Though Bajaj Finance’s June 2020 quarter (Q1) top line beat market estimates, the lender missed on the profit front due to Covid-19-led increase in credit cost.

The consumer finance major reported a 12.4 per cent year-on-year increase in net interest income to Rs 4,152 crore, higher than consensus estimate of Rs 3,638 crore. However, with a three-fold rise in bad loan provisioning, its profit before tax plunged 29.3 per cent year-on-year to Rs 1,310 crore, or 35 per cent lower than Street expectation of Rs 2,019 crore.

The lender has made an additional provisioning to the tune of Rs 1,450 crore in the June quarter taking the contingent expected credit loss provision due to Covid to Rs 2,350 crore at the end of June. The contingency provisioning for Covid is now at 10.8 per cent of the moratorium book. Total provisions, along with those for Covid, rose to Rs 2,973 crore at the end of June as opposed to Rs 1,870 crore at the end of April, resulting in a provision coverage of 13.7 per cent of the moratorium book.

Moratorium book of the lender reduced to Rs 21,705 crore, which is 15.7 per cent of the assets under management (AUM) of the lender at the end of June quarter, from Rs 38,599 crore (27.1 per cent of AUM) at the end of April due to reduction in bounce rate and improved collection efficiencies.

While higher provisioning and moderate growth of seven per cent year-on-year in assets under management (AUM) are in line with the company's priority to mitigate balance sheet risk, including efficient liability management, the key highlight of Bajaj Finance’s Q1 was the improvement in collections and fall in moratorium book.

Shweta Daptardar, analyst at Prabhudas Lilladher, says: “Bajaj Finance’s Q1 provides good comfort on collection front and provision for moratorium book. Though there would be some delinquencies due to Covid-19 in FY21, the impact would be relatively limited.”

The improvement in moratorium was across segments and it was for reduction in bounce rate (indicates non-repayment of dues on time) and improved collection efficiencies, said the company.

Notably, major chunk (around 70 per cent) of consumer B2C and mortgages, which together account for over 50 per cent of Bajaj Finance’s AUM, saw no bounce history in the recent times, which is very positive, opines Daptardar, who also foresees 15-16 per cent further upside in the stock.

What’s more, according to Bajaj Finance's presentation, post restart in May, the bounce rate and collection efficiency of all 1.7 million newly disbursed loans is in line or marginally better than pre-Covid-19 loans and, if this trend continues, the company would comfortably focus on growth in second-half of FY21.

Thus, how the collection trend pans out in Q2 would be a key. It has added 2,800 collections officers and approximately 16,000 collection agency staff to manage the increased bounce volumes caused by Covid-19 disruptions.

Q2 would also be crucial in terms of delinquencies, as some analysts are still sceptical of the overall balance sheet stress.

Deepak Kumar, analyst at Narnolia Financial Advisors, says, “Though moratorium has come down, there is no clarity on overdue status of the moratorium book.” Therefore, Q2 results will give some idea if the current Covid-19 provisioning is sufficient or not, he added. The 3-month moratorium period for the March dues ended in June and slippages, if any, would be September month.

Currently, 85 per cent of the lender’s business is functioning. It estimates an AUM growth of 10-12 per cent in FY21 given that the government does not enforce a second lockdown. According to its estimates, more than 75 cities that it operates in will be back to pre-Covid volumes by October, a further 40-75 cities by November, another 10-40 cities by January 2021 and the top 10 cities will be back to pre-Covid volumes by March next year.

While the company has also increased its FY21 credit cost expectations from April due to extended disruptions and it reversed interest income of Rs 220 crore related to moratorium account. Analysts say, this was already indicated and is a prudent step.

In Q1, gross NPAs fell by 210 basis points sequentially to 1.4 per cent due to 86 per cent fall in slippages or loans turned bad.

The lender said it has acquired 0.53 million new customers in the June quarter taking its total consumer base to 42.95 million at the end of Q1FY21, up 16 per cent year-on-year. Its capital adequacy ratio (CRAR) at the end of Q1FY21 stood at 26.4 per cent with tier 1 capital at 22 per cent.

On the whole, how Q2 pans out would be crucial for the stock, which shed 4.3 per cent post result on Tuesday versus a 1.4 per cent rise in the BSE Sensex. Part of the fall, however, can be attributed to profit-booking as the stock had risen 45 per cent from its lows in March.

Deposit base of the lender grew 33 per cent year on year to Rs 20,061 crore in Q1FY21. It reduced rates on its deposits twice in Q1 aggregating to 65 bps.