Bajaj  Finance’s  early  warnings  help lender win investors’ hearts today

It pays to be transparent and Bajaj Finance is reaping the benefits of being honest with investors.

The consumer lender had warned about the consequences of a consumption slowdown on its balance sheet early on, and it had also intimated the market about the potential hit from its exposure to brokerage firm Karvy.

This explains why investors chose to focus instead on the 45% increase in standalone net profit that Bajaj Finance reported today for the December quarter.

The rest of the metrics were wanting, but were known pain points. For instance, Bajaj Finance reported a 13% growth in new loan additions, far lower than what it had been reporting in preceding quarters.

This means that consumers are not buying at the same speed they used to, even when equated monthly instalments (EMI) proposition is dangled for them. As this column had pointed out earlier, the slower new loan addition could also be because of increased competition. Large banks such as HDFC Bank with distribution heft have increased their efforts in the small ticket loan segment.

On an asset under management (AUM) basis, its loan growth was 35% including that of its subsidiary Bajaj Housing Finance Ltd, sharply lower than the 41% growth it reported in the previous three quarters.

But these details were released by the lender on 6 January, and at that time, the stock had fallen about 4%. But worries about a drop in growth are long-forgotten, with the stock now near all-time highs.

Bajaj Finance shares ended up about 5% higher on Wednesday after the lender released its December quarter results.

The 45% increase in net profit comes from a robust 44% growth in fee and commissions besides a healthy 38% net interest income growth.

The hit from Karvy was visible as provisions nearly doubled to ₹817 crore.

But the company’s valuations are buttressed not just by growth, but by the enviable quality of its loan book. Here, Bajaj Finance seems to have managed to keep asset quality pressures under check, even though there are signs of stress.

The ratio of loans where repayment was due over 30 days rose for vehicle loans and discretionary consumer loans. Again, these were known pain points. The rural portfolio, which is one of the highest growing portfolio for the lender, also showed some stress.

On the whole, Bajaj Finance seems to have met investors’ expectations. The company’s stock wins simply because of the lack of quality shares in the market. Beyond that too, Bajaj Finance has weathered the consumption slowdown fairly well. That said, the three month ended December was the fourth consecutive quarter showing a slowdown in loan growth. Juxtapose the fact that the stock trades at a multiple of over seven times its estimated book value for FY21, valuations are looking steep.