Bajaj Finance Limited (BAJFINANCE) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Bajaj Finance Q2 FY '27 Earnings Conference Call. [Operator Instructions] I'm pleased to welcome Mr. Rajeev Jain, Vice Chairman and Managing Director; and Mr. Sandeep Jain, COO and CFO; and other senior members of the management team. I now invite Mr. Rajeev Jain for his opening remarks, post which we will open the floor for the Q&A session. Thank you, and over to you, Mr. Jain.

Thank you, Morgan Stanley team for hosting us. Very good evening to all of you, or good morning, depending on the geography you're in. Welcome to the BFL Q2 earnings call. The investor deck for Q2 has been uploaded on our website. I hope you had a chance to go through the same. I'll quickly focus on key updates for the quarter and our management assessment before Q&A. I expect to between 15 to 20 odd minutes. Let's quickly jump to Panel 4 for -- in terms of the quarter 1 [ by ]. Overall, I would say it is an excellent quarter with strong performance across all key metrics, of AUM, new customer addition, credit cost, profit growth, ROA and ROE. AUM, as you can see, grew by 26.5% to INR 5 lakh INR 84,628.24 crores, delivering net AUM addition of close to INR 38,000 crores in the quarter. [ PBT ] grew by 29% to INR 8,537 crores in Q2. This is before the macroeconomic provision that we've created of another INR 320 -- INR 337 crores to grew by 34% to INR 8,874 crores. PAT grew by 29% to INR 6,367 crores. Before macro overlay provision, it grew by 34% to INR 6,619 crores. In Q2, company booked INR 13.5 million, just to tad below INR 13.5 million new loans and added 4.5 million new customers. Overall customer franchise stood at 100, just a tad below 29 million customers. ROA for the quarter came in at 4.6% and ROE came in at 20.6%. OpEx to total income was 33% and net NPA came in at basis points. Overall, I would say, a pretty good quarter for the firm and first half for the firm. In general, AUM growth was pretty secular. I'll quickly go through -- I've jumped actually to panel 52. If you see, the growth is pretty secular, urban consumer finance grew by 43%, rural consumer finance by 63%. MFI though on a low base, grew 54%, CV and traction low -- as grew 89%, last [indiscernible], captive book, as you're aware, as I've been talking for the last 2 quarters, continues to wind down and would create significant tailwinds for us in terms of credit costs as you move forward is now down to just INR 2,400-odd crores. MSME grew by 3%. It should now start to grow actually. So we should start to see as we get in the second half, a double-digit kind of growth momentum in the business. Gold loan book portfolio continued to grow, it's now 4.1% of balance sheet. It was just at about INR 24,000 crores in Q2. As of Q2, we added 320-odd gold loan branches during the quarter. Total network is now across 2,000 branches. It's at 2022 branches, and we remain. Quite clear about ending the year with close to 2,800 on gold loan -- stand-alone gold branches. The rest of the business, as you can see, grew in the quarter at 20% to 30%. So we're all pretty secular growth across all lines of business, in a way, on a -- if I look at the gross loan growth because capital book is dialing down, you should add another INR 1,000-odd crores that's virtually INR 39,000 crores of book growth that we are principally talking about. These are fascinating numbers even for me, I would say. I didn't imagine we'll be growing quarterly between INR 38,000 crore and INR 39,000 crores on a run rate basis because that's been the case for the last 2 quarters now. I'll go back to 5, 6 and 7 to quickly give you highlights on of the quarter. New loans grew 11% to INR 13.5 million. There is some level of noise in year-on-year number because last year's season was earlier this year season and later. We are well on track to deliver between INR 60 million to INR 62 million new loans in FY '27. We added, as I said, 4.2 million new customers during the quarter. We are clear about adding between 18 million, 19 million, 20 million customers, between 18 million to 20 million customers in -- to the franchise in FY '27. Overall franchise I talked about, stood at 129 million and cross-sell franchise stood at 82 million. Liquidity buffer remained strong at just a tad below INR 20,000 crores. Cost of funds came down sequentially by 9 basis points and came in at 7.3%. Deposit book is 14%. We've increased rates in Q2. And hopefully, we'll see some momentum here as we move forward. OpEx to total income improved to 33%. And despite continued investments that we're making in gold loan branches, [ MFI ] beaches and technology transformation. We remain pretty comfortable place to deliver a 25 to 40 basis point improvement in FY '27 on OpEx to NPL. Now on credit quality, loan loss to average improved to 1.56% from 1.88% last year. As a measure of prudence, we recognized, as I said, a macroeconomic overlay of INR 337 crores. Excluding this provision, the loan losses and provisions actually declined year-on-year by 12% and loan loss to average in the process would look to be like 1.0%. You may see here that the Stage 2 and Phase 2 assets actually increased by INR 1,601 crores. It actually includes a INR 1,047 crore increase