Equity L/S Analyst | Forensic Accounting | India, Yellowstone Equity

Ankit Agrawal, CFA

Equity L/S Analyst | Forensic Accounting | India

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/bajaj-finance-ltd" target="_blank" data-smartkarma-citation="entities:8950:1" rel="noopener">Bajaj Finance Ltd (BAF IN)</a> reported weaker than expected Q1FY22 earnings led by weakening asset quality and subdued growth due to adverse impact from the second wave of COVID. On the other hand, it reported strong advancement in its next phase transformation of becoming an app based fintech ecosystem. With this app based ecosystem, we think BAF is gearing up to be the next big fintech in the country. If all goes well, we won’t be surprised to see BAF getting bigger than Paytm, PhonePe, etc. over time. BAF has an inherent advantage over its peers in the form of a large vetted and wealthy customer base as well as in-house products that can be tailored as per customer requirements. BAF’s fintech peers, on the other hand, acquire customers through significant discounts and cash burn. Also, these peers have limited in-house products and have to rely mostly on third-party products that provide limited leeway for customization. While, BAF’s current valuations are around fair at 65-70x on a normalized profit base (i.e. ex of COVID impact), we think BAF still has potential to surprise on earnings growth led by its new Fintech avatar.

Bajaj Finance Ltd (BAF IN) reported weaker than expected Q1FY22 earnings led by weakening asset quality and subdued growth due to adverse impact from the second wave of COVID. On the other hand, it reported strong advancement in its next phase transformation of becoming an app based fintech ecosystem. With this app based ecosystem, we think BAF is gearing up to be the next big fintech in the country. If all goes well, we won’t be surprised to see BAF getting bigger than Paytm, PhonePe, etc. over time. BAF has an inherent advantage over its peers in the form of a large vetted and wealthy customer base as well as in-house products that can be tailored as per customer requirements. BAF’s fintech peers, on the other hand, acquire customers through significant discounts and cash burn. Also, these peers have limited in-house products and have to rely mostly on third-party products that provide limited leeway for customization. While, BAF’s current valuations are around fair at 65-70x on a normalized profit base (i.e. ex of COVID impact), we think BAF still has potential to surprise on earnings growth led by its new Fintech avatar. 

Bajaj Finance: Undergoing Major Transformation Towards Becoming a Fintech Company

<a href="https://www.smartkarma.com/entities/lic-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:15667:1" rel="noopener">LIC Housing Finance (LICHF IN)</a> reported weak earnings for Q1FY22. It reported heightened impairment of 830cr leading to significant decline in YoY profitability. This follows from significantly high provisioning of 977cr done last quarter. Together, LICHF has taken provisioning of over 1900cr in last two quarters which is just under 1% of AUM. This compares with average credit cost of 0.2% of AUM in the past decade and a prior peak of 0.51% in FY11. The heightened provisioning resulted in Q1FY22 PAT decline to 151cr from 824cr YoY and 406cr QoQ. The QoQ decline in PAT was led by compression in NIM (declined to 2.20% from 2.32% QoQ) and one-time charge to employee expense of around INR 125cr. However, it is always the darkest before the dawn. We anticipate significant recoveries and up-gradation in asset quality going ahead as the environment normalizes.

LIC Housing Finance (LICHF IN) reported weak earnings for Q1FY22. It reported heightened impairment of 830cr leading to significant decline in YoY profitability. This follows from significantly high provisioning of 977cr done last quarter. Together, LICHF has taken provisioning of over 1900cr in last two quarters which is just under 1% of AUM. This compares with average credit cost of 0.2% of AUM in the past decade and a prior peak of 0.51% in FY11. The heightened provisioning resulted in Q1FY22 PAT decline to 151cr from 824cr YoY and 406cr QoQ. The QoQ decline in PAT was led by compression in NIM (declined to 2.20% from 2.32% QoQ) and one-time charge to employee expense of around INR 125cr. However, it is always the darkest before the dawn. We anticipate significant recoveries and up-gradation in asset quality going ahead as the environment normalizes.

