Brokerage house Investec has initiated coverage on Bajaj Finance with a “sell” rating and reduced the target price to Rs 4,800 a share.
Despite Bajaj Finance's outstanding results over the past decade in terms of growth, asset quality, and profitability, Investec anticipates challenges in the current decade. These include the constraint of Bajaj Finance's size, increasing competition in unsecured credit, shrinking barriers to entry in unsecured credit, potential unsustainability of Bajaj Finance's super-normal profits, and incremental capital allocation in lower return on equity segments.
Analysts at Investec also said technical factors such as the listing of subsidiary Bajaj Housing and a potential regulatory push to transition to a bank could trigger a de-rating
Despite these risks, Bajaj Finance's valuation reflects a 90 percent premium over large private banks, which Investec believes does not accurately account for the risks.
In recent years, lending institutions have prioritised unsecured credit as a focus segment and new entrants such as One97 Communications Ltd (Paytm), CIFC, and Poonawalla have gained market share in a short period of less than two years. This trend is supported by the widespread distribution of smartphones and the availability of data, which have aided in shrinking barriers to entry, it said.
Despite being known for its fast-growing asset book, the reduction in discretionary spending and the turn in the interest rate cycle in FY23 impacted Bajaj Finance's growth.
The entry of large players such as Jio Financial Services and Reliance Industries in the financial services sector is set to intensify competition, affecting the growth outlook of players like Bajaj Finance.
Private banks are focusing on "buy now, pay later" financing, and their shift towards personal loans will keep pressure on yields in the B2C book, according to a recent Kotak Institutional Equities report, which puts pressure on Bajaj Finance's medium-term profitability in the consumer B2B and B2C segments.
"We estimate Bajaj Finance’s yield in the PL/SME segments at 18.5% (while lending to prime customers, 750+ CIBIL score). This kept credit costs low in the past, but we believe this is not sustainable and expect competition to disrupt profits/growth. BAF’s growth and profitability should moderate, and we build AUM and PAT CAGR of 23% and 20% (FY23E-FY26E). We are ~3%/5% lower than consensus estimates on FY25E AUM/PAT", Investec said in its recent report.
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