Underperformance in any portfolio stock is painful for investors, especially when the markets are trading at all-time highs and the rally in the market is broad based. Things get even more confusing when the underperforming portfolio stock has created wealth for you in the past and has a buy rating from majority of the brokerages.
Bajaj Finance is one such stock that has got investors confused with its underperformance and at the same time brokerages being optimistic about its future.
Bajaj Finance on year-to-date basis is down by more than 8 percent when BSE Sensex is down by 0.94 percent. In the past one year, BSE Sensex is up by more than 18 percent while Bajaj Finance shares have gained little over 4 percent.
What is interesting to note here is that if we consider the relative performance of Bajaj Finance vis-à-vis BSE Sensex on month-on-month basis, we are now entering into 5th consecutive month where Bajaj Finance shares are seen underperforming as compared to the BSE Sensex returns.
What is even more interesting to note is that if Bajaj Finance shares finished underperforming against BSE Sensex in February as well (5 consecutive months), it will only be the second instance of such consecutive 5 months of underperformance since the year 2006, at least. The last time Bajaj Finance shares underperformed BSE Sensex in 5 consecutive months was during the period March 2008 to July 2008 marked by the global financial crisis.
Since 2006, there have been several instances where Bajaj Finance shares have underperformed BSE Sensex returns for four consecutive months. For example, in the period encompassing March 2022 to June 2022, August 2022 to November 2022, April 2007 to July 2007 and June 2006 to September 2006, we saw shares of Bajaj Finance underperform month after month. However, the underperformance has rarely extended into the fifth consecutive month.
Is there weakness in the financials?
According to a market expert tracking financial sector ," In January as per the data released by NSDL, FPIs were net sellers of $3.6bn across financials. On the F&O front FPIs have been largely short in financials as well. If one looks at the derivative data, financials have seen significant shorting interest. Sluggish deposit growth and higher cost of funds have dragged the margins. Also, unsecured lending has been a cause of concern. Moreover, higher institutional ownership across financials over the years has also been one of the reasons that has acted as a drag. "
Bajaj Finance shares are trading below its long-term average of one-year forward price to book value according to UBS which recently initiated coverage in the stock with a sell rating. According to the UBS report, consensus is likely overestimating its growth-return on asset (ROA) profile despite its large size and increased competition.
Other brokerages such as KR Choksey and Philip Capital have a buy rating on Bajaj Finance with a price target of up to Rs 10,000 per share. Motilal Oswal Financial Services Ltd (MOFSL) has given target price of Rs 8,500 per share for Bajaj Finance, indicating an upside of over 27 percent from the closing price as on February 9. MOFSL research report suggests that the house believes AUM will grow at ~35 percent YoY as the customer acquisition will be strong and the cost ratios will be broadly stable aided by the operating leverage. The report also highlights that Bajaj Finance should be able to offset NIM compression in FY25 with lower operating cost ratios and expects the company to deliver a PAT CAGR of 27 percent over FY23-FY26.
Bajaj Finance shares are trading below their 20-day simple moving average (SMA), which indicates a short-term weakness.
Purvesh Shelatkar, head of institutional broking at Monarch Networth Capital has shared his concerns on the financial sector. “Jio Financial demerger from Reliance Industries and becoming a separate entity is a serious development in the financial space in India. The increased competition will impact all the other players' businesses including Bajaj Finance. What also needs to be noted is, thanks to government Initiatives NPAs have fallen to ridiculously low levels indicating further improvement is not possible for the banks and NBFCs. Pressure on NIMs will continue to be there for the sector. The regulator itself has warned about the rising unsecured loans introducing the possibility of increased defaults that may negatively impact the financial sector. All this indicates the possibility of stress coming back to the system, and therefore to my mind, even the top rated HDFC Bank is performing badly even as the liquidity tsunami is leading to excesses in some pockets of the market."
Given the cautious view by UBS on Bajaj Finance and buy reports by the retail brokerage houses, the market is divided on its outlook for the NBFC player that has been a consistent compounder for investors over several years. Holding decisions of retail investors may depend on how long the Bajaj Finance shares continue to underperform the key benchmark index. Prolonged weakness in the counter could prove to be more painful for investors of the company- unless it reverses its trend this month onwards.
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