Rural B2C business remains a sore point with overall credit costs climbing 15bps YoY in Q3 to 1.7%
AUM growth robust at 35% YoY to Rs 3tn+; we expect BAF to surpass Rs 5tn by FY26
Maintain BUY with new TP of Rs 10,105 (vs. Rs 9,605) on rolling valuations to FY26E with lower target P/ABV of 5.5x for standalone business
Credit costs swell: BAF’s credit costs climbed 48% YoY and 16% QoQ to Rs 12.5bn as against our estimate of Rs 11.6bn and formed 1.7% of average loans (+15bps YoY and +12bps QoQ), due to continued stress from the rural B2C segment. The urban B2C segment also showed stress in Q3. Though the company has slowed growth in rural B2C lending as a precautionary measure, we now raise our credit cost estimates to 165-190bps over FY24-FY26 – tracking management’s guidance of 175-185bps (ex-management overlay). BAF’s GNPA and NNPA remained robust at 1% and 0.4% respectively as of 9MFY24.
NIM declines: NIM (calc.) fell 40bps YoY to 10.3% due to a higher cost of funds and the regulatory increase in risk weights on bank loans to NBFCs. Though management intends to mitigate the impact by raising loan yields, this measure will be constrained by competitive pressures, especially from public sector banks. We cut our NIM estimate for FY25 by 16bps to 10.1% and introduce our FY26 forecast at 10%.
Strong growth: BAF delivered 35% YoY AUM growth to Rs 3.1tn at end-9MFY24. The mortgage business (31% of AUM) grew 31% YoY and urban B2C (20% share) was up 29%. SME lending (13% share) grew 39% to Rs 414bn. Two- and three wheeler financing climbed 64% YoY, contributing 6.2% of AUM from 5.1% at end9MFY23, as the company continues to finance non-Bajaj Auto products as well. The newer business is also progressing well. We expect a 29% CAGR in AUM over FY23- FY26 to Rs 5.3tn and a 24% PAT CAGR over the same period. Capital adequacy remained strong at 23.9% as of Dec’23 with tier-1 capital at 22.8%.
Maintain BUY: Although we remain bullish on BAF, we factor in the funding and credit cost pressures by reducing our target P/ABV multiple for the standalone business from 6.3x to 5.5x, bringing it on par with the stock’s long-term mean. Baking in our revised estimates and target multiple, along with rollover of valuations to FY26E, we arrive at a fair value of Rs 9,488/sh for standalone operations (Rs 9,125 earlier). Adding Rs 617/sh for subsidiaries, we have a new SOTP-based TP of Rs 10,105 (Rs 9,605 earlier) for BAF that offers 41% upside. BUY.
Click here to download Bajaj Finance – Q3FY24 Result Review 29Jan24 by BOB Caps Research
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