Bajaj Finance Ltd, the non-banking financial company (NBFC) with a focus on consumer loans, has underperformed the benchmark Sensex and Nifty indices in 2022, the first time it has done so in 14 years. The company has been a darling of investors despite valuations being steep at times.
So far this year, both the Sensex and Nifty have risen nearly 6 percent but Bajaj Finance shares have dropped 4.8 percent, a first such underperformance since 2008. This was also the first negative annual return since 2011.
Known for its fast-growing asset book, Bajaj Finance has been a multibagger for investors. Its asset under management (AUM) growth averaged 30 percent in the three years before the sharp drop to about 4 percent in FY21 when the pandemic hit. Despite covid-19 putting breaks on consumption spending and therefore consumer loan growth, the company managed to clock a decent growth in FY22.
Another factor that justified Bajaj Finance’s steep valuations was its superior asset quality. Bad loans at most times were sub-5 percent of its loan book. While the pandemic resulted in a sizeable restructuring of its loan book, the lender has been able to keep stress under control.
Notably, Bajaj Finance was perceived to be a superior investment compared with banks. Ergo, the valuation premium that the lender commanded vis-à-vis banks such as HDFC Bank, IndusInd Bank and ICICI Bank was large.
However, with banks hogging the limelight now owing to the earnings boost seen in the past few quarters and the robust outlook, the appeal of the non-bank lender has waned with respect to the valuation gap.
That said, Indians have turned cautious on borrowing for consumption although unsecured consumer loan growth has galloped of late again. According to analysts, the reduction in discretionary spending and the turn in interest rate cycle in FY23 has cast a shadow over the lender’s growth. Further, banks have become aggressive in the unsecured loan segment and given their edge in funding, Bajaj Finance could feel the pinch.
“Going forward, we expect banks to continue gaining market share in this segment as they gain on competitiveness vs NBFCs in a rising interest rate regime. Moreover, with the entry of JFS, a deep-pocketed player, into consumer lending, competitive intensity in the space is set to increase even more, which could detrimentally affect the growth outlook of players like BAF,” said Macquarie Research in a recent note.
The entry of another heavyweight, Reliance Industries, in financial services through Jio Financial Services Ltd also is a threat to incumbents, especially consumer lenders such as Bajaj Finance.
The intense competition especially in the consumer B2B and B2C segments will put pressure on Bajaj Finance’s medium-term profitability. Private banks are focusing on ‘buy now, pay later’ financing. Their shifting focus to personal loans will keep pressure on yields in the B2C book as well, according to a recent Kotak Institutional Equities report.
All this explains why the Bajaj Finance stock’s performance has been muted this year. After hitting a lifetime high of Rs 7,929 a share in October 2021, shares of Bajaj Finance are now trading around Rs 6,620 apiece.This puts its valuation at 6.08 times estimated book value for FY24, compared with HDFC Bank’s 2.83 times and ICICI Bank’s 2.88 times.
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