in Stage 2 in the gold loan business. due to the short tenure schemes that we have actually launched when the new RA guidelines came out, and that has had an impact. We have since August stopped doing short-tenor schemes as a firm. We don't see any credit cost impact as a result of it already out of the INR 1,099 crores, which is -- which contributed -- which is close to INR 1,100 crores came from gold loan in stage 2, [indiscernible] has been resolved and has flown back to stage 1. So it's a transient movement for the quarter is really what we and don't see any impact on credit costs or even otherwise or in terms of auction and so on and so forth. Vintage grade performance across our [ 3 MOB, 6 MOB, 9 MOB ] continues to reflect significant and sustained improvement in the portfolio. And we are reasonably comfortable with the credit cost outlook for FY '27. Of course, we remain in a [ VUCA ] world, so we'll take quarterly [indiscernible]. [indiscernible] of course, if first quarter -- first half is to go by, we remain pretty comfortably placed on credit quality at this point in time for FY '27. PCI remained pretty strong at 60%. GNP NPA came in at 1.06 and 42 basis points. ROI talked about [indiscernible]. Let me just cover now on capital raise because that's something that we announced -- recently, on October 1, as you're aware, the Board approved, subject to shareholder approval. INR 11,700 crores of [ QIP ] and preferential warrants by Bajaj [ Finserv ] to the tune of INR 5,800 crores in accordance of course, with subject to approvals and by the shareholders. The Board's decision of raising additional capital is principally driven by mainly growth story of India and of the company and its subsidiaries. That's the principal reason why we're raising capital. And we are very also clear that without having to dilute in any given manner, the sustainability of the medium-term goals of ROA and ROE that we have actually outlined to shareholders. It's pretty much for growth that we are looking to raise capital as we move forward. quickly, let me now cover panel 9 to 11. I won't cover too much, but we continue to double down on finance transformation. We now have scaled our AI unit to 328 odd people. Given the breadth and the depth of the work that we're doing, the facial recognition camera technology is now deployed in close to 534 stores and 1163 service branches. We're getting a lot of learnings from these deployments, AI bots are now handling 75% of our DIY customer service volumes, disbursements, you can see the numbers, year-on-year 11%. So as we deepen our understanding of enterprise AI and deploy it, we get experience, real learnings. We're becoming more and more effective, both in terms of cost and in terms of experience customer and of the employee. Overall company has no 129-odd agents and 65 agentic applications. We are well on track to deliver 180-odd agent application and 600-odd agents for the year. So I would cover panel 13 and 14, just the only point I'll cover on Panel 13, 14 is that we or launch our first customer risk model from a risk management standpoint, we'll book by 100,000 accounts in our B2B business, look at its three performance. and based on that, start to evaluate that for other lines of businesses. So it's in a testing phase. Overall, as -- from a modeling standpoint, it does show a 15%, 20% improvement in terms of our risk outcomes. Let's see how the models perform in reality. And based on that, then we'll start to give you. We are working on our B2C model as well at this point in time, subject to the same performance we would launch our B2B B2C model as well if the performance by January for our B2B business holds based on our assessment at this point in time. Quickly, BHFL on subsidiaries, panel 14, good quarter for them as well. The disbursements in AUM grew 25%, some of loans, which are affordable loans cross INR 500 crores in monthly disbursement. OpEx to NT continues to grow. We continue to make progress in terms of -- on a year-on-year basis, improved from 19.7% to 19.1%, and PAT grew 18% despite very, very intense competitive environment as they continue to face and ROE improved as a result of improving leverage to 12.7% from 12.2% and their asset quality remain pretty healthy. BHFL had a good quarter. PAT grew 36%. It added 121,000 customers. To summarize and then open it up for questions. Overall, I would just say that the first half principally demonstrates the strength and scalability of our business model at this scale to grow 26% is I would say, good growth to be in underlying credit -- while maintaining credit costs that, as I've said, that probably it's likely that in the 4 years, there's likely to be one of the lowest years on credit costs. We are well on track for that. And [ Fine ] is moving rapidly from individual deployments to enterprise-wide transformation, both for employees and for consumers as we move forward. That's really from me. Just last point on portfolio quality, which is Panel 59 to 62, we principally remain green on all business metrics. You may see a gold loan variation there, but I've already explained the point. And as I said, 55-odd percent has already got resolved. So it's a transient point. With that, I'm happy to take questions.

