Bajaj Finance an elephant that can dance, say bullish analysts, but investors stay cautious

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Investor sentiment around blue chip stock Bajaj Finance has remained subdued for over a year now but analysts are positive on the stock given its consistent performance.

The NBFC's shares are down 2 percent over the last one year while Nifty has advanced 11 percent, as investors remain concerned about the rising competitive intensity in the unsecured lending space.

The analysts are bullish as the company has compounded earnings at the rate of 34 percent in the past five years and sales at 27 percent over the same period. Those 'pesky' phone calls by Bajaj Finance agents explain the growth rate.

In Moneycontrol's Analyst Call Tracker, Bajaj Finance features in the list of 'Contrarian Upgrades' where the price has gone down but upgrades have increased. Analyst ‘Buy’ calls on the stock stand at 24 currently, compared to 19 a year ago.

In July, foreign broking firm CLSA upgraded the stock from 'Outperform' to 'Buy' and increased the target price to Rs 9,000 against Rs 6,600 earlier.

Bajaj Finance's sequential asset under management (AUM) growth at 9 percent in the June quarter beat CLSA's estimate of 6-7 percent. CLSA said the AUM growth was extraordinary for an NBFC of Bajaj Finance's size.

The NBFC's AUM stood at Rs 2.7 lakh crore as of June 30, 2023.

Brokerage firm Jefferies, too, recently upgraded its target price for Bajaj Finance to Rs 8,310 from Rs 7,280.

“We see Bajaj Finance delivering a healthy 27 percent CAGR in loans, which will support 26 percent CAGR in earnings over FY23-26 and ROE of 25 percent,” its analysts wrote in their report.

Also Read: Tech Mahindra faces series of downgrades in a challenging quarter

According to Shweta Daptardar of Elara Securities, Bajaj Finance is an “elephant that continues to dance”. Disciplined unsecured book expansion and prudent high ECL (expected credit loss) provisioning are among the several reasons she is bullish on the NBFC.

In the Q1 FY24 earnings concall, the management said their rural B2C portfolio stands in yellow, with Stage 2 spiking from 1.58 percent in Q4 FY23 to 1.7 percent in the quarter gone by. Stage 2 is when loans are overdue by 31-89 days.

There are very few NBFCs that do detailed customer profiling and risk categorisation as meticulously as Bajaj Finance. So analysts are not too concerned about the asset quality side.

In Q1 FY24, Bajaj Finance reported its lowest-ever gross non-performing assets (NPA) at 0.87 percent and net NPA at 0.31 percent.

So why are the investors concerned?

Investors fear that Bajaj Finance's exponential growth could be stunted as competition heats up in the lending space. Apart from the entry of Jio Financial Services (JFS), the NBFC behemoth is also staring at increased unsecured lending from banks.

Macquarie had in November 2022 said while it was too early to understand the exact customer segments and target markets that JFS to cater to, it seemed clear that JFS will be focused on consumer and merchant lending, which is the mainstay of NBFCs like Bajaj Finance and fintechs like Paytm.

Also Read: Bajaj Finance Q1 results | What analysts say on guidance, new products

In such a scenario, investors are not too enthused to pay 5.5-6 times its book value on a forward basis, said analysts.

Meanwhile, players like Cholamandalam Finance and Shriram Finance, who are now diversifying their AUM mix, are available at cheaper valuations.

This explains why Chola Finance is up 44 percent in 2023 so far, Shriram Finance is up 33 percent while Bajaj Finance is up 8 percent during the same period.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.​​​​​​​​​​