Bajaj Finance shares: What’s behind the correction?

Bajaj Finance shares: What’s behind the correction?

Last updated: 07 Jun, 2021 | 02:46 pm

Bajaj Finance shares: What’s behind the correction?

Bajaj Finance share price closed 5% lower this afternoon, after the company highlighted that NPAs could rise in the first half of FY22 due to the Covid-induced lockdowns. The company has provided an update on the estimated impact of the second wave of the pandemic on the company’s financials in FY22. We take a look at how this could impact Bajaj Finance shares going forward.

Which segments could be impacted?

  • In its latest quarterly results, Bajaj Finance had reported a decline in Consolidated AUM across Auto Finance (Consumer B2B), Sales (Consumer B2B) and Consumer B2C segments. Together, these segments made up more than 45% of the segment revenue in Q4 (shown in the above image).
  • Bajaj Finance said that in April and May too, B2B and Auto Finance businesses were most affected due to strict lockdowns in the majority of states. These businesses delivered just 70% of their planned volumes in April 2021 as multiple states started imposing lockdowns from mid April. Their volumes dropped to 40% in May 2021. Most states have indicated continued lockdown till 7th or 15th June.
  • Other lines of business though have held up during the pandemic, delivering 85% of the estimated business volumes in April, according to Bajaj Finance. It leveraged its digital capabilities, which helped in 60% of planned business volumes in May, for businesses other than B2B and auto financing.
  • Bajaj Finance has estimated an impact of Rs 4,000-5,000 crore to its AUM (assets under management) growth plan for FY22 on account of the disruption caused by the second wave.

Asset Quality worries

  • The second wave of the pandemic is likely to hit the company’s asset quality in the upcoming quarters. 
  • In the Jan- March 21 period, Bajaj Finance’s gross NPA ratio and net NPA ratio stood at 1.79% and 0.75%. The company had guided  gross NPA to range between 1.4% and 1.7%, and net NPA within 0.4-0.7%, in the long term. However, the numbers are likely to be higher in the upcoming quarter. Read our analysis of Q4 results here
  • Forward flows across overdue positions were higher due to constraints on collections amidst strict lockdowns across most parts of India. As a result, the company estimates its GNPA and NNPA in Q1 and Q2 to be higher, Bajaj Finance has said. 

INDmoney Analysis

  • Given the nature of its business, Bajaj Finance has estimated its credit costs to rise and assets under management to drop in the fiscal ending March 2022.
  • Unsecured, consumer and two-wheeler loans tend to be the most affected segment compared to other asset classes like car or home loans; and hence, Bajaj Finance’s cautious guidance does not come as a surprise.
  • Following the mid-quarter update, foreign brokerage firms including JP Morgan and Citi have estimated Gross NPAs to rise to 2-2.2% in the upcoming quarter
  • JP Morgan has highlighted that the guidance is based on the assumption that normal activity will resume by the end of July. However, there are risks of a prolonged lockdown, not factored in to the current update. The brokerage has a ‘Neutral’ rating on the stock with a target price of Rs 5,100. 
  • Given the strong run-up in shares over the last few months, the stock could remain weak over the near-term. Out of 29 analysts tracking the stock, six  have given a ‘sell’ rating, according to Bloomberg data. The price targets range from as low as Rs 4,200 (Kotak Institutional Equities) to Rs 6,200 (Motilal Oswal).
  • While the ongoing crisis has been hard for banks and NBFC’s, given its strong leadership position and robust balance sheet, the company is very well equipped to navigate through these difficult times. The company is well-poised to make up for the growth in the second half of the year.