Bajaj Finance Q4 result: Shares fall 7% on cost concerns, rich valuation

Bajaj Finance Q4 review: While asset under management, portfolio composition, and digital transformation will remain key drivers for the stock, premium valuation, and elevated costs may cap upside

Bajaj Finance Q4 review: Despite a strong March quarter (Q4FY22) performance, shares of Bajaj Finance dropped 7.2 per cent to Rs 6,714 on the BSE on Wednesday, as analysts remained mixed on the company’s future prospects. In comparison, the benchmark S&P BSE Sensex slipped 0.94 per cent.

While asset under management (AUM), portfolio composition, and digital transformation will remain key drivers for the stock, premium valuation, and elevated costs may cap upside.

Analysts at Antique Stock Broking, for instance, said that even as Bajaj Finance undergoes digital transformation, one needs to monitor whether this shall enable it to grow at better pace.

"While company might see operating leverage benefits in the long term, it still needs to do meaningful investment before one sees adequate benefits from this. We understand the organization shall continue to deliver better returns during this time, but valuations at 6.8x FY24 book are sure rich," they said.

Those at HDFC Securities added that with the necessary digital transformation, the incremental portfolio growth from new-to-franchise customers will call for higher capital investments without the assurance of either a stronger customer franchise or greater customer stickiness.

The brokerages have 'Hold' and 'Reduce' ratings on the stock with a target of Rs 7,750 and Rs 6,430, respectively.

On Tuesday, Bajaj Finance’s management announced the creation of a digital website to offer a platform agnostic experience to users which will have identical user interface (UI) / user experience (UX) to digital app.

"Once implemented, the digital web platform will offer a similar experience across both, app and web, and customers will be able to commence journeys on one platform and conclude on the other platform," it said. Phase-1 of the web platform will go live by October, 2022 and Phase-2 by March, 2023.

However, CLSA opines the web platform will lead to elevated cost-to-income ratio at 34 per cent to 35 per cent. The Operating expense-to-NII ratio stood around 35 per cent in Q4FY22.

"We cut our FY23/FY24 net profit estimate by 4 per cent each to factor in potential NIM compression and a higher OPEX ratio of 35 per cent over the next two years. Bajaj Finance should deliver a return on asset (RoA) and return on equity (RoE) of 4.2-4.4 per cent and 21-22 per cent, respectively, over the medium term," said Motilal Oswal Financial Services.

The brokerage, however, maintained 'Buy' rating with a reduced target price of Rs 8,350 per share.

That said, from a long-term perspective, analysts expect the core business to remain well on track to get transformed into an adaptable new age fin-tech.

"At the current market price, the company trades at 8.2x its FY23 price-to-book value (P/BV). BAF stands poised to deliver robust AUM growth of 22 per cent over FY22-24 with RoE and RoA of 22-24 per cent and 4-5 per cent over FY23 and FY24, respectively, on the back of improving auto financing cycle, pick up in mortgage lending business, and lower estimates of credit cost supported by a strong balance sheet,"said analysts at Sharekhan.

Further, BAF plans to be a digital company by FY23, and has the ability to demonstrate high credit growth in the new credit cycle, aided by its strong cross-sell franchise and robust risk management framework. Hence, we maintain our ‘Buy’ rating with a price target of Rs 9,097, they added.

Bajaj Finance reported consolidated net profit of Rs 2,420 crore, up 80 per cent YoY and 14 per cent QoQ on account of robust NII and other income growth. NII grew by around 30 per cent YoY/ 2 percent QoQ while other income rose by 54 per cent YoY.

Gross and net non-performing assets (GNPA / NNPA) declined by 14 bps and 10 bps QoQ to 1.6 per cent and 0.68 per cent, respectively. Consolidated AUM stood at Rs 1.97 trillion, up 29 per cent YoY/9 per cent QoQ, and added Rs 14,700 crore worth of loans sequentially.