Analysts in wait-and-watch mode on Bajaj Finance

While Street continues to like the business, analysts await clearer signals on consumer buying

A robust business model established over years of experience often tends to withstand the test of time quite remarkably. That of Bajaj Finance, India’s largest consumer durables financier, is one such example. 

During the note ban period, there were doubts on whether Bajaj Finance could replicate its historic performance in terms of customer acquisition, loan growth and, more importantly, asset quality in the December quarter (Q3). Much to the Street’s surprise, Bajaj Finance comfortably met these parameters. 

Customer acquisition grew by 35 per cent year-on-year in Q3, while assets under management expanded by 33 per cent to Rs 57,600 crore, year-on-year. Even asset quality stood out with gross non-performing assets ratio at 1.47 per cent, and that too without utilising RBI’s 90-day dispensation on loans less than Rs 1 crore. Overall financials remained robust, with net interest income and net profit growing by 27 and 36 per cent, respectively. These factors have helped Bajaj Finance’s stock rebound from its demonetisation period low of Rs 766 to Rs 1,125 on Tuesday.

However, after outperforming the broader markets by a reasonable margin for most of the last two years, the stock has lagged in the past six months. Bloomberg data indicate that while the Bank Nifty has gained six per cent in the past six months, Bajaj Finance is up only 2.1 per cent. Analysts nonetheless feel that Bajaj Finance may not surpass its previous high of Rs 1,180 in a rush. Pointing to some key indicators, they prefer to see how March quarter pans out, particularly on consumer loans, before altering their expectations on the stock.

Consumer loans, which grew by 52 per cent year-on-year in September quarter (Q2), grew 47 per cent year-on-year in Q3. But, within this segment, consumer durables grew slower at 27 per cent versus 48 per cent in Q2. As for the vehicle financing (two and three wheelers), the dependence on Bajaj Auto was seen higher in Q3 – 46 per cent dependence on Bajaj Auto for two-wheelers and 29 per cent for three-wheelers as against 38 per cent and 18 per cent, respectively, a year ago. Average ticket size, which dipped post demonetisation, is yet to see a strong recovery. All these factors prompt analysts to be on a wait-and-watch mode.

“We aren’t able to see a secular return in consumer buying yet. While demand for consumer durables may have picked up as summer sales is already playing out, we can’t say the same for vehicle sales,” says an analyst with a domestic brokerage. 

Analysts at Jefferies feel the annual compounded loan growth for Bajaj Finance could be lower in FY16-19 compared to what was in FY13-16. The brokerage flags that at current valuations (5.2 x FY18 price-to-book), risk-reward appears negative.