Strengths: * Large, well-diversified NBFC Bajaj Finance has emerged as one of the largest retail asset financing NBFCs in India, and continues with its two-pronged strategy of building scale and maximising profit. Segments such as mortgages, small business loans, and commercial lending are focused on building scale, while consumer durable loans, personal loans, and 2- and 3-wheeler financing are focused on maximising profit. As on September 30, 2020, assets under management (AUM) registered de-growth of 5% (year-on-year) to Rs 104,987 crores on a standalone basis. The AUM consisted primarily of personal and consumer durables loans (34%), mortgages (loans against property [LAP] and home loans including LRD; 14%), SME loans and vendor financing (20%), two- and three-wheeler financing (12%), rural financing (12%), loan against securities (5%) and others (3%). At a consolidated level, the AUM grew by 1.3% to Rs 137,090 crores, with Bajaj Housing Finance Limited (BHFL) constituting 24% of the AUM. BHFL is the vehicle for BFL for growing the mortgages business and has attained significant size and scale in the past two years as a share of the overall AUM for the Bajaj group. At a consolidated level, the AUM consists of personal and consumer durables loans (26%), mortgages (loans against property [LAP] and home loans; 39%), SME loans and vendor financing (10%), two- and three-wheeler financing (9%), rural financing (9%), loan against securities (4%) and others (3%). While the group has been reporting strong growth in the AUM over the past five years, growing at a CAGR of 27%, the current weak macro-economic environment is expected to impact the growth in the near term. Nevertheless, over the medium term, the group is expected to continue to outpace the industry. * Strong capitalisation Capitalisation is robust, with sizeable standalone networth of Rs 33,589 crore and adequate Tier-I capital ratio and capital adequacy ratio (CAR) of 23.0% and 26.6%, respectively, as on September 30, 2020. Gearing was comfortable at 3.0 times as on September 30, 2020. The gearing policy is conservative. Adjusted gearing has been below 6 times over the past five years, despite aggressive growth in AUM. Bajaj group has demonstrated the ability to raise capital at regular intervals to keep the gearing metrics under control. Over the past five fiscals, the group has raised Rs 14,908 crores of equity which has significantly increased the networth of the company with the recent capital raise being of around Rs 8500 crores in November 2019. Each time the gearing metrics have inched closer to 7x, capital raising plans have been initiated and concluded. The healthy capitalisation enhances the ability to absorb potential losses on its portfolio; adjusted networth to net NPAs was healthy, at 45 times as on September 30, 2020 (34 times as on March 31, 2020). CRISIL expects the capital profile for the company to remain comfortable over the medium term, supported by regular capital infusion, demonstrated ability to raise capital, and healthy internal cash accruals; thus providing cushion against asset-side risks. * Healthy earnings profile, partially constrained by higher provisioning expenses Earnings are supported by a large proportion of high-yield businesses and competitive borrowing costs. For the first half ended September 30, 2020, return on managed assets (ROMA, annualised) remained healthy at 2.2%, albeit moderated, compared to 3.8% in fiscal 2020. The impact on earnings was on account of elevated provisioning partly also due to accelerated provisioning due to Covid-19. BFL made an additional provision of Rs 1,360 crore in first half of fiscal 2021 as a contingency provisioning for Covid-19. Of the overall credit cost estimate of Rs 6,000-6,300 crore for fiscal 2021, the company has provided Rs 3,386 crore in first half of fiscal 2021, while the incremental Rs 2600-2900 crore is expected to be provided in the coming quarters. The company has also reversed interest income of Rs 361 crore in first half of fiscal 2021 for the loans under moratorium. Nevertheless, earnings profile is supported by higher fee income and comfortable net interest margins. Additionally, the company has increased efforts to diversify earnings by focusing on various fee-based income avenues, such as existing member identification cards, co-branded credit card and third-party product distribution. Nevertheless, earnings remain susceptible to high credit costs, especially during continued macroeconomic stress, despite the conservative provisioning policy. With CRISIL-adjusted provision coverage ratio at 59% as on September 30, 2020, the coverage was in line of that of peers. While Bajaj Finance's profitability may moderate as the proportion of mortgage loans increases under its housing finance subsidiary, it is expected to remain better than that of peers over the medium term. * Strategic importance to, and strong expectation of support from, the Bajaj group Bajaj Finance is strategically important to the Bajaj group, the company gets significant financial, managerial and operational support from its parent, Bajaj Finserv. It also derives synergies from being a captive financier for Bajaj Auto Ltd (Bajaj Auto; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). Bajaj Finance is one of the crucial entities of the group's financial services business, and its established track record of profitable growth enhances its strategic importance. Bajaj Finance also plays a critical role in helping Bajaj Auto meet its sales targets and maintain market share; it financed around 53% of Bajaj Auto's sales volume in fiscal 2020, from 20% in fiscal 2010. CRISIL believes Bajaj Finance will continue to receive support from the group. Bajaj Finserv's financial flexibility has steadily improved over the years supported by performance of its operating companies including insurance ventures. In the unlikely event of Bajaj Finance requiring group support in an extraordinary situation, Bajaj Holdings and Investment Limited has ample liquidity in the form of cash and bank balances and portfolio of quoted investments to address the requirements. In addition, CRISIL believes that there is sufficient flexibility inherent in the market standing of the various listed and unlisted financial services firms in the group. CRISIL also believes that the financial flexibility will be sufficient to support any material requirements of Bajaj Finance even if the group were to step up its stake in the insurance ventures. Weaknesses: * Focus on risky asset classes and under-seasoned mortgage loan book The company has managed its asset side risk well. On a consolidated basis, reported gross non-performing assets (GNPA) was 1.34% as on September 30, 2020 (including Supreme Court dispensation cases) against 1.6% as on March 31, 2020. Some improvement in September 2020 was seen over March 2020 on account of moratorium offered to its borrowers and asset classification freeze resulting in roll back due to apportionment of collections towards overdue only. Further CRISIL notes that, on consolidated basis Bajaj Finance had about Rs 1,934 crore (1.4% of AUM) as on September 30, 2020, where asset classification benefit (not classifying as NPA) was extended as per RBI's Covid-19 regulatory package. The company has high exposure to risky asset segments such as personal loans and consumer durable loans (including life-style and digital loans), 2- and 3-wheeler finance, and unsecured business loans, which constituted around 58% of its standalone loan portfolio as on September 30, 2020, and are vulnerable to economic cycles. Further, significant proportion of Bajaj Finance's portfolio comprising mortgage loans has witnessed strong growth over the past few years and remains under-seasoned. BFL had given moratorium to its borrowers on an opt-in basis. Pursuant to the imposition of the lockdown, the company's collections too were impacted initially. The book under moratorium of Bajaj Finance stood at 27.1% as on April 30, 2020. With the steady improvement in collections, the moratorium book reduced to 15.7% of AUM as on June 30, 2020. This has further reduced by September 30, 2020 but still remains at 8% which was classified as Stage 2 assets. Similar stage-2 assets was 1.8% as on March 31, 2020. The company's ability to manage the asset quality metrics going forward amidst the current environment which has impacted the underlying borrower cash flows remains a key monitorable. Nevertheless, the overall provisioning cover of the group was comfortable with 59% coverage ratio for stage-3 assets. Further for stage-2 assets the company maintained a provisioning cover of 32% as on September 30, 2020. |