Investors lap up Bajaj Finance despite NPA warning; stock up 10% in 2 days

The management of Bajaj Finance in a mid-quarter update indicated some adverse impact of Covid-19-related fresh lockdowns on business during the April-June quarter (Q1FY22)

Shares of Bajaj Finance continued their upward movement for the second straight day on Friday, and hit a new high of Rs 6,228.60, up 2 per cent on the BSE. The stock of the non-banking finance company has rallied 10 per cent in the past two days on hopes that B2B and auto finance businesses will do much better with the reopening of the economy.

The stock of Bajaj Finance had corrected 6 per cent in the four days prior to Thursday as it slipped from its previous high of Rs 6,009 on June 4, 2021, to Rs 5,674 on June 9, after the consumer financier voiced concerns over asset quality issues due to localised lockdowns following the second wave of Covid-19. After reporting a healthy performance in Q4FY21, management of Bajaj Finance in a mid-quarter update indicated some adverse impact of Covid-19-related fresh lockdowns on business during the April-June quarter (Q1FY22). The company indicated that its B2B and auto finance businesses were most affected due to strict lockdowns in the majority of states.

“The company estimates an impact of Rs 4,000-5,000 crore to its AUM growth plan for FY2022 on account of the disruption caused by the second wave. However, Q1FY2022 will see a higher impact on assets under management (AUM) due to lower volumes in B2B businesses. The company has taken several actions to reduce its operating expenses and cost of funds to partially mitigate the financial impact caused by lower AUM growth,” Bajaj Finance said in a mid-quarter update on Friday, June 4, after market hours.

B2B and auto finance businesses were most affected due to strict lockdowns in the majority of states. These businesses delivered 70 per cent of their planned volumes in April 2021 as multiple states started imposing lockdowns from the middle of that month. Their volumes dropped to 40 per cent in May 2021. Most states have indicated continued lockdown till 7th or 15th June. With the expected reopening, June should be much better, the company said.

“With the high severity of the second wave, some impact on AUM/credit cost was expected. B2B and auto financing contribute around 16 per cent to the overall AUM for the company, however, their contribution to overall customer acquisitions is very high. Considering the short duration of the high-volume products, they also contribute meaningfully to fee income for the quarter,” according to analysts at Motilal Oswal Financial Services.

The brokerage firm sees temporary moderation in these businesses and expects some part of the lost demand to be compensated by the start of the unlocking. With good pent-up demand, we may see a positive surprise in H2 – provided there is no impact in the form of a third Covid wave or the wave is less intense in nature, it said. The stock was trading above the brokerage's target price of Rs 6,200 per share.

In the last quarter, management had revealed a business transformation journey by creating a seamless credit experience and announcing an integrated payment solution. Since the process is due in July-August 2021, we await more clarity over the same, said analysts at Emkay Global Financial Services in a stock update.