Bajaj Finance sinks 8% amid rising NIM pressure

Investors shunned shares of Bajaj Finance on Friday, a day after the non-banking financial company (NBFC) reported a sharp contraction in its net interest margin (NIM) for the March quarter of the financial year 2023-24 (Q4FY24).

The losses accounted for a fifth of the benchmark S&P BSE Sensex’s 609-point loss.

Most brokerages have tamed their earnings expectations for the next couple of quarters, after the management said it expected the pressure on NIMs to continue in the near term.

“While the management mai­ntained its asset under man­agement (AUM) growth guidance at 26-28 per cent in FY25, likely net interest margin (NIM) compression in H1FY25 and revised credit cost to 1.85 per cent versus 1.7 per cent pre-Covid is likely to keep earnings under pressure during H1FY25,” said analysts at ICICI Securities.

Bajaj Finance’s NIM in Q4FY24 contracted by 20 basis points (bps) to 10 per cent on a quarter-on-quarter (Q-o-Q) basis due to an increase in the cost of funds (CoF) and a gradual shift in AUM composition towards secured assets.

The management expects NIM to contract further by 30-40 bps in the first half of FY25.

Besides, it sees CoF peaking by July-August, 2024, and pivot towards secured assets AUM stabilising by September 2024.

Domestic brokerage Motilal Oswal Financial Services Lim­ited (MOFSL) has downgraded the stock to ‘neutral’ with a reduced target price of Rs 7,800.

“Our downgrade is predicated on the near-term headwinds on AUM growth; likely NIM compression of 35bps in FY25; and elevated credit costs from the B2C portfolio in almost all of FY25,” the brokerage said in their result review report.

In Q4FY24, Bajaj Finance’'s total customer franchise stood at roughly 83.6 million, up 21 per cent year-on-year (Y-o-Y) and 4 per cent Q-o-Q. New customer acquisitions came at 3.2 million versus 3.1 million Y-o-Y and 3.85 million Q-o-Q.

New loans booked rose 4 per cent Y-o-Y to 7.9 million against 7.6 million in Q4FY23.

The new loans booked during the quarter were lower by 0.8 million sequentially on acc­ount of restrictions placed by the Reserve Bank of India (RBI) on the disbursal of loans under ‘eCOM’ and ‘Insta EMI Card’.

Total AUM, thus, grew 34 per cent Y-o-Y and 6 per cent Q-o-Q to Rs 3.3 trillion.

The rural business-to-customer (B2C) business exhibited muted AUM growth given that Bajaj Finance has cut business volumes in this segment in the face of higher delinquencies.

The urban sales finance business was hit by the RBI emb­argo on e-commerce and digital Insta EMI Cards.

Credit costs were higher due to the elevated rural B2C delinque­ncies.

The management has guided for gross credit costs of 1.75-1.85 per cent in FY25.

“The management's guidance for FY25 is below its long-term guidance on multiple metrics such as AUM growth, credit costs, return on asset (RoA), and return on equity (RoE).

"Bajaj Finance’s key product segments (until now) have been the secular growth segments.

"However, its foray into multiple new products such as cars, tractors, commercial vehicles (CVs), and potentially micro-finance (MFI), could (in the future) make its growth vulnerable to cyclicality despite having a well-diversified product mix.

"Thus, despite a healthy PAT CAGR of 25 per cent over FY24-FY26, and a RoA/RoE of 4.3 per cent/22 per cent in FY26E, we see limited upside catalysts,” MOFSL said.

The analysts, however, remain positive from a long-term perspective on Bajaj Finance due to its resilient business model, built on strong customer acquisition engines and cross-sell opportunities.

Analysts at Kotak Institutional Equities have maintained their ‘add’ rating on the stock with an unchanged target price of Rs 7,800.

“Though we have cut estimates by 4-6 per cent for FY25 and FY26, we expect Bajaj Finance’s overall profitability to remain healthy with RoE of 22-23 per cent,” it said.

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