Borrower leverage in some segments like salaried personal loan and professional loans saw 15-25% increase after 2-year of disbursal. Management said that the leverage is higher in the top 15 cities and reduces as they penetrate deeper.
Q4 profit rose 57% y-o-y, 14.6% beat vs. our estimate due to stronger NIM, lower costs and provision. Asset quality was stable. Strong growth in new customers, expanding cross-sell base, along with product and geographic expansion should drive strong, sustainable loan growth. Opex could ease further on operating leverage gains. We lift FY20-21e EPS by 8%. Solid earnings growth & returns should support premium valuations. Retain Buy with revised PT of Rs 3,600.
Loan book grew 41%y-o-y
Growth was broad based across segments. Consumer B2B (durable/digital products) +33% y-o-y, SME +38% y-o-y and rural 69%y-o-y. Despite softer consumption trends, category/geographic expansion and rising finance penetration has supported growth as per management. 2W/3W loans grew 54.5% y-o-y led by higher share of Bajaj Auto’s sales. Mortgage book grew 43% y-o-y. BAF added 1.9 mn customers in Q4 (FY19 8.3mn). Cross-sell base rose to 26 mn (+7 mn y-o-y). We lift FY20-21e loan book estimates by 1-2% and forecast 33.5% loan CAGR over FY19-21e.
NIMs surprise positively
Q4 NIMs were 12.4% (-19 bps q-o-q, JEFe 11.4%). Average yield (calc.) was 19.4% (124 bps y-o-y) vs. JEFe 18.6% led by higher mix of higher yielding consumer/rural AUM, lower commercial AUM mix and higher fee income. Average funding costs fell 30 bps q-o-q to 7.9%. Marginal funding cost was 8.3% in Q4. Liability profile stays well diversified. CP mix fell 415 bps q-o-q, while mix of bank loans, NCDs and deposits rose q-o-q. We forecast 19 bps NIM compression over FY19-21e.
Cost to income surprises positively again; more cost levers exist
Cost to income was 34.5% (Q4FY18 39.4%) vs JEFe 35%. Operating leverage benefits are visible. We see further cost levers as (a) cost to income at housing finance subsidiary could improve as scale improves; (b) mix of repeat customers continue to rise (Q4 67% vs. 65% trailing 12M). Management has guided for cost to income of 34-35% in the medium term.
Asset quality remains stable, ex IL&FS
Q4 GNPA was 1.54% (-1 bps q-o-q). Excl IL&FS, GNPLs would have been 1.34%
(-7 bps y-o-y). Portfolio metrics was stable across most segments except LAP (deterioration due to IL&FS exposure). Credit cost fell 28 bps q-o-q to1.5%. ECL provision has edged lower due to stronger asset quality metrics at year end. S3 ECL coverage was 59.9% (Q3 60.3%) and S1&2 EC coverage was 0.85% (-3bps q-o-q).
Lift EPS 8%; PT to Rs 3,600
We factor in higher AUM, higher NIM, lower opex and provision est. We roll over RI based PT to June 20e (Mar 20e). At 7.3x FY20e BV and 32x FY20 EPS, admittedly, valuations are at premium, but strong execution, robust structural earnings growth and solid returns should support premium multiples.
Loan growth & geographic penetration
Broad-based growth despite headwinds: BAF reported strong 41% y-o-y loan AUM growth led by broad based growth across key segments. AUM growth in (a) consumer B2B segment (consumer durables) was up 41% y-o-y, (b) 2W/3W financing was up 55% y-o-y, (c) consumer B2C (personal loans) was up 49% y-o-y, (d) SME (business & professional loans) was up 38% y-o-y, and (e) mortgage segment was up 43% y-o-y. Rural lending (consumer & personal loans) grew 69% y-o-y.
Rural growth remains strong: Rural AUM grew 69% y-o-y. BAF would continue to deepen its geographic presence by adding touchpoints to its rural business base.
Leverage: Borrower leverage in inner/deeper markets are lower as per BAF. Borrower leverage in some segments like salaried personal loan and professional loans saw 15-25% increase after 2-year of disbursal. Management said that the leverage is higher in the top 15 cities and reduces as they penetrate deeper.
Co-branded EMI Cards: While currently BAF has a tie up with only RBL bank w.r.t co-branded cards, over the medium term, they would look at adding one more partner to be able to be within top 4-5 issuers of credit cards.