Home / Markets / Mark To Market /  Bajaj Finance’s digital plans hold the key as costs drag

Bajaj Finance Ltd’s investors are sitting on handsome gains. The shares have risen by 38% in the past one year, far ahead of the 6% gain in the Nifty Financial Services index.

The outlook for this non-banking financial services company (NBFC) is bright. It has plans to expand with its omnipresence strategy, which includes building a web platform and enhancing its mobile app to widen reach. Phase 1 of the web platform is expected to go live by October and phase 2 by March 2023.

Not good evough
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Not good evough

Such strategies would build Bajaj Finance’s franchise, but the operating expenses to net interest income (NII) ratio would remain elevated. Management estimates the ratio to be 34.5-35.5% in FY23. In FY22, this had increased by 390 basis points (bps) year-on-year (y-o-y) to 34.6%. One basis point is 0.01%.

Investors are not thrilled, evident from the more than 7% drop in Bajaj Finance’s shares on Wednesday. Also, in Q4, net interest margin (NIM) fell sequentially by about 100 bps to 12.8%, according to analysts at Motilal Oswal Financial Services. NII at 4,803 crore missed estimate of Motilal Oswal analysts by 7%, though cost of funds stabilized at 6.7%.

“Bajaj Finance trades at expensive valuations and the fall in share price could be on the back of profit booking and the drop in Q4 NIM because of lower yield in certain products. Even so, the growth story is strong as the investment in technology should hold it in good stead. Customer addition is expected to be robust and assets under management (AUM) growth will continue," said Akshay Ashok, research analyst, institutional equities, Prabhudas Lilladher.

The NBFC aims to add 8-9 million customers in FY23. In FY22, the customer franchise grew by 19% y-o-y to 57.6 million. Core AUM clocked 26% y-o-y growth to 192,087 crore. New loans booked during FY22 increased by 46% y-o-y. Further, asset quality improved y-o-y.

Investors will track the progress on the digital transformation journey closely. Also, movement in NIM would be key.

“We bake in a drop in NIMs of 43 bps and cost pressures (36% cost to income) into our FY23-24 earnings per share estimates with a return on assets of 4.4% and return on equity of 22.2% by FY24E. We believe the transformational exercise and execution will continue to anchor valuation," said analysts at Elara Securities (India).

Any delay in digital transformation and increased competition are downside risks.

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