Bajaj Finance stock fully priced amid some challenges, opportunities

Bajaj Finance posted robust Q1 FY26 AUM growth and efficiency gains but higher credit costs, MSME stress and regulatory risks suggest the stock is fully priced

Bajaj Finance’s (BAF) earnings for the April–June quarter (Q1) of FY26 were in line with estimates, with robust 24.6 per cent year-on-year (Y-o-Y) growth in assets under management (AUM) and higher operating efficiency. However, lower other income and elevated credit costs offset some of these positives.

 

Credit cost rose to 2.02 per cent compared with 1.97 per cent (adjusted) in Q4 FY25, with management flagging stress in the micro, small, and medium enterprises (MSME) portfolio, which accounts for about 12 per cent of AUM, due to the macroeconomic slowdown. BAF’s results reflected efficiency gains, with cost-to-income at 33 per cent and opex-to-AUM at 3.8 per cent, levels that management believes may be sustained until FY27. AUM is expected to continue growing at mid-20s rates while maintaining profitability.

 

Margins are expected to improve by 10 basis points in FY26, driven by lower cost of finance (CoF). Management has guided for CoF at 7.6–7.65 per cent in FY26 versus 7.79 per cent in Q1. BAF aims to reduce its dependence on deposits to 15–16 per cent from the current 17–19 per cent. Deposit rates have already been cut by 70–80 bps. The company will look to increase its share of external commercial borrowings (ECBs), non-convertible debentures (NCDs), and bank borrowings to further lower CoF. Net interest margins (NIMs) are expected to remain between 8.9–9 per cent over FY26–28, aided by faster transmission of rate cuts and changes in the AUM mix.

 

Management reiterated its FY26 targets of adding 14–16 million new customers and booking 50 million loans. While stress is evident in the SME portfolio, with industries showing growth contraction or demand slowdown, BAF’s diversified loan book should help it deliver AUM compound annual growth (CAGR) of 25 per cent over FY25–28. 

 

In Q1, credit costs were elevated in two- and three-wheeler and MSME businesses, largely unsecured loans. BAF has taken corrective action in these segments, with growth likely to remain subdued. The company restructured standard advances worth Rs 219 crore in Q1 and expects to restructure another Rs 150 crore in Q2. It remains confident that credit costs will taper, particularly in the second half of FY26, while maintaining its FY26 guidance of 185–195 bps.

 

Karnataka, which contributes 11 per cent of AUM, poses challenges due to political risks. BAF is reducing exposure in microfinance (MFI), two-wheelers, and rural B2C lending in the state. However, emerging stress in the MSME segment could weigh on near-term growth.

 

BAF added 4.7 million customers in Q1 FY26 (compared with 4.5 million a year earlier and flat quarter-on-quarter), taking its customer base to 106.5 million, up 21 per cent Y-o-Y. Loan bookings rose 23 per cent Y-o-Y to 13.5 million. AUM grew 26 per cent Y-o-Y and 6 per cent quarter-on-quarter (Q-o-Q).

 

Net interest income grew 22 per cent Y-o-Y and 4 per cent Q-o-Q. NIM declined 10 bps sequentially to 9.53 per cent from 9.63 per cent in Q4 FY25. Non-interest income rose 16 per cent Y-o-Y (13 per cent Q-o-Q), with fee income up 17 per cent. The cost-to-income ratio improved to 32.7 per cent from 33.1 per cent in Q4, while pre-provision operating profit (PPOP) grew 22 per cent Y-o-Y (7 per cent Q-o-Q). Credit costs rose 5 bps sequentially to 2.02 per cent. Earnings grew 22 per cent Y-o-Y (5 per cent Q-o-Q). Asset quality weakened slightly, with gross NPA at 1.03 per cent and net NPA at 0.5 per cent, deteriorating by 7 bps and 6 bps Q-o-Q, respectively. Provision coverage ratio stood at 52 per cent versus 54 per cent in Q4 FY25.

 

AUM growth is expected to remain strong, backed by net interest income growth of around 24 per cent during FY25–28 and similar earnings growth, supported by stable-to-improving NIMs, operating leverage, and gradually improving asset quality. Return on equity (RoE) could be about 20 per cent. A slowdown in growth remains a key risk.

 

Rajeev Jain, currently vice-chairman and managing director, will continue as MD till March 2028 following the resignation of Anup Saha. The board is expected to finalise a detailed succession plan within six months.

 

Most analysts remain positive. According to Bloomberg, of the 18 analysts polled since August, 10 are bullish, five neutral, and three bearish. Their average one-year target price is Rs 970, compared with the stock’s 52-week high of Rs 1,025.75 on Monday, before closing at Rs 1,010.05 on the BSE.