Waning demand likely to put brakes on Bajaj Finance's stock ride

After a short period of correction for Bajaj Finance after the liquidity crisis that unfolded in September last year, the stock has been on a continuous uptrend to its current all-time high price of Rs 3,091. The 57 per cent gain from its lows last year, which have been backed by fundamentals, has helped it enter the list of the most-preferred non-banking financial company (NBFC) stocks in the last six months.

Many factors have helped Bajaj Finance stay ahead of the pack, the most important being its ability to remain relatively unhurt during the liquidity crunch — be it in terms of profitability or expanding its loan book. However, recent data points suggest that the path ahead could be difficult if the ongoing slowdown in consumer demand and waning rural demand take hold. Analysts at Emkay Global Financial Services say demand is yet to pick up after the recent festive season. According to the brokerage, store-level footfalls have declined by 20–30 per cent year-on-year across regions in India. News reports also suggest a similar fall in demand from rural markets and sales of passenger vehicles. All of these will impact the financials of Bajaj Finance.

Loans to the consumer durables segment comprising the retail segment and lending to durables manufacturers constitute 40 per cent of the financier’s assets under management. Likewise, rural borrowers are an important customer segment for Bajaj Finance, with rural branches accounting for 50 per cent of the company’s total branches.

Rural customers are particularly important for housing loans, small business loans and other commercial loans. This is why Siddharth Purohit of SMC Capital believes that investors should be ready for some moderation in loan growth for Bajaj Finance in the coming quarters. “Based on channel checks, there is a significant quantum of enquiries but these are not getting converted into sales. While it could convert post the general election, there could be some growth moderation in the meanwhile,” he adds.

Therefore, any slowdown is likely to derail the growth trend for Bajaj Finance and impact its valuations, which at 6.6 times FY20 estimated book value leaves little room for error and also makes Bajaj Finance the most expensive NBFC stock among the top 15 listed peers.

What could perhaps help Bajaj Finance tide over any possible slowdown is its increasing dependence on its existing customers. Known as cross-selling strategy, over the recent years, the financier has increased its product offering to its existing customers. Consequently, even if there is a blip on new client accretion, old borrowers could be reached out for extending fresh loans. This is why Nischal Maheshwari, CEO, Institutional Equities, Centrum Broking, believes that Bajaj Finance has transformed itself into a play on artificial intelligence rather than on retail demand. Currently, its base comprises 

19.7 million customers acquired through cross-selling. Analysts at Jefferies note that this is Bajaj Finance’s key moat to combat the rising competition in the segment.

Therefore, the coming quarters will be critical to gauge if the cross-selling strategy of Bajaj Finance helps it tide over the slowdown in its underlying markets. With other factors such as the cost of funds at about 8 per cent and net interest margin (a measure of profitability) at over 9 per cent taken care of and well within the comfort zone, Bajaj Finance’s loan growth will be the key monitorable aspect in the March quarter.  

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