Bajaj Finance’s re-rating is tied to meeting FY24 growth guidance –

Bajaj Finance Ltd’s March quarter (Q4FY23) was decent. Also, what stood out was the upbeat comment from management. Bajaj Finance is hopeful of maintaining its loan growth momentum going forward, even as it sees increasing competition from banks and NBFCs. For FY24, it has guided assets under management (AUM) growth from 28% to 29% year-over-year (yoy) and aims to add 11-12 million new customers. The company added a record 11.6 million customers in fiscal 23.

Investors seem pleased, with shares rising 2.4% on Thursday. However, some analysts are cautious. “While we recognize that Bajaj Finance has an excellent track record of delivering better than guidance, we see no margin of safety in guidance given to housing, B2B and LAP (lending against property) are seeing growth moderation and their segment unsecured is experiencing competition (likely to intensify further),” Investec Capital Services (India) Ltd said in an April 27 report.

Against this backdrop, investors will be closely watching whether Bajaj Finance can meet its guidance and the re-rating of the stock in the near term would depend on that.

Turning to fourth quarter results, new loans booked and overall assets under management posted strong year-on-year growth of 20% and 25%, respectively. In a competitive landscape like this, deposit mobilization is crucial as Bajaj Finance’s deposit growth is losing steam. In the fourth quarter, Bajaj Finance deposits grew approximately 4% sequentially, compared to 9% and 16% in the third and second quarters, respectively. In addition, the delayed effect of interest rate increases will increase the cost of funds. The revaluation of deposits would therefore translate into pressure on the net interest margin (MIN).

While the NIM contraction would be gradual, in a scenario of one more rate hike by the Reserve Bank of India, the NIM could fall by 40-50 basis points (bps) in FY24, the NIM said. management. Management aims to protect margins by reducing operating expenses and containing credit costs; still, a minimal 5-15bp decline in return on assets may be on the cards in FY24.

Bajaj Finance is undoubtedly diversifying into new product segments and geographies, which should fuel long-term loan growth. That being said, stock valuation is expensive. In addition, incremental risk, such as the inevitable conversion to bank format, is not priced in and raises uncertainties about liability transformation and compliance costs, analysts at Kotak Institutional Equities said in a report. “The risk of maintaining high growth (and therefore multiples) in light of a large balance sheet size remains,” the analysts added.


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