Accumulate Bajaj Finance; target of Rs 5340: Prabhudas Lilladher

Prabhudas Lilladher's research report on Bajaj Finance

BAF’s Q3FY21 earnings were plagued by asset quality stress, weak PPoP and somber business traction. NPAs at elevated 2.86% (PLe: 2.5%), interest reversals to the tune of Rs4.5bn and slower fee income traction (mere3% QoQ growth) due to caution on disbursements drove down PPoP with a decline of 3% QoQ and YoY.  PAT at Rs11.5bn stood broadly in-line (PLe: Rs11.8bn) growing 19%QoQ led by lower provision (down 21%QoQ) as credit costs on standard assets stood down (190 bps in Q3 v/s 369 bps in Q2) with collection efficiencies reverting to pre-COVID levels in early buckets. Yet, BAF reported write-offs of 1.37% and restructured loans at 1.42% of overall AUMs as certain customer segments; namely, 3-wheeler, B2C, B2B and mortgage (MSME/LAP) exhibited erratic payment behavior. While FY21 remains an aberration clouded by slower growth and elevated credit risks, we prune down our growth estimates to 6% (earlier 8.5%), expect NPA spike to 3.1% (earlier <3%) but maintain credit costs at 3.9% for FY21. Consequently, our NPA/credit costs for FY22 also increases marginally to 2.7%/2.3% (earlier 2.5%/1.8%). This has led to downgrade in our EPS estimates by 9%/17% over FY21/FY22.   

Outlook

We confide in Co.’s judicious strategy to curtail disbursements and tighten credit filters in times of uncertainties. Maintain ACCUMULATE (downgraded on 5^th Jan’21 citing conservatism in business strategy and vulnerable asset quality; with a price target of Rs 5,340 valuing at 6.8x PABV MAR'23E (earlier Rs 5,491).