Analysts said Bajaj Finance will see a decline in earnings and a decline in its multiples.
According to analysts at UBS, the market is likely overestimating Bajaj Finance’s ability to continue growing AUM at its historical pace while maintaining ROA despite increased competition and its large size.
UBS assumed coverage of Bajaj Finance with a Sell rating and a target price of ₹6,800 per share, which implies a decline of 9% from Tuesday’s closing price.
It expects Bajaj Finance’s returns to be under pressure in urban consumer finance business, which formed 37% of standalone Assets Under Management, 45% of interest earned and over 60% of core fee income in FY23.
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UBS believes Jio Financial Services (JFS) may disrupt Bajaj Finance’s core consumer business as the Reliance Industries-backed NBFC would start competing directly with Bajaj Finance in the medium term.
“Reliance Retail’s network of 18,650 stores, Jio’s 460 million customer base and Jio Financial’s base ₹A base of Rs 24,300 crore could spur expansion of Jio Financial’s loan book,” UBS said.
Jio Financial Services has launched consumer and personal loan (PL) products, areas where Bajaj Finance typically leads other non-banking finance companies (NBFCs). JFS also has auto, home loans and business loans in its pipeline.
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Given Bajaj’s high market share in consumer loans and PL, there are risks of market share losses and growth slowdown.
“For Bajaj Finance, the entry of Jio Financial Services could lower returns on consumer loans and loss of share in producer subsidy, where Bajaj has around 60% stake currently. We expect Bajaj’s NIM to contract 80 bps in FY23-26E due to a mix of lower yields and a higher cost of finance,” UBS said.
UBS believes that the quality of Bajaj Finance’s customer base is top notch, with a total of 77 million customers and 47 million cross-selling customers given that it targets the mass affluent.
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It further said Bajaj Finance’s incremental growth should be driven by cross-selling new loan products to high-end customers, which may take time to ramp up and may dilute ROA.
Bajaj Finance shares are trading at 5.5x one-year forward P/BV, which is below its long-term average. Barring the Covid-19s, Bajaj Finance’s earnings beat consensus, but the magnitude of subsequent earnings updates has declined. UBS is forecasting a revenue drop and ROE decline and also expects a downgrade ahead for Bajaj Finance.
At 1:20 pm, Bajaj Finance shares were trading 1.46% lower ₹7,363.60 each on the BSE.
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Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 17 Jan 2024, 13:19 IST