Bajaj Finance: Despite gains, risk of slowing consumer demand not priced in

Growth rate seen moderating further given little sign of revival

A recent report by CRISIL stated that retail loan growth, at 12 per cent for the first half of the current financial year, was the slowest in five years for the industry. 

This has had little impact on Bajaj Finance, considered a barometer of consumer demand, which has nearly doubled year-to-date. It has managed to rake in the gains despite its management turning cautious on the underlying demand nearly two quarters ago. Clearly, the Street is throwing caution to the wind. 

Some of these gains may be attributed to the financier’s ability to successfully raise capital. This, analysts at Emkay Global Financial Services say, needs to be appreciated, considering the current market conditions. It also reflects the strength of its parentage. 

However, the question remains — how much of these gains are sustainable. “The business case of Bajaj Finance remains strong. The risk-reward, though, is turning unfavourable for investors,” says Rajiv Mehta of YES Securities. 

What this means is that, at forward valuations of 5.5x its FY21 book, it doesn’t justify the likely growth rate ahead. The first signs of slowdown were visible when the addition of new loans rose 28 per cent in the September quarter (Q2), lower than the historic 33-35 per cent trajectory. 

Analysts expect the growth rate to moderate further, as there is little evidence of consumer demand turning favourable. Further, the management commentary during the festive season wasn’t very encouraging. 

However, it appears that the current valuations have not factored in this risk. What could further derail the show is a rise in non-performing assets, which have been steadily inching upwards — from 1.48 per cent a year ago to 1.61 per cent in Q2. 

Stress was apparent in pockets such as digital products, lifestyle, and vehicle loans, even in Q2. If loan growth moderates, it needs to be seen how well it supports the asset quality ratios.

Whether the December quarter results reflect the provisioning cost that Bajaj Finance may need to make for its Karvy exposure also remains to be seen. It is said to be Rs 200-300 crore. Barring the comfort of parentage and Bajaj Finance’s well-capitalised position, uncertainty around its near-term growth is slowly mounting.