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00:00We've had earnings from some very important and key members of the MBFC sector overnight

00:07and we are going to now take stock of that with Jignesh Shial, he's the Director of Research

00:13and Head of the BFSI sector at INCRED.

00:16Jignesh, good morning and thanks for taking the time out.

00:20Let's start with your stance on Bajaj Finance, some interesting updates as well coming through.

00:27What are you making of the earnings firstly?

00:30Obviously, thanks for the invite that I've got.

00:38Bajaj, yesterday the numbers have been pretty good, there had been some rise on the stress

00:47level, but obviously what management has been highlighting, there had been a rural stress

00:52which has been melting up since a while, but now it looks to be, as what management

00:57is talking about, that more or less for Bajaj at least, the stress has already been peaked

01:03out and going forward we will see that the trend is only improving.

01:07Obviously, I'm cautiously optimistic for now, but Bajaj being one of the largest MVFCs,

01:12having a significant presence in rural India, they have a relatively fine understanding

01:18of the trend and all, and they have been highlighting that stress hasn't peaked out

01:22and going forward we should see a decline, so that's definitely a good news, and that's

01:27what I guess the stock is basically reflecting.

01:30Jignesh, also there is a suggestion that they are looking to do away with the two-wheeler

01:39finance now, and it's actually a little bit of a surprise because, of course, naturally

01:44a lot of that is towards Bajaj Auto, but if they do away with that, what does this

01:49mean for the sector, because there is a significantly large player here moving out of that.

01:53What are you making of this?

01:54No, I mean, they are not saying that they are moving away from the two-wheeler space.

02:01Basically, what is happening is that Bajaj Finance has basically started as the capital

02:07financing MVFC for Bajaj Auto, but now Bajaj Auto is basically starting with their own

02:13MVFC, which is under the separate group altogether, they will be doing two-wheeler financing for

02:18their own vehicles and all, a two-wheeler, three-wheeler, and that's where Bajaj Finance

02:23as an entity is moving away from it, but obviously, I think from 2022 onwards they have started

02:29with their own two-wheeler financing business, which is for other than Bajaj Auto, two-wheelers

02:35which they are doing it up, so there they will be consistently improving the penetration

02:41and all.

02:42They are just moving away from Bajaj Auto financing part, which is capital MVFC arm

02:47that they have started with it, so definitely that is the area where they are going to do

02:52away with it, but overall two-wheeler financing still remains intact for them.

02:55But specific to Bajaj Finance, then, Jignesh, will it not impact operations, because there

03:01should be some wind-down of that catering to two-wheelers, at least from Bajaj Finance's

03:07point of view, right?

03:09Yeah, definitely there will be some impact, which I think the run-down will have an impact

03:13on the profitability and all over a period of time, but as even yesterday's call, the

03:19management has highlighted, obviously, moving away from capital has always been a difficult

03:24task because they have been funding it up pretty well, but on the growth front, definitely

03:30that run-down will have a bit of an impact on the profitability side, but even on the

03:34credit quality side, that will be a good news for them, because obviously, in general,

03:39whenever it has happened that there is, when you do a capital financing, funding and all,

03:46the credit quality gets a bit of a compromise on that particular part, so moving away from

03:50that particular piece and getting into a two-wheeler financing, other than Bajaj Auto, the impact

03:57will be positive on the credit quality front, but obviously, profitability and growth will

04:00impact at least for the next couple of quarters till the time the entire run-down happens,

04:05but on the asset quality side, that will be good news.

04:08You know, the other thing that came through in the conference call yesterday, and please

04:12correct me if I'm wrong, we understand that clients with more than three live unsecured

04:18loans are now showing a higher propensity for default.

04:23That said, even as against that, the point to counter that is the customers with exposure

04:29to more than three unsecured loans is now just 9% of the book, as against 13% earlier.

04:34So how are you looking at this change and this to and fro between this particular aspect?

04:40Look, this is, I think, you know, it's a bit of taken, you know, adversely, but it's not

04:51that way.

04:52I mean, typically, when there is a flow, so Bajaj has highlighted clearly that there are

04:58a set of customers which generally has two or three loans or more than three loans as

05:02well, where Bajaj has been exposed to it.

05:04Obviously, before pre-COVID also, there was roughly around 8% kind of a book, which extended

05:10till 13% when, you know, obviously, when the liquidity was pretty good, and there was definitely

05:15a good demand and people were, you know, were asking for it and the environment was also

05:20good.

05:21It went up, it stretched up to 12-13%, but when obviously, when since last couple of

05:26quarters, management was very much cautious, so they realized that there is an overheating,

05:31which has already been happening specifically in rural India and all, so they started cutting

05:35down to particular exposures.

05:36So from 13, it has again fallen down to around 9-10% currently, which is close to what they

05:40used to do earlier pre-COVID and all, but having two or three loans, that doesn't mean

05:45that that customer is always bad or even, you know, there is no specific default, which

05:50is happening.

