Shares of Bajaj Finance Ltd. fell after Macquarie initiated coverage on the non-bank lender with its lowest rating citing weak franchise strength in online consumer financing and tapering loan growth.
Bajaj Finance is a “dominant lender in the offline space, but customers are moving online, which is far more crowded and competitive”, the financial services provider said in a July 6 report co-authored by analysts Param Subramanian and Suresh Ganapathy. “Bajaj has weaker franchise strength in online consumer financing, which we view as a megatrend.”
Though the company is trying to address this by launching its own digital app ecosystem, the transition will be “difficult as it requires a reset from a business-to-business financier to a business-to-consumer company”, the report titled ‘Past Its Prime' said. “Both e-commerce and payments businesses are duopolies in India with well-entrenched and deep-pocketed players, with open architecture checkout financing solutions. These players also score strongly over indigenous super-apps on front-end tech and user experience.”
Macquarie said super-app forays have “rarely” worked in India, and that Bajaj's digital foray is viewed more as “hygiene”, rather than a major customer acquisition or cross-sell engine and is yet to reflect in any discernible increase in these metrics.
The research house rated Bajaj Finance ‘underperform', with a target price of Rs 4,500 apiece—implying a potential downside of 20.1% from the current levels.
That's contrary to 18 of the 30 analysts tracking the company reiterating a ‘buy'. While seven analysts suggest a ‘hold', five recommend a ‘sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of more than 33%.
According to Macquarie, Bajaj Finance's “sheer size brings its own set of challenges and risks”.
“Bajaj has a very high penetration (around 50%) in India's 12-crore top retail customer base. It has limited runway to grow upwards in the pyramid as we view credit cards as a superior product, and so has to grow down.” Because of that, “sustaining a strong customer acquisition momentum with a high credit threshold cut-off will be difficult”.
Also, the Reserve Bank of India's regulations to bring NBFC norms on asset quality recognition and capital requirements to risk management requirements on a par with banks may impact the company. “Bajaj Finance may need to convert to a bank to sustain growth, which could bring a significant drag on its profitability.”
Conversion to a bank, it said, comes with its costs, primarily cash reserve ratio and statutory liquidity ratio requirements, as well as the minimum lending requirements towards the priority sector. According to Macquarie's calculations, Bajaj Finance would need to raise Rs 86,200 crore to finance those minimum requirements.
“This could see a return-on-assets impact of about 90 basis points on conversion to a bank. This is a significant impact on Bajaj's profitability, and not factored into its current valuations,” the report said.
Key upside risks:
Any improvement in the loan growth profile for Bajaj arising out of improvement in cross-sell and customer acquisition rates.
Shares of Bajaj Finance fell 1% at close on Thursday.
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