Bajaj Finance Q1 Review: Growth Story Intact, But Analysts To Watch Margin Trajectory; Shares Surge
Bajaj Finance's strong profitability to continue but there are concerns over margin trajectory, say analysts.
Shares of consumer-focused lender Bajaj Finance Ltd. surged after analysts said the first-quarter show puts doubts over profitability to rest and makes way for further growth. Yet, they will watch the margin trajectory.
The non-bank lender reported a 159% year-on-year rise in its profit to Rs 2,596 crore in the quarter ended June. The profit growth was supported by a 48% increase in its net interest income and a 57% drop in provisions for the quarter.
Asset quality position improved with gross non-performing asset ratio at 1.25%, compared with 1.6% as of March 31, as stage 3 assets dropped 19% sequentially to Rs 2,539 crore. Net NPA ratio, too, improved 17 basis points to 0.51%. Provision coverage ratio as of June 30 stood at 60%.
Consolidated assets under management improved 28% year-on-year to cross the Rs 2 lakh crore mark, with strong growth across rural financing, mortgage lending, urban business to consumer finance loans and urban sales finance businesses.
Bajaj Finance jumped more than 9%, the most in at least a year, in early morning trading.
Here's what analysts made of Q1FY23 results of Bajaj Finance:
Morgan Stanley
NII beat with comforting commentary has addressed net interest margin concerns.
Consecutive quarters of 5% return on assets should result in consensus estimate upgrades.
Management has guided that the rise in cost of funds in FY23 and early FY24 should be gradual, and the increase beyond that should likely get offset from operating cost leverage.
Management has guided to Rs 4 lakh crore in assets under management by FY25.
Expects significant loan growth acceleration on its base case of steady economic growth.
Rate the stock as 'overweight' with a target price of Rs 8,000 apiece, implying an upside of nearly 20% from current levels.
Jefferies
Growth should stay strong and support premium valuations.
Credit quality trends are improving with 10 out of 11 products in good recovery rates bucket.
Two-wheeler and three-wheeler lending business is running slightly behind, in terms of credit quality.
Upfront provisioning last year for Covid-19 has led to credit costs falling 57% year-on-year.
Larger branch network and strengthening of digital pipes will aid in new customer acquisitions and cross-sells.
While customer acquisition has been strong over the last three years, cross-sell has been lower. Will be tracking growth in cross-sell over the next 12-18 months.
Housing finance will be a key growth driver, but structural return on assets would be lower.
Continue to maintain 'hold', with price target reduced from Rs 7,600 to Rs 7,300, a potential upside of about 9%.
Motilal Oswal
Customer acquisitions and new loans trajectory have been strong and the momentum will only get stronger from hereon with the digital ecosystem in place.
Expects Bajaj Finance to be able to deliver a healthy AUM compounded annual growth rate of 26% over FY22-FY24.
Believes that NIM compression is likely in FY23 given that levers on borrowing costs have largely played out and it has limited ability to pass on the higher cost of funds on a large fixed-rate book.
Bajaj Finance should deliver an RoA of 4.4% and return on equity of 22% over the medium term.
Key things to watch out for include evolution of payments landscape, velocity of consumer app and web platform, potential foray into credit cards from own balance sheet and margin trajectory.
Maintain 'buy' with a target price of Rs 7,320 a share, an implied return potential of about 9%.
