Sharekhan maintains their Buy rating on Bajaj Finance stock with a revised price target of Rs 6000. Bajaj Finance Q3 FY21 results were mixed. Operational numbers were largely in line with estimates but elevated provisions were dampeners. Asset quality improved on a sequential basis, which was along expected lines. Bajaj Finance continued higher provisions (taken on a prudent basis for Stage 1 and 2 loans) and softened PAT performance. However, Sharekhan believes it is positive, and frontloading provision is a burden. Bajaj Finance management commentary on growth and asset-quality outlook for the near term is now more confident, which is a change since last quarter.

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Moreover, Bajaj Finance is now looking more sure-footed on growth and credit costs for the medium term, which is encouraging. On the operational front, Bajaj Finance saw NII (Calculated) falling by 5% yoy, but up 3.2% qoq, while PPOP was down 3.2%% yoy and was below expectations. The company’s assets under management (AUM) were flat. Sharekhan believes there are several business transformation steps that are underway for Bajaj Finance, which would not only be positive for business sustainability, scalability, but also position Bajaj Finance to take advantage of a strong economic upturn expected in FY2022E.

Business transformation, as well as relations with Banks such as DBS along with RBL Bank will help diversify business channels. The drag on Bajaj Finance margins due to liquidity buffers continued in Q3 as well, but it is now waning, which is a positive support for Bajaj Finance’s margins. Loan losses and provisions for Q3FY2021 were at Rs 1350 cr due to higher provision for Stage 1 and 2 assets due to prudence approach.

Bajaj Finance subsidiary, Bajaj Housing Finance performance was weak with NII growth but PAT declined YoY due to higher loan losses and provisions.

Sharekhan believes armed with factors such as a strong balance sheet, robust risk management, and prudent management, Bajaj FInance is a strong franchise for the long term and is well placed to ride over medium-term challenges. Sharekhan have fine tuned our estimates and target multiples.

Bajaj Finance: Key positives

Bajaj Finance provisioning coverage ratio as of 31 December 2020 was healthy at 65%. Provisioning coverage on stage 1 and 2 assets was 190 bps as of 31 December 2020 and provides comfort for investors. Healthy Capital adequacy ratio (including Tier-II capital) as of 31 December 2020 stood at 28.18% and the Tier-I capital stood at 24.73%. Liquidity surplus as of Q3 FY2021 stood at Rs 14347 cr (at still elevated levels) but much lower from Rs 22414 cr in Q2 FY2021, indicating lower cost of liquidity surplus.

Bajaj Finance: Key negatives

Bajaj Finance's elevated provisions, as during the quarter, the company has done one-time write-off of principal outstanding of Rs 1970 cr and interest outstanding of Rs 365 cr on account of COVID-19 related stress.

Bajaj Finance: Key risks

Bajaj Finance's prolonged or intermittent lockdown may result in slower growth and operational challenges, which along with worsening of economic parameters will pose a challenge.