Bajaj Finance shares gain as Nomura sees 22% upside

Nomura said that Bajaj Finance continues to deliver strong numbers across the parameters with Asset Under Management (AUM) CAGR of 31% over FY13-Q1FY24.

“New product launches, maintaining balance between secured and unsecured loans, and extensive usage of tech are a few of the key reasons for its sustained performance, in our view,” Nomura said. 

The brokerage house believes that the exit of Housing Finance Development Corporation Ltd (HDFC) is a big positive for Bajaj Finance, while the concerns over the entry of Jio Financial Services are overdone.

“After the exit of HDFC Ltd., all the exposure of HDFC to the financial system has been moved out of the non-banking financial companies / housing finance companies (NBFC/HFC) classification. This is a big positive for BAF and Bajaj Housing Finance (BHFL) from a liability-garnering and finer-pricing perspective, given the various regulatory caps on various liabilities streams for NBFCs/HFCs,” Nomura said.

Meanwhile, Bajaj Finance shares have been under pressure due to concerns about Jio Financial Services, which Nomura believes are overdone. 

“Setting up a successful unsecured business is relatively difficult for an NBFC, given low ticket size and inferior customer quality. Jio Financial Services’ execution capabilities would only be clear in the medium term,” the brokerage added.

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Bajaj Finance has a well diversified liability franchise, which, coupled with its AAA rating, strong parentage, prudent ALM management and robust track record, has led to declines in the gap of funding cost with large banks over the past few years, it noted.

Additionally, Bajaj Finance recently introduced new products, and plans to further expand its product lines including micro finance, and new car and tractor and gold loan financing. Nomura believes these will provide support to its growth aspirations.

However, the inability to scale-up these new businesses would remain the key risk from a growth perspective.

While Nomura is bullish on Bajaj Finance, its potential conversion into a bank due to size constraints is a key risk, as it would lead to declines in RoA and RoE along with a capped promoter stake and tenure of MD and CEO, Nomura noted.

The brokerage expects Bajaj Finance to deliver AUM CAGR of 27% over FY23-26F, average net interest margin (NIM) of 10% and average credit cost of 1.6%, which should drive CAGRs of 25% EPS, 4.5% RoA and 24% RoE during FY23-26F.

At 11:10 am, Bajaj Finance share price was trading 0.57% higher at ₹7,175.00 apeice on the BSE.

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Updated: 25 Aug 2023, 11:15 AM IST