Bajaj Finance Ltd reported mixed results for the first quarter of FY25 (Q1 FY25), highlighting concerns about its future growth and profitability.
Despite strong asset growth, net profit increased by only 14 percent year-on-year (YoY), significantly below the typical growth rate of over 25-28 percent, due to higher provisions and compressed margins.
Strong asset growth
Bajaj Finance’s assets under management (AUM) surged to over Rs 3.54 lakh crore by the end of June 2024, marking a 31 percent YoY increase.
This growth was driven by contributions from all business segments, although rural lending showed signs of moderation.
However, the rise in net profit was hindered by increased provisions and a drop in collection efficiency, which led to higher credit costs.
Increased provisions
Provisions for the lender rose sharply by 69 percent YoY in Q1 FY25. The credit cost, excluding management overlay, was 1.99 percent, which adjusted for the release of management overlay stood at 2.12 percent.
The company has utilized contingent provisions amounting to Rs 105 crore, resulting in the full utilization of the overlay, which stood at Rs 1,060 crore as of March 2022.
The management expects credit costs for FY25 to range between 1.75-1.85 percent, assuming the stress observed in Q1 FY25 was temporary.
Secured products
Focus on secured products BFL has been shifting its focus towards secured products like mortgages, which now constitute 31 percent of the AUM.
Bajaj Housing Finance Ltd. (BHFL), a wholly-owned subsidiary, filed a draft red herring prospectus (DRHP) with SEBI in June for a potential IPO. BHFL’s loan book is expanding rapidly, with home loans accounting for 52 percent of its portfolio.
The growth in the mortgage business during Q1 FY25 was primarily driven by lease rental discounting (LRD) and developer financing.
In a positive regulatory development, the Reserve Bank of India (RBI) lifted the embargo on sanctions and disbursals of loans under BFL’s two lending products.
Future outlook
Despite a rise in operating expenses by 22 percent YoY, BFL’s cost-to-income ratio improved to 34 percent in FY24.
However, margins were compressed due to an increase in the cost of funds and changes in the asset mix.
Analysts expect margins to remain under pressure in the next quarter but anticipates improvement in the second half of the fiscal year, assuming a potential rate cut by the RBI.
