When Bajaj Finance Ltd tapped the capital market in November, investors were more than willing to put money though valuations looked steep. The stock returned 61% in 2019 and trades at seven times its estimated book value for FY20 at present.
However, now, investors seem to have taken note of the consumption slowdown nipping at the consumer lender’s heels and how it could finally make a dent.
In an early update on the December quarter performance, the company said that its assets under management (AUM) grew by 35% for the quarter. That is the lowest in two years for Bajaj Finance. For some analysts, the AUM growth was disappointing.
However, the most worrisome part was that growth in new loans was 13%, which is sharply lower than the 23% of the previous quarter. What this means is that Bajaj Finance is not adding new customers at the pace it used to.
This also means that consumers are not buying at the speed they used to, even when the EMI (equated monthly instalments) proposition is dangled for them. The slower new loan addition could also be because of increased competition. Large banks, such as HDFC Bank Ltd, with distribution heft have increased their efforts in the small-ticket loan segment.
Slowdown in new loans portends slower AUM growth going forward. This means that valuations now look steeper for Bajaj Finance as they are buttressed by its proven track record of robust business growth even in trying times. No wonder, investors dragged the stock down about 4.7% on Monday.
Another factor analysts flagged is the hit from the exposure to the troubled brokerage firm Karvy Financial Services. “We remain confident of Bajaj Finance’s overall asset-quality profile, backed by a robust collection mechanism. However, provisions for Karvy Exposure ( ₹310 crore) may keep credit costs elevated," said analysts at Emkay Global Financial Services Ltd in a note.
Bajaj Finance’s management had warned about the slowdown in AUM growth in the September quarter. However, the slowdown seems to be deeper than what the lender had anticipated. “Consumption slowdown was visible in the Bajaj Finance numbers earlier also. However, it seems to have become a little more pronounced. So, valuations have to adjust accordingly," said an analyst, requesting anonymity.
Even so, analysts don’t seem to be in a hurry to downgrade the stock. Bajaj Finance wins simply because there were not many strong balance sheets among non-banking financial companies. Further, investors are hoping that, like in the past, the lender will put up a good show despite adverse times. Only this time that may not be the case as the updated quarterly numbers show.
A bunch of economic data may show that India’s companies are coming out of a trough, but the Indian consumer is not yet ready to increase leverage.