by Suhani Adilabadkar

It was a dream run till February 2020 - Bajaj Finance’s stock price had gained 460% since the beginning of 2017. After reporting a strong December quarter FY20, with revenue growing 40% and PAT rising 52% YoY, Bajaj Finance touched a new 52-week high in early February 2020. The stock was down 50% in the next 30 days as Covid-19 plagued investor sentiment and the government prepared for a national lockdown. With consumer behavior moving to a cautious mode and discretionary spending down, Bajaj Finance witnessed weak loan growth and low customer additions. The stock declined to 1,800 levels by the end of May. After the September 2020 quarter results were out, the company’s stock fell 5% as net profit fell 36% and provisions jumped more than 186% YoY.

Quick Takes:

• Assets under management (AUM)  at the end of Q2 FY21 were flat at Rs. 1,37,090 crore,  loan disbursements fell 44% YoY to 36 lakh, and new customer additions were at 12.2 lakhs compared to 19.2 lakhs in the same period a year ago

• Bajaj Finance continued with its accelerated provisioning as loan losses and provisions jumped 186% YoY to Rs. 1700 crore in the quarter ended September 2020

• Operating expenditure for the quarter ended September 2020 was down 16% YoY to Rs 224 crore

• Consolidated moratorium, which stood at 27.1% of AUM as on 30th April fell to 15.7% in Q1 FY21, further declined to 8% at the end of the September 2020 quarter

• A transformation project is in the works with an objective of enabling customers to buy Bajaj Finance products within 3 clicks

• The management expects to reach pre-Covid levels of activity seen in February 2020 by March-April 2021.

September Quarter FY21: ‘back to growth’ planning

The quarter was all about restarting and creating ‘back to growth’ plans for Bajaj Finance as the company accelerated volumes across businesses. This came after adopting a conservative stance till August due to the extended moratorium and absence of updated bureau data. Most of the increase in volumes came from September onwards. Consequently, AUM turned out flat at Rs. 1,37,090 crore, rising by just 1% YoY. Disbursements of loans fell 44% YoY with 36 lakh loans disbursed during the quarter. New customer additions were at 12 lakh compared to 19.2 lakh a year ago. 

With the focus on strengthening its balance sheet, Bajaj Finance continued with accelerated provisioning as loan losses and provisions jumped 186% YoY to Rs. 1,700 crore in the September quarter from Rs. 594 crore a year ago. Net Interest Income (NII) was up by 4% YoY to Rs. 4,165 crore in Q2 FY21 from Rs. 4,000 crore a year ago. 

Net profit fell 36% YoY to Rs 965 crore in the September quarter due to interest income reversal, additional cost of liquidity, and high provisioning. Total customer franchise stood at 4.41 crore at the end of the September 2020, a rise of 14% YoY.

Frontloading Provisions and Losses

Over the past decade, Bajaj Finance’s AUM has grown at a CAGR of 39%, and its net profits at  40% CAGR. Covid-19 has unfolded new business dynamics for the company. After treading cautiously till August, Bajaj Finance’s volumes accelerated in September as it restarted all businesses except retail EMI card business and wallet loans. These are on pause mode till Q4 FY21. 

According to the management, compared to last year’s volumes, urban consumption businesses (B2B) was at 72%, rural consumption business (B2B) at 91%, credit card origination at 73%, e-commerce at 75%, and auto finance at 54%. 

As the economy heals and gets back to normal, Bajaj Finance has adapted to the new normal. It has changed gears to adapt to new consumer behaviour. Instead of its regular run-rate of Rs.600 crore every quarter, provisions quadrupled YoY in the quarter ended March 2020 and doubled in the June 2020 quarter. 

Bajaj Finance has accelerated provisions by 962% YoY in the September 2020 as a precautionary measure. Out of the total Rs. 1,700 cr provisions at the end of September 2020, Rs. 1,100 crore was charged to the profits. This is a massive one-time hit to the books, and there are additional loan losses that may occur in FY22. 

Bajaj Finance has the financial strength to undergo this pain. The company’s Managing Director Rajiv Jain said, “We do want to enter next year forgetting about 2020-21, whether from the balance sheet standpoint or in terms of loan losses. We will front-load the loan losses. We will backload the growth. So that net-net, in April 2021, we are back to where we would have been if COVID-19 did not happen in April 2020”. 

Getting Back to Growth

Bajaj Finance has introduced product innovations like flexi-loans where a customer can draw down and pay down loans with complete flexibility and control over interest outgo. This is helping customers in the present challenging times as Rs. 10,350 crore term loans have been converted to flexi-loans in the past two quarters.

A transformation project is in the works with the objective of enabling customers to buy Bajaj Finance products within 3 clicks. This project is expected to be completed by June-July 2021. Cross-franchise currently stands at 66% (new loans) and has come in handy during Covid times reducing customer acquisition costs and regulating credit risk. 

Operating expenditure for Q1 FY21 was lower by 11% YoY and 20% sequentially and for September quarter FY21 it was 16% lower at Rs. 224 core compared to the previous year. Bajaj Finance’s asset quality is best in the industry with Gross and Net NPA coming in at 1.03% and 0.37%, respectively, at the end of the September quarter. And lastly, the consolidated moratorium which stood at 27.1% of AUM as on 30th April fell to 15.7% in Q1 FY21 and further declined to 8% in September quarter FY21.

Back to Pre-Covid Levels

Bajaj Finance stock price is back to its pre-Covid levels. In fact, the stock made a new 52-week high of Rs. 4,951 recently. The uptrend started from early November aided by positive economic data,  GST collections, surging home loans, and healthy railway freight data, among other metrics. After going through one of the most stringent lockdowns, this might be pent up demand or festive demand. Be that as it may, Bajaj Finance is poised to take advantage. As Jain said, “We have become a lot more confident in September as you've seen”. The market, on the other hand, is waiting for Bajaj Finance’s conversion into a full-fledged bank.