Near term margin pressures likely to continue for Bajaj Finance stock

The company continues to invest in technology, digitising operations. But operating leverage kicking in has helped to improve its cost ratios over FY24

A strong balance sheet, paired with healthy growth, suggest Bajaj Finance is on the track to maintain its growth rates for the next two to three years. The management has revised its assets under management (AUM) growth target upwards to 29-31 per cent for financial year 2023-24 (FY24) versus 25-27 per cent earlier. 

The non-banking financial company (NBFC) is looking at customer additions of 12-13 million, with a possible upwards revision in the second half of FY24, or H2FY24. The portfolio mix has remained steady, enabling the company to build scale and deliver profitability while maintaining its asset quality.

One word of warning is that the margin pressure is likely to continue, since it is hard to pass on higher interest rates, and the company has been refinancing maturing liabilities at higher rates. The management expects margins to contract by 10-15 basis points each quarter over the next couple of quarters before stabilizing.

The NBFC continues to invest in technology, digitising operations. But operating leverage kicking in has helped it improve its cost ratios over FY24. Guidance is that credit costs will marginally be higher by 6-8 basis points at about 155-165 basis points in FY24. The company expects to deliver return on assets and return on equity of 4.6-4.8 per cent and 21-23 per cent respectively.

Bajaj Finance has added 3.84 million customers during the first quarter of FY24 (Q1FY24), as compared to 3.1 million customers in the previous quarter. It delivered a growth of 41 per cent year-on-year (YoY) and 24 per cent quarter-on-quarter (QoQ). The total customer base is now 73 million. The company booked around 9.9 million new loans during Q1FY24 for a growth of 31 per cent.

The sequential performance is impressive. The AUM growth was driven by rural business (up 7 per cent QoQ) and mortgages (up 7 per cent QoQ) and stronger pick-up in 2/3-wheeler finance (up 14 per cent QoQ). The gold loan business also did well.

Net interest income grew by 7 per cent sequentially to Rs 6,720 crore, aided by AUM growth of 9 per cent, but margins contracted by 11 basis points QoQ. Operating expenses grew by 8 per cent QoQ and pre-provision operating profit grew by 8 per cent QoQ. The net interest margins (NIMs) was stable QoQ at around 13 per cent.

The company added 95 new locations and 12,000 distribution points in Q1FY24. It expects to see operating leverage come through every quarter hereon as technology induction and digitisation pays off.

Credit costs inched up marginally by 10 basis points QoQ and stood at 154 basis points. Profit after tax (PAT) growth was strong at 32 per cent YoY and 9 per cent QoQ, hitting Rs 3,440 crore. Asset quality continued to remain healthy and has improved over pre-covid levels. The gross non-performing assets (NPA) and net NPA stood at 0.87 per cent and 0.31 per cent respectively, which is an improvement over 0.94 per cent and 0.34 per cent respectively in Q4FY23.

The key variables in FY24 will include the evolution of the payments landscape and uptake of its payment offerings, and the degree to which the possible NIM compression can be offset with better operating leverage and declining cost ratios. The operating expenditure to net interest income ratio should decline by around 100 basis points per fiscal until FY25 at least.

In terms of scale and asset quality, Bajaj Finance is a market leader in the NBFC space and receives premium valuations.