Elevated costs, valuation may drag Bajaj Fin

Stock falls 7.2% on mixed prospects

Despite a strong March 202122 quarter (Q4FY22) performance, shares of Bajaj Finance dropped 7.2 per cent to ~6,714 on the BSE on Wednesday, as analysts’ opinion on the company’s future prospects remained mixed. In comparison, the benchmark S&P BSE Sensex slipped 0.94 per cent.

While assets under management (AUM), portfolio composition, and digital transformation will remain key drivers for the stock, premium valuation, and elevated costs may cap the upside.

Analysts at Antique Stock Broking, for instance, said that even as Bajaj Finance undergoes digital transformation, one needs to monitor whether this shall enable it to grow at a better pace. "While the company might see operating leverage benefits in the long term, it still needs to do meaningful investment before one sees adequate gains from this. We understand the organisation shall continue to deliver better returns during this time, but valuations at 6.8x in FY24 book are sure rich," they said.

Those at HDFC Securities said that with the necessary digital transformation, the incremental portfolio growth from new-to-franchise customers will call for higher capital investments without the assurance of either a stronger customer franchise or greater customer stickiness.

The brokerages have 'Hold' and 'Reduce' ratings on the stock with a target of ~7,750 and ~6,430, respectively.

On Tuesday, Bajaj Finance’s management announced the creation of a digital website to offer a platform agnostic experience to users which will have identical user interface (UI) and user experience (UX) to digital app.

"Once implemented, the digital web platform will offer a similar experience across both, app and web, and customers will be able to commence journeys on one platform and conclude on the other," it said. Phase-1 of the web platform will go live by October, 2022 and Phase-2 by March, 2023.

However, CLSA opines that the web platform will lead to an elevated cost-to-income ratio at 34 per cent to 35 per cent. The operating expenseto-nii (net interest income) ratio stood around 35 per cent in Q4FY22.

"We cut our FY23/FY24 net profit estimate by 4 per cent each to factor in potential NIM (net interest margin) compression and a higher OPEX (operating expense) ratio of 35 per cent over the next two years. Bajaj Finance should deliver a return on asset (ROA) and return on equity (ROE) of 4.24.4 per cent and 21-22 per cent, respectively, over the medium term," said Motilal Oswal Financial Services.

The brokerage, however, maintained a 'Buy' rating with a reduced target price of ~8,350 per share. That said, from a long-term perspective, analysts expect the core business to remain well on track to get transformed into an adaptable new age fin-tech.

“At the current market price, the company trades at 8.2x its FY23 price-to-book value (P/BV). Bajaj Finance stands poised to deliver robust AUM growth of 22 per cent over FY22-24 with ROE and ROA of 22-24 per cent and 4-5 per cent over FY23 and FY24, respectively, on the back of improving auto financing cycle, pick up in mortgage lending business, and lower estimates of credit cost supported by a strong balance sheet,” said analysts at Sharekhan.

Further, the company plans to go digital by FY23, and has the ability to demonstrate high credit growth in the new credit cycle, aided by its strong cross-sell franchise and robust risk management framework. Hence, we maintain our ‘Buy’ rating with a price target of ~9,097, they added.

Bajaj Finance reported a consolidated net profit of ~2,420 crore, up 80 per cent year-on-year (YOY) and 14 per cent quarter-on-quarter (QOQ) on account of robust NII and other income growth. NII grew by around 30 per cent YOY and 2 percent QOQ while other income rose by 54 per cent YOY.

While AUM, portfolio composition, and digital transformation will remain key drivers for the stock, premium valuation and elevated costs may cap the upside