Growth picking up; digital rollout is key; estimates revised by (2)-2%; TP up to Rs 6,000; downgraded to Sell as high growth is priced in
Bajaj Finance’s Q2FY22 earnings were in line with estimates even as write-offs were high, offset by higher NIM. Business momentum is picking up, though investments in growth and recovery expenses offset the benefits in the near term. The Street’s focus will anyway remain on execution of the digital strategy over the next two quarters and digital momentum that may be gathered over subsequent 2-3 quarters. High growth, as a consequence of the aforesaid initiatives, is already reflected in the current market price. Downgrade to Sell post the recent rally; FV at Rs 6,000 (rollover from Rs 5,600).
Stressed loans stable, inevitable write-off despite high recovery expenses
Bajaj Finance’s overall stressed loans (gross stage-2+gross stage-3+write-offs incurred during the period) were flat q-o-q at ~10%. While gross stage-2 loans and gross stage-3 loans declined ~110 bps q-o-q and 50 bps q-o-q to 3.6% and 2.5%, write-offs were high at ~4% (annualised). This is despite the fact that the company incurred almost Rs 2 bn in recoveries during the quarter. Interest reversals were high as well at Rs 3.2 bn. We believe that since most of the delinquent loans are unsecured, these loans need to be written off beyond a point; this was observed last year post the first Covid wave as well. We continue to build in credit cost of 2.8% in FY2022e (1.9% in H2FY22), a tad (Rs 2-3 bn) higher than guided by the company.
Takeaways on digital initiatives
(i) Bajaj has delayed the launch of its revamped new consumer app to mid-December; the current version has 12.9 mn customers (Bajaj’s total franchise is 52.8 mn). The new app will help onboard new customers and let new-to-Bajaj customers transact through the app. (ii) The traffic on e-store increased to 29.7 mn customers, about 3X in two quarters. About 30,000 of total merchants out of total 119,000 distribution points are already on this app. (iii) Bajaj’s merchant app will go live in Feb 2022. The app will help customers access more merchants and improve Bajaj’s overall customer engagement.
High growth is already priced in; downgrade to Sell
We are revising our estimates by -2% to +2% reflecting marginally higher loan growth, lower NIM and higher expenses. We continue to build in high growth, i.e. 27% core earnings growth over FY2023-24E, followed by 20% earnings growth over 2025e-2035e and 11% over the subsequent eight years. Thus, our valuations already build in Bajaj’s high growth trajectory. The current market price is likely factoring in 20% earnings growth over FY2025-35e, followed by 16% growth over the next eight years, leaving no room for volatility. We downgrade to Sell from REDUCE.