Shares of Bajaj Finance fall 3% as management projects margin contraction

Bajaj Finance stock: During the recently concluded quarter, Bajaj Finance saw 29 bps year-on-year (YoY) and 11 bps quarter-on-quarter (QoQ) decline in NIM to 10.5 per cent

Investors booked profit in the shares of Bajaj Finance after the non-banking financial company’s (NBFC’s) management indicated another 25-30 basis points (bps) of net interest margin (NIM) contraction in the second half of the current financial year (H2FY24).

The shares settled as the top laggard on the benchmarks on Wednesday, falling 2.9 per cent on the National Stock Exchange (NSE). By comparison, the 50-share Nifty ended 0.7 per cent lower. The stock declined 2.72 per cent to end the day at Rs 7,871.10 on the BSE.

During the NBFC’s post Q2FY24 earnings conference call, the management of Bajaj Finance said the cost of funds would continue its upward trajectory before plateauing in Q4FY24. Increasing CoF and stagnant yields will take a toll on margins over the next couple of quarters. 

“That said, operating leverage kicking in will partially offset impact of margin compression,” it said.

During the recently concluded quarter, Bajaj Finance saw 29-bps year-on-year (Y-o-Y) and 11 bp quarter-on-quarter (Q-o-Q) decline in NIM to 10.5 per cent. 

Its earnings are largely in-line with estimates with net profit rising 28 per cent Y-o-Y to Rs 3,551 crore, net interest income (NII) growing 26 per cent Y-o-Y to Rs 8,845 crore, total customer franchise rising 22 per cent Y-o-Y to 77 million, new loan bookings growing 26 per cent Y-o-Y to 8.5 million, and total as­set under management (AUM) swelling 33 per cent Y-o-Y to Rs 2.9 trillion.

How key brokerages reacted:

 

Jefferies | ‘Buy’ | Target Price (TP): Rs 9,470

While the management has guided that margins may see another 25-30bps compression in H2FY24, potentially denting top line in the coming quarters, we believe BAF has levers to slow apex growth (55 per cent is variable) to mitigate impact on profit / return on assets (RoA).

 

Goldman Sachs | ‘Sell’ | TP: Rs 7,205

The NBFC's loan book composition, contraction in NIM, and slightly higher credit costs (1.54 per cent) are negative for the NBFC.

 

Motilal Oswal Financial Services | ‘Buy’ | TP:Rs 9,600

Customer acquisitions and the new loan trajectory momentum will get stronger with the digital ecosystem (app, web platform and full-stack payment offerings) in place.

 

Key monitorables for FY24, it said, would be the evolution of its payments landscape and adoption of its payment offerings, and the degree to which the NIM compression can be offset with operating leverage, resulting in a contraction in cost ratios.
 

Axis Securities | ‘Buy’ | TP: Rs 9,425

The Rs 10,000-crore capital raise will further fortify the capital position (current Tier capital is at 22 per cent) and enable BAF to scale up new product lines, and deliver robust growth over the medium term. The capital raise would also make BAF well-prepared to steer superior growth amidst the increasing competitive intensity.

 

HDFC Securities | ‘Add’ | TP: Rs 8,870

The increasing scale of operations, concomitant with rising competitive intensity, is likely to translate into a slower pace of AUM growth (sub-25 per cent) over the medium term.

 

Kotak Institutional Equities | ‘Sell’ | TP: Rs 7,400

The rating reflects the risk of Bajaj's eventual transition to a bank. Bajaj Finance will need to deliver 21 per cent growth (Rs 2X system growth) in the high-growth phase (FY2026-35E) to reflect the current market price. This will translate to 8 per cent interest income market share, similar to the current share of ICICI Bank.

 

JM Financial | ‘Buy’ | TP: Rs 9,500

Bajaj Finance's leadership execution capabilities and capital growth make it well positioned to drive growth and deliver on its profitability metrics. We estimate AUM CAGR of 29 per cent over FY23-25E with average RoA/RoE of 4.7 per cent/ 22.7 per cent, respectively over FY24-FY25E. We value BAF at 31x FY25E EPS.