Bajaj Finance delivers strong growth in Q3. Should you buy this NBFC stock post third quarter?

NBFC giant Bajaj Finance garnered the highest-ever consolidated quarterly profit of 2,973 crore in the third quarter of FY23, rising by 40{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} year-on-year. Also, new loans booked and net additions to customer franchise were at record levels in Q3. The company’s asset quality is pristine. Post Q3, brokerage Prabhudas Lilladher has maintained its buy rating on Bajaj Finance stock, however, reduced the target price. Intense competition in consumer finance and mortgage business, while the NBFC’s plan to enter the microfinance business are key factors to look into.

In Q3FY23, Bajaj Finance’s new loans booked were the highest ever at 7.84 million. Customer franchise witnessed the highest-ever quarterly increase of 3.14 million in Q3 — taking the total to 66.05 million as of December 31, 2022. Assets under management (AUM) grew by 27{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} YoY to 230,842 crore in Q3.

Meanwhile, net interest income came in at 7, 435 crore up by 24{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} YoY. Gross NPA and Net NPA as of December 31, 2022, stood at 1.14{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 0.41{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} respectively, as against 1.73{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} and 0.78{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} as of December 31, 2021. The Company has a provisioning coverage ratio of 64{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} on stage 3 assets and 116 bps on stage 1 and 2 assets as of December 31st, 2022.

In their research note, Akshay Ashok and Raj Mange analysts at Prahudas Lilladher said, “BAF’s Q3FY23 earnings (PAT at Rs29.7 billion) stood in line with our estimates (PLe: Rs30 billion), on account of strong NII growth. PPoP aided by healthy NII grew 8.2{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}QoQ/23.8{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} YoY to Rs48.5 billion above our estimates [ PLe of Rs47.9 billion]. Margins sustained, as rate hikes did not have an adverse impact on cost of funds and NIM for Q3FY23 came in at 13.24{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} vs 13.26{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} in Q2FY23.”

In terms of asset quality, the duo’s note said, BAF’s asset quality exhibited improvement during Q3FY23 with (1) significant improvement in auto finance asset quality (GNPA {194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} at 5.99{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} vs 8.01{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} (Q3FY23)) (2) ECL Stage 3 provision at 8.4 billion vs 7.3 billion (Q2FY23) (3) largely stable PCR at 64{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} vs 62{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} (Q2FY23). Overall stage 2 assets stood at 3.94 billion as of 31 December 2022 as against 4.38 billion as of 30 September 2022.

Meanwhile, the company also recorded healthy core performance. The note said, “in Q3FY23, BAF reported its highest ever customer franchise addition in a quarter- even bettering record set in Q1’23. The company added 3.14 million customers, customer franchise grew 4.9{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}QoQ to 66.05 million and AUMs grew at 5.7{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}QoQ/27.4{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}YoY at Rs2,308 billion. On QoQ basis, AUM growth was driven by Consumer B2C business (6.6{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}+) and Rural B2C (4.1{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}+). SME business growth was tepid at 4.5{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}QoQ vs 8{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6}QoQ growth shown in Q2’23. AUM growth was slow in mortgages at 3.3{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} QoQ due to intense pricing pressure.”

On valuation, the duo’s note said, “The impact of rate hikes on cost of funds is more gradual than anticipated. However our multiple stands reduced, as competition intensity remains high especially in consumer finance and mortgage segment along with company’s plan to enter into risky microfinance business. However re-rating can happen if company executes long range strategy framework and increase stickiness of new franchise customers. Maintain ‘BUY’.” But the analysts have reduced their price target to 7,835 on (7x Sep’24E PABV) from 8,953 (earlier:8.4x Sep’24E PABV).

In the long-range strategy, the brokerage’s note cited that Bajaj Finance has released LRS which is an annual 5-year rolling strategy planning process with an execution plan of 12-24 months. As part of LRS, the Company analyses macro, industry outlook, technology megatrends, business megatrends and selects a leading benchmark company to learn from.

Also, the company is planning to launch new auto loans in Q2 FY24, Micro Finance in Q4 FY24, and tractor financing in Q1 FY25. It further plans to open 100 locations in UP, Bihar, and North-East and another 100 locations in FY25.

On Friday, Bajaj Finance’s share price closed at 5,756 apiece down by 0.71{194d821e0dc8d10be69d2d4a52551aeafc2dee4011c6c9faa8f16ae7103581f6} on BSE. The company’s market cap is over 3.48 lakh crore.


Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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