The stock which delivered 73% returns in CY2015, 46% returns in CY2016, 103% returns in CY2017, 46% returns in CY2018, and 62% returns in CY2019 but plunged more than 48% due to pandemic in 2020, that’s very unfortunate and we should talk about it.

Bajaj Finance Ltd (NSE: 2002 Rs.)

Founded in 1987, Bajaj Finance Ltd. is a non-banking financial company, which engages in lending and allied activities. Its assets under management (AUM) in the January-March 2020 period grew at the slowest pace at 27.4% in at least twelve quarters and the move was intentional, The management had tightened credit norms for MSMEs because everybody knows that nobody has money to pay back. Due to lockdown, the company lost almost 3,50,000 customers and Rs 4,750 crore in assets under management. Investors didn’t like it and the stock plunged. Let’s have a look its AUM data:

Key contributors to Bajaj Finance’s loan book:

Considering some major parts

  • 30% of its assets under management came from mortgages
  • 20% comes from the ‘consumer B2C business’
  • 13% comes from the SME business
  • 10% comes from B2B sales finance
  • 9% comes from auto finance.

Effects of Covid 19 on major types of loans

Mortgage loans are relatively safe since historically default rates on home loans are low. It consists of borrowers who are salaried for the last two years with an annual income of Rs 11–13 lakh. So, it is considerably safe.

Consumer B2C Loans essentially includes personal loans. In the current cycle, where job losses and salary cuts have already begun, there are concerns about an increase in defaults. But, Bajaj Finance said on concall that 65% of its customers have a bureau score of 750 and above. A score of 750 and above is considered good credit. Not pretty much but yes it is also considerably safe.

SME Loans is the culprit that deserves attention. SMEs that Bajaj Finance deals with have a turnover of Rs 5 crore to Rs 16 crore. This category falls within what is defined by TransUnion CIBIL as ‘medium’ sized enterprises. The default rate in this category was among the highest at 18.1 %, even before the Covid crisis hit. A further rise in delinquencies in this category cannot be ruled out given the sudden stop in business that most enterprises have faced.

Financials at glance:

Unlike other sectors, Banks/NBFCs have a separate way of analysis its numbers. This one-pager information is pretty enough to analyze one of the biggest NBFCs in India if you know their meanings.

Bajaj Finance has perhaps the strongest balance sheet among NBFCs and its capital adequacy ratio is around 25% and leverage ratio is between 4 to 5 times. its cost of funds is much lower than that of its peers. It is expected to remains well-capitalized. Its deposit book stood at whopping Rs 21,400 crore at March-end compared to Rs 13,193 crore year-on-year.

Bajaj Finance said it acquired 1.9 million new customers in the December quarter as against 2.5 million customers in the previous quarter. Its customer base at the end of December quarter stood at around 42.6 million compared to 34.5 million in the year-ago period.

Valuations: The shares have gone from trading as high as 12-times price-to-book ratio and at an average valuation of 9x P/B, to now trading at 5.5x P/B, close to its lowest valuation of 5.2x P/B. The valuation is the trailing price-to-book ratio since full financial year earnings are yet to be released.

Covid 19 Bonanza for NBFCs

To recover the economy, the government agreed to provide full and partial guarantees on investments in debt securities issued by non-bank lenders under two different schemes.

1) The first scheme is a Rs 30,000 crore special liquidity facility.Under this scheme, investments can be made in investment grade debt securities of NBFCs. These investments will be fully guaranteed by the government. which means in case of default, government would repay in full.

2) The second scheme a Rs 45,000 crore partial credit guarantee scheme which is being expanded. Scheme extended to cover primary issues of lower-rated NBFCs. For investment in such securities, the government will provide a 20% first loss guarantee. Only Lower-rated and unrated securities will be eligible for relief via the scheme.

Separately, the government also said that micro, small and medium sized enterprises will get Rs 3 lakh crore in collateral-free, government-guaranteed loans.

Earnings Fineprint: Bajaj Finance Q4FY20

  • Net Interest Income up 38% to Rs 4,459 crore
  • Net profit falls 20% to Rs 892 crore
  • Covid-19 related contingency provision at Rs 900 crore
  • Impairment expenses up 2.3 times at Rs 1,865 crore
  • Gross NPA at 1.61% while Net NPA stood at 0.65%
  • Provision Coverage Ratio stood at 60%

Bajaj Finance: Management Commentary

  • 27% of the consolidated AUM is under moratorium, of which 68% customers who availed the moratorium were not default in January and February.
  • Focus going forward will remain on existing customers rather than new customers.
  • Default rate for moratorium assets was 12%, which jumped 3 times in April.
  • Do not see it deteriorating once economy improves.
  • Re-pivoting deposits towards more retail deposits.
  • Corporate deposits account for 33% of the total deposits as of today which will be reduced going forward.

“We can take shocks like Covid-19 which is a once in a 100 years shock. Our pre-provisioning profit is very strong.” — Bajaj Fin

By Vishal

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