Kotak initiates coverage on Bajaj Housing with a ‘sell’ rating, sees 21% downside for stock

The brokerage highlighted BHFL's expensive valuations, trading at 4.7x book and 39x FY2026E earnings, which pose significant downside risks.

Kotak Institutional Equities has initiated coverage on Bajaj Housing Finance Ltd (BHFL) with a “Sell” rating and a target price of Rs 100 per share, representing a 21 percent downside from its current market price. The brokerage highlighted BHFL's expensive valuations, trading at 4.7x book and 39x FY2026E earnings, which pose significant downside risks. While Kotak acknowledged the company's long growth runway and pristine asset quality, it noted that these positives are already factored into the current valuations. The report estimated a fair value at 3.4x book and 27x earnings for December 2026.

BHFL’s growth trajectory remains robust, with an expected 24 percent compound annual growth rate (CAGR) in assets under management (AUM) over FY2024-27, primarily driven by its focus on the prime housing segment, said Kotak. The company, the second-largest housing finance corporation (HFC) in India with an AUM of Rs 91,400 crore in FY2024, has maintained its position as one of the fastest-growing HFCs, achieving a 29 percent AUM CAGR over FY2020-24. BHFL’s low-risk profile is underpinned by a focus on the salaried mass affluent segment, an average home loan ticket size of Rs 46 lakh, and a diversified business mix that includes home loans (58 percent of AUM), lease rental discounting (19 percent), loan against property (10 percent), and developer loans (11 percent), the brokerage added.

Asset quality remains a standout feature, with gross stage-3 loans at just 0.3 percent in FY2024 and negligible credit losses in non-retail segments. Credit costs are expected to remain moderate at 7-17 basis points over FY2025-27, supported by low delinquencies and stable coverage ratios. BHFL’s centralised underwriting processes, digitised credit operations, and robust collection teams have contributed to this strong performance, said Kotak.

Kotak projects a 25 percent CAGR in earnings and a 16 percent CAGR in EPS over FY2024-27, driven by AUM growth, stable margins, lower operating expenses, and moderate credit costs. Recent capital issuance is expected to mitigate borrowing cost pressures, enabling flat margins and lower leverage while maintaining strong growth. However, near-term return on equity (RoE) is anticipated to remain range-bound at 13-14 percent, with medium-term RoE likely stabilising in the mid-teens.

Key risks to BHFL’s outlook include challenges in executing its growth strategies effectively, potential margin compression due to migration to external benchmark lending rates (EBLR) or rate volatility, and intense competition in the prime housing finance segment, the Kotak report added.