Bajaj Finance Ltd’s March quarter (Q4FY23) was decent. Further, what stood out was the management’s upbeat commentary. Bajaj Finance is hopeful of sustaining its loan growth momentum going forward, even as it notes rising competition from banks and NBFCs. For FY24, it has guided for assets under management (AUM) growth of 28%-29% year-on-year (y-o-y) and aims to add 11-12 million new customers. The company added a record 11.6 million customers in FY23.
Investors seem pleased, taking the stock up by 2.4% on Thursday. However, some analysts are wary. “While we acknowledge Bajaj Finance has an excellent track-record of delivering better than guidance, we see no margin of safety in the guidance given housing, B2B and LAP (loan against property) are witnessing growth moderation and its unsecured segment is experiencing competition (likely to further intensify),” Investec Capital Services (India) Ltd said in a 27 April report.
Against this backdrop, investors will closely watch if Bajaj Finance is able to meet its guidance and the stock’s near-term re-rating would depend on that.
Coming to Q4 results, new loans booked and overall AUM, saw robust 20% and 25% y-o-y growth, respectively. In a competitive landscape like this one, deposit mobilization is crucial given that Bajaj Finance’s deposit growth is losing steam. In Q4, Bajaj Finance’s deposits grew about 4% sequentially, compared to 9% and 16%, in Q3 and Q2, respectively. Plus, the lag effect of interest rates hikes is set to increase the cost of funds. Repricing of deposits would thus translate into pressure on net interest margin (NIM).
While NIM contraction would be gradual, in a scenario of one more rate hike by the Reserve Bank of India, NIM could slide 40-50 basis points (bps) in FY24, the management said. The management aims to protect margins by lowering operating expenses and containing credit costs; even so, a minimal 5-15bps decline in return on asset can be on the cards in FY24.
To be sure, Bajaj Finance is diversifying into newer product segments and geographies, which should give long-term loan growth a boost. That said, the stock’s valuation is pricey. Further, incremental risk such as inevitable conversion to the banking format is not priced in and brings uncertainties on liability transformation and compliance costs, said analysts from Kotak Institutional Equities in a report. “The risk of sustaining high growth (and hence multiples) in light of a large balance sheet size remains,” added the analysts.
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