Sell- Growth revived firmly in Q3FY22

Bajaj Finance’s loan growth is firmly back, up 9% q-o-q in Q3FY22. We expect the overall medium-term trajectory to remain strong even as a combination of competition across segments, rising rates and investments in new initiatives will exert some pressure. Amid normalising business and asset quality performance, cooling down in the Street’s initial euphoria on the new app will temper stock performance, retain Sell; FV of Rs 6,350 (5.9X book FY2024e), rolled over from Rs 6,000.

Business transformation slower

Bajaj Finance continued its digital transformation journey, although a bit weaker than initially envisaged. Key highlights – (i) only 6 mn existing customers (~12% of the existing base) have migrated to the new app; (ii) phase-2 of the app will be launched in 3-4 sprints; (iii) e-store generated 5.3% of loans in Q3FY22; and (iv) Bajaj will provide detailed progress on app activity after three quarters; the initial guidance was to provide more pointers from Q4FY22.

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Growth firmly back

Bajaj Finance reported a solid quarter with 25% y-o-y AUM growth, 41% NII growth and 22% provision decline driving 85% growth in PAT. Loan growth at 9% q-o-q reflected pick-up in underlying business activity. With a growing physical franchise augmented by digital initiatives, we expect loan growth to remain strong at about 24-25% over the near term. However, competition remains strong across segments, which will likely offset some of the positives.

Execution risk not reflected; SELL

Bajaj Finance stock has rallied significantly over the past one year, outperforming most BFSI peers on the back of high interest levels in its transformation exercise and likely value expected to be generated by its proposed digital ecosystem. Expectations of high valuation of fintech players (before listing of Paytm) also fuelled the rally.

We believe that the initial phase of euphoria on the app is behind us and Bajaj’s ability to seamlessly execute on its well-articulated strategy remains crucial. Bajaj’s management has demonstrated strong execution skills in the past but any slowdown/disappointment on the digital transformation can weigh in on the stock, in light of high investor expectations. The risk-return framework, at this point in time, is hence unfavourable. Retain Sell.