2QFY20 report on Bajaj Finance and L&T Finance holdings

2QFY20 report on Bajaj Finance and L&T Finance holdings:

1. BAJAJ FINANCE: Strong performance, fee traction robust

–       Bajaj Finance’s (BAF) PBT grew 41% YoY in 2QFY20, while PAT increased 63% YoY to INR15b owing to the lower tax rate. The quarter was characterized by continued strong AUM growth and stable margins/asset quality.

–       Consol. AUM increased 38% YoY to INR1.4t, led by strong growth across segments, barring commercial lending. BAF continues being cautious on digital products, auto finance and SME finance. The share of new loans to existing customers increased YoY from 66% to 70%.

–       The company continues financing a large share of Bajaj Auto’s 2Ws (52%) and 3Ws (46%) compared to the historical average of 30-35%.

–       Margins (calc.) were stable QoQ at 12.1%, with CoF too largely stable at 8.0%. The share of bank borrowings increased 500bp QoQ to 38%.

–       Fee income continues growing faster than the balance sheet – it was up 66% YoY to INR6.3b. Management guided that it would continue growing in excess of the balance sheet.

–       Asset quality was stable with the GNPL ratio at 1.6% and PCR at 60%. Credit costs are likely to be 1.7-1.8% in FY20 v/s average of 1.5-1.6%.

Bajaj HFC: Book now stands at ~INR257b, up 18% QoQ. It reported PAT of INR1.3b. Asset quality was largely stable with the GS3 ratio at 0.06%.

Valuation view: BAF has maintained its robust growth trajectory with deepening geographical penetration and increasing repeat business. Over the past two years, it has also enhanced its capabilities on two fronts – generating higher fee income and improving the deposit franchise. We expect the improving deposit franchise to be a key driver for incremental liabilities over the next few years. Given its parentage and AAA-credit rating, BAF has comfortably sailed through the recent liquidity crisis and maintained strong growth rates. While growth has slowed down, AUM CAGR is still estimated at 27% over FY19-22. We raise our estimates by ~6% to factor in the higher top line. Maintain Neutral with a target price of INR3,850 (6.2x Sep’ 21 BVPS)

2. L&T FINANCE HOLDINGS: Disbursements calibrated; asset quality largely stable

–       LTFH reported a decent second-quarter performance amidst the tough economic environment. PAT (excluding one-off items) grew 16% YoY to INR6.5b (7% ahead of our estimate). LTFH, however, took a one-time hit of INR4.7b on profits from DTA revision DTA under the new tax regime.

–       Overall focused book disbursements declined 12% YoY to INR98b, driven by lower real estate and infra disbursements. Rural disbursements were in line with past trends. As a result, the share of rural lending in the total loan book increased 300bp YoY to 27%.

–       While overall loan growth came in at 10% YoY, the ‘focused’ book growth was strong at 19% YoY. While management expects 2HFY20 to be relatively slower in retail lending, it expects a pickup from FY21 onwards.

–       Spreads were stable QoQ and YoY at 6.1%.Interestingly, the borrowing book declined 3% QoQ (our estimate: +2%).

–       GNPL/NNPL ratio increased 25/35bp QoQ due to seasonality in rural NPLs and the impact of floods in some areas. The company continues maintaining INR3.5b floating provisions.

–       Tax rate for the quarter stood at 14% versus our estimate of 22%.

–       Valuation view:  Over the past year, LTFH has reported a healthy operating performance and asset quality, despite the tough liquidity conditions. It has also made contingency provisions (currently at INR3.5b). The plan to de-prioritize structured finance and DCM is in sync with its target of ‘retailization’ of the balance sheet. However, loan growth has been slower than what we had estimated – we cut our loan book estimates by 6% for FY20/21, while our EPS estimates are largely unchanged. We maintain our Buy rating with a target price of INR120 (1.2x Sep ’21E BVPS).