Bajaj Finance eCOM, Insta EMI Card Ban: Stock Fell 5% Since RBI's Move, Should Traders Buy On Dips?

Bajaj Group-backed NBFC giant, Bajaj Finance has taken a huge hit since RBI banned the company from lending new loans on its two online products namely 'eCOM' and 'Insta EMI Card' with effect from November 15. Since then, the stock has tumbled by nearly 5% on BSE. But brokerages like Motilal Oswal and JM Financial believe the impact of RBI's move could be minimal on Bajaj Finance, and its growth drivers continue to be intact. Hence, these 2 brokerages have given buy for a target price of at least Rs 9,500.

Bajaj Finance's share price is struggling to hold over the Rs 7,000 mark. On Friday, last week, the stock stood at Rs 7021.85 apiece, down by Rs 50.40 or 0.71%. Its market cap is nearly Rs 4.34 lakh crore.

But in the trading week that ended on November 14th, Bajaj Finance shares dipped by over 2.3% on BSE. Meanwhile, RBI banned e-lending on the two products on November 15th, and Bajaj Finance saw an upside of 2% to Rs 7,365.85 apiece on November 16th before correcting sharply. Since then, Bajaj Finance shares have declined by 4.7% on BSE.

In its notification, RBI said, "has directed Bajaj Finance Ltd. ("the company") to stop sanction and disbursal of loans under its two lending products 'eCOM' and 'Insta EMI Card', with immediate effect."

RBI added, "This action is necessitated due to non-adherence of the company to the extant provisions of Digital lending guidelines of Reserve Bank of India, particularly non-issuance of Key Fact Statements to the borrowers under these two lending products and the deficiencies in the Key Fact Statements issued in respect of other digital loans sanctioned by the company. These supervisory restrictions will be reviewed upon the rectification of the said deficiencies to the satisfaction of RBI."

Meanwhile, Bajaj Finance in its regulatory filing clarified saying, "We would like to further inform that the Company has temporarily suspended the issuance of Existing Member Identification cards ('EMI cards') to new customers till such time that the deficiencies observed by RBI are rectified to their satisfaction. The Company continues to offer financing to new and existing customers at dealer stores in the normal course of business."

Nevertheless, Bajaj Finance does not see any material financial impact due to this ban.

According to Motilal Oswal's note, the silver lining is that this RBI Ban has come after the festive period, wherein BAF generates a monthly run-rate of 350-400K loans on e-commerce platforms. The next 45-90 days are relatively lulled where we would expect BAF to be generating monthly e-commerce loan volumes of 220-230K.

How will this ban impact Bajaj Finance?

Motilal's note said, over a 45-90 day period, BAF could potentially lose out on e-commerce new loan volumes of 345K-690K.

On the cumulative impact on volumes from eCOM and Insta EMI Card, Motilal highlighted that with a monthly run-rate of ~220-230K loan volumes on e-commerce platforms and ~110-120K monthly B2B loans originated through the Insta EMI Card, we believe that BAF might have to compromise on loan volumes of ~450K (over 45 days) to ~900K (over 90 days).

Furthermore, Motilal said that assuming average ticket sizes of INR30K, INR40K and INR50K, we expect an impact on disbursements between INR13.6b and INR45.0b assuming a 45-90 day embargo period. This will mean disbursements could decline by 0.5%-1.6% of BAF's AUM as of Sep'23.

Moreover, as per JM Financial's note, the RBI embargo is on lending on InstaEMI cards and eCOM products. EMI Cards is one of the flagship acquisition/lending products for Bajaj Finance within which InstaEMI is a virtual card which customers can buy by paying a small fee. As of Sep-23, Bajaj Finance has an acquisition run-rate of ~670k digital EMI cards per quarter with 4.2m digital EMI cards in force. This is ~10% of the total EMI cards in force for Bajaj Finance. The RBI embargo is on lending on InstaEMI and not on issuance of InstaEMI cards. JM added, "As a result, we do NOT expect any impact on customer acquisition for Bajaj Finance due to this event."

Concerning eCOM, JM's note said, "it is a lending facility for e-commerce customers. As per the Annual Report of FY23, Bajaj Finance had disbursed 28.2m loans under the eCOM facility. As per our understanding, the average ticket size of these loans could be ~INR25k. This implies total disbursements of ~INR70bn annually (and ~ INR6 bn per quarter). This is

How Long The Ban Could Continue?

JM's note said, "The management intends to resolve the KFS issue within 2-3 weeks from their end, post which it will be up for RBI to undertake the review of the changes. Expected timeline for resolution is likely to be ~45-90 days in our view."

It added, "Depending on the period for which the embargo is in place, we expect impact to be ~INR5bn of disbursements per month (in the worst case). The eCOM product is seasonal in nature and with biggest festive Season (Diwali and Navaratri) behind us, actual impact on disbursements is likely to be lower."

Should you buy Bajaj Finance share?

Motilal's note said, "Deficiencies (as against the digital lending guidelines) identified by the RBI are more operational in nature (with regards to KFS) and do not raise any questions on BAF's processes or the structures of the various products in these two sourcing channels. BAF shared that it does expect any material financial impact from this event."

Further, the brokerage added, "We have not made any changes in our estimates as yet, even though we acknowledge that there will be an impact on both AUM growth as well as fee income in 2HFY24. However, our long-term thesis for this franchise remains intact. BAF will take corrective action, and once successful in satisfying the RBI, its momentum will only get stronger ahead with the digital ecosystem - app, web platform and full-stack payment offerings - in place. Reiterate BUY - any significant correction in the stock price purely because of this event should be used as an opportunity to accumulate."

Finally, JM's note said, "We believe this is a negative development from a sentiment perspective while actual
growth/earnings impact is likely to be minimal. This could weigh on the stock price in the near-term though we believe repetition of such an event could lead to multiple de-rating. We watch for quick resolution of the current issue and believe growth drivers are intact. After recent correction of ~10% from post-2QFY24 result highs and recent capital raise, stock is attractively valued at 4.8x FY25e P/BV and 23.5x FY25e P/E."

Hence, JM has also recommended buying for a target price of Rs 9,500. From the current price level, this would imply more than 35% potential upside in Bajaj Finance's share.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.