Bajaj Finance Correction offers an attractive entry; upgrade to ADD for Target Price INR 6,700: HDFC Sec

Bajaj Finance

Correction offers an attractive entry; upgrade to ADD

Bajaj Finance (BAF) delivered a strong operating performance, with steady NIMs in a rising interest rate and strong AUM growth (+27% YoY) environment. The healthy AUM growth comes despite elevated competitive intensity in select segments such as home loans, B2B finance, etc. Asset quality improved further, with GS-II/GS-III at 1.3%/1.1% (FY22: 2%/1.6%) and normalised credit costs. The management articulated its 2022-27 Long Range Strategy (LRS), outlining ~25-30% AUM/PAT CAGR on the back of robust customer acquisition, further emphasis on cross-selling and the addition of new loan products. While our concerns on the quality of earnings from the new-tofranchise (NTF) customers and new products remain, the sharp 20% correction in the past few months appears at a disconnect from the franchise earnings potential. We tweak our FY23 earnings estimates (~4%) to factor in higher other income and upgrade to ADD with a revised TP of INR6,700 (earlier TP at INR7,314) with implied P/E of 28x Sep-24 EPS (in line with SBICARD for a broadly similar 32% earnings CAGR).

 Steady operating metrics amidst rising competitive intensity: BAF reported steady NII/PPoP growth (+25%/24% YoY), led by healthy AUM growth (+27% YoY) and steady NIMs (11.5%) amidst rising interest rates. Cost-to-income ratio clocked in at 35% and is likely to stay elevated during FY23-FY24, driven by investments in digital initiatives, distribution, and customer additions.

 Medium-term strategy—omnichannel, doubling down on cross-sell: BAF articulated its 2022-27 Long Range Strategy (LRS) building an incremental narrative around an omnichannel strategy to drive a 25% AUM CAGR. With a target client base of ~110mn customers by FY27, BAF is increasing its focus on cross-selling existing and to-be-launched new products. However, BAF’s broad markers around growth and profitability appear ambitious, especially given its planned foray into below-prime customer and geographic segments coupled with continued elevated competitive intensity, in existing segments.

 Upgrade to ADD on valuation: Our REDUCE stance on BAF was largely centred on a downside risk to growth and expensive valuation. However, the ~20% valuation correction in the past three months offers some respite on multiples; upgrade to ADD despite marginally below-consensus estimates.