BAJAJ FINANCE : Q3 CONFERENCE CALL TRANSCRIPT

MANAGEMENT MR. RAJEEV JAIN - MANAGING DIRECTOR, BAJAJ FINANCE LIMITED MR. SANDEEP JAIN - CFO, BAJAJ FINSERV LIMITED

MR. ATUL JAIN - CEO, BAJAJ HOUSING FINANCE LIMITED

MR. ANUP SAHA - DEPUTY CEO, BAJAJ FINANCE LIMITED

MR. RAKESH BHATT - DEPUTY CEO, BAJAJ FINANCE LIMITED

MR. KURUSH IRANI - BAJAJ FINANCE LIMITED

MODERATOR:MR. SUBRAMANIAN IYER - MORGAN STANLEY

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conference call hosted by Morgan Stanley. This event is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley disclosure website at www.morganstanley.com/researchdisclosures. Please note that this call and your questions will be recorded and may in certain circumstances be distributed to clients and/or made publicly available. By participating in this event you consent to such recording, distribution and publication. All participants' lines will be in listen-only mode and there'll be an opportunity for you to ask questions after the presentation concludes. I'll now hand over to our host, Mr Subramanian Iyer from Morgan Stanley, to begin. Thank you and over to you, sir.

Subramanian Iyer Thank you, Charlie. Hello, everyone. This is Subramanian Iyer from Morgan Stanley. Thank you very much for joining us for the Bajaj Finance earnings Q3 FY23 results. To discuss the results, I'm pleased to welcome Mr Rajeev Jain, Managing Director, Mr Sandeep Jain, Chief Financial Officer, and other senior members of the management team. Thanks to Rajeev and Sandeep for giving us the opportunity to host you. Without further ado, I now invite Rajeev to take us through the key financial highlights for the quarter, post which we'll open the floor for Q&A. With that, over to you, Rajeev.

Rajeev Jain Thank you, Subu, thank you, Morgan Stanley. Good evening to all of you, or good morning, depending on the geography. I, along with Sandeep here, have Atul Jain, who's the Managing Director at BHFL, and Anup Saha, Deputy CEO of BFL, and a few other colleagues from the company. I'll jump right into the investor presentation that is uploaded in the investor section of our website. Jumping on very quickly, I'll try and speak for 20-odd minutes and from there on, then we can take on questions.

Jumping right onto panel number four. Overall a good quarter, I would say, across all financial and portfolio metrics, albeit marginally lower AUM growth. On track overall to deliver 52,000 to 53,000 crores of core AUM growth in FY23, that leaves only one quarter left. So far, the growth has been around 39,000-odd crores of core AUM growth. Q3 clearly witnessed highest-ever loans booked and new customer addition, and I'll talk about it in the next panel. In terms of going fully digital, now we have 31 million consumers on the app in terms of net installs. Phase two of consumer app has started to now go live in sprints. On track, both on app and web, to fully go digital by March 23.

Some quick stats. AUM grew 27% to just a tad below 2 lakh 31,000 crore. Opex to NII came in at 34.7, and I'll talk about it two panels later. PAT came in just a tad below 3,000 crores at 2,973 year-on-year with a 40% ROE, just a tad below 24% on an annualised basis, and net NPA at 41 basis points. As I said, good quarter on financial and portfolio metrics for the company.

Diving deep in on panel number five. Core AUM growth was 12,476 crores, slightly shorter in the mortgage side of the business due to intense pricing pressures. Predominantly, the growth was slower on account of slower mortgages and I'll cover that when we talk BHFL. AUM 27% we've talked about. New loans came in at 7.84 million, last year same time we had booked 7.44 million.

B2B disbursements was 16,026 crores on a year-on-year basis, up 6%. October was pretty good for B2B for Europe consumer discretionary. November, December the demand slowed down significantly. So far, January, the first 26 days of the month, is looking much better. In terms of new customer addition, first time we've crossed 3 million customers and added 3.14 million customers in a quarter. Overall, we started the year thinking we'll do 9 to 10 million, it looks like we'll cross 11 million new customers in the current year.

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Customer franchise 66 million, we're probably end anywhere between 68.5 to 69 million customer franchise ending March. Location, out of 140-odd crore population, we're currently present in 110-odd crore coverage, we added 29 locations. We'd forecasted we'll grow, we'll probably at 400 locations. It looks like we'll probably at 250, 300 only in the current year.

Competitive intensity, I've talked about this point for the last three, four quarters, remains highly elevated, everybody seems to want to do retail. Between growth and margin, margin takes precedence. That's our fundamental view at a management philosophy level, so we continue to protect, which is evident in point number nine. Cost of funds went up, was 7.14, it increased by 23 basis points, but the overall NIM remained flat, it didn't dilute. That's the principal point that we are making, that between growth and margin, choose margin. We, of course, want to grow, we are a growth-oriented business. We want to grow well, but when choosing between the two, the choice is clearly on margin because it creates better sustainability of the business from a long-term standpoint.

