Analyst Call Tracker: Banks, infra dominate Dec ‘buy’ lists; Bajaj Finance in top bets of 2023

Team Optimism

FY24 has been a robust year for the banking, financial services and insurance (BFSI) sector, aided by healthy credit growth momentum led by retail and SME segments.

“Most of the banks have guided for healthy loan growth going forward. The pressure on margins will continue going into H2FY24, with cost of funds (CoF) yet to peak. Most banks are likely to exit FY24 with net interest margins (NIMs) broadly similar to or marginally lower than FY23,” analysts at Axis Securities said.

The RBI’s recent announcement of increase in risk weight for unsecured lending categories of personal loans and credit card receivables could potentially slow down growth in these segments in the near term. However, no major asset quality challenges appear and credit cost trends should not look worrisome in FY24, thereby supporting earnings.

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This was reflected in ICICI Bank’s Q2 results, when the second-largest private sector bank clocked a 35.5 percent year-on-year (YoY) growth in standalone profit at Rs 10,261 crore while net interest income (NII) jumped 24 percent as bad loan provisions saw a significant drop.

“ICICI Bank delivered a superior performance in Q2FY24, and we expect a robust growth momentum in advances and deposits... Diversified loan portfolio, healthy asset quality, digital capabilities, and sufficient capitalisation augur well for the company’s future performance,” domestic brokerage Geojit said in a recent note.

Among PSU banks, SBI remains the best play on the recovery of the Indian economy on account of its robust capitalization, strong liability franchise, and improved asset quality outlook, as per Axis Securities.

“We believe despite the margin pressures, SBI remains well poised to deliver RoA/RoE of 1 percent/15-17 percent over FY24-25 supported by stable credit costs and steady cost ratios,” it added.

Hamara Bajaj

In December 2022, Bajaj Finance had 20 ‘buy’, 4 ‘hold’ and 6 ‘sell’ calls. One year later, the number of ‘buy’ calls jumped to 27 – the biggest increase in the Nifty pack.

The consumer lending giant clearly has the Street hooked.

Not without a reason.

Bajaj Finance reported a 28 percent YoY jump in consolidated net profit of Rs 3,551 crore for the July-September quarter on the back of improved net interest income (NII), new loans, and robust customer additions.

Despite roughly 40 percent of its loan book comprising of unsecured consumer lending, its asset quality was healthy, with gross non-performing assets (NPA) at 0.91 percent, and net NPA at 0.31 percent.

The company’s assets under management (AUM) grew at a healthy 33 percent to Rs 2.9 lakh crore in Q2, from Rs 2.1 lakh crore in the year-ago period – a remarkable feat for a company of this size.

Bajaj Finance faced a stumbling block in November after the RBI directed it to stop sanction and disbursal of loans under its two lending products eCOM and Insta EMI Card.

Insta EMI (equated monthly installment) cards allow for pre-approved sanctions up to Rs 2 lakh for online and offline purchases whereas eCOM comprises flexi personal and unsecured business loans.

However, analysts see only a limited impact on the company because the Insta EMI card base forms less than 1 percent of its total disbursement. Moreover, the company management has indicated a swift resolution of the compliance matters.

In a note, Jefferies said it sees a limited financial impact as the Insta EMI card base is just 5 percent of Bajaj Finance's total clients. The RBI move is surprising but while this is a negative, the speed of correction will be key to reinstating the products, the brokerage firm said.

CLSA said the issue should be resolved in one or two quarters but may impact profits by around 6 percent while the ban is in place. The brokerage sees this as more of an operational breach rather than a major violation.

Tech Pain

Half of the companies in the pessimism list belong to the IT sector, battered by slowing growth momentum in the US and Europe – their biggest markets.

IT services companies reported a weak performance in Q2FY24, with a median revenue growth of just 1 percent quarter-on-quarter, though strong deal wins provided a ray of hope.

Within the IT pack, Wipro languished at the bottom with the most ‘sell’ calls.

“Wipro’s business performance has been lackluster over the last six quarters, following a robust FY22 performance after Thierry Delaporte assumed the role of CEO in July-20. The demand softness in key verticals (BFSI and Consumer) and high exposure to discretionary Consulting vertical have weighed on Wipro’s operational performance, despite significant internal changes to improve decision making and refresh business leadership,” Motilal Oswal said in a report.

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However, it added that improvement in large deal wins indicate that these strategies are proving to be effective despite challenging macroeconomic conditions.

“While there is limited clarity on the timeline for macro recovery in key markets, easing inflation and lower interest rates might encourage the release of discretionary spends. Given the high consulting exposure (15% of revenues), Wipro should be among the early names to benefit from a demand revival. This can act as an upside surprise for a stock with low expectations and large valuation gap with peers,” it added.

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