Bajaj Finance: Consumer portfolio driving growth

Consumer lending grew 43% in FY16, but change in strategy curtailed housing loan business

Bajaj Finance, the market leader in consumer finance, posted yet another quarter of strong results led by 43 per cent year-on-year (y-o-y) growth in assets under management (AUM) to Rs 18,996 crore in the March 2016 quarter. Net interest income at Rs 1,151 crore was up 38 per cent y-o-y and exceeded, albeit marginally, Bloomberg estimate of Rs 1,148 crore. While higher provision slowed profit growth - net profit of Rs 315 crore (up 36 per cent y-o-y) but below Bloomberg estimates of Rs 351 crore, analysts are not worried.

Shweta Daptardar of KRC Research says: “March quarter is always subdued for Bajaj Finance as there is some rundown effect from the December quarter.”

This is probably why the stock of Bajaj Finance fell only 0.4 per cent in Tuesday’s trade, even as profits fell way short of estimates. The growth in the March 2016 quarter was primarily driven by the consumer lending business, which accounts for 43 per cent of the total AUM. The AUMs of consumer durable finance, personal loans and home loans segments grew 33-66 per cent y-o-y in the March quarter.

Business loans (ticket size of less than Rs 35 lakh) also saw healthy traction. While growth was flat in the loan against property and self-employed home loans segments, it’s not a reason to worry. “Change in strategy from distribution model to direct selling model resulted in flat growth for these segments,” says Rajeev Jain, managing director, Bajaj Finance.

Analysts agree that the shift in strategy is positive for the company as asset quality in these segments will strengthen and costs will fall. The cost-to-income ratio has already declined from 44.9 per cent a year ago to 44 per cent in Q4’FY16.

The only noticeable concern was the 37 per cent y-o-y increase in provisioning in Q4’FY16, on account of Rs 44 crore of additional provisioning towards an infrastructure account. Despite this, asset quality remained stable as the net non-performing assets (NPA) ratio inched up marginally to 0.28 per cent at the end of the March 2016 quarter from 0.26 per cent in the December 2015 quarter. As the management remains cautious on commercial loans and no further pain is envisaged in infrastructure lending, asset quality should remain stable going forward.

While there are many positives, expensive valuation (4.6 times FY17 price-to-book value) might cap upside for the stock. The stock currently trades at Rs 7,622, about 13 per cent lower than consensus target price of Rs 6,605, with 13 of 24 analysts polled on Bloomberg recommending a ‘buy’.