Strong consumer demand and aggressive expansion will likely drive topline growth for Bajaj Finance; Covid-driven credit costs and interest reversals in base will accelerate yoy earnings. Street will likely continue to focus on progress/success of its digital strategy, a tad weaker than expected for now. Retain Sell.

Core performance was in line

Bajaj Finance reported PAT of Rs 24.2 bn, up 80% yoy. Core PBT was up 32% yoy to Rs 39 bn, in line with estimates, driven by 25% growth in NII. Loan book was up 29% yoy, 26% excluding IPO finance. NIM was down 15 bps to 10.15%; flat, excluding the impact of IPO finance. Cost/income ratio was up 15 bps yoy and flat qoq at 34.6%. The company’s credit cost stood at 1.5% (lower than its guidance) versus 2.5-4.4% over the past four quarters. Overall ECL coverage declined to 1.25% from 1.5% qoq driven by reduction in gross stage-3 loans to 1.6% from 1.73% and gross stage-2 loans to 2% from 3%.

An enhanced web strategy and investments in payments business

Bajaj Finance shared an update on its digital strategy in the earnings call. New rollouts are as per timelines, after some delays in Q3. Bajaj’s focus till now has been on rolling out its apps; the company articulated its web strategy for the first time. Customer fatigue may set in with launch of super-apps by multiple operators; this may likely prompt Bajaj to enhance its web presence.

The firm will focus on payment business in FY2023E. It proposes to build a full service payment platform including payment gateways, P2P, P2M etc – either by itself or through partnerships. Mgmt highlighted that investments in this segment will drive cost-income ratio in FY2023E.

Revise estimates, retain SELL

We are cutting our core estimates by 2-3% reflecting marginally lower loan growth and NIM. We expect Bajaj to deliver 23-25% near-term loan growth. High interest reversals in FY2022 will support NII growth even as funding costs rise. We expect 23-26% core PBT growth over FY2023-25E, translating into ~21% RoE. This drives its rich RGM-based FV of Rs 6,500 (up from Rs 6,350) translating to 6X book and 31X earnings for FY2024E. We still struggle to find value at current market price; retain Sell.