Bernstein bullish on Bajaj Finance, Muthoot Finance, IndusInd Bank amid strong growth outlook

So far this year, shares of Bajaj Finance and Muthoot Finance surged up to 20 percent, while IndusInd Bank declined by 5 percent

Global brokerage firm Bernstein has initiated coverage ratings on three banking and financial firms: Bajaj Finance, IndusInd Bank, and Muthoot Finance. Analysts are optimistic about the Indian banking sector, citing robust credit growth and favorable asset quality, and believe it has a promising future as a great compounding story.

"While the large private sector banks remain clean compounding stories with their continuous deposit market share gains and emerging scale benefits, the niche lenders (typically operating as Non-bank Financial Companies (NBFCs) and Housing Finance Companies (HFCs) offer equally compelling compounding stories," analysts at Bernstein said in a recent note.

The brokerage firm gave Bajaj Finance a 'market-perform' rating with a target price of Rs 6,800 per share. They believe that the company is a true superstar in the Indian lending landscape with flawless execution, but much of that is already priced into its valuations.

"Though its stellar execution has been its biggest differentiator versus peers, there are other factors that helped the company over the last decade including a relatively benign competitive environment and a sharp surge in consumption credit as investment cycle slowed and consumption cycle picked up during the last decade," analysts said.

Over the past decade, Bajaj Finance managed to maintain a stable spread and operating leverage that pushed up its RoA to 4.8 percent compared to an average of 4 percent during the prior decade.

Analysts noted that while the NBFC major has healthy growth prospects, there is potential for consensus earnings cuts due to headwinds. "Challenges include a sector-wide trend of slowing consumption credit, increased competitive intensity, and the already high scale of Bajaj Finance, which limits outperformance against the overall sector," they stated in a recent note.

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Despite these challenges, Bernstein expects Bajaj Finance to achieve a compounded annual growth rate (CAGR) of 21 percent in earnings over FY24-26 and values the company at a PE of 24x FY25E EPS.

On the other hand, Bernstein has initiated an 'outperform' rating on IndusInd Bank, with a target price of Rs 1,800 per share, citing the bank's strong positioning for a potential rate easing cycle and high exposure to attractive segments like commercial vehicles and micro-finance.

Compared to its banking peers, IndusInd Bank stands to benefit the most from an eventual rate cut given its higher share of fixed rate loans on the assets side as well as higher share of borrowings or wholesale deposits on its liability side.

"We view IndusInd Bank as a quasi-NBFC due to its NBFC-like loan book composition and weak deposit franchise. We expect the company's return on equity (RoE) to be 15-16 percent and loan growth of 18 percent between FY24-26. We value IndusInd Bank on 1.9x FY25E BVPS," the brokerage firm added.

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Similarly, Bernstein started an 'outperform' rating on Muthoot Finance with a target price of Rs 2,000 per share. The brokerage firm sees a promising future for gold loans  amid India's insatiable love for gold and its use as collateral for borrowing. Considering this, analysts said that Muthoot Finance the best play in this segment and anticipated 19 percent earnings CAGR from the gold financier, valuing it at a PE of 15x FY25 EPS.

"Muthoot is a pure-play gold loan lender with gold loans forming more than 80 percent of its loan book and has the best operating metrics versus peers in the segment. It has delivered very healthy returns ( more than 20 percent TSR) over the last decade as it maintains its focus on one product that has very attractive returns and a healthy (even if cyclical) growth trajectory," the brokerage firm highlighted.

So far this year, shares of Bajaj Finance and Muthoot Finance surged up to 20 percent, while IndusInd Bank declined by 5 percent. In comparison, benchmark Nifty 50 index has increased by 8 percent during the same period.

Overall, analysts believe that since the regulatory arbitrage between NBFCs and banks are declining, NBFCs that focus on catering to niche segments, especially the mass market segments, still have a long growth runway thanks to the still low debt penetration in India.