Here’s why Nomura sees 21% upside for Bajaj Finance

Bajaj Finance’s plans to further expand its product lines, including micro finance, new car and tractor and gold loan financing, will provide support to its growth aspirations, says Namura which initiated coverage on the stock with ‘buy’ call

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New products, a balance between secured and unsecured loans and extensive use of technology have helped Bajaj Finance sustain its performance and will continue to do so, brokerage firm Nomura said on August 25.

The research house has initiated coverage on the stock with a “buy” rating and a target price of Rs 8,700.

At 10.45 am, the stock was quoting at Rs 7,168.80 on the NSE, higher by 0.44 percent from previous close. Nomura’s target price indicates a 21 percent upside from these levels.

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Analysts at Nomura said Bajaj Finance weathered multiple crises like the taper tantrum in FY13, demonetisation in FY16, the Infrastructure Leasing and Financial Services (IL&FS) turbulence in FY18 and  COVID-19 in FY21-22 with much ease compared to its rivals in India.

Over FY03-FY23, Bajaj Finance delivered assets under management (AUM), profit after tax (PAT), earnings per share (EPS) and book value per share (BVPS) at CAGR of 35 percent, 35 percent, 22 percent, 20 percent, respectively.

Despite maintaining such high growth, the firm’s asset quality remained pristine except during the global financial crisis (GFC), it said.

“Post-GFC, major players exited the retail segment. And BAF rode on this opportunity to gain market share in various categories of retail loans especially in consumer durable, unsecured loans and home loans,” Nomura’s analysts Ajit Kumar, Param Subramanian and Ankit Bihani said in the report.

Also Read: Bajaj Finance an elephant that can dance, say bullish analysts, but investors stay cautious

Future prospects

Bajaj Finance plans to expand its product lines, including microfinance, and new car and tractor and gold loan financing, which will provide support to its growth aspirations.

“While introducing new products in overall AUM, BAF makes sure the share of unsecured loans remains range-bound at 42-44 percent of total AUM to maintain a fine balance between growth, margins and asset quality,” the analysts said.

They expect Bajaj Finance to deliver AUM CAGR of 27 percent over FY23-26F, an average net interest margin of 10 percent and an average credit cost of 1.6 percent, this should drive CAGRs of 25 percent EPS, 4.5 percent return on assets (RoA) and 24 percent return on equity (RoE) during FY23-26F.

A key risk will be Bajaj Finance’s conversion into a bank due to size constraints, which could lead to a decline in RoA/RoE along with a capped promoter stake and tenure of the managing director and chief executive officer.

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