Amidst exuberance, Bajaj Finance investors may be caught on the wrong foot

Analysts still peg growth for FY20 upwards of 30%, even as management turned cautious after Q1

Bajaj Finance’s loan book, whether in size or granularity, doesn’t come close to that of India’s largest bank — State Bank of India (SBI). Yet, Bajaj Finance’s stock made waves lately when it pipped SBI in terms of market capitalisation. Trading at nearly 8x its 2019-20 (FY20) book, valuations have always been pricey for the Bajaj Finance stock. At current levels, it is at 10–20 per cent above its five-year average valuation.

It is true that high quality commands high valuations, and in tough times, the market leader and niche players tend to gain investor faith. However, the question is whether the Bajaj Finance stock can continue defending its valuation.

Compared to peers, maybe it could. But when benchmarked again its own record, the asking rate seems tough to defend — at least in the near term. For instance, Bajaj Finance’s management has opted to be a tad cautious on growth — lowering its loan growth target to 25–30 per cent for FY20, which the Street seems to disregard.

Analysts at Emkay Global Financial Services and Axis Capital in a recent note, based on their channel checks, believe the consumer lender could grow upwards of 30 per cent. Given that the July-September quarter hasn’t been brisk from a consumption perspective, and demand is just about returning ahead of the festive season, the numbers don’t add up to buttress analysts’ assumptions.

For another, while in the April-June quarter (first quarter, or Q1), the company did grow its loan book by 30 per cent, the growth rate missed the historic trend of 32–35 per cent for Q1 as seen in the past four years. Clearly, this does indicate that while growth per se may not be an issue, replicating past trends could be tough for Bajaj Finance in the current environment. There is also the base effect fast catching up and investors must accordingly moderate their expectations from the stock. “At these levels, I would suggest investors to book some profit,” says a fund manager, doing so with some of his long positions in the stock.

There could be another issue too — that of asset quality. While Q1’s gross non-performing assets ratio at 1.6 per cent isn’t alarming, there were higher delinquencies in some pockets, such as digital product financing, small businesses, and consumer durable loans. The likelihood of this trend continuing is high, say analysts, as the overall lending climate hasn’t improved much.

The September quarter results and the management commentary will be key to Bajaj Finance to defend its valuations.