Slowing growth and other reasons why analysts are turning bearish on Bajaj Finance

Non-banking finance company Bajaj Finance Ltd, which is focused on lending, asset management, wealth management and insurance segments, has faced high selling pressure of late on fresh ‘sell’ recommendations.

Shares of Bajaj Finance fell 2.1% to end at Rs 7,068.65 apiece on the BSE on Tuesday. The stock has lost more than 12% since touching a one-year high of Rs 8,020 apiece on October 18.

Hong Kong-headquartered investment and stock advisory firm CLSA has initiated a ‘sell’ rating on the stock citing multiple reasons. CLSA iterated Bajaj Finance as the younger version of HDFC Bank, and set a target price of Rs 6,000 per share.

“It lies in our belief that the next five years will neither be as rosy as the previous five nor as rosy as what investors have priced into the stock. Due to a number of factors, we do not expect current valuation levels to sustain over the medium term. Hence, the stock is poised for a gradual valuation de-rating,” said Piran Engineer, analyst at CLSA.

Two months ago, Kotak Institutional Equities had also raised its concerns over Bajaj Finance’s valuation after the second-quarter earnings report. HDFC Securities has also initiated a ‘sell’ rating on the stock with a revised target.

At that time, two out of 27 analysts tracking the stock had a sell rating on the stock. This has now risen to five analysts, including CLSA, which have a negative outlook on the stock.

Slowing growth

CLSA foresees the continued impact of the coronavirus pandemic on Bajaj Finance’s revenue growth and further anticipates the auto loan segment to see muted growth in the future due to high non-performing loans (NPLs).

Mortgages, which had been growing at more than 40% on a compound annual basis prior to Covid-19, have seen a slowdown sharper than its housing finance peers. The customer repeat purchase ratio has declined from a high of 58% in fiscal 2019 to 35% in the second quarter of fiscal 2022. As a result, CLSA expects a slowdown from 35% asset under management (AUM) CAGR pre-Covid to 22% AUM CAGR over FY21-24.

Fintech impact

“Fintechs (partnered with banks and payment companies) and credit cards are increasingly posing a threat in the consumer durables financing segment, which is Bajaj’s key funnel for customer acquisition,” said Engineer, who co-authored the report with analysts Shreya Shivani, Adash Parasrampuria, and Mohit Surana.

Bajaj Finance itself is at the late stages of rolling out a digital transformation project, encompassing an upgraded consumer app with an ‘omnichannel’ experience, a suite of payments products and sales/partner productivity. The payments foray is not expected to deliver large profits, but may enhance customer engagement.

The omnichannel experience targets online shoppers, an area where Bajaj is a marginal player. While there is investor excitement about this project, CLSA believes this would transform only 40% of Bajaj’s business (sales finance, personal loans and rural lending). Other segments are likely to remain business-as-usual. 

‘Bluest’ sky scenario priced in

CLSA said that Bajaj Finance’s growth outperformance versus HDFC Bank is poised to shrink from 15 percentage points earlier to five points going forward. Also, its price-to-earnings (P/E) valuation premium over the private-sector bank has increased from 30% to 120% in the past two years.

Moreover, its incremental market cap since the emergence of Covid-19, driven by the ‘fintech’ story, is larger than even Paytm’s, despite having a much smaller customer and merchant base. Bajaj Finance’s last three equity capital raises increased its book value per share by 56%.

“We do not foresee any more capital raises in the next three to five years. Bajaj trades at a similar FY23 price/sales ratio as Afterpay despite lower growth. All these relative factors, plus our fundamental residual income (RI) model, validate our sell rating,” Engineer said.