Bajaj Finance: Stress in consumer pockets real, stock worth may be tested

Auto loans, B2B and B2C consumer durable loans face the heat in Q3

The devil lies in details. The saying would have never been truer than now for Bajaj Finance which published its December quarter results post market hours on Wednesday. While a bit off from the all-time of Rs 5,372 that Bajaj Finance stock touched just ahead of the new year, for investors who may have brushed aside some critical concern– that of growth and asset quality, owing to Bajaj Finance’s leadership position in the consumer finance business and also its ability to procure capital at the lowest ever price (7.78 per cent in Q3) among non-banking finance companies, post Q3 results it may be time to review the stance.

Gross non-performing assets (NPA) in Q3 at 0.55 per cent seems to be like the best-ever for the company. However, disregarding the Supreme Court’s standstill order, the number would have shot to 2.86 per cent; tad higher than the post-demonetisation NPA level.

A granular portfolio analysis indicates that mainstay segments such as consumer finance and lending to small businesses have seen a huge increase in gross NPA ratios in Q3 and some of it can be attributed to the restructuring exercise. While auto loans performed the worst, with stress increasing by about 600 basis points (bps) year-on-year in Q3, retail consumer durables loans (urban and rural) saw 200 – 231 bps spike in gross NPA ratios. The wholesale consumer durable loans also witnessed 100 – 150 bps year-on-year increase in Q3. With detailedvi asset quality break-up for Q2 not available, when numbers are compared against the June quarter, where customers availed moratorium, and there was no standstill on NPA recognition, it doesn’t paint a comforting picture either (see table). Clearly, the pandemic has taken a toll on the wallets of customers, whether salaried or self-employed and borrowers seem willing to let go of their loan obligation when times are tough. This also suggests that collection efficiencies may just gradually return to pre-covid levels and not as fast as what the Street had anticipated. “It looks like we have seen many cycles in just nine months and volatility of ups and down has been unpredictable”, said Rajeev Jain, MD, Bajaj Finance.

This is also indicated by Rs 1,352 crore of elevated provisioning in Q3, up 63 per cent year-on-year. Provisioning in Q4 is anticipated at Rs 1,200 – 1,250 crore. Q3 also saw a one-time write-off of Rs 1,970 crore due to covid-related stress and the available provisioning buffer is now at Rs 800 crore.

More importantly, from returning to normalcy in June FY22, the ballpark has slightly moved to the first half of FY22. Recently, Shweta Daptardar of Prabhudas Lilladher downgraded Bajaj Finance stock from ‘buy’ to ‘accumulate’ recently citing reasons that the stock is priced to perfection.  

With challenges persisting, Bajaj Finance’s tall valuations of 8.4x FY21 book will be further tested.