Tuesday, 6 August 2019

Bajaj Finance’s Q1 show strong, but some warning signs worry investors.


Bajaj Finance’s Q1 show strong, but some warning signs worry investors.

Disbursements of digital products to small businesses in rural and urban areas fell 15-18%
The percentage of loans having non-payment beyond 30 days has risen to 5.30% as of June end, from 4.65% in March, for two-wheeler loans

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Bajaj Finance Q1Bajaj Finance Shares

In normal times, a jump of 43% in quarterly net profit and an impressive 41% growth in asset under management should be enough to cheer investors of Bajaj Finance Ltd.
But these are not normal times, and therefore investors chose to see beyond the growth surge to the emerging worries on asset quality. After all, pristine asset quality is what makes consumer lender Bajaj Finance more precious than its peers.
To its credit, the lender has chosen safety over growth, and said it has tightened its underwriting standards for loans.
Bajaj Finance Q1Bajaj Finance Shares
Bajaj Finance Q1Bajaj Finance Shares

With this tightening of course, the lender had to give up on disbursement growth.
Ergo, the over 3% fall in its stock can be explained from the fact that growth slowed, albeit by design. For instance, the tightening of standards dented disbursements of digital products to small businesses in rural and urban areas by 15-18%.
The implications of the tightened underwriting rules on future growth cannot be ruled out. In light of this, the impressive 41% growth in AUM for June quarter becomes short-lived. Logically, its valuations would adjust to this change, which explains the reaction of investors today.

Further, the light on asset quality is blinking amber across products for the lender. Luckily, the warning on asset quality comes from the company itself as Bajaj Finance gives a detailed picture of delinquencies and their seriousness every quarter.
For instance, the percentage of loans having non-payment beyond 30 days has risen to 5.30% as of June end from 4.65% in March for two-wheeler loans. Sequentially, the percentage of 30-day overdue loans has risen for most products.
To be sure, the ratios are lower than a year ago which indicates that asset quality is not in danger. That said, any increase in slippages in the current environment of consumption slowdown should raise concern. Already, the company had to increase loan loss provisioning by 69% for the June quarter.
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