Surge in Q2 provisions hurts Bajaj Finance's bottomline: Key takeaways

MUMBAI: Higher provisioning to tide over the Covid-19 crisis weighed on Bajaj Finance’s September quarter performance, however, cost-cutting helped the company's bottom line.

The stock ended 0.88 per cent lower at Rs 3233.25 on the BSE as the largest non-banking finance company (NBFC) fell short of Street expectations on the profit performance. Going ahead, investors will closely watch the steps NBFC firm will take to get back its growth trajectory.

Here are the key takeaways from Bajaj Finance’s earnings announcement:

How much did the company earn?
Bajaj Finance posted a 35.94 per cent year-on-year (YoY) drop in net profit at Rs 964.88 crore for the quarter ended September 30. The figures fell short of Street's expectations as an ET NOW poll had projected the figure at Rs 1,037 crore.

What was the net interest income like?
The company’s net interest income for Q2FY21 was up by 4 per cent at Rs 4,165 crore from Rs 4,000 crore in Q2FY20. During the quarter, as a measure of prudence, the company has reversed capitalised interest of Rs 142 crore. The total amount of interest income reversed in H1FY21 was Rs 361 crore.

How has the pandemic impacted in the quarter?
The loan losses and provisions for the quarter piled up and stood at Rs 1,700 crore against Rs 594 crore last year.

“Consequent to the ongoing pandemic, the company has further increased its provisions on stage 1 and 2 assets by Rs 1,370 crore to Rs 5,099 crore as of September 30. The company has strong pre-provisioning profitability to manage loan losses arising out of Covid-19,” the company said in a release.

What steps did firm take to cushion the pandemic blow?
Since the onset of Covid-19 pandemic, the company has taken significant measures to reduce operating expenses. As a result, total operating expenses for Q2 FY21 was down by 16 per cent YoY to Rs 1,160 crore from Rs 1,384 crore. Total operating expenses to net interest income for Q2 FY21 was 27.8 per cent as against 34.6 per cent in Q2 FY20.

How was the asset quality at the end of the quarter?
Gross NPA (non-performing assets) and net NPAs as of September 30 stood at 1.03 per cent and 0.37 per cent, respectively, against 1.61 per cent and 0.65 per cent as of 30 September 2019.

The provisioning coverage on stage 1 and 2 assets was 369 basis points (bps) as of September 30 versus 273 bps in the June quarter and 90-100 bps in pre-pandemic scenario.

How is the liquidity position of the company?
Liquidity surplus as of September 30 stood at Rs 22,414 crore against Rs 8,107 crore a year ago. The cost of liquidity surplus for Q1 FY21 was approximately Rs 220 crore as against Rs 47 crore in Q2 FY20.

Analyst’s take
"Bajaj Finance’s operational results being better than expectations and credit cost moving in-line imply that earnings estimates may remain unchanged or revised higher marginally," said Rajiv Mehta, Lead Analyst - Institutional Equities at YES Securities.

“We retain a positive stance and believe that management commentary on growth rebound would be most critical for incremental valuation re-rating,” said Mehta.

What are the valuations like?
At Rs 3,202.10 per share, it trades at 42.49 times its trailing 12-month earnings and 6.18 times its book value. The return on equity (RoE) stands at 14.54.