Bajaj Finance: Investors should await clarity on moratorium, asset quality

Some analysts believe that lower moratorium does not necessarily mean an improvement in asset quality outlook
While business growth is an important metric, the Street’s reaction to Bajaj Finance’s June 2020 quarter (Q1) update, announced on Monday after market hours, indicates that investors are more concerned about the lender’s asset quality during the pandemic. 

Despite a muted business performance in Q1, shares of Bajaj Finance gained almost 8 per cent on Tuesday to emerge as the top Sensex gainer. The gains are largely because of a sharp reduction in the firm’s moratorium book, which has a direct impact on asset quality and earnings.

According to the Q1 update, Bajaj Finance’s assets under management (AUM) under moratorium fell to 15.5 per cent (Rs 21,000 crore) in Q1, from 27 per cent as of April 2020, giving relief to investors.
According to analysts at Motilal Oswal Securities: “The sharp reduction in moratorium is a big positive. Better performance in the asset quality would result in big delta to earnings through lower credit cost/margin compression.” The domestic brokerage, thus, has cut the firms’ FY21 and FY22 credit cost by 50 and 25 basis points, respectively, and revised FY21 earnings estimate upwards by 13 per cent.

 

 
However, there’s a word of caution as well. Some analysts believe that lower moratorium does not necessarily mean an improvement in the firm’s asset quality outlook. This is because lenders have become conservative while extending moratorium under the second phase (June to August), and even if one instalment is paid, the account is not considered under moratorium, which results in lowering of the moratorium book.

Therefore, the trend in slippages (accounts turning bad) and management commentary on overall asset quality would be crucial. Bajaj Finance also indicated a higher provisioning for Covid-19 in Q1, after making a Rs 900-crore provision in the March quarter.
In Q1, its AUM and deposits fell by 6-10 per cent, sequentially, to Rs 138,000 crore and Rs 20,000 crore, respectively. While year-on-year growth for these two parameters decelerated to around 7 per cent and 33 per cent in Q1FY21 from 27 per cent and 67 per cent in Q4FY20, respectively, analysts believe once the economy is on track, regaining ground will not be tough for Bajaj Finance, given its strong brand and expertise. However, this too is debatable given that consumer sentiment has taken a hit because of job insecurity, income levels, etc after the lockdown.

The company’s capital adequacy (26.4 per cent) and liquidity position remains strong in Q1.

 
Overall, investors are recommended to await clarity on moratorium and asset quality, as the stock is already up 72 per cent since June, and trades at 4.7x its FY22 estimated book value.


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