Bajaj Finance's stellar show on strong demand; net profit rises 81% in Q1

Bajaj Finance reported a sharp 81 per cent year-on-year growth rate in net profit for the June quarter (Q1). There was a 35 per cent year-on-year rise in assets under management (AUM; indicates loan book size) to Rs 933 billion.

Rajeev Jain, managing director, says strong consumer demand during the quarter propelled AUM growth. The Street celebrated the sturdy show with the stock hitting an all-time high of Rs 2,535.50, before closing at Rs 2,517.6 (1.2 per cent up), even as the market was flat.

The faster growth was despite some headwinds in the form of volatile weather which impacted demand for consumer durables such as air conditioners, coolers and refrigerators, Jain said. 

The relatively minor share of such products in the overall AUM also helped ease any impact. With the company expected to clock strong growth and sustain its high margins, analysts believe it lends support to the rich stock valuations.

All its business segments clocked strong growth, with their AUMs growing 27 per cent year-on-year. “Overall macro and rural demand was strong during the quarter, as partially reflected by our performance,” Jain adds. Rural AUM, though small in size, increased the most, up 75 per cent. The share in overall AUM was seven per cent; it was six per cent a year before. The company expects improvement in rural and overall consumer demand to persist.

With impressive AUM growth, net interest income (NII), the gap between interest earned and expensed, soared 46 per cent. More, owing to significant operating leverage (operating expense to NII plunged by 520 basis points to 37 per cent), operating profit rose by 60 per cent.

Though the net interest margin (NII divided by average interest-earning assets) remained flat at the year-before level, it remains impressive at 10-10.5 per cent. However, the MD cautioned that after the September quarter, margins could come under pressure with rising interest rates and an overall inflationary environment.

The management also expects its gross non-performing assets ratio, 1.4 per cent in Q1, to remain in the range of one to two per cent. And, the provision coverage ratio (69 per cent in Q1) to be around 70 per cent in FY19. The impact on account of switch to Ind-AS accounting norms is also likely to wither.

In this backdrop, analysts remain bullish on the prospects. “New category and geographic expansion (250 branches are likely to be added in FY19), high cross-selling opportunity and rural business expansion will drive AUM growth. We expect Bajaj Finance to post over 30 per cent compounded annual growth in AUM over FY18 to FY20,” says Vineeta Sharma, analyst at Narnolia Securities.

Though the stock currently trades at a very high valuation of close to six times the FY20 expected book value (highest in the banking and financial services sector), analysts believe the strong performance justifies this.