[Operator Instructions] First question is from Piran Engineer from CITIC International.

Congrats on the quarter. Just I may slip in two questions because they are short to answer. Firstly, on gold loans, why aren't you all offering short-term gold loans? Isn't that easier from an LTV perspective because you're discounting only, say, 3 months or 6 months of interest versus 12 months?

[indiscernible] with the second one, Piran?

Yes. Sir, the second one is like historically, 2-wheeler customers, you all have been uncomfortable cross-selling other loans to never part of the cross-sell franchise. Given the fact that our open market 2-wheeler customers have significantly lower asset quality significantly better asset performance. Do you consider them to be part of your cross-sell franchise?

Fair, [indiscernible], if you want to answer?

The exact issue, what we faced in Q2, and that's the reason why cash has gone up to about INR 11,000 crores in golden business on account of shorter schemes. See, for customer to come every 3 months, the branch or for making full payment, payment of interest coming for rollover become very, very cumbersome. And accidentally, customer gets into delinquency. And the customer gets in delinquency, the only way the customer can resolve the cases by making the full payment of principal interest, which is not necessarily the most appropriate thing for the customer. . So as a result, I think what is more appropriate, and we are working on that as the gas Finance is to offer a longer scheme, let's say of 12 months that we were offering always. But to set up customers who want to pay regular interest give them option of making monthly and quarterly interest payment as well as a regional option. This will all both the options, both the issues. One is customer can make frequent payment of interest and reduce obligation. At the same time, we not have to come to branches again and again for [indiscernible].

On Tula answer, yes, Piran. On Tula answer is, yes, because we are clear, we want to run open architecture to a 30%, 35% of the credit cost. But the customer segment print doesn't change. So the in principle answer is yes, pool is a low. That's how I would answer it. Sorry, you had a follow-through on question one, I think?

Yes, yes. The only product was what percentage of the gold loan customers would take bullet loans versus, say, quarterly or monthly installment grow? Because I would presume alone would be bullet.

So Piran, today, you're right, the bulk of them, 99% of them are today bullet unability payment.

So they can continue to take bullet, but take 9 months or 12 months. So you can always come and prepay earlier prior because there's no friction.

Cost so they can always move 3 or 6 months.

So it's better not to push the customer into delinquency and then auction and so on and so forth. The wiser thing to do to give him a longer tenure and has the flexibility to repay rather than anything else. So that's at least our assessment and learning and we'll really stick to that.

I'll request you to come back for a follow-up question. Participants limit yourself to one question for our participant and rejoin for the follow-up. Next question is from the line of [indiscernible] from Autonomous.

Can I ask one on the -- I've got three, four actually, I'm just trying to prioritize. Let's go with asset quality. In MSME, you've seen GNPA continue to deteriorate. What book is driving that? And also broadly, GNPA going up 10 basis points in the quarter. Which areas you've talked about gold, but any other areas that we should be thinking of in terms of where stress might be building? And related to that, broadly, how should we think about consumer debt-to-asset kind of capacity. And which areas do you think consumer leverage is still low enough that you could comfortably in? Because it does feel that coming out of the half cycle, consumer leverage was high. It slowed down a bit, but like you highlighted in the last quarter, not a lot. So just wondering how you think about this philosophically?

