Bajaj Finance on July 26 raised its long-term guidance on return ratios, following a strong set of numbers for the quarter ended June. However, margin compression and rising credit costs remain a concern for the non-bank financier, amid rising competition.
The company has upgraded its long-term Return on Assets (RoA) guidance to 4.6-4.8 percent from the previous range of 4-4.5 percent. Furthermore, the Return on Equity (RoE) guidance has been improved to 21-23 percent from the earlier range of 19-21 percent.
Bajaj Finance has also revised Gross Non-Performing Assets (GNPA) guidance to 1.2-1.4 percent from the previous range of 1.4-1.7 percent. Additionally, the Net Non-Performing Assets (NNPA) guidance has been tightened to 0.4-0.5 percent, compared to the earlier range of 0.4-0.7 percent.
This reflects the company's strong underwriting and risk-management processes, said analysts.
At 9:30 am, the stock was quoting at Rs 7,505, about 1 percent higher from previous closing price. The stock is about 6 percent away from its 52-week high levels.
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The financials
In Q1, loan losses and provisions came in at Rs 995 crore, up 32 percent year-on-year. The NBFC's credit costs for the quarter came in at ~170 basis points against previous quarter's ~155 basis points. The management has guided for FY24 credit costs at 155-165 basis points.
The bump up in credit costs this quarter also came on the back of Rs 35 crore of standard ECL provisioning, one-time provisions of ~Rs 15 crore, and an overlay of Rs 50 crore towards redevelopment of the ECL model, said the management in the earnings concall.
ECL (expected credit loss) is a method of accounting for credit risk based on the loss likely to occur on a loan or portfolio of loans.
What analysts are saying
Going ahead, brokerages expect rising cost of funds to keep Bajaj Finance's margins under pressure. In Q1, cost of funds came in 7.61 percent, an increase of 22 basis points over the last quarter.
Analysts at Motilal Oswal Financial Services are modelling a NIM (net interest margin compression of ~25 bp in FY24E due to the expected rise in cost of borrowings and difficulty in passing on interest rate hikes to customers.
It has a Buy rating on the stock with target price of Rs 8,800. However, it has cut FY25E EPS (earning per share) estimate by ~2 percent to factor in higher credit costs.
Most foreign brokerages, too, have a Buy rating on the stock. For instance, Morgan Stanley has an Overweight rating on the stock with target of Rs 9,250 per share.
That said, analysts have flagged the entry of Jio Financial Services as a key risk for the entire NBFC space. "Anticipated increase in competitive intensity could keep valuation under pressure," said ICICI Securities.
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