MUMBAI: Indian consumers did not shed their frugality in the first three months of FY22, which means that prospects for consumer lenders aren’t as bright as anticipated earlier. Bajaj Finance Ltd has become the first lender to indicate that investors need to tone down their expectations.
In an early update on the quarter, the lender has estimated that its asset under management (AUM) will take a hit of Rs4,000 crore-Rs5,000 crore in the current financial year and much of this would be felt in the first quarter. The reason is that lockdowns were large scale and strict in May, with most large states imposing curbs following the second wave coronavirus infections. The lender’s business-to-business segment has been hit hard, with most shops and establishments staying shut in May. The second segment most impacted was vehicle loans, the lender said. This corroborates with the dismal auto sales numbers reported by companies during last month. Bajaj Finance could see just 60% of disbursements it had originally planned, it said.
Auto loans and B2B loans are big contributors to volume and new customer accretion. The impact on these segments does not augur well for the lender’s fee income too. “Considering the short duration of the high-volume products, they also contribute meaningfully to fee income for the quarter,” pointed out analysts at Motilal Oswal Financial Services Ltd in a note.
Asset quality too was hit hard. The lender has witnessed a drop in collections and an increase in bounce rates of equated monthly instalments. In other words, more loans are being defaulted upon than originally anticipated. The lenders expects its credit costs to increase by ₹1100-1300 crore over and above what it had indicated earlier. Ergo, bad loan ratios will be higher too. Bajaj Finance has a provision of ₹840 crore towards pandemic related risks which should give investors some comfort.
The company hopes that activity will normalise by July. “This update is based on information available to date and with an expectation that economic activity will normalize by early July,” the lender said in its exchange filing. Indeed, some states have announced a gradual opening up with active cases coming down. Bajaj Finance’s recovery will hinge on how fast restrictions are lifted and to what extent states loosen their rules. Analysts believe that much of these adverse impacts have been priced in and shares of Bajaj Finance dropped 5% in early trade today.
Nevertheless, earnings per share estimates are likely to be pruned. Motilal Oswal has already slashed its estimate for Bajaj Finance EPS by 11% for FY22. Analysts at HDFC Securities Ltd warn that the current valuations do not justify this sober reality in the wake of the second wave. Bajaj Finance shares have gained 11% since April and trade at a rich multiple of 8 times estimated book value for FY22.
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