Worries emerge for Bajaj Finance stock over valuation, growth

High valuations could be justified if digital fintech transformation imparts higher growth

The stock of NBFC major Bajaj Finance has seen selling in the past few sessions, after negative reports by some analysts. CLSA says the stock was likely to “undershoot expectations in the medium –term”. The report cited “a large base, decline in customer repeat purchase ratio and rising competitive intensity in core segments posing risks to its medium-term loan growth”.

The CLSA report assigns a target price of Rs 6,000 and initiated a sell rating when the market price was at Rs 7,452. Earlier (in late October post Q2 results), Kotak Institutional Equities had assigned a similar target price with a fair value of Rs 6,000 and said high growth was reflected in the CMP, which was then at Rs 7,850.

While the Q1 results had been a little disappointing, the Q2 results were in line with expectations. The market is watching the foray into fintech very carefully. However, an independent analyst also pointed out three negative factors that could be of concern.

One is persistent insider selling. A total of 280,000 shares with market values amounting to roughly Rs 220 crore have been sold by 16 individual insiders in the last quarter. Another factor is a dip in free cash flow. Cash flow was a positive Rs 3,141 crore in Q2FY21 (on Sep 30, 2020) and it had dipped to negative by Q2FY22. A third negative factor is debt:equity ratio, although this has improved. Net debt to equity was at 2.85 in Q2FY22 versus 3.01 in year-ago period. Given negative operating cash flows, this could be of possible concern.

The auto loans segment has been hit by high non-performing assets, and, given poor trends in auto sales, growth could stay low in this segment. Fintechs, banks, credit cards and payment companies are all increasing the competitive temperature in consumer durables financing where Bajaj is a market leader.

The mortgages segment has also seen a slowdown compared to competitors in the housing finance space. CLSA says the customer repeat purchase ratio has declined from 58 per cent in 2018-19 to 35 per cent in Q2FY22, perhaps as a result of competition. Given the sheer size of the company, base effects will also lead to slower growth. Hence, CLSA expects a slowdown in the CAGR of assets under management (AUM) from 35 per cent pre-covid to a healthy but much lower 22 per cent over FY21-24.

Bajaj is rolling out its fintech upgraded consumer app with an “omnichannel” experience. The payments foray is expected to enhance customer engagement rather than deliver large profits in the short-term. The fintech rollout should favourably impact about 40 per cent of Bajaj’s business (sales finance, personal loans and rural lending).

Bajaj Finance’s overall stressed loans were flat QoQ at about 10 per cent. Write-offs were high at about 4 per cent (annualised) despite almost Rs 20,000 crore in recoveries during Q2FY22. Interest reversals were also high at Rs 320 crore. Most of the delinquent loans are unsecured. Credit costs would be estimated around 2.8 per cent in FY22.

In valuation terms, CLSA believes the stock is likely to correct down as the market assesses the impact of slowing growth. There’s an “x” factor which may provide an upside. It’s hard to assign a clear valuation to the digital fintech transformation. If this does impart higher growth and offers good network effects for cross-selling, this could justify high valuations. The stock has fallen 4.5 per cent in the last month and it’s trading at Rs 7,230. There’s a downside, if the market does downgrade the stock to Rs 6,000 levels.