RBI curbs on Bajaj Finance not a structural issue, multiples derating likely if issue persists

• For every month it takes to rectify this, Bajaj Finance may have to let go of 500,000 consumer durable loans.
• JM Financial is of the view that this is a negative development from a sentiment perspective while actual growth/earnings impact is likely to be minimal.
• Market expects a timely resolution of the problem, as growth drivers are still in place.
  

The Reserve Bank of India earlier this month has directed Bajaj Finance “to stop sanction and disbursal of loans under its two lending products ‘eCOM’ and ‘Insta EMI Card’, with immediate effect”. Despite the rap on its knuckles, the Street does not see this as a structural issue and the share prices of this non-banking finance company are unlikely to come under pressure over the medium-term. However, the impact on stock price will depend on how soon this gets rectified.

For every month it takes to rectify this, Bajaj Finance may have to let go of 500,000 consumer durable loans, which have an average ticket size of ₹20,000, translating into ₹1,000 crore disbursements per month or 0.4% of the current AUM (assets under management), explains HSBC Global Research. Analysts say that Bajaj Finance is working to speedily comply with requirements of the RBI. RBI suspended loan disbursements for these two products due to “non-adherence of the company to the extant provisions of its Digital Lending Guidelines, particularly non-issuance of Key Fact Statements to the borrowers under these two lending products”.

According to BAF’s Annual Report of FY23, the NBFC disbursed 28.2 million loans under eCOM facility. Analysts expect the issue to be resolved in three months. With the festive season behind, analysts expect the impact on loan disbursements to be not more than ₹500 crore.

BAF’s ‘Insta EMI Card’ is a product that the lender provides to all new consumer durable customers when they avail of a loan. When the customer uses this card for a subsequent purchase, either on an e-Commerce website or for an online purchase through Bajaj Marketplace, Bajaj Mall, dealer tie-ups, etc., that transaction is an eCOM transaction. In FY23, BAF reported 2.8 million transactions through e- commerce platforms, 2.4 million loans through Bajaj Mall and 1.1 million B2B loans through digital EMI Cards (cumulatively translating to c0.5m loans per month). According to analysts, these get classified under B2B Sales Finance (consumer durable, rural or urban).

The product has a high IRR (22-24%), high RoA (7-8%), low duration (around six months) and high profit contribution (c15% annually in our estimate), the longer the suspension lasts, the higher the loss.

It then depends on how speedily the RBI can revert or if they want additional actions. Should this continue beyond two months, the impact on profits through lower AUM growth and lower RoA would compound, says HSBC.

JM Financial is of the view that this is a negative development from a sentiment perspective while actual growth/earnings impact is likely to be minimal. This could weigh on the stock price in the near-term though JM believes repetition of such an event could lead to multiple de-rating. “We watch for quick resolution of the current issue and believe growth drivers are intact. After recent correction of around 10% from post-2QFY24 result highs and recent capital raise, stock is attractively valued at 4.8x FY25e P/BV and 23.5x FY25e P/E.”