While the long-term story is intact, risk-reward has become unfavourable after recent rally; Reduce retained
Large provisions, low business volumes due to lockdowns and higher liquidity on the balance sheet led to 19% y-o-y earnings decline for Bajaj. Moratorium reduction in June is impressive but may remain volatile relative to peers in case of further lockdowns or extended economic slowdown. Risk-return is unfavourable, and we recommend investors to book profits; retain Reduce with FV of Rs 2,800.
Moratorium down significantly in June; not comparable across lenders
Sharp moratorium decline needs to be put in perspective. Bajaj’s AUM under moratorium declined to 15.7% as of June 2020 compared to 27% as of April 2020. Notably, Bajaj’s borrowers need to pay the current monthly installment to exit the moratorium, while in the case of other NBFCs (example: L&T Finance), the borrowers need to clear entire dues to exit from the moratorium. To put this in perspective, Bajaj’s overall cash inflows, despite a sharp reduction in the moratorium, are lower than other NBFCs (that follow the latter policy) that report similar reductions in moratorium ratios. Nevertheless, the decline for Bajaj is sharp and the trends are improving m-o-m.
Bounce rates down marginally though. Bajaj highlighted that its bounce rates are down 300-400 bps m-o-m; as such, bounce rates in June were likely 32-33% from 37% in May. It appears that the post bounce follow-up efforts have picked up significantly, increasing the difference between bounce and moratorium loans; Bajaj has beefed up its team for the same.
No significant rise in moratorium even after reviving flexi loans. The Street has raised concerns on the flexi loans offered by Bajaj (25% of AUMs). These loans are offered by the company for the past five years to non-delinquent borrowers with good track records. We believe these loans are in the normal course of business, comparable to other EMI or interest only/WCDL. Increase in this facility by Rs 86 bn in Q1 is no doubt high but even if we add flexi borrowers under moratorium of Rs 36 bn, the moratorium ratio increases to 18%.
Retain REDUCE, FV Rs 2,800
We are retaining Reduce rating with FV of Rs 2,800 (no change). We continue to like the long-term story of Bajaj; expect a more gradual improvement from here though the lockdown in select parts of the country could continue to impact recoveries and disbursements. Against this backdrop, we believe that risk-reward has turned unfavourable post the recent sharp stock rally. We recommend that investors book profits at the current levels; prefer Bajaj Finserv instead.