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Bajaj Finance investors need to prune expectations

Bajaj Finance has estimated that its asset under management (AUM) will take a hit of Rs4,000 crore-Rs5,000 crore in the current financial year and much of this would be felt in the first quarter. (Photo: Mint)Premium
Bajaj Finance has estimated that its asset under management (AUM) will take a hit of Rs4,000 crore-Rs5,000 crore in the current financial year and much of this would be felt in the first quarter. (Photo: Mint)

  • Motilal Oswal has slashed its estimate for Bajaj Finance EPS by 11% for FY22. Analysts at HDFC Securities Ltd warn that the current valuations do not justify this sober reality in the wake of the second wave

The pandemic’s second wave has turned India’s consumers more pessimistic on income and employment. That people won’t borrow to spend is now clear, and at the receiving end are consumer lenders such as Bajaj Finance Ltd.

Bajaj Finance on Monday indicated that investors need to tone down their expectations for this year when it comes to its performance. In an early update on the quarter, the lender estimates that its assets under management (AUM) will get hit to the tune of 4,000-5,000 crore in the current financial year, and much of this would be felt in the first quarter.

The reason is that lockdowns were large-scale and strict in May with most large states putting restrictions following the second wave of infections. The lender’s business-to-business (B2B) segment has been hit hard, with most shops and establishments remaining shut in May. The second segment most impacted was vehicle loans, the lender said. This corroborates with the dismal auto sale numbers reported by companies during the month. Bajaj Finance could see just 60% of disbursements it had originally planned for, it added.

Satish Kumar/Mint
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Satish Kumar/Mint


Auto loans and B2B loans are big contributors to volumes and new customer accretion. The impact on these segments does not augur well for the lender’s fee income, too.

“Considering the short duration of the high-volume products, they also contribute meaningfully to fee income for the quarter," pointed out analysts at Motilal Oswal Financial Services Ltd in a note.

The upshot is that Bajaj Finance’s growth would not recover as fast it had earlier anticipated. This is hardly surprising at a time when the Reserve Bank of India’s consumer confidence survey showed that sentiment was at its lowest point.

For Bajaj Finance, not just growth but asset quality too was hit hard due to the second wave. The lender witnessed a drop in collections and an increase in bounce rates of equated monthly instalments. In other words, more loans are being defaulted on than originally anticipated.

The lender expects credit costs to increase by 1,100-1,300 crore over and above what it had indicated earlier. Ergo, bad loan ratios will be higher, too.

Bajaj Finance has a provision of 840 crore towards pandemic-related risks, which should give investors some comfort.

The company hopes that activity will normalize by July. Indeed, some states have announced a gradual opening up with active cases coming down. Bajaj Finance’s recovery will hinge on how fast restrictions are lifted and to what extent states ease their rules.

Analysts believe that much of the adverse impact has been priced in and shares of Bajaj Finance dropped 5% in early trade on Monday.

Nevertheless, earnings per share (EPS) estimates are likely to be pruned. Motilal Oswal has already slashed its estimate for Bajaj Finance EPS by 11% for FY22. Analysts at HDFC Securities Ltd warned that the current valuations do not justify this sober reality in the wake of the second covid wave. Emkay Global Financial Services Ltd foresees a rise in the lender’s restructured loan book, too.

Bajaj Finance shares have gained 11% since April and trade at a rich multiple of 8 times estimated book value for FY22. The second covid wave has made investors take a hard look at their expectations when it comes to economic recovery and consumption revival. Bajaj Finance’s valuations may also need a re-look.

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