Bajaj Finance’s digital shift is a tipping point

Valuations are not cheap, but it helps that the consumer lender has been able to consistently deliver on growth, said an analyst, requesting anonymity. “After the sharp run-up in the stock, rather than valuation correction, it is likely that the stock may see time correction for some time," he said.

In its December quarter (Q3FY22) earnings call on Tuesday evening, Bajaj Finance said it aims to achieve strong consumer momentum, better customer experience, and reduced cost and risk through its business transformation strategy. With the increased adoption of its new mobile app, Bajaj Finance expects annual customer franchise additions to accelerate to 8-9 million versus the earlier guidance of 7-8 million. The company is on a digital transformation journey, the progress of which would be closely tracked by investors in the days to come. In its first phase, Bajaj Finance intends to transition all consumers to the new digital platform from February.

As such, Bajaj Finance has delivered strong growth in Q3, reporting its highest ever quarterly consolidated profit after tax of ₹2,125 crore, comfortably surpassing analysts’ estimates. The profit represents a surge of 85.5% year-on-year (y-o-y) and 43.5% sequentially.

Growth is on a firm footing, said analysts. Bajaj Finance’s net interest income rose as much as 41% y-o-y. The company has also reported the highest-ever core assets under management (AUM) growth of ₹14,700 crore in a quarter. “The AUM growth was broad-based with all segments contributing to growth except the auto finance business, which was a laggard in this quarter as well," said analysts from Sharekhan. As of 31 December, AUM increased by 26% y-o-y to ₹181,250 crore. Bajaj Finance expects Q4 and FY22 AUM growth to remain strong if the third covid wave does not create disruption. So far in January, there is no impact on business momentum, the company said.

Bajaj Finance foresees 25–27% AUM growth. Even so, the company remains conservative because of the looming threat of the Omicron variant of coronavirus and has increased the overlay provision from ₹832 crore as of 30 September to ₹1,083 crore as of 31 December.

Gross and net non-performing asset (NPA) ratios reached pre-covid levels, as they reduced sequentially from 2.45% and 1.10% in Q2FY22 to 1.73% and 0.78% in Q3FY22, respectively.

Deposits grew by 28% y-o-y to ₹30,481 crore and contributed 20% to overall borrowings.

Post results, shares of Bajaj Finance declined by 2% on NSE on Wednesday, a day when the Nifty50 index fell about 1%. However, as said earlier, Bajaj Finance’s investors are already sitting on handsome gains. Analysts from Kotak Institutional Equities said, “The Bajaj Finance stock has rallied significantly over the past one year, outperforming most BFSI peers on the back of high interest levels in its transformation exercise and likely value expected to be generated by its proposed digital ecosystem," Additionally, expectations of high valuations of fintech companies, prior to the listing of Paytm’s parent One 97 Communications Ltd, also helped sentiments.

Kotak’s analysts further added in a report on 18 January, “We believe that the initial phase of euphoria on the app is behind us and Bajaj’s ability to seamlessly execute on its well-articulated strategy remains crucial. Bajaj’s management has demonstrated strong execution skills in the past, but any slowdown/disappointment on the digital transformation can weigh in on the stock, in light of high investor expectations."