Bajaj Finance: Has the narrative changed?

                             

Bajaj Finance: Has the narrative changed?

There was a point of time when Bajaj Finance could do nothing wrong. But, something appears to have changed for the stock in the last one month.

Data Source: NSE

For a long time, Bajaj Finance has remained the Gold Standard for stock market investors. At a time when every NBFC was struggling post the IL&FS crisis in 2018, Bajaj Finance was the rare exception. Like HDFC, Bajaj Finance not only recovered the losses of 2018 but ended up scaling greater heights. However, the steep fall in the price of Bajaj Finance in the last 45 days has been extremely sharp and every bounce has been met with more aggressive selling. That is evident from how the delivery selling has clustered at higher levels in the chart, in tandem with the price fall. That clearly hints at delivery selling in the counter. What has changed for Bajaj Finance; and has the narrative really changed?

Bernstein downgrades BFL on unsecured loans

The first aggressive downgrade of Bajaj Finance came from Alliance Bernstein which downsized the price target from Rs4,800 to Rs1,740. This was largely an outcome of the COVID-19 outbreak. Bernstein was of the view that the 21-day lockdown could adversely impact Bajaj Finance’s unsecured consumer lending model. With the COVID-19 pandemic showing no signs of tapering globally, most analysts are apprehensive that the lockdown could continue beyond April 2020. Also the EMI moratorium for 3 months is likely to hit Bajaj Finance cash flows sharply.

Problems in recoveries and credit costs

The lockdown of the economy would have two repercussions for Bajaj Finance. Firstly, the credit recoveries will virtually come to a grinding halt till the end of June. That would almost mean a lost quarter for Bajaj Finance. In addition Bajaj Finance has a 40% exposure to two of the groups that are most vulnerable to default in the lockdown scenario; SMEs and retail borrowers. Ironically, at a time, when the RBI is dropping repo rates aggressively, most NBFCs are likely to see a compression of their net interest margin (NIM) as the yields on assets will grow slower than the cost of funds. That could be the Catch-22 for Bajaj Finance.

Rethinking the Bajaj Finance valuation game

From an optimistic standpoint, the P/E ratio of Bajaj Finance has come down from a rich 62x to around 26x at current prices. However, P/E may not really be a relevant metrics at a time when the first quarter is going to be a washout and the consumer finance market could take at least 12 months to recover old activity levels. If earnings take a hit, even at current prices the stock may not look very cheap. For the first time, a number of brokers are now coming out and downgrading the entire financial services sector in India. With a weightage of 41% in the Nifty Index, that would not be great news.

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