Bajaj Finance growth, profitability may come under pressure: Kotak explains why

Kotak expects Bajaj Finance to achieve a 26 percent loan growth for FY25 following a strong start to the year with 32 percent growth in Q1 FY24

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Competitive intensity in the high-yield unsecured loans segment, could eventually put pressure on Bajaj Finance’s margins and pose a risk to the company’s ambitious growth guidance, which exceeds 25 percent. This is according to a recent report by Kotak Institutional Equities.

The non-bank finance company’s (NBFC) loan book is skewed in favour of unsecured loans that earn high yields. Unsecured personal (B2C) and unsecured SME loans constitute 41 percent of its assets under management.

Additionally, sales finance (mostly consumer durable loans) is 9 percent. Retail secured loans comprise auto (two and three-wheeler) loans at 5.2 percent of AUMs and home loans (urban and rural) at 18.3 percent.

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“With an increase in new entrants in this business, especially on digital platforms, Bajaj’s market share may decline over time. Jio Financial Services may also focus on this (unsecured) segment, capitalising on Reliance Digital outlets,” Kotak said in a report.

It also suggests that Bajaj Finance may need to explore lower-yield segments to maintain high growth and asset quality, as there may be limited headroom in high-yield personal and unsecured segments. The company’s expansion into high-yield, below-prime segments like microfinance and tractors requires different management approaches and may require disproportionate attention.

The KIE analysts believe that sustaining high yields and profitability while delivering high multi-year growth may prove challenging for Bajaj Finance.

Through a reverse valuation exercise, they have determined that the current market price (Rs 7,500) factors in a compound annual growth rate (CAGR) of 22 percent until FY2035. “This is a challenging feat in non-banking format,” the report said.

KIE has a ‘Reduce’ rating for Bajaj Finance with a fair value of Rs 6,800 for the stock. They expect Bajaj Finance to achieve a 26 percent loan growth for FY25 following a strong start to the year with a 32 percent growth in Q1 FY24. They project flat net interest margins for FY24 and anticipate a 27 percent earnings growth.

At 12:15pm, the stock was quoting Rs 7,463 on the NSE, lower by 0.26 percent from previous close. The stock is up 13 percent year-to-date.

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