Look, so the first point is on asset quality. I mean, clearly -- okay, on MSME specifically, it's -- we're seeing -- it's nothing as for growth, there's no denominator growth. So you should actually see this number as a peaking number, okay? That's -- so it's a poor mathematics and anything else. That's how I would answer the MSME. Flat growth, you're likely to see GNPA and we go up. When we look at the [ 3 MOB, 6 MOB, 9 MOB ], we are looking at numbers principally closer to 2019, which is really -- I have articulated many [indiscernible], better than that, as [ Sudan ] is saying, you're seeing better than that actually. So we are very comfortable with the MSME [ 3 MOB, 6 MOB, 9 MOB ] and development book because we started to make changes in the nature of origination from last July onwards. So I think that's just one. Just point number 1 on to your first point. On your second point, we don't foresee -- we don't see at this juncture any blind spots. It is a learning. We realized in August sometime that while in April, we launched based on the set of changes that came in from a regulated standpoint. And the entire industry launched 3 months, we also launched 3 months. It's a learning vehicle. And track quickly. It's not an easy one. I must make that point to you because industry still continues to do 3 months. We don't want to push -- we are clear. We don't want to push the customer into default stroke delinquency and the regulations and the guidelines are very clear. If you flow into default, you're barely, otherwise, you don't come back into regularization and so on and so forth. There are other unintended consequences for a non-monoline company that I then cannot lend to their customer if it flows into delinquency for any other product as well. So we don't want to be in that space. On your third question, which was related to...

Actually...

Consumer leverage remains -- sorry, sorry consumer leverage remains a consumer-to-consumer play rather than a generic point. As you are aware, we continue to see consumer debt to GDP grow a little slower, but continue to move forward. We are in public domain over the last 3 years that 3PL is a single univariate metric that continues to trouble us. We have brought that down from 14% to 7% in terms of origination my mandate to the team is to bring that down to 3.5 in the 6 months' time. That's really where we are principally at it. Despite, as I said, I'm looking at ultra low credit metrics, because we have seen that a customer who has multiple pieces of points of leverage that has a higher probability, tendency to flow into default. So we will keep bringing down the 3PL number of business or business further. Further means by half or we'll have it by March again. Yes, is doing by Feb. So that's really what our proactive stance is it's bottoms-up customer and leverage as a central dimension of our risk assessment process.

That's fair. On the GNPA, the 10 basis point increase, it's in a number of areas that adding up to it. Now clearly, your target as is 1.4%. I don't have to make a big deal out of it, but there are a number of areas showing increase. That's why I asked a general question at June.

For [ Chintan ], I think the right metric to -- from a comparison perspective as you do compare between Q1, Q2, Q3 and Q4 is to look at Stage 2 stages together, which has actually improved from 1.9% to 188 basis points, excluding gold loan. It's what we have also communicated in the presentation. The movement in the GNPA, it goes up in quarter 2, mainly on account of number of days being higher in Q2 compared to Q1. which means that 1 additional month of GNPA flows in quarter 1, quarter 2 always. And that has been the case always. If you look at past recall also, that's how the numbers would show. This is mainly on a kind of number of days, nothing to do with portfolio quality or any kind of stress getting built up in the balance sheet.

Fourth quarter is the lowest.

Yes.

So-- because number of days less...

90 days, yes.

I request to all the participants, please limit yourself to one question per participant. Next question is from the line of Kuntal Shah from Oakland Capital Management.

My specific question is, what are the reasons you see this overlay? And how does it relate to earlier overlays or a permanent change in the ECL models basically because how do we think about frequency and size of discrete overlays going forward versus embedding them in ECL model assessment? How do we...

This is over and above is model consult. Point number one. That's why it's overly. I think that's a first point to clarify, which means it remains available to the management to use. I think that's just first point from a clarification standpoint. I'll let Sandeep respond to...

So is it a policy to overlay good times to releasing that time?

We are -- is not a point before I -- okay. Is it to build resilience? The answer is yes. Okay? So the fundamental reason for creating overlay, let me articulate it not because we see stress building. But we -- I want us to remember always that this is bullet proofing of the business. It is for resilience. We are a cyclical business. We will see credit costs go up marginally, credit costs go down marginally. Those marginal periods of when we go to 2 point, we went to a peak of from 1.75 to let me give you a cycle view of us as a firm. I mean that's a very low cycle view somebody could articulate argue that we go from 1.5% in a low period to historically. Now the number would reduce further, as I've said, to 2.15%. That's really, if you see last two has been. That's really a cyclicality for us as a firm. We would like to further strengthen that, I would say, narrow the band further so that we can, in a cyclical business, reduce cyclicality is the -- and which is what we call resilience is the way thinking about the business model. And Sandeep, do you want to add something else?

