Home >Markets >Mark To Market >As EMIs get quarantined by covid-19, Bajaj Finance hopes for sunshine
The blow of the lockdown in March meant that AUM growth is reduced to 27% on a year-on-year basis in Q4.
The blow of the lockdown in March meant that AUM growth is reduced to 27% on a year-on-year basis in Q4.

As EMIs get quarantined by covid-19, Bajaj Finance hopes for sunshine

  • Bajaj Finance has lost 350,000 customers and its AUM has eroded by 4,750 crore (3.2%) during the lockdown
  • The stock has lost over 50% of its value in the last two months as the virus outbreak was expected to derail the EMI-induced spending

Indians are not able to shop like they used to and worry that they won’t be able to repay the loans they took to shop before the lockdown. It shouldn’t come as a surprise that Bajaj Finance, a lender whose mainstay business is to make Indians spend more through convenient equated monthly instalments (EMI), has suffered immensely.

In a call with analysts on Monday, Bajaj Finance said it lost 350,000 customers and its asset under management (AUM) eroded by 4,750 crore (3.2%) during the lockdown.

The blow of the lockdown in March meant that AUM growth is reduced to 27% on a year-on-year basis for the fourth quarter. Compare this with the 53% y-o-y growth in the December quarter, the starkness is unmistakable.

The stock has already lost over 50% of its value in the last two months as the virus outbreak was expected to derail the EMI-induced spending. Discretionary spending was already slowing down, making it difficult for Bajaj Finance to hold on to its historic high AUM growth rates. Covid-19 has only exacerbated the slowdown for the lender.

But in its call with investors on Monday, the non-banking finance company's (NBFC) management sounded confident of a quick recovery once the 21-day lockdown is lifted.

The lender’s base case scenario entails an increase in credit costs by 50-60% higher than normal. The lender expects a revival in demand by July and a full recovery by September. Its worst case scenario is the lockdown gets lifted on 15 May, which would alter demand structurally and credit costs would soar by 80-90%. What investors should worry most is that the lender is not considering the possibility of a worse outcome. Analysts still have a buy rating on the stock but that has a lot to do with the sharp 50% drop in the past one month. HSBC has lowered its earnings per share estimate for FY21 and FY22 by an average 20% but maintains that the sharp fall in the stock has made it attractive.

In the coming months, a key factor for Bajaj Finance investors is how the lender is able to navigate the demands of moratorium from its borrowers even as it finds difficult to demand the same from its own lenders. The asset-liability management, a constant bother for NBFCs ever since the collapse of Infrastructure Leasing & Financial Services (IL&FS), will continue to be arduous.

Another big factor would be the effect on asset quality and most analysts are expecting a sharp surge in credit costs and bad loan ratios.

Bajaj Finance too is expecting a big impact, indicated by a one-time large provision the lender is going to set aside to deal with covid-19 related delays in repayments by customers.

Bajaj Finance is an aggressive lender in the consumer space, that has enjoyed premium valuation given its high growth rates. The consumption growth story of India has been losing its shine off late with demand slowing down. As covid-19 threatens to hasten the process, Bajaj Finance is betting that Indians won’t be able to keep off their aspirational purchases once the lockdowns ease.

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