Bajaj Finance has wind in its sails

Bajaj Finance Ltd’s shares hit a new 52-week high of ₹8,043 on Wednesday, before closing about 1% lower. The latest business update of the non-banking financial company for the three months ended September (Q2FY24) suggests it is set to see yet another strong quarter performance. This, in turn, could pave the way for earnings upgrades.

The quarterly run rate for new customer additions continued to be above three million for the fourth consecutive time last quarter. As of September end, the total customer franchise and deposit book stood at 76.6 million and ₹54,800 crore, respectively. These measures saw a growth of around 22% and 39%, respectively, on a year-on-year basis. While new loans booked during the quarter grew by 26% year-on-year, the metric was lower sequentially.

Given this, the growth in Bajaj Finance’s assets under management (AUM) is on an uptrend, rising by 33% year-on-year to ₹2.9 trillion as on September end. This suggests that disbursements were strong in most product segments, including two-wheelers across multiple original equipment manufacturers, said analysts at Motilal Oswal Financial Services. For perspective, Bajaj Finance’s AUM growth rates as of June and March end were 32% and 25%, respectively.

Now, it is worth mentioning that the steady performance is even before the festive season has brought its cheer. As such, there are tailwinds for customer additions with consumers potentially making purchases during the festivals. This, in turn, is good news from the AUM perspective. This also means that if Bajaj Finance maintains the steady pace of execution in the second half of FY24, then further re-rating in the stock cannot be ruled out.

To be sure, there are a few headwinds ahead and one of them is the expected softness in margin. Bajaj Finance’s net interest margin is likely to see some pressure in Q2 and Q3 due to high cost of funds, which it may not be able to pass on entirely. Here, one needs to keep an eye on how the company’s liquidity surplus shapes up.

Secondly, there is an element of uncertainty creeping up as Bajaj Finance expands its footprint in the unsecured portfolio and enters new product lines. In this backdrop, “On grounds of prudency, we model 1.4% gross NPA (current 0.9%) and 1.75% credit costs over FY24-26E factoring in unsecured and new products expansion especially into auto, microfinance institutions, tractors,” said Shweta Daptardar, an analyst at Elara Securities (India). NPA is non-performing asset. Even so, Daptardar opines that the asset quality is healthy despite potentially high growth in AUMs.

Meanwhile, Bajaj Finance’s board will meet on Thursday to discuss a capital raise, even though the company’s tier-1 capital adequacy ratio is at a robust 23%. “One of the justifications could be that the company is in a high-growth phase,” reckoned analysts from Macquarie Capital Securities (India) in a report on 25 September. In the June quarter earnings call, Bajaj Finance had said it aims to achieve AUM growth of 29-31% in FY24.

Also, Bajaj Finance’s foray into new segments would require capital to fuel growth in these verticals. “Another could be building buffers for any increase in risk weights for unsecured loans. However, in our view, its current capital levels provide enough headroom for both these factors,” said the Macquarie report.

Investors would do well to closely follow the developments on this front and understand the impact on return ratios, if any. For now, investors in the stock are sitting on handsome gains as the shares have risen by almost 20% in 2023 so far versus a 7.4% gain in the Nifty50 index.