bajaj financeManagement overlay provisions reduced to INR4.83bn in 1QFY22 (vs Rs 8.4bn in FY21).

1QFY22 results – higher delinquencies led to elevated provisions and interest reversals: Bajaj Finance (BAF IN) reported net profit of Rs 10bn (+4% y-o-y/-26% q-o-q. Interest reversals of Rs 4.51bn in 1QFY22e (Rs 3.06bn in 1QFY21) kept NIM under pressure at 10% (+9bps y-o-y/-27bps q-o-q). Higher slippages (c8.9% of opening AUM annualised) and write-offs (Rs 9.5bn) during the quarter resulted in provisions being elevated at Rs 17.5bn (+4% y-o-y/42% q-o-q). Gross Stage 3 rose 117bps q-o-q to 2.96% while provision coverage fell to 51.3% (58.4% in 4QFY21). Restructured assets declined by Rs 4.52bn q-o-q to Rs 12.87bn. Management overlay provisions reduced to INR4.83bn in 1QFY22 (vs Rs 8.4bn in FY21).

Highlights from management commentary: The inability to collect during the Covid-19 related lockdown contributed to the surge in NPLs in 1QFY22. Slippages were mainly driven by the three-wheeler segment within auto finance, which comprises about 30% of overall auto loans. Requests for restructuring were lower than before. The EMI bounce rate, which increased to 1.08x of 4QFY21 level in the quarter, has improved to 0.96x in July 2021. Management guided for a 33% cost-to-income ratio by 4QFY22 (30.6% in 1QFY22), GNPAs of 1.7-1.8% by FY22 (2.96% in 1QFY22) and provisions of Rs 42-43bn in FY22, which amounts to ~260bp of credit cost.

We cut our earnings estimates by c8% for both FY22e and FY23e: We moderate our AUM growth outlook to a CAGR of 20% over FY21-23e (versus 27% earlier). Other drivers of our earnings cuts are a reduction in our NIM and NII estimates to build in the rising proportion of mortgages (which is facing competitive pressure on yields and is inherently a low spread business) and ~2.6% credit costs in FY21e, in line with management guidance. Despite the cut, our estimate for RoE for BAF remain at +20% for both FY23e and FY24e.

Downgrade to Hold as uncertainty over growth and asset quality is set to weigh on valuations: At 6.7x/35.5x FY23e BV/EPS, respectively, BAF’s valuations look expensive, in our view. The moderating AUM growth outlook, NIM pressure due to changing loan mix and overhang on asset quality due to Covid-19-related disruptions are likely to remain headwinds to a re-rating from here. Value creation from the digital transformation is not quantifiable. Near-term upside should be limited. We lower our target price to Rs 6,390 from Rs 6,500, which implies 8% upside and 7.3x FY23e BV. We downgrade our rating to Hold from Buy.

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