Bajaj Finance Shares Decline as UBS Assigns "Sell" Rating, Predicts 18% Drop

Analysts at UBS remain cautious about Bajaj Finance’s outlook for 2025, citing concerns over persistently high credit costs, particularly in personal and SME loans, which constitute 38% of the company's total loan book. The brokerage also believes that the company’s ability to sustain its profitability may be challenged by an increase in funding costs and competitive pressures in the lending sector.

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Bajaj Finance share price declined by 1.5% to ₹8,312 per share on February 20 after brokerage firm UBS assigned a "sell" rating, setting a price target of ₹6,800—indicating an 18% potential downside from current levels.

Despite this downgrade, the non-bank lender's stock has surged 12% over the past month, outperforming the Nifty 50 index, which has dropped 2% during the same period.

UBS Caution on Bajaj Finance

Additionally, UBS anticipates a structural decline in the company's Return on Assets (RoA) and margins, potentially falling short of its long-term strategic objectives. The firm highlighted that while Bajaj Finance has demonstrated strong growth in the past, its ability to maintain the same level of expansion over the next decade could be difficult.

"We believe the market is overly optimistic about the company's consensus Earnings Per Share (EPS) projections. The current stock price factors in a 10-year EPS Compounded Annual Growth Rate (CAGR) of 23%—a challenging target," UBS stated in its report.

Stock Performance and Market Trends

So far in 2025, Bajaj Finance has gained 20%, emerging as the top-performing stock in the Nifty 50 index, followed closely by Bajaj Finserv, which has risen 18%. Meanwhile, the Nifty 50 has declined 3% year-to-date. The strong performance of Bajaj Finance can be attributed to its aggressive expansion in consumer finance, digital lending, and its ability to penetrate deeper into semi-urban and rural markets.

However, analysts caution that the overall economic environment, including inflationary pressures and rising interest rates, may impact the borrowing capacity of consumers, leading to a potential slowdown in loan disbursals. Furthermore, any regulatory changes in the non-banking financial company (NBFC) sector could also impact the company’s growth trajectory.

Financial Performance and Asset Quality

For the third quarter of FY25, Bajaj Finance posted a 17% increase in consolidated net profit, reaching ₹4,247 crore. Net interest income (NII) for Q3FY24 grew by 23% to ₹9,382 crore, reflecting the company’s ability to generate higher income from its lending activities. The increase in profitability was driven by higher loan disbursements, improved cost efficiencies, and a steady increase in customer acquisitions.

Despite these positives, asset quality showed signs of deterioration. The company’s gross non-performing assets (GNPA) rose to 1.12% in Q3FY25 from 0.95% a year earlier, while net NPA increased to 0.48% from 0.37%. The rise in NPAs indicates that some segments of borrowers, particularly in unsecured lending, are facing challenges in repaying their loans.

Future Outlook

Looking ahead, the key challenge for Bajaj Finance will be maintaining its strong growth momentum while managing rising credit costs. The company's ability to mitigate risks associated with delinquencies and ensure stable asset quality will be crucial in sustaining investor confidence. While the stock has delivered robust returns recently, analysts suggest that investors should remain cautious about potential headwinds, particularly in a high-interest-rate environment.

Bajaj Finance’s digital initiatives, focus on technology-driven lending, and expansion into newer markets are expected to be its key drivers of growth. However, sustaining high margins and profitability in a competitive market will require careful execution of its strategic goals.