Bajaj Finance misses Street estimates in Q2; margin compression a key concern: Analysts

The margin contraction, though in-line with estimates, remain a key concern among analysts as the management guided for additional 25-30 basis points (bps) margin compression in the second half of this fiscal year (H2FY24)

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Bajaj Finance share price fell 2 percent on October 18, after the financier’s Q2 FY24 net profit growth slightly missed street estimates. Analysts remain bullish on the counter owing to its resilient asset quality and broad-based loan growth.

Bajaj Finance reported its fiscal second quarter net profit grew 28 percent on-year to Rs 3,551 crore, falling a bit short of Rs 3,626 crore expected in a Moneycontrol poll of analyst estimates.

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Analysts at HSBC upgraded target price for the non-bank lender to Rs 9,620 per share (versus Rs 9,500 per share). “We increase earnings per share (EPS) estimates to 0.1-2.5 percent over FY24-25 to reflect higher assets under management (AUM) growth. The management’s profitability guidance remains healthy and earnings growth outlook is intact,” they added.

Jefferies, too, raised target price for Bajaj Finance to Rs 9,470 apiece (versus Rs 8,830) as analysts retained estimate of 26 percent profit compounded annual growth rate (CAGR) over FY23-26.

However, analysts cautioned that the growth in net interest income (NII) was at a slower pace than AUM growth owing to margin pressure.

The consumer financier’s NII rose 26 percent YoY to Rs 8,845 crore in Q2FY24, whereas AUM grew 33 percent YoY to Rs 2.9 lakh crore.

ALSO READ: Bajaj Finance to acquire 26% in Pennant Technologies for Rs 268 crore

Margin compression a key concern

The margin contraction, though in-line with estimates, remain a key concern among analysts as the management guided for additional 25-30 basis points (bps) margin compression in the second half of this fiscal year (H2FY24) due to rising cost of funds.

As per the investor presentation of the company, net interest margins (NIMs) contracted by 14 basis points (bps) on a sequential basis, while cost of funds increased 6 bps quarter-on-quarter (QoQ) to 7.67 percent in Q2FY24.

The margin pain-point may further increase as Bajaj Finance is unlikely to pass on the rise in cost of funds to clients, underlined analysts at Jefferies.

That said, analysts at Motilal Oswal hopes that lower operating cost ratios should be able to offset NIM compression in FY24. “We expect Bajaj Finance to deliver PAT CAGR of 28 percent over FY23-26 and return of equity (RoE) of 23 percent in FY26. We maintain a ‘buy’ rating on the counter, with a target price of Rs 9,600 per share,” they added.

ALSO READ: RBI imposes Rs 8.50 lakh penalty on Bajaj Finance for rule violations

Asset quality paints a hopeful picture

Bajaj Finance’s asset quality improved in Q2FY24 as gross non-performing assets (NPA) stood at 0.9 percent against 1.17 percent in the year-ago period and net NPA improved to 0.3 percent in Q2FY24 against 0.4 percent in the year-ago period.

Stage 3 assets stood at Rs 2,645 crore as of September 30, 2023 as against Rs 2,530 crore as of September 30, 2022.

Despite the improvement in the asset quality, Bajaj Finance’s loan losses and provisions in Q2FY24 rose to Rs 1,077 crore, as against Rs 734 crore in in a similar period last year.

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