Bajaj Finance exceeds expectations in Q3, but stock’s valuation already pricey

Growth is on a firm footing, point out analysts. Bajaj Finance’s net interest income rose as much as 41% year-on-year. The firm has also reported the highest-ever core assets under management (AUM) growth of Rs14,700 crore in a quarter. “The AUM growth was broad-based with all segments contributing to growth except for the auto finance business, which was laggard in this quarter as well,” said analysts from Sharekhan. As of 31 December, AUM increased by 26% year-on-year to ₹181250 crore. Note that if the third covid wave does not create disruption, Bajaj Finance expects Q4 and FY22 AUM growth may remain strong. So far in January, there is no impact on business momentum, said the company.

Looking forward, Bajaj Finance foresees 25% to 27% AUM growth. Even so, the company remains conservative due to the looming threat of Omicron coronavirus variant and has thereby increased the overlay provision from ₹832 crore as of 30 September to ₹1083 crore as of 31 December.

Gross and net non-performing asset (NPA) ratios reached pre-covid levels as they reduced sequentially from 2.45% and 1.10% in Q2FY22 to 1.73% and 0.78% in Q3FY22, respectively. Deposits grew by 28% y-o-y to ₹30481 crore and contributed 20% to overall borrowings.

Going ahead, the company aims to achieve strong consumer momentum, better customer experience, and reduced cost and risk through its business transformation strategy. With the increase in adoption of new mobile app, Bajaj Finance expects the annual customer franchise addition to accelerate to 8-9 million versus the earlier guidance of 7-8 million. The company is on a digital transformation journey, the progress on which would be closely tracked by investors in the days to come.

Having said that, investors can hardly complain. After all, Bajaj Finance’s shares have appreciated around 50% over the last one year. “Bajaj Finance stock has rallied significantly over the past one year, outperforming most BFSI peers on the back of high interest levels in its transformation exercise and likely value expected to be generated by its proposed digital ecosystem,” said analysts from Kotak Institutional Equities in a report on 18 January. Additionally, expectations of high valuations of fintech companies, prior to the listing of Paytm’s parent One 97 Communications Ltd, also helped sentiments.

Kotak’s analysts further added, “We believe that the initial phase of euphoria on the app is behind us and Bajaj’s ability to seamlessly execute on its well-articulated strategy remains crucial. Bajaj’s management has demonstrated strong execution skills in the past but any slowdown/disappointment on the digital transformation can weigh in on the stock, in light of high investor expectations.”

While post results, shares of Bajaj Finance opened higher in the morning trade on Wednesday, the broader market weakness weighed on the stock later on.