Bajaj Finserv Ltd’s earnings for the three months ended 30 September look remarkably similar to those of the preceding couple of quarters.
Net profit again more than doubled. In the September quarter, it grew 2.28 times from a year ago to Rs 158 crore. Income from operations rose 52% to Rs 714 crore; the life insurance, general insurance and retail finance divisions all returned to profits.
But while the headline numbers look impressive, there are a couple things to quibble about—stuff that though admittedly is not affecting profitability at the moment, but may come back to bite Bajaj Finserv in the future.
One, life insurance premium collections are falling at a faster pace. In the September quarter, gross written premium fell 27% from a year ago. Premium collections had slipped 25% in the June quarter and 23% in the March quarter.
The reasons for the decline are well known, but the changes proposed by the Insurance Regulatory and Development Authority are over a year old now. Thus, a more than 20% fall in renewal premium is all the more worrying.
Cost-cutting could prop up profit only this far and the decline in premia could hurt earnings a couple of years down the line and affect valuations. Most brokerages attribute almost two-thirds of the company’s value to this business, even though it contributes only one-fifth to profit at the earnings before interest and tax (Ebit) level. Managing director Sanjiv Bajaj said the company is confident of the return of growth in the second half of this fiscal. The base effect should also help.
Secondly, consider the retail finance business that contributed 40% to Bajaj Finserv’s Ebit. Its asset book crossed Rs 10,000 crore by the end of September, a growth of 11.5% since June-end. This has moderated from the 19.2% growth in the previous quarter. There is also a slight decrease in its deployment rate, while provisioning and loan losses grew by a faster 41% sequentially.
Still, Bajaj Finserv has a monopoly in financing consumer durables, as IDFC Securities Ltd points out, and this slight deterioration is to be expected when interest rates are rising. Net non-performing assets at the end of September were 0.33%, the lowest in five years.
The stock has outperformed the broader market since the beginning of this fiscal. Unless these problems suddenly magnify, there is little reason to believe that this trend will break.