Bajaj Finance reports 22% AUM growth but margins and asset quality yet to return to normalcy

Bajaj Finance reported AUM growth of 22% YoY and 5% QoQ, 7-12% QoQ growth in consumer durables, personal loans, SME and rural segments, operating costs increased 76% YoY and 48% QoQ led by higher collection costs, increased manpower and branch additions, restructuring book in Q2FY22 stood at Rs. 4.26bn and provisions against restructuring stood at Rs. 2.89bn (19.1% PCR). The cost-to-income ratio is expected to decline to 33-34% by 4QFY22 from 38% in 2QFY22 as collection costs subside.
    
Going forward, the company is increasing its focus on sourcing loans through its various digital channels and expects to source 500,000 EMI card customers digitally from 3QFY22 onwards and generate 500,000 loans/quarter from its EMI store in the next one year. To increase its growth potential and diversify its loan book, the company is creating advances in North and East India.
 
The company expects loan loss provisioning to normalize to Rs. 7-8bn quarterly run rate from 3QFY22 onwards however, the FY22e credit cost guidance remains unchanged at Rs. 46bn. The One-Time Restructuring book increased to Rs. 15.12bn as on September 2021 from Rs. 12.87bn as of end of June 2021. The stage 2 and 3 assets are likely to decline to Rs. 78-80bn from Rs. 100.65bn (as on end of September 2021. Asset quality is expected to normalize by March 2022 and gross stage 3 to reduce to between 1.7-1.8% and net stage 3 to between 0.7-0.8%. The company expects the margins to normalize from Q3FY22 in the range Rs. 1.8-2bn.
 
With its future outlook of +20% loan book growth, one can expect , +4.5% RoA and 45% EPS CAGR estimate over FY22-24e places its operating metrics and profitability distinctly above its set of peers.
The potential key drivers that could lead to higher growth could be successful digital transformation and augmentation of fintech capabilities, stronger customer acquisition and cross-selling of products. The company is dipping its toes in the Fintech space with their new consumer app and merchant app which may be introduced in December 2021 and February 2022 respectively.
 
On the flip side, moderation in growth and high competitive pressure on yields could prove to be challenges the company needs to overcome in the near future.