Bajaj Fin: Profitability pressure, low AUM growth make analysts sceptical

Illustration by Ajaya Kumar Mohanty
Even though the year did not belong to the non-banking financial companies (NBFCs), Bajaj Finance has been an exception. 

With year-to-date gain of over 44 per cent, the stock is the top performer not only among NBFCs but also in the entire financials pack.

The road ahead, however, may not be as rewarding for investors. Analysts polled on Bloomberg affirm a 12-month target price of Rs 2,389 a share; that’s about five per cent lower than the current market price of Rs 2,516.

The skepticism largely arises from some recent trends. For instance, the absolute customer addition growth has missed the 30 per cent target for two consecutive quarters. As a result, growth in assets under management or AUMs, too, missed the historic 40 per cent-mark. Likewise, despite repricing its assets to pass on increasing cost of funds, net interest margin (NIM) or profitability has seen some pressure.

Sequentially, NIM fell by about 50 basis points (bps) in the September quarter (Q2), while it came off by over 300 bps from the December 2017 peak. “As interest rates rise further and liquidity remains under pressure for NBFCs, we expect margin pressures to persist,” analysts at Deutsche Bank note. Lastly, with nearly 60 per cent of its book comprising unsecured loan assets, the Street will closely monitor Bajaj Finance’s asset quality. While for now, it is below the FY18 levels of 1.8 per cent, Q2 did witness some sequential increase, though not too alarming. Even if Bajaj Finance’s recent AUM growth, NIMs and asset quality are better than its peers, it may not be adequate to defend valuations.

With valuations of five times the FY20 estimated book value, analysts say the stock is priced to perfection. At these levels, Bajaj Finance is the only NBFC stock to trade 30 per cent higher than its five-year average valuations even after October’s market carnage. Analysts at Credit Suisse say they would be cautious on Bajaj Finance as growth slowdown in the NBFC sector will impact stocks’ premium multiples. 

Those at Morgan Stanley have turned ‘equal-weight’ as valuations stay stiff. Investors thus need to temper their expectations from the stock.

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