05:51It's on a conscious side, they have taken a call whereby they don't want to get into

05:55that particular over-leveraged customer's mode, and where the cut-down has already happened

05:59from around 13% to around 9-10% right now, and till the time, you know, being a seasoned

06:04player into unsecured financing for so long, obviously, they know when to, you know, pull

06:10the plug out or when again to start doing it up and all.

06:12So when they see the market has been improving, probably this particular share will improve.

06:17But for now, it has gone up from 8% to 13% and now again back to 9-10%, which is a kind

06:22of a good news.

06:24Point taken, Jagnesh, and well pointed out as well, of course.

06:28But let's move on then to M&M Finance, and again, your initial take on the earnings.

06:35Obviously, this quarter had been a relatively bad quarter for them, there had been a rise

06:43in defaults and obviously, that has resulted into provision increase and the net losses

06:49as far as write-ups and all are concerned, still been captured or still been capped.

06:54But provision obviously has taken a turn and that's the reason appropriatability has been

06:57lesser.

06:59What management has been highlighting, it's a kind of delayed payments or repayments and

07:04not defaults as such.

07:05So there is a probability that the reversal will happen in the second half.

07:08But for now, definitely, it's a kind of a concern that market is seeing it up and that's

07:12the reason why the reflection is coming up.

07:15But what we see it up more is that, I guess, unlike other auto finance players, the diversity

07:20is still relatively lesser, major of the book is still in auto financing segments altogether

07:26and that basically is impacting M&M more because when the auto cycle slows down or the auto

07:30demand slows down, compared to other MMOCs, M&M has a larger impact and that is what is

07:35getting reflected here.

07:37Alright.

07:38But your view on collections, I know that the management has suggested that the first

07:4215 days of the second half recoveries have been quite good.

07:47But there is also, there is always this concern with respect to collections when it comes

07:51to agrarian states.

07:52Secondly, their auto segments, the CV segments specifically, it's not been encouraging.

08:00Can you talk to us specifically about some of these factors?

08:03No, no.

08:04You are saying it's absolutely right.

08:06We need to keep an eye on it because second half generally means better than the first

08:09half.

08:10That has always been the tendency.

08:12That is what the historical track record also suggests.

08:14What we are seeing is that the growth has been consolidating and more importantly, the

08:17underwriting itself has been seeing a significant improvement in M&M overall if you see it up

08:22compared to how historically they have done it up.

08:24But obviously, when the volatility happens and cyclicity is visible, we have to wait

08:28and watch out for whether the collection is going through or not.

08:33And if they are able to demonstrate that the numbers are pretty good for probably a quarter

08:38or two, then probably, I guess, we will have a little bit more confidence on what they

08:42are saying in delivery.

08:43For now, we will keep an eye on it.

08:45But I will still stay on a positive bias that because it's more cyclicity and not specifically

08:53a default, I think there is a large probability or there is a higher probability that they

08:56will be able to recover it up in the second half, but we will remain very watchful of

08:59it.

09:00Okay.

09:01Jignesh, among the counters that still have to announce earnings, any which are on your

09:06radar and your expectations from some of them, can we expect same trends?

09:11I know a lot of these factors will depend from company to company, but largely, what

09:17are you expecting from the balance of the earnings season?

09:20Well, I think obviously, we have been seeing it up and we have been highlighting also since

09:26a while that even management has been saying it up that credit costs or defaults are going

09:31to see a kind of normalization like pre-COVID or not.

09:36So obviously, there will be some hiccups which is visible specifically for those lenders

09:40who are more present into semi-urban rural areas altogether.

09:45So defaults are definitely seen a kind of a spike and that's what is visible.

09:51The expectation is that the second half will be better, so the commentary will be relatively

09:55good for the second half, but we have to watch out for.

09:58What is more interesting is that the seasoned players like whether it is Bajaj, whether

10:03it is from among the banking side, whether it is HDFC, even ICC is supposed to come out

10:08with numbers over this weekend.

10:10I think the seasoned players who had built up this book since a while, since a quite

10:13long period of time, they are relatively better off at this point of time compared to those

10:17guys who has built up this entire book in the last 2 years or 3 years where the major

10:22of the lending has happened and since seasoning has not happened, those players are more comparable

10:28compared to those guys where the overall book is relatively having more vintage and has

10:33seasoned out over a period of last couple of years.

10:35So we will stick to the quality, that is the call.

10:38I think large names with better underwriting and all, those are the guys who will be able

10:43to come out pretty quickly or pretty impressively compared to those guys where vintage is relatively

10:49lesser.

10:50Right, well Jignesh you lead that, thank you so much for joining us and taking us through

10:54your view on not just those two heavyweights in the NBFC space but the sector as a whole.

11:00Thank you so much for joining us here.

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