Bajaj Fin reports 33% growth in Q3 profit, stock may remain range-bound

Bajaj Finance reported 33 per cent growth in its profit before tax (PBT) at Rs 2,170 crore in the December quarter of FY20, compared to Rs 1,636 crore in the same quarter last financial year (Q3 FY19). Growth was driven by net interest income (NII), which increased 42 per cent year-on-year (YoY) to Rs 4,537 crore in Q3FY20; total income expanded 41 per cent YoY to Rs 7,026 crore.
 
The shadow lender’s ability to rationalise cost also helped improve the quality of growth. For instance, in Q3, the operating expenses to NII ratio rose to 33.9 per cent, from 34.9 per cent in the year-ago quarter. As a result, the company maintained its profitability.
Helped by lower tax rates — adopted by Bajaj Finance and its subsidiaries (mainly Bajaj Home Finance) — the consolidated net profit of the lender increased 52 per cent to Rs 1,614 crore, from Rs 1,060 crore in Q3 FY19. Assets under management (AUM) of the lender grew 35 per cent YoY to Rs 1.45 trillion as of December 31, 2019.
 
Reacting to strong numbers, the Bajaj Finance stock ended Wednesday’s trade with gains of 4.95 per cent to close at Rs 4,421.75 apiece.
 
On the asset quality front, it was a mixed bag for the lender. The numbers appeared fine during the quarter, with the gross non-performing assets (NPA) ratio at 1.61 per cent in Q3 versus 1.55 per cent in Q3FY19. On a sequential basis, the numbers remained flat, which was positive.
 
However, the quarter saw bad loan provisioning increase 84 per cent YoY to Rs 831 crore as it made accelerated provision of Rs 85 crore towards its exposure to a delinquent stockbroker against an outstanding of Rs 303 crore, and Rs 15 crore towards a south India-based conglomerate. The provisioning coverage ratio for the quarter dipped to 57 per cent,  as against 60 per cent seen in the earlier quarters. Slippages have also increased by 31 per cent YoY to Rs 936 crore. 

In all, barring a few pockets of stress, Bajaj Finance’ Q3 results were par for the course. The management commentary, however, was cautious.
 
“The degree of slowdown is unprecedented and our earnings momentum could have been stronger if not for the weak macroeconomic environment,” said Rajeev Jain, MD, Bajaj Finance. This explained why growth in new loans was below the usual run rate (of 15-18 per cent) at 13 per cent to 7.64 million loan accounts in Q3. New customers acquired during the quarter stood at 2.46 million, marginally lower than the year-ago run rate of 2.6-2.8 million every quarter. There is also a growing dependence on the existing pool of customers, with Bajaj Finance’s cross-sell ratio moving up to 3.1 per cent from about 2.4-2.6 per cent last year. The existing customers contributed 68 per cent of the new loans in Q3.
 
Jain sounded equally concerned about the quality of customers as well. “Other than the affluent and the salaried classes, every other segment is turning troublesome in terms of delinquencies,” he warned. Also, calling out a genuine issue of collections and recoveries in the two-wheeler and three-wheeler space, Bajaj Finance has turned its view on the sector from cautious last quarter to high-risk in Q3. “Where there is a mix of salaried and self-employed customers, there is trouble,” he said.
 
The lender, though, remains watchful on pockets, such as lifestyle and digital products loans, while maintaining its ‘high-risk’ stance on loan against property. That said, the 30-day past due ratio has steadily increased over a year even in relatively safer segments, such as consumer durable loans, personal loans, and business loans by 30-50 bps YoY in Q3.
 
With commentary from Bajaj Finance being one of the weakest in recent times, analysts say its stock price may remain range-bound in the near-term. Valuations at 8 times FY21 estimated book also caps the upside potential.