the decline could be sharp," it added.

Motilal Oswal Financial Services, meanwhile, has cut estimates by 11 per cent for FY22, factoring in lower our AUM  (by 5 per cent) to 19 per cent now. "On the back of higher provisioning, net profit sees a downgrade of 11 per cent for FY22. We further tweak our FY23/FY24 estimates by 2 per cent, factoring in lower AUM. Despite the earnings cut, ROEs are likely to be 20 per cent, with superior core operating profitability," it said.

Courtesy weakness in economic activity, the management also said EMI bounce rates, which had reached pre-Covid levels in Q4FY21, were up by around 8 per cent in Q1FY22 and are likely to lead to higher gross and net non-performing assets in H1FY22. BAF estimates an incremental credit cost of Rs 1,100-1,300 crore for FY22E on account of disruption caused by the second wave.

Given this, Emkay Global reiterated that elevated write-offs (Rs 2,000 crore in Q4 and Rs 2,340 crore in Q3) and restructured book (Rs 1,740 crore) placed under stage 2 assets last year remain a cause of concern.

"We moderated our growth numbers post Q4 earnings along with keeping relatively higher credit costs for FY22. We maintain our estimates intact for now and continue with our cautious stance on the company, considering persistency of lockdowns in few large states as well as likely fear of a third wave in coming months. We also expect a surge in the restructured portfolio post fresh guidelines from the RBI last month," it said. The brokerage has a 'Hold' rating on the stock with a target price of Rs 5,400 (~6.5x FY23E ABV).

That said, a section of analysts stay bullish on the company from a long-term perspective as they believe BAF has taken several actions to reduce its expenses and cost of funds to partially mitigate the financial impact.

Citi and Bernstein, for instance, have 'Buy' and 'Outperform ratings on the stock with target price of Rs 5,800 and Rs 7,240, respectively while JPMorgan has a 'Neutral' rating with a target price of Rs 5,100.

Source: Brokerage reports