Bajaj Finance reported strong headline performance in Q1FY23, supported by a buoyant business environment and continued benefit of lower interest rates. While the momentum continues for the next few months, lower discretionary income and rising rates will likely stumble Bajaj’s rapid growth trajectory. Post the recent rally, we downgrade the stock to Sell rating with Fair Value of Rs 5,400.
Challenges can’t be ignored: Bajaj Finance reported high NIM, benefiting from continued decline in funding cost and lower-than-expected credit costs. We, however, believe that intense competition, especially in the consumer B2B and B2C segments, will put pressure on Bajaj’s medium-term profitability. Private banks are focusing on BNPL (consumer durable) financing. Banks shifting focus to personal loans will keep pressure on yields in the B2C book as well. While benchmark rates have increased significantly, Bajaj Finance continues to benefit from decline in cost of funds (6.64% from 6.71% in Q4FY22), which will likely start to inch up from H2FY23E.
Bajaj’s internal grading suggests asset quality performance of most segments, except two-wheeler financing, is strong. We, however, believe that rising inflation and resultant lower discretionary income pose risks. The company reported 6% q-o-q loan growth in Q1FY23, as compared to 8-9% q-o-q reported in Q1 in pre-Covid years.
Downgrade to Sell post the rally: We are revising up our core estimates by 2-4% reflecting better NIM trajectory; overall earnings are up 1-8% reflecting lower credit costs. We continue to model 26% core loan growth, moderating to 22% in FY2024-25E. While current growth and return matrices remain strong, competitive and macro headlines may not support Bajaj’s rich valuations. The recent stock rally provides an opportunity to cut exposure. We downgrade the stock to Sell; FV Rs 5,400 (4.9X book; rolled over to Rs 5,100).