When Bajaj Finance tapped the capital markets in November, investors were more than willing to put money even though valuations looked steep. The stock returned 61% in 2019 and trades at seven times its estimated book value for FY20 currently.
But now, investors seem to have taken note that the consumption slowdown nipping at Bajaj Finance’s heels could finally make a dent.
In an early update on the December quarter performance, the consumer lender said that its asset under management (AUM) grew by 35% for that quarter. That is the lowest in two years for Bajaj Finance. For some analysts, the AUM growth was disappointing.
But the most worrisome part was that growth in new loans was 13%, which is sharply lower than 23% in previous quarter. What this means is that Bajaj Finance is not adding new customers at the same pace like it used to.
This also means that consumers are not buying at the same speed they used to, even when equated monthly instalments (EMI) proposition is dangled for them. The slower new loan addition could also be because of increased competition. Large banks such as HDFC Bank with distribution heft have increased their efforts in the small ticket loan segment.
Slowdown in new loans portends a slower AUM growth going forward. That means that valuations now look even steeper as Bajaj Finance’s valuations are buttressed by its proven track record of robust business growth even in trying times. No wonder, investors dragged the stock down nearly 4% on Monday.
Another factor analysts flagged is the hit from the exposure to the troubled brokerage firm Karvy Financial Services. “We remain confident of BAF’s overall asset-quality profile, backed by robust collection mechanism. However, provisions for Karvy Exposure ( ₹3.1 billion) may keep credit costs elevated," said analysts at Emkay Global Financial Services Ltd in a note.
To be sure, the lender’s management had warned on the slowdown in AUM growth in September quarter. However, the slowdown seems to be deeper than what the lender had anticipated. “Consumption slowdown was visible on Bajaj Finance numbers earlier also. But it seems to have gotten a little more pronounced. So valuations have to adjust accordingly," said an analyst requesting anonymity.
Even so, analysts don’t seem to be in a hurry to downgrade the stock. Bajaj Finance wins simply because there aren’t many strong balance sheets among non-banking financial companies. Further, investors are hoping that like in the past, the lender puts up a good show despite adverse times. Only this time, that may not be the case as the updated quarterly numbers show. A bunch of economic data may show that India’s companies are coming out of a trough but the Indian consumer is not yet ready to increase leverage.