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Home Business Downgrade Bajaj Finance to ‘sell’, fair value Rs 4,000

Downgrade Bajaj Finance to ‘sell’, fair value Rs 4,000

We are raising our estimates by 5-11% to reflect low credit costs, while core earnings are up by 1-4%.

Nearly out of the woods but a tall task ahead. Bajaj Finance’s 3QFY21 performance reflects its firm grip on credit costs and ability to resume its growth from 1QFY22E. Demand recovery, and a wide and diverse
franchise, coupled with NIM tailwinds, will drive a strong near-term. However, current valuations not only reflect the recovery but demand much more visibility on sustenance of its long-term profitability and growth trajectory, leaving no room for negative surprises. Post the sharp rally, downgrade to ‘sell’ from ‘reduce’; FV Rs 4,000.

Bajaj Finance seems to be in firm grip of its asset quality by arresting slippages and creating sufficient buffers over five quarters (4QFY20-4QFY21) to commence FY2022E on a clean slate. Collections in early buckets seem to have improved across the board. Broadly, collections across CD, digital, business loans, rural B2B were almost near pre-Covid levels while other segments viz. B2C, auto, rural B2C, LAP and home loans continue to remain weak.

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The company reported Stage2+3 loans of Rs 100 bn (Rs 120 bn before write off) as compared to Rs 130 bn in 2QFY21 and Rs 60 bn in 3QFY20 (pre-COVID).

Bajaj Finance’s transformation project including process reengineering, launch of much awaited marketplaces (apps) for distribution of loans/EMI products, life insurance policies, health, asset management and brokerage products, payment solution (Bajaj Pay) will kick off from 1QFY22. The focus in the initial period will be on improving productivity through its merchant solutions.

We are raising our estimates by 5-11% to reflect low credit costs, while core earnings are up by 1-4%. A flat base of FY2021E, demand recovery, strong franchise of 46 mn borrowers, large POS and wide bouquet of over 20 products will help the company deliver about 20-25% loan growth and healthy (20%+) RoE over the medium-term, likely driving premium valuations.

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We raise our FV to Rs 4,000 (4.5X book) from Rs 3,000 to reflect higher estimate, rollover to March 2023E and marginal reduction in cost of equity.

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