Very clearly, we continue to rest our model on empirical data. which is what anybody would build a model on. That's point Number 1. Point number 2 is, while we do look at forward economic factor and guidance to look at what kind of overlays one should have from a macro perspective, which is also a part of the -- with the internal part of, I would say, ECL framework itself. At times it fails to capture the potential effect of what's happening in the real world. So let me give a clear example, El Nino that we are seeing in the country, we are at 87% monsoon at this point in time. On the oil price, which is now constantly holding at $100 to $110 kind of price, the cascading impact of this on the economy on the interest rate on the inflation is very difficult to factor in the macro model. And that's where the management judgment comes in picture. Let me also be very clear. It's not a perfect science. It's an estimate of the management in terms of which portfolio could have impacted. We believe it's point time unsecured businesses barring salary because [ Saliba ] not get impacted so much because of oil price and inflation, but the sell-from customers could really get impacted. We have done stress testing on those set of customers. and propose a higher provisioning on the customers who are in Stage 1 in the uncured non-salad portfolio. We've also done stress testing of Stage 2 outstand of the customer and support additional provision on par. We did not do stress testing specifically on taste because test, if you remember last year in quarter 3, we have already introduced [ LGD ] flooring, which captures, I would say, a significant higher provisioning coverage than what is required for the kind of portfolio that we manage. So I think keeping in mind all those two things, we keep doing this on a quarterly basis. And based on the evolving and emerging situation, we decided if there's a need for us to have overlift.

The statistical modeling technically could argue the 60% floor probably needs to release today. Let me make that point. So you have -- I'll compound your point further you may say that means you have more than even this the answer is probably yes. But we have just spoken the resilience. I want to make one last one, Kuntal. Sometime very soon, we will cross the point of where the largest nonbank merge into bank, okay? We are seized -- one, we have product move, we'll be proud of that moment as and when it happens, but we are also seized of the importance of resilience in our balance sheet that is needed to continue to grow from there on and get to as per last ad, say, INR 11 lakh crore number by FY 30. So that's all I would just say from a last point standpoint. .

This really helps. But can you just quantify what is the current stock as of today of macro and management overlay?

The overall macro provision stands at about INR 226 crores. Is my memory sows mile, that's a number. On the management overlay side, we have created a provision of INR 512 crores, INR 185 crores was taken in last quarter and INR 327 crores we have taken in the current quarter. Apart from that, the LGD flooring that we have created would also carry a number between INR 50 crores to INR 500 crores of additional provision that is already sitting in stage 1, 2, 3 assets, mainly because the actual number of the empire may suggest a lower number. But because we have applied the principle of LGD floor, we continue to make provisioning at a higher rate. So that number could be in the region of INR 350 crores to INR 500 crores is what our estimate at this point in time.

Participants, please limit yourself to one question per participant. Next question is from the line of Kunal Shah from Citi.

So the first question is on growth guidance. Last time you said like you review post the second quarter, you said it's very fascinating to see almost 26% growth plus the capital raise is also for the growth story. So what would be the growth guidance here in year onwards for near and medium term? So that's the first question. And second, in terms of the overall margins, cost of funds are down 9 basis points, but given that we are in the rate hike scenario, we had still seen some margin compression and NIMs on calculated basis appear to be down. So how do we see once cost of funds start to see up? What is the outlook on margins, yes?

So I would say FY '27, 2 quarters gone. We're seeing the early onset of festival first 9, 10 days. I would say probably between 26%, 27% growth we should deliver now on a full year basis. I think that's just medium term, we maintain a guidance of 20% to 25% on a year lower here and a year higher there. So that's the second point. On NIM, clearly, at this point in time, we are baking in two more increases in the current year that would take us to 6% kind of rates. You would see marginal moderation on NIM. As you move from here, we should be able to manage comfortably is what I would say in terms of NIM. Because part of that would come from OpEx to NTI. Part of the sale would come in from, of course, some credit costs as you're seeing. So overall profitability and return ratio, we should be able to continue to navigate is what I would say to you.

But operation in NIM would be only marginal. That's what we are suggesting?

Yes, at this point in time, yes. You've seen, I think, the 12 basis points compression in Q1 to Q2.