Liquidity buffer was strong at just a tad below 13,000 crores. Given the overall strong ALM management, as you can see, the pass-through even in cost of funds is very gradual. Quarter two to three was 23, before that it was another 20-odd basis points. In the first nine months of the year, the total increase is 45 basis points. Given that we run our liability maturity longer than the asset maturity, we'll continue to see a lot more gradual pass-through on cost of funds as we move along, even into the next year.

Deposits book slower in the last quarter versus the first two quarters, we clearly took a lot more aggressive stand. In the first two quarters it was the right thing to do, but we have to deploy all the revenue we originate. Our rate increases in Q3 have been slower than what it was in Q1 and Q2. Having said that, deposits on the balance sheet grew by 3,562 crores, overall now it's 21% of the balance sheet. On a standalone basis, I think it's 28% of the balance sheet. We are very clear, on a consolidated basis, it will be 25% of the balance sheet sometime in the medium term.

NII grew 24%. Actual growth was 28% last year in Q3, IPO financing was at the peak and the company earned during that period 203 crores of IPO financing. Which, of course, since then has been discontinued from April 01, due to regulation, so adjusted on a crore basis, the NII growth is actually 28% versus the real number that you're seeing at 24%. That will become evident as Q4 gets done. Opex to NII improved. We're beginning to see some level of operating leverage emerge, moved down from 35.9 to 34.7 as the core balance sheet starts to build up quarter after quarter, with a similar line of product mix, we should start to see some level of operating leverage emerge. It'll still be marginally higher than it was at pre-COVID level, let me just flag that, as well. Q4, we are reasonably comfortable that we'll be able to sustain these metrics. As we go into next year it will be lower than the current year, we're clear about that. We have peaked on building out the operating expenses investments frame and as the balance sheet builds out, we should see improvement on that.

Loan loss of 841 crores, 1.4, 1.5% of average assets. We continue to hold 1,000 crores of management overlay for uncertainties at this point in time. GNPA and NNPA were lowest. When I say lowest, I think we were lower than that only when we were 13,000 crores of balance sheet in 2013 and it was six months NPA classification, so clearly lowest ever that we've been in the last 16 years. As Sandeep is saying, classification is different, came in at 114 and 41 basis points. Stage two down, stage three marginally up and, as you can see, balance sheet is building out, but it's up by 80-odd crores. All portfolios are green, including the AF portfolio now. Product mix was steady across all nine different verticals that we publish, across B2B, B2C and so on and so forth. Consolidated profit after tax we talked about. Capital adequacy remained pretty strong, Tier 1 capital was 23.3%.

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Employee headcount stood at 40,700. We added, I think, 1,300 employees between Q2 and Q3 across the three companies. You're aware, we've disclosed it to the street, point number 23, that we've taken a 41.5% stake in Snapwork Technologies to strengthen our technology roadmap.

BHFL, where as I said earlier, the quarter was a little slow. Approvals grew 14% at 14,514 crores. Disbursements were 7,429, just a tad below 8,000 crores in Q3 last year. It was in the quarter a de-growth but overall, AUM is still up 33% on a nine-month basis to 66,000 crore. Portfolio composition pretty steady, between 61% of the balance sheet is home loan balance sheet, and so on and so forth. Cost of funds increased by 49 basis points, the entire balance sheet is principally variable, so the pass-through has happened equally. To that extent, this balance sheet is protected from interest rate risk. Liquidity buffer was quite strong, as we were expecting stronger divestment. As you can see, the liquidity buffer remained pretty strong, they're well capitalised. Borrowing mixes was steady.

Opex to NII came in at 24.5%, there's improvement because NIM has expanded. Loan losses were down 50% YoY. BHFL also holds a management overlay of 242-odd crores. They are clearly the lowest risk business in India in terms of mortgages. The growth NPA is at 23 basis points and 10 basis points net NPA, so by far. As the for that scale, it's not amongst the lowest balance sheet balance sheet in India, with a 61% home loan business. Stage two assets, hardly anything to talk about, given the number. Stage three assets at 135 crores.

So, other than disbursements, which were slow and, as a result, AUM growth was slow, I would say quarter four BHFL was also good on all financial metrics, other than the disbursement and corresponding AUM growth, which we are hopeful between Q4 and Q1 should come back to growth as well.

