Bajaj Finance: Strong quarterly results enthuse confidence of doubling AUM by FY25

The management commentary after the earnings instilled further confidence with experts raising their target price for the stock in the coming months.

The improvement in headline GNPA (gross non-performing assets) ratio with auto finance business witnessing better asset quality was a key positive. The GNPA and NNPA ((net non-performing assets) declined by 35 bps QoQ and 18 bps QoQ to 1.25 percent and 0.5 percent in Q1FY2023. The management has guided for GNPA of 1.4 percent to 1.7 percent in the long term.

The company has expanded its branch network by 50 percent in 3 years (to more than 3,500) and has beefed up its digital offerings. This will aid new client acquisition and better cross-sells that lends management with confidence to guide for doubling of AUM to over Rs 4 lakh crore over FY22-25 and sustain higher ROA (return on assets) than its guidance of 4.5 percent in medium term.

Bajaj Finance is already carrying out used-car financing and it will launch the new auto loan business in FY24; however, it will not venture into CV (commercial vehicle) Finance.

During the quarter, the company has revised its deposit rates upwards by 55-70 bps. The company plans to have deposits contribution of 25 percent in the long term by accelerating the acquisition of retail deposits.

Even though the management guided that it will prioritise margins over loan growth, experts believe that NIM (net interest margin) compression is likely in FY23 given that levers on borrowing costs have largely played out and it has limited ability to pass on the higher cost of funds on a large fixed-rate book.

The management expects the opex-to-NII (net interest income) ratio to be in the range of 35.5-36.0 percent in FY23, due to continued investments in teams and technology and for omnipresence strategy. The opex-to-NII ratio is expected to be flat in Q2 and thereafter may see some gradual reduction. The management believes that the company has reached an inflection point in investments and has paused to find a sweet spot and the operating leverage will emerge eventually.

The company expects loan losses at 1.35-1.45 percent of average assets in FY23 and expects a demand slowdown in Q3FY23 due to inflation and rising interest rate regime. However, the management acknowledges the fact that there is still significant growth opportunity in all its business verticals.

The company has started standalone branches for developing its gold loan business and has seen strong traction. By the third or fourth quarter of current fiscal, it intends to start with digital gold loan acquisition and is confident that, in the next 3-4 years, this could become a large business.

The company is on track to go fully digital across all products and services on app by January 2023 and on web by March 2023.

According to experts, the key things to watch out for in FY23 would be the evolution of its payments landscape and how its sustains the momentum as well as the growth on the consumer app and the progress on the envisaged web platform.

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