Bajaj Finance's mastery of volume game visible in Q4 performance

Despite the systemic liquidity issues in recent months, cost of funds haven’t changed for Bajaj Finance - maintained at 8.3 per cent in Q4
In an industry where volumes matter the most, Bajaj Finance seems to have perfected the art. Its March quarter (Q4) performance, which exceeded expectations, is testimony to the same. 

The results also defied talks of slowdown in consumer sentiment, with its consolidated assets under management (AUM) growing 40 per cent year-on-year (YoY) in Q4. This was, in fact, the best quarterly growth in FY19. Net interest income and net profit surged to Rs 3,395 crore and Rs 1,176 crore in Q4, up 50 per cent and 57 per cent, respectively.

As Rajeev Jain, managing director of Bajaj Finance, explained, the diversification strategy has helped them post robust performance. From focusing on household appliances such as washing machines and refrigerators, Bajaj Finance today funds mobile phone, furniture, and houses purchased by customers. 

Bajaj Finance’s ability to harvest from the existing pool of customers is also working well. Of the 34.5-million customer base, about 75 per cent contributes to cross-selling opportunities, up from 72 per cent a year ago. The pool of non-delinquent (or credit worthy) customers has risen from 65.7 per cent last year to 67.5 per cent, therefore keeping a lid on asset quality. 

Despite the systemic liquidity issues in recent months, the cost of funds did not change for Bajaj Finance; it remained at 8.3 per cent. The financier’s top quartile rating has helped source funds at competitive rates. Jain says that when customers are not willing to pay a higher price, costs need to be kept at these levels. Consequently, net interest margin (a measure of profitability), also remained at the comfortable 9 per cent-level. Asset quality was also maintained in Q4. Gross non-performing asset (NPA) ratio, at 1.54 per cent, rose 13 basis points (bps) YoY, while net NPA ratio saw a 20-bp increase to 0.63 per cent, while sequentially, these reduced marginally.

However, one needs to keep a tab on Bajaj Finance’s rural portfolio (45 per cent of total AUM), in which stress is visible in consumer and commercial segments. Gross NPA ratio rose 29 bps YoY and 11 bps sequentially to 1.53 per cent in the consumer retail business, while delinquencies were visible for the first time in the commercial lending business.

For investors, there’s the question of accumulating Bajaj Finance at expensive valuations of 6 times its FY20 book. While quality stocks come at a price, investors could wait for better entry points.