BFSL added 77,000 customers, 24 locations. They've got branches now in added six locations in Q3 alone. It'll end the year with 30-odd locations as BFSL. We did a significant upgrade to the app and the web platform, added 45 new features. We'll be adding another between 15 and 16 new features in Q4 as well, and the asset should be a lot more solid and strong as we exit Q4, or the current fiscal, to significantly grow BFSL as a business in the next fiscal. MTF book, which is our core proposition we bring to the table, continues to grow. Profit came in at 3 crores. Last year we also had a similar benefit like the IPO financing benefit on account of IPO allocation, they had a 7 crore one-time profit sitting in there. Their headcount is at 532 people. That's the really the quarter in substance in terms of financials and growth metrics.

Omnipresence, very quickly, I'll jump right in, just in the interest of time. As I said, we'll fully go live across web and app by March 23, so I'll not cover page number ten and 11, but I'll just cover the metrics that we published. Locations will be a little short, we'll probably do 300-odd locations in the current year, between 400 and 450, that why you see yellow there. Otherwise, on downloads, net installed, in-app programme, we are looking super green. Top five in financial domain in Playstore, we're right there in the top five. Service requests are growing quarter- on-quarter, 22 to 25%, so significant improvement in service metrics as a result of us going… Of all the service requests raised, of all service requests that a customer makes, now 22% of them are coming through the app and are migrating to app. We foresee that this number in the medium term could probably go to 40, 45%. Wallet accounts is the only one which is yellow. Otherwise, UPI handles, bill pay transactions we are fully green. 18 million rewards we issued in the quarter.

QR deployment has now started to gather pace. We are now adding 7,500 to 8,000 merchant QRs on a daily basis. We foresee that in the current quarter we'll probably add just a tad below half a million new merchant QRs and because the entire functionality and the infrastructure went live in November, we tested that in December, currently we're adding anywhere between 7,500 to 8,000 merchant QRs on a daily basis. We expect to start becoming visible at the point of sale universally in the next fiscal. What we have done to the app this year, from nowhere we've become top five in terms of downloads. Monthly downloads now are on an average between 5

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million to 6 million, we intend to do that for the payments business from a merchant QR standpoint in the next fiscal.

Let's go to panel… These are all green, as you can see there. Customer franchise metric, this is a panel that we published in the second quarter. Clearly you can see that despite the franchise growing, the profit per customer and AUM per customer continues to grow. That's the acquire and cross-sell strategy, so we remain confident that despite growing franchise, we don't foresee that our AUM per customer will get compromised in any given matter.

This, from now on, fourth quarter with the third quarter results we'll start to publish to the street, in general, a long-range strategy update on a rolling basis. We, as a company, have been doing this for 13 years. We thought the time has come from a maturity standpoint to start to publish that to investors as well. What you see is a very quick, abridged version of what we do. Given that we're talking about it for the first time, this is on panel 16, what do we do as part of what we call long-range strategy?

It's an annual five-year rolling strategy plan with an execution plan of 12 to 24 months. We look at the macro as part of the rolling framework, look at the industry outlook, look at the technology megatrends, look at business megatrends, select a benchmark company to learn from, and create a bottom-up financial plan. It's a highly institutionalised and rigorous process and involves the top 500 people in the company on an annual basis over a 45 to 50 day period. We've been doing it for the last 13 years, so we thought, given the maturity of the company, the time has come for us to start to update that to the investors as well.

Very quickly, it's weaved around a basic construct. The basic construct of the company is on six key pillars. What is our ambition as a company? What is our strategy as a company? What is our approach as a company? What is the philosophy around which we have built the business? And what do we expect our market share and profit share to be as a company in this country? If you go to ambition, clearly ambition is to be a leading payments and financial services company. Have 100 million consumers, we'll end this year with 70 million consumers, as I said earlier. 3% of payments GMV, 3 to 4% of total credit and 4 to 5% of retail credit. That's clearly the ambition for us as a company from a long-range standpoint.

Strategy is to build omnipresent financial services company. Wherever the consumer goes, goes to branch, goes to app, goes to web, goes to social, goes for reward, and eventually goes virtual, we want to be omnipresent, offering all our products and services. Approach has remained simple for the last 13 years, acquire and cross-sell across all assets and liabilities and broking products to consumer, small business, commercial and rural consumers in India, across all consumer platforms.

Philosophy, build business with a ten-year view. We're very clear, financials services built with a ten-year view and deliver through the cycle 19 to 21% shareholder returns. Except for COVID, we've done that successfully for the last 12, 13 years and we intend to continue to do that. We think because of our construct, it's helped us deliver that at a design level because we take a longer-term view on building our business, it helps us anchor our business much more strongly.

Market share, clearly among the top five in every respective product that we're in. That's the ambition at the design level. And profit share, to be on the top 20 most profitable companies in India and five to six most profitable financial services companies in India on a sustainable basis, is really the frame.

That's the construct. Now, if you take the construct and say what does that cover in the strategy from a rolling standpoint, is really what you see on the next panel. We see industry, it grew, the past data is factual, the next

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