Thursday, December 8 2022

Bajaj Finance posted a strong overall performance in the first quarter of FY23, supported by a dynamic business environment and the continued benefit of lower interest rates. While the momentum will continue over the next few months, falling discretionary income and rising rates will likely hamper Bajaj’s rapid growth trajectory. After the recent rally, we are downgrading the stock to sell with a fair value of Rs 5,400.

The challenges cannot be ignored: Bajaj Finance recorded a high NIM, benefiting from a continued decline in funding costs and lower than expected credit costs. We believe, however, that intense competition, particularly in the B2B and B2C consumer segments, will put pressure on Bajaj’s medium-term profitability. Private banks focus on BNPL (sustainable consumption) financing. Banks focusing on personal loans will also keep pressure on returns in the B2C portfolio. While benchmark rates have risen significantly, Bajaj Finance continues to benefit from the lower cost of funds (6.64% vs. 6.71% in Q4FY22), which will likely start to rise from H2FY23E.

Bajaj’s internal rating suggests that the asset quality performance of most segments, with the exception of two-wheeler financing, is strong. We believe, however, that rising inflation and the resulting decline in discretionary income pose risks. The company reported loan growth of 6% quarter-over-quarter in the first quarter of FY23, compared to 8-9% quarter-over-quarter in the first quarter of the pre-Covid years.

Downgrade to Sell post-recovery: We are revising our base estimates up by 2-4%, reflecting a better NIM trajectory; overall profit is up 1-8%, reflecting lower credit costs. We continue to model core loan growth of 26%, slowing to 22% in fiscal year 2024-25E. While the current growth and return matrices remain strong, competitive and macro headlines may not support Bajaj’s lofty valuations. The recent stock market rally provides an opportunity to reduce exposure. We are downgrading the stock to Sell; FV Rs 5,400 (pound 4.9X; reported at Rs 5,100).


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