Down 60% since February, brokerage firms do not see a quick revival for this large-cap NBFC stock

Catching the flu in the January-March quarter, one of India’s biggest NBFC firm, Bajaj Finance reported a 19% decline in profits from a year-ago period. Bajaj Finance, taking a precautionary route to the coronavirus pandemic increased provisions to Rs 1,953 crore, up from Rs 831 crore in the previous quarter. However, top brokerage firms are not recommending investors to buy Bajaj Finance stock with the management commentary that focuses on capital preservation. Bajaj Finance shares were having a merry time on Dalal Street prior to the March mayhem when the scrip tanked 57%. Bajaj Finance had been outperforming the benchmark indices till February and post the fall have been underperforming them.

“Management’s caution over growth and asset quality would lead to balance sheet consolidation, resulting in a revised growth trajectory (~25-30%) for BAF. The shift will make it a compounding growth story against existing accelerated growth and valuation story,” said brokerage and research firm Emkay Global. The brokerage has a ‘hold’ rating on the stock with a target price of Rs 2,150, translating to an upside of just 9% from current levels. Emkay clearly does not like the management’s comments which may result in Bajaj Finance becoming risk-averse and hurting its margins and growth. “We appreciate BAF’s superior liability franchise and strong collection network. However, a clarity over growth and NPAs will only come after the lockdowns and completion of the moratorium. We have cut our earnings by ~7.3%/2.7% for FY21/22E,” it said.

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The cascading effect of the nation-wide lockdown is visible in Bajaj Finance’s books. “..recovery and bounce rates have risen 3x to 4x than normal. In auto finance, 70% book in moratorium and overall basis 27%. Asset quality stress is leading to higher credit cost and dip in earnings,” said ICICI Securities. Earnings estimates have been trimmed by the brokerage by 19% for financial year 2022, estimating slower business growth. Rural India is expected to kickstart the recovery for Bajaj Finance by the NBFC itself. A target price of Rs 2,000 as estimated by ICICI Securities has just mere 1% upside from current levels. 

Asset under management (AUM) growth was registered at 27% on-year basis. However, lockdown hit the business by 4%, resulting in a loss of Rs 4,550 crore. In the absence of a lockdown the AUM growth could have been as high as 31%. Yes Securities sees a downside on Bajaj Finance of 7.2%, while also expecting the situation to get much worse if the coronavirus episode prolongs.

Brokerage firm Motilal Oswal has the most optimistic outlook for Bajaj Finance, expecting it to surge to a target price of Rs 2,210 per share or a 10% upside. “We further cut our earnings estimates by 10%/5% for FY21/FY22 to factor lower growth. Despite capital-raising benefits (50bp+), we model in 70bp lower NIMs due to interest reversal, expected due to higher slippages in FY21. We also model in a 25% drop in fees to account for lower disbursements and lower cross-selling of credit cards,” the brokerage said. 

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