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Why are the markets punishing Bajaj Finance, Bajaj Finserv?

So far in calendar year 2020, the stock of the non-bank finance company (NBFC) has corrected 47 per cent, while that of Bajaj Finserv is down 50.34 per cent
Shares of Bajaj Finance extended their decline into third day, down 6.4 per cent to hit fresh 52-week low Rs 2,098.55, on the BSE on Tuesday as concerns over the outbreak of coronavirus (Covid-19) pandemic hitting the growth prospects dented sentiment. 

 
Bajaj Finserv, too, slipped up to 3.6 per cent to hit a low of Rs 4,493.4 on the BSE. In comparison, the benchmark S&P BSE Sensex was at 29,128 level, up 688 points or 2.4 per cent.

 
Bajaj Finance is a company that is involved in consumer financing... With the 21-day lockdown, consumption has slowed down considerably, and discretionary buying is out of sight. In my view, the strong growth that the company was clocking over the past few years is not coming back for at least six months now,” says A.K Prabhakar, head of research at IDBI Capital. 

 
Explaining the steep correction in the stock, Prabhakar says the firm was commanding premium valuation due to the 30-40 per cent growth in a market where others were growing at half the rate. With the economy now slowing down even further, the same growth rate is hard to achieve.

 
So far in calendar year 2020, the stock of the non-bank finance company (NBFC) has corrected 47 per cent, while that of Bajaj Finserv is down 50.34 per cent. In the month of March so far, the stock of Bajaj Finance has tanked 53 per cent, while that of Bajaj Finserv has slipped 51 per cent.

 
Recently, 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 wrote in their rating rationale.

 
As Bajaj loan growth comes to a grinding halt, we expect credit costs to escalate by 100 bps (2.7% for FY2021W vs. 1.7% for FY'20). We expect SME loans (13% of the loan book) and Consumer B2C loans (27% of total loans) to be at risk of delayed collections. Within B2C consumer loans, self-employed personal loans could be vulnerable, it added.

 
According to analysts at JPMorgan, the current sell-off has taken the floor out on valuations and effects of this, in their view, could be longer lasting on asset quality and growth across a range of sectors. 

 
“We model in significantly lower growth across the financial sector (0-14 per cent) and factor in Covid-19 dislocation lasting till June and a return to normalcy only in F22,” they said in a report dated March 26. 

 
A combination of slow growth going into the COVID-19 dis-location and funding problems in Small Private banks and NBFC sector, has the potential for a longer tail of exacerbated stress in the real sector, it added.

 
What should investors do?

 
Given the ambiguity over the lockdown and the consequent impact on small businesses, analysts suggest investing in the stock as systematic investment plan (SIP) for one-year or stay put for the long-term.

 
“Given the kind of delay in repayment, especially after the 3-month moratorium imposed by the Reserve Bank of India, the entire NBFC space in under cloud. As for Bajaj Finance, March quarter of FY20 and June quarter of FY21 will remain under pressure,” says Gaurang Shah, head of investment strategy at Geojit Financial Services.

 
He, however, maintains a ‘buy’ call on the stock due to the sharp correction in valuation and strong management. 

 
Prabhakar of IDBI Capital, meanwhile, advises investors to either buy in limited quantity or invest in the stock as SIP at current levels.


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