Business updates from the managements of Bajaj Finance and M&M Financial Services (MMFS) indicate that credit demand remains robust and these two majors have successfully gained momentum after the pandemic.
MMFS is looking at a compounded annual growth rate (CAGR) of 18 per cent in assets under management (AUM) during FY23 to FY26 on the back of the strong recovery.
The company has initiated risk-mitigating initiatives, including diversification into non-vehicle loans, building digital capacity and re-classification of customer profiles into affluent and mass-affluent in semi-urban segments to better target marketing.
It seems to have managed to control stressed assets which was a chief source of worry with its rural/ semi-urban profile and its focus on vehicle loans.
MMFS recorded loan growth of 32 per cent year-on-year (Y-o-Y) in the April-June quarter of 2023 (Q1 FY24), keeping it on course for its aim of doubling FY22 AUM by FY25.
The share of non-vehicle loans is picking up at about 10 per cent, with a target of 15 per cent by 2025.
Asset quality is improving with credit cost likely to be held between 1.3 per cent and 1.5 per cent during FY23-26, with Gross Stage3 (GS3) assets at 5 per cent by then.
The GS3 has fallen to 6.4 per cent in Q1 FY24, down from 19.4 per cent in Q4FY22.
MMFS, in a business update, said Stage-3 is estimated at 4.4 per cent (4.3 per cent as at June 2023) and Stage-2 at 5.8 per cent (vs 6.4 per cent).
The provisioning coverage ratio (PCR) is at 60 per cent, which is healthy and in line with peers.
Gross non-performing assets (NPAs) have fallen from 9.14 per cent in FY21 to 4.55 per cent in FY23 and net NPAs are expected to stay in the 1.7-1.9 per cent range.
The net interest margin (NIM) is low at around 7.5 per cent due to a fixed rate book, but is also likely to bottom out at around 7 per cent by end FY24.
Investments in technology and franchise have resulted in higher cost ratios.
As costs normalise and operating leverage kicks in, NIM should improve.
A key risk given the rural exposures is erratic monsoons. Q2 FY24 disbursements stood at Rs 13,300 crore, up 12.6 per cent Y-o-Y.
The year-to-date disbursements till end of September 2023 was at Rs 25,500 crore, up 20 per cent Y-o-Y.
Bajaj Finance (BAF) may be looking at a rights issue or a QIP issue to raise additional equity capital and it has called a Board Meeting for the same.
Given the strong performance and high capital adequacy this move is more likely to prepare for aggressive action if the newly demerged Jio Financial enters consumer and merchant financing as a competitor.
BAF reported core AUM growth of 29 per cent in FY23 and 32 per cent Y-o-Y in Q1FY24.
It is moving into newer segments like Auto, MFI (microfinance), Tractor and Commercial Vehicles, which could push AUM growth by an extra 1-2 per cent. Hence, the new equity capital could be to fund growth.
BAF said the new loans booked during Q2 FY24 grew by 26 per cent Y-o-Y to 8.53 million.
AUM grew by 33 per cent Y-o-Y to Rs 2.9 trillion as of 30 September 2023.
The non-bank lender’s investment on a digital ecosystem and omni-channel transformation provides good levers to increase its fee income also.
The management’s long-term guidance for return on equity (RoE) stands at 21-23 per cent but at current leverage, it can clock a higher RoE of 24-25 per cent.
Hence, it has headroom to expand AUM using new equity capital while keeping guidance.
The omni-channel presence covers physical, app-based, web, social and virtual channels and BAF has optimised its digitisation to control costs and drive engagement.
Given the rural focus and the high vehicle finance exposures, MMFS results will be indicative of consumption pickup in the hinterland and traditionally, the upcoming festive season is a key period.
Bajaj has a footprint across the entire landscape and its results suggest that the digitisation is paying off since it seems to have maintained AUM momentum.
Both managements seem confident they can achieve or beat prior guidance given Q2 momentum.
The two stocks, however, fell on Wednesday, with MMFS down by a steeper 4.4 per cent and BAF by 1.4 per cent, a day when leading indices fell by about half a percentage point.
Most brokerages are positive on these two stocks.
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