Hold Bajaj Finance, target price Rs 2,331: Emkay Global

With management’s rising focus on recoveries and managing asset quality, growth will take a back seat at least for a few quarters.

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Emkay Global has downgraded Bajaj Finance to hold from a buy rating with a target price of Rs 2,331 (Rs 3,570 earlier) over 12 months. This marks an upside of 5.6 per cent over a CMP of Rs 2,208.

According to the brokerage, the management’s focus on recoveries and cost-control measures (zero expansion), will lead to growth taking a back seat for a few quarters.

Bajaj Finance’s Q4FY20 performance (post Covid-19’s impact for 10 days in March) was fairly weak, with adjusted AUM growth of around 31 per cent (YoY – adjusting for Covid 19 impact), which further reiterates rising competitive intensity, especially in the B2B business, as well as consistent market share loss.


Further clarity on growth and asset quality is expected only after the lockdown and moratorium period (most likely post Q1FY21 earnings).

The share price moved down by -3.05 per cent from its previous close of Rs 2207.50. The last traded price is Rs 2140.25. Incorporated in 1987, Bajaj Finance has a market cap of Rs 132813.84 crore.

Investment Rationale

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The brokerage downgraded the NBFC to hold from buy corresponding to around 3.2 times P/B FY22E on elevated uncertainties around growth and asset quality. Bajaj Finance management has hinted at severe cost-control measures in the coming quarters in order to compensate for lost revenues. However, such measures include zero branch expansion, among others, which in turn would impact future revenue trajectory. The brokerage feels the medium-term growth momentum should be maintained by increasing focus on cross-selling to existing customers.

Post the crisis, the NBFC may have a revised growth trajectory (sub ~30%), considering its current AUM size and the limited scope for asset expansion.


Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 7011.05 crore, up 10.91 per cent from last quarter sales of Rs 6321.45 crore and up 40.63 per cent from last year same quarter sales of Rs 4985.39 crore. The company has reported net profit after tax of Rs 1614.11 crore in the latest quarter.
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