LICHF: Poor Show, But It Is Always the Darkest Before the Dawn

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Earnings Appear Overstated: Bajaj Finance (BAF.IN) [Bajaj] posted FY 1Q22 results of INR 10.2 bn, declining INR 3.4 bn (25.6%) linked quarter driven by weakness in Consumer Financing. The loss provision increase of INR 5.2 bn (42.2%), which - despite the growth - still did not keep up with the pace of stated NPA growth; and *Time To Man Up:  The day of reckoning is coming for Bajaj as net new NPLs amounted to INR 193 bn at FY 1Q22 – increasing at 281.3% on an annualized basis. By our calculation, reserves (much of the portfolio is weak consumer credits) need to increase INR 157 bn - representing nearly three years of PBT and over 50% of shareholder’s equity. In other words, Bajaj needs to man up and start reporting losses – this is a troubled financial institution.

*Results Down, Credibility Continues To Decrease: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 1Q22 bottom-line results of 1.8 bn, declining INR 890 mn (33.3%) linked quarter. Results were weaker across the board;  and  *Accelerating Negative Credit Delta: Inclusive of NCOs of INR 8.5 bn or 3.62% annualized total loans, we note that net new NPLs skyrocketed INR 12.0 bn or increasing an eye popping 106.7% on an annualized basis during the period. By our calculation, if the large blip in credit continues, LTFH  management ought to think about adding another INR 69 bn plus to the reserve. A hit this large represents over seven years of PBT or 6.3x average equity.

*Results Down, Credibility Continues To Decrease: L&amp;T Finance Holdings (LTFH.IN) [LTFH] reported FY 1Q22 bottom-line results of 1.8 bn, declining INR 890 mn (33.3%) linked quarter. Results were weaker across the board;  and  *Accelerating Negative Credit Delta: Inclusive of NCOs of INR 8.5 bn or 3.62% annualized total loans, we note that net new NPLs skyrocketed INR 12.0 bn or increasing an eye popping 106.7% on an annualized basis during the period. By our calculation, if the large blip in credit continues, LTFH  management ought to think about adding another INR 69 bn plus to the reserve. A hit this large represents over seven years of PBT or 6.3x average equity.  

L&T Finance Holdings – Struggling To Survive

Thematic (Sector/Industry)

*Not So Stable: According to the Reserve Bank of India (RBI), gross NPLS are not anticipated to be as bad as originally believed. In addition, the RBI retains its cautious outlook on MSME credit risk; and
* Rose Colored Glasses: As we have highlighted in numerous individual Indian bank notes, credit quality continued to deteriorate at an accelerated pace prior to the second wave of COVID-19. While many financials are already considered technically insolvent, the reality is that there has been absolutely no let up in the breakdown of credit quality.

*Not So Stable: According to the Reserve Bank of India (RBI), gross NPLS are not anticipated to be as bad as originally believed. In addition, the RBI retains its cautious outlook on MSME credit risk; and
* Rose Colored Glasses: As we have highlighted in numerous individual Indian bank notes, credit quality continued to deteriorate at an accelerated pace prior to the second wave of COVID-19. While many financials are already considered technically insolvent, the reality is that there has been absolutely no let up in the breakdown of credit quality.

Reserve Bank Of India – FSR Is Very Unrealistic

India

LIC Housing Finance Limited provides housing finance services to individuals for purchase, construction, repair and renovation of new or existing flats and houses. The Company also provides finance on existing property for business, personal needs and gives loans to professionals for purchase, construction of clinics, nursing homes, diagnostic centers, and office space throughout India.

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LIC Housing Finance (LICHF IN)

Bajaj Finance: Undergoing Major Transformation Towards Becoming a Fintech Company

Bajaj Finance is undergoing a major transformation and could become the next big fintech of India. It is launching an app ecosystem offering omni...

Ankit Agrawal, CFA

LICHF: Poor Show, But It Is Always the Darkest Before the Dawn

LICHF reported poor Q1FY22 earnings. However, we anticipate significant recoveries and upgradation in asset quality going forward as the...

Ankit Agrawal, CFA

Bajaj Finance – Just BAFfling

BAJAJ FINANCE: Bajaj posted a QOQ FY 1Q22 results decline 25.6% driven by credit weakness in Consumer. Net new NPLs increased at 281% annualized...

Thomas J. Monaco

L&T Finance Holdings – Struggling To Survive

L&T Finance Holdings: LTFH reported FY 1Q22 bottom-line declined 33.3% QOQ. Results were weak across the board. LTFH's reserve is short INR 69 bn...

Thomas J. Monaco

Reserve Bank Of India – FSR Is Very Unrealistic

RESERVE BANK OF INDIA: According to the RBI, NPLS are not anticipated to be as bad. This couldn't be further from the truth. NPLs continue to...

Thomas J. Monaco

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