Bajaj Finance's Q2 a damp squib despite unlocking; stock falls over 4%

Lender's caution on customer additions and fresh loan disbursals suggests the unpredictable nature of retail asset quality, say analysyts.

Bajaj Finance was the biggest loser among Nifty50 and Sensex components on Wednesday. With an over 4 per cent decline in its share price, the Street labelled the consumer lender’s July-September quarter (second quarter, or Q2) business update as dismal. 

Hopes were high on the back of improving data points, whether in terms of car sales, consumer durables, home improvement products or personal lifestyle utilities, such as apparel and grooming.

On the contrary, Bajaj Finance’s new customer addition at 1.2 million in Q2 was way off the 1.7–1.9-million customer addition levels seen in the past. In a good quarter, the number had even touched 2.2–2.4 million. 

Additions during the quarter under review were 38 per cent lower year-on-year, even though they were double the 532,000 figure recorded in the April-June quarter. 

What is tougher to comprehend, particularly in the context of the economy opening up, is the dip in assets under management or AUM, for the second consecutive quarter, even if it was a marginal 0.6 per cent. 

Analysts at Motilal Oswal Securities (MOSL) say the financier could have fared well on wholesale consumer durables loans, but may have gone slow in retail consumer durables and small business loans.

Seen as a barometer of India’s retail credit story, Q2’s weak showing prompted investors to question if the retail credit theme had peaked and if so, whether Bajaj Finance’s expensive stock valuation at 4.4x its 2020-21 (FY21) estimated book was justified.

Bajaj Finance was among the first to turn cautious about a year back, citing the economic slowdown. The management’s risk aversion became more pronounced in April and Q2’s business update cements it. Also, the lender is carrying excess capital of Rs 22,300 crore, which works to 15 per cent of its total assets and 19 per cent of total liabilities, says Shweta Daptadar of Prabhudas Lilladher. This, again, points to extreme risk aversion and an eventual contraction in profitability. 

The guidance on asset quality, too, hasn’t been very encouraging, with the management reiterating that there could be elevated provisioning in Q2. If so, that would be three straight quarters of Covid-hit higher provisioning costs. Analysts at MOSL have retained their credit cost expectation at 4.5 per cent in FY21.

For now, Bajaj Finance isn’t ticking the right boxes. How it approaches the upcoming festive season demand would be extremely critical to judge the trajectory of its financials. 

Until clarity emerges, investors may be better off staying away from the Bajaj Finance counter.