Bajaj Fin: Rich valuations might cap upside

Despite consistent performance for many quarters, there could be asset quality pressures in the unsecured loans segment

Bajaj Finance shares have rallied 67 per cent in the past year, outperforming the benchmark indices. Part of this is due to strong growth over the past few quarters on top-line and asset quality, as well as continued market share gains in the consumer durables segment. Notably, the company has grown its assets under management (AUMs) 30 per cent levels every quarter over five years. As a result, the Street has re-rated the scrip to 3.5 times the FY17 estimated book value vis-a-vis 1.2 times one-year forward price to book ratio two years ago. Expansion in rural areas and commercial lending, as well as further acceleration in the home loans segment, will fuel growth. While the company continues to be positive on future growth on the back of demand boosters such as the seventh pay commission and low penetration, rich valuations could cap the stock’s upside from current levels.

“Bajaj Finance’s valuations now look challenging to us, especially in the context of a relatively higher share of unsecured lending (28 per cent of book), wherein current loss levels are likely much below through-cycle averages,” say analysts at JP Morgan. Analysts at Ambit Capital second this view, saying early signs of delinquencies in this segment are masked by higher growth.

The company has grown its loan against property (LAP) book from seven per cent of assets under management (AUM) in FY09 to 39 per cent currently. Analysts fear soft real estate prices could increase asset quality pressures for the LAP segment. The company witnessed a 32 per cent sequential jump in its provisions in the September 2015 quarter as it made accelerated provisions to account for stress in one of its infra accounts and a few mortgage clients. While the management remains confident on asset quality, the company’s gross and net NPA ratios also remained largely stable at 1.7 per cent and 0.5 per cent, respectively, at the end of the September quarter. The company's track record, too, provides comfort on asset quality front. Analysts, however, believe that since current stock valuations do not factor in any possible risk on this front, any slippage could hurt sentiments adding that rising competition in these segments is a key monitorable.

While the company does not share the net interest margin figure, it remains confident of maintaining margins despite the falling interest rates. This is because half its loans to customers are on a fixed interest rate basis, which helps in compensating for the decline in interest rates given the large share of floating-rate loans.

For now, most analysts remain positive on Bajaj Finance, given its leadership position in the consumer durables lending segment, good earnings visibility and past track record. Their average target price of Rs 5,627, however, indicates a mere two per cent upside.