Strong consumer demand and aggressive expansion will likely drive Bajaj Finance‘s revenue growth; Covid-induced credit costs and base interest inversions will accelerate year-over-year earnings. Street will likely continue to focus on the progress/success of its digital strategy, a little weaker than expected at this time. Keep Sell.

Baseline performance was consistent

Bajaj Finance announced a PAT of Rs 24.2 billion, up 80% year-on-year. Core PBT grew by 32% year-on-year to Rs 39 billion, as estimated, driven by 25% growth in NII. The loan portfolio increased by 29% year-on-year, 26% excluding IPO financing. NIM fell 15 basis points to 10.15%; stable, excluding the impact of IPO financing. The cost/income ratio increased by 15 basis points year-on-year and remained stable at 34.6%. The company’s cost of credit came in at 1.5% (lower than forecast) versus 2.5-4.4% over the past four quarters. Overall ECL coverage decreased to 1.25% from 1.5% QoQ, due to the reduction in Stage 3 gross loans to 1.6% from 2 to 2% versus 3%.

A strengthened Web strategy and investments in payment activities

Bajaj Finance shared an update on its digital strategy during the earnings call. New deployments are on schedule, after some delays in the third quarter. So far, Bajaj has focused on deploying its applications. the company articulated its web strategy for the first time. Customer fatigue can set in with the launch of super-applications by several operators; this can probably inspire Bajaj to improve its web presence.

The company will focus on payment business in fiscal year 2023E. It offers to build a full-service payment platform including payment gateways, P2P, P2M, etc. – either by itself or through partnerships. Mgmt pointed out that investments in this segment will boost the cost-income ratio in fiscal 2023E.

Revise estimates, withhold SELL

We are reducing our base estimate by 2-3%, reflecting slightly lower loan growth and NIM. We expect Bajaj to generate short-term loan growth of 23-25%. High interest rollovers in fiscal 2022 will support NII growth even as funding costs increase. We expect core PBT growth of 23-26% in fiscal year 2023-25E, translating to a RoE of approximately 21%. This results in its rich RGM-based FV of Rs 6,500 (vs. Rs 6,350) translating to 6X book and 31X revenue for FY2024E. We are still struggling to find value at the current market price; keep Sell.