"We believe an extended lockdown (to 3 May or later) could be implemented for much of the economy. We worry that a subdued recovery (especially in the services sector) and a liquidity freeze for SMEs (due to banks’ caution and liquidity issues for NBFCs, with government/RBI support key) could significantly impact self-employed/SME loans," it said in its rating rationale.
The analysts believe a slower-than-expected economic recovery would significantly impact the non-bank finance company's gross non-performing loans (GNPLs), loan growth, return on equity (ROE) and net interest margin (NIM) as the loan mix would shift to lower-yielding loans, resulting in 30 per cent/48 per cent share price corrections in our base/downside scenarios. They have cut the FY20-22 EPS estimates by 6-37 per cent and their price target by 65 per cent.
The Covid-19 induced slowdown, UBS believes, could have worse impact on the auto finance segment than demonetissation or global financial crisis (GFC), further casting shadow on the NBFC's loan segment.
"There was asset quality pressure in the 2W/3W loan segment (9 per cent of AUM) during demonetisation and the GFC, and we think COVID-19 impact is likely to be worse. We believe pressure could also be elevated in the SME (12 per cent of AUM) and non-salaried PL segments (9 per cent of loans in March 2019), and are watching urban B2B business (12 per cent of AUM). We factor in credit cost of 350bps in FY21E and 240bps in FY22E (200bps in 9M FY20) and loan growth of 14 per cent in FY21E," it said.
On the upside though, the brokerage believes Bajaj Finance's customer acquisition model, distribution network, previous track record in cross-selling other loan products and fee-income initiatives, and high operating leverage could help to stage recovery.
"We continue to believe strong client mining, coupled with a low market share in large products like mortgages and SMEs (link), could drive over 25 per cent loan and over 30 per cent EPS growth in the medium term in a fast recovery. It recently raised capital and is well capitalised (tier-1 ratio 23.2 per cent in December 2019), with a high PPOP/asset ratio of 6.5 per cent. We think it could easily absorb 1200-1500bps credit costs," it reasoned.
Last month, foreign brokerage Bernstein had downgraded Bajaj Finance
to ‘underperform’ and had cut the target price to Rs 1,740 from Rs 4,820.
“The unsecured consumer finance business models would become challenging in the current pandemic environment. At the current early stage of Covid-19 outbreak in India, it is uncertain to project how long the physical restrictions from the government would last beyond the 21-days imposed lockdown. At this stage, it would be conservative to assume that first quarter of FY2021 would be a near complete economic freeze and a crawling recovery post that,” they had written in their rating rationale.