Growth or stability, the dilemma for investors looking at Bajaj Finance

With the stock doubling in six months, the consumer lender has outperformed peers

It's not often that a company gives a cautious outlook and yet, its stock price scales a new high. The case in point is Bajaj Finance and with the stock doubling in six months, and nearing the Rs 5,000 a share zone, its valuations are once again in the expensive territory of 6.5x FY22 estimated book. At these levels, the question is whether investors should own the stock for its pedigree and market position despite its valuation not justifying the slowing pace of growth.
 

The company recently guided that FY22 may be a year of normalcy, though the steady state growth rate may be 20 – 21 per cent.

While better than FY21's likely single digit growth, this is way off the 30 per cent loan plus growth rate which has fetched Bajaj Finance the premium valuations in the past. The lender aspires to grab 3 - 3.5 per cent share of the credit market in the next 4-5 years, or double its credit share from the 1.3 per cent share in FY20. With the commentary on asset quality gradually improving, analysts at BofA Securities have trimmed their credit cost estimates from 1.86 in FY22 to 1.76 per cent. What this suggests is that FY21 provisioning costs may fully take care of the business disruption caused by the Covid-19 pandemic.
 

For Shweta Daptadar of Prabhudas Lilladher, a lender choosing to grow at a slower pace is prudent in the current environment.

“Investors would be willing to pay premium valuations for this prudence, because this gives confidence on its asset quality and balance sheet strength,” she says.
 

However, a few are beginning to think differently. According to Bloomberg polls, 22 per cent analysts covering Bajaj Finance stock presently have ‘sell’ recommendation as against 7 per cent in January. Analysts at Spark Capital say the risk-reward remains unfavourable. Those at BofA Securities highlight that the higher-than-expected competitive intensity is a risk hanging over the stock. “We see higher competitive intensity in personal and mortgage loans, including intense competition from banks. This combined with an expected decline in lending rates by banks could weigh on the company's yields and hence spreads,” they point out. A shift in consumer trend towards online vis-à-vis offline retail could result in a structural decline in demand for Bajaj Finance.

A combination of lower growth, increasing competitive landscape and steep valuations may hence prompt investors to tread cautiously with the Bajaj Finance stock going forward.