For top financiers, the slowdown is catching up faster than anticipated

Weak commentary from Bajaj Finance and HDFC Bank's loan growth missing estimates indicate that even market leaders are vulnerable to the ongoing slowdown

It was red Monday for the D-Street and it didn’t spare the stocks of Bajaj Finance and HDFC Bank, which are perceived as safe havens by investors. Shares of the two market leaders in their respective lending businesses were down over eight per cent and 2.5 per cent respectively, reacting to news flow which wasn’t encouraging.

Sanjeev Bajaj, the MD of Bajaj Finserv, which holds majority stake in Bajaj Finance, was on television admitting that sales growth of consumer durables, loans to small and medium enterprises and loan growth in rural pockets are slower than last year. Shares of Bajaj Finserv, which owns majority stakes in the group’s life and general insurance businesses, were also down by over 10 per cent.

To top it, HDFC Bank put out its June quarter’s (Q1) loan and deposit growth numbers – up 17 per cent and 18.5 per cent respectively, which fell short of Street expectations.

For investors, these data points don’t add up well.

Given their ability to widespread the business and thereby de-risk from slowdown, financial services stocks such as Bajaj Finance and HDFC Bank have often been viewed as safe proxies to capture India’s consumption theme. However, with the underlying segments facing a tough test of demand – whether automobiles, consumer durables or discretionary, the rub-off it has had on financial services sector has been faster and harsher than anticipated by investors.

The case of Bajaj Finance, in particular, is quite interesting. Diversifying from a financier of consumer durables, the company lately branched out to funding personal needs, e-commerce purchases, household essentials such as furniture and so on. On the other hand, it has also been aggressive on home loans and small business loans, particularly in the hinterlands. Yet, despite the diversification if the management states that it has been affected by the economic slowdown, analysts say June could be a quarter of moderate growth; maybe sub-30 per cent. However, valued at a whopping 9x FY21 estimated book, Bajaj Finance remains to be the most expensive non-banking finance company (NBFC) stock owing to its ability to grow ahead of competition, maintain growth at 30 per cent or more and robust asset quality. If this assumption is tested, analysts say even large investors could be prompted to take a valuation call on the stock. “Bajaj Finance is already trading at a zone out of comfort level and isn’t justified under any circumstance,” says Asutosh Misra, head of research, Ashika Stock Broking.

Concerns are more or less similar for HDFC Bank. Among the top league names, the bank’s stock at near 4x FY21 estimated book has sustained its high valuations over many years. The Street lauded the bank for its ability to expand loan book at over 20 per cent consistently. Numbers put out for Q1 though lagged the trend. While finer details will be known in a few days as the June quarter results are declared, analysts say HDFC Bank’s near 20 per cent exposure to automobile sector (including commercial equipment loans) may have spoilt the show. There is also another concern in the form of receding CASA (current account – saving account) ratio. Down to 40 per cent in Q1 from 42.4 per cent in March’19 quarter, much of deposits are getting added as retail term deposits (TDs). While it may be directionally positive, retail TDs are costlier than CASA and tend to be sticky only if they continue to offer the right value. Sidhart Purohit of SMC Capital says that this is an aspect which needs attention. “CASA ratio has been on a downhill post the demonetisation and therefore net interest margin (NIM; a profitability measure) may fall a bit in Q1. Moderation in retail loan growth may also affect NIMs,” he adds.

However, unlike Bajaj Finance, analysts do not expect HDFC Bank to give up its valuations just yet, for its ability to maintain asset quality better than peers. That said, management commentaries will be extremely crucial for the Street to reset its expectations on the two stocks.