Markets
Bajaj Finance outlook is promising but watch the margins
Summary
- Overall, analysts reckon there could be earnings upgrades post Q2 results.
Bajaj Finance Ltd has seen improvement in some financial metrics over the past few quarters. The non-banking financial company’s latest update for the three months ended September (Q2FY23) shows the momentum has continued in the last quarter as well.
Bajaj Finance maintained a healthy run rate in customer acquisition with new additions at 2.6 million in Q2 versus 2.7 million in Q1. Further, assets under management as on September end grew by 31% year-on-year (y-o-y) to ₹218,350 crore. The deposit book rose by 37% y-o-y to ₹39,400 crore as on September end. However, the acquisition of new loans in Q2 was a tad disappointing, falling by 8% sequentially. But investors may not lose sleep over this going into Q3 given that the festive season would boost demand.
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Why is the growth subdued in the services sector?
Overall, analysts reckon there could be earnings upgrades post Q2 results. The outlook is promising, but concerns on net interest margins (NIMs) cannot be ruled out. “Fixed rate loans form a large part of Bajaj Finance’s book. As such, it would be difficult for the company to pass on higher cost of funds, which puts pressure on NIMs," said Shweta Daptardar, analyst at Elara Securities (India). She expects NIMs to compress y-o-y in Q2FY23 and FY23. “Also, the company is currently in the middle of a digital transformation, which means sustained cost pressures," Daptardar said. Even so, levers such as loan growth and easing of credit costs would partly offset these pressures.
Additionally, for Bajaj Finance, the drop in liquidity buffer from about ₹11,600 crore in Q1 to ₹9,300 crore in Q2 bodes well for margins. This is because excess liquidity is always a drag on margins, said Akshay Ashok, analyst at Prabhudas Lilladher. “With rising interest rates, the cost of fund rises, but shrinking liquidity buffer would protect their margins," he said.
Investors would do well to track the roll out of the company’s web platform. Also, the performance of its consumer app holds key against the backdrop of Bajaj Finance’s pursuit of going digital.
Competition is intense, which is a looming risk, but investors seem to be factoring in a brighter picture to a good extent. Shares of Bajaj Finance Ltd have rallied by more than 25% in the past three months and are now 8% below their 52-week highs seen on 18 October 2021. Valuations are on the higher side, analysts said.
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