1QFY22 benefits – greater delinquencies led to elevated provisions and interest reversals: Bajaj Finance (BAF IN) reported net profit of Rs 10bn (+4% y-o-y/-26% q-o-q. Interest reversals of Rs 4.51bn in 1QFY22e (Rs 3.06bn in 1QFY21) kept NIM beneath stress at 10% (+9bps y-o-y/-27bps q-o-q). Higher slippages (c8.9% of opening AUM annualised) and create-offs (Rs 9.5bn) through the quarter resulted in provisions becoming elevated at Rs 17.5bn (+4% y-o-y/42% q-o-q). Gross Stage 3 rose 117bps q-o-q to 2.96% even though provision coverage fell to 51.3% (58.4% in 4QFY21). Restructured assets declined by Rs 4.52bn q-o-q to Rs 12.87bn. Management overlay provisions decreased to INR4.83bn in 1QFY22 (vs Rs 8.4bn in FY21).
Highlights from management commentary: The inability to gather through the Covid-19 associated lockdown contributed to the surge in NPLs in 1QFY22. Slippages have been mostly driven by the 3-wheeler segment inside auto finance, which comprises about 30% of general auto loans. Requests for restructuring have been reduce than ahead of. The EMI bounce price, which elevated to 1.08x of 4QFY21 level in the quarter, has enhanced to .96x in July 2021. Management guided for a 33% expense-to-earnings ratio by 4QFY22 (30.6% in 1QFY22), GNPAs of 1.7-1.8% by FY22 (2.96% in 1QFY22) and provisions of Rs 42-43bn in FY22, which amounts to ~260bp of credit expense.
We reduce our earnings estimates by c8% for each FY22e and FY23e: We moderate our AUM development outlook to a CAGR of 20% more than FY21-23e (versus 27% earlier). Other drivers of our earnings cuts are a reduction in our NIM and NII estimates to construct in the increasing proportion of mortgages (which is facing competitive stress on yields and is inherently a low spread company) and ~2.6% credit charges in FY21e, in line with management guidance. Despite the reduce, our estimate for RoE for BAF stay at +20% for each FY23e and FY24e.
Downgrade to Hold as uncertainty more than development and asset excellent is set to weigh on valuations: At 6.7x/35.5x FY23e BV/EPS, respectively, BAF’s valuations look costly, in our view. The moderating AUM development outlook, NIM stress due to altering loan mix and overhang on asset excellent due to Covid-19-associated disruptions are probably to stay headwinds to a re-rating from right here. Value creation from the digital transformation is not quantifiable. Near-term upside really should be restricted. We reduce our target cost to Rs 6,390 from Rs 6,500, which implies 8% upside and 7.3x FY23e BV. We downgrade our rating to Hold from Buy.