Bajaj Finance Ltd. secured a 'buy' rating from Nomura, as the brokerage initiated coverage on the company.
The brokerage has set a target price of Rs 8700 in its primary coverage, implying an estimated 6.4 times book value per share and a 29.3 times earning per share for FY25.
The non-banking financial company has continued to deliver strong numbers across parameters, Nomura said. It projects Bajaj Finance to deliver an assets under management compound annual growth rate of 27% over FY23–26. The company's average net interest margin of 10% and average credit cost of 1.6% should drive earnings per share and return on assets CAGRs of 25% and 4.5%, respectively, the brokerage said.
Execution of New Segments
The sustained performance of the company can be attributed to its successful introduction of new products, its careful management of secured and unsecured loans, and its extensive integration of technology, Nomura said.
Recently, the company has incorporated new products into its portfolio and intends to continue this expansion, including areas like microfinance, as well as financing for new cars, tractors, and gold loans. These avenues will play a crucial role in supporting the company's growth ambitions, according to the brokerage.
HDFCs' Exit A Positive
Due to its diverse liability foundation, Bajaj Finance, along with its AAA rating, solid backing from its parent company, careful asset and liability management and historical performance, has experienced a reduction in the gap between its funding costs and those of major banks in recent years, said the brokerage.
HDFC Ltd.'s exit is a positive for the company from a liability garnering and finer pricing perspective, Nomura said. HDFC's exit has removed all its exposure to the financial system from the non-banking and housing finance company classifications.
Jio Financial Services' Impact
Bajaj Finance saw a 6% fall in stock performance in the past month, due to pressure from Jio Financial Services Ltd.'s listing. This weight is overplayed, according to the brokerage.
JFS's execution capabilities will only be clear in the medium term, Nomura indicated. Establishing a successful unsecured business proves to be intricate for an NBFC, particularly due to the modest loan sizes of Jio and its comparatively lower customer quality, it said.
Key Risks
Bajaj Finance's potential conversion into a bank could be a key risk, due to size constraints, according to the brokerage. The shift could result in decreased return on assets and equity, coupled with restricted promoter stake and chief executive officer/managing director tenures, it said.
The incapacity to expand emerging ventures like micro financing, and new car/tractor financing also stands as a primary growth-related risk.
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