Bajaj Finance: Q3 show suggests strong comeback, company remains cautious

Festive season demand has lifted new customer addition and loan growth closer to pre-pandemic levels

Initial numbers for the December quarter (Q3) posted by Bajaj Finance turned out to be encouraging. New customer addition at 2.2 million, about 80 per cent jump sequentially, and new loan accounts added at 6 million, growth of 84 per cent sequentially, auger well for the country’s largest consumer financier. With better-than-expected festive season demand and Q3 results — which benefitted from three festivals, Dussehra, Diwali and Christmas (compared to only two a year-ago) — in terms of revenue and net profit growth, Bajaj Finance’s financials may exceed estimates. Yet, its shares were down 1.54 per cent on Tuesday, as much of this improvement was already priced into the stock, which touched an all-time high of Rs 5,372.50 ahead of the new year.

Though Q3’s performance suggests a strong comeback for the lender, it indicates that the company remains extremely cautious on the ground and that customer confidence, too, is yet to return to full strength.

Despite the increase in new customer addition, assets under management (AUM) — which is the sum of loans, advances and investments — grew only 4.8 per cent sequentially. On a year-on-year basis, the number was down about 1 per cent, suggesting a probable shrinkage in loan outstanding per customer. In other words, the ticket sizes may have been rationalised according to the credit history and scores of the borrower. That new loan accounts acquired during the quarter is down by 21 per cent year-on-year, whereas new customer addition has declined only 10.6 per cent. Also, new loan account additions of Q3 lag FY20’s average quarterly figure of 6.86 million by 12.5 per cent, indicating both lender and customers remain cautious. Simply put, the worst may not be behind and that is being captured in Bajaj Finance’s Q3 numbers.

As analysts at Morgan Stanley note, AUM and disbursement activity were a tad lower than they had expected and it is likely that the possible write-offs in Q3 may have suppressed the AUM growth.

Cross-selling percentage has also fallen to 63 per cent in Q3, as against the 65-68 per cent range. Whether this is on account of moratorium or change in credit scores will be known later.

With Q4 historically being a dull period, the focus would be on Bajaj Finance’s Q3 asset quality. Even as its book under moratorium is meagre (less than 3 per cent in Q2), the balance sheet may reveal a clearer picture with Q3 being the first quarter of results without major restrictions. If stress is indeed kept in check as analysts at Motilal Oswal Financial Services expect, it will be something to cheer about for investors. A rerating though seems unlikely given the valuation at an all-time high of 9x FY21 estimated book.