Bernstein sees 20% upside in IndusInd Bank, 7% downside in Bajaj Finance

The downside in Bajaj Finance, Bernstein said, was because much of the positives are priced into the stock's rich valuations

Bernstein, a brokerage firm based in Tennessee, USA, has initiated coverage on Bajaj Finance, IndusInd Bank, and Muthoot Finance. While they see a 20 per cent upside in IndusInd Bank, and 14 per cent in Muthoot Finance, they forecast a 7 per cent downside in Bajaj Finance.

This downside in Bajaj Finance, Bernstein said, was because much of the positives are priced into the stock's rich valuations. While the brokerage sees a healthy growth ahead, it sees room for consensus earnings cuts given several headwinds.

"Bajaj Finance faces several challenges, including a sector-wide trend of slowdown in consumption credit; an already high scale of BAF that limits outperformance vs. the sector; risks of scale-up in new segments having limited overlap with current core segments; and increased competitive intensity," Bernstein said with a 'Market-Perform' rating and a target price of Rs 6,800, a downside of 7 per cent from current levels.

That said, analysts at Bernstein remain positive on the Indian banking sector, citing robust credit growth, favourable asset quality, and healthy margins.

While major private sector banks continue to excel with steady deposit market share gains and expanding scale benefits, Bernstein said niche lenders, predominantly non-bank financial companies (NBFCs) and housing finance companies (HFCs), present equally compelling growth narratives.

According to the brokerage, credit demand being met by niche lenders with innovative credit products and business models have proven to be a big shot in the arm for the Indian financial sector. NBFCs, specifically, are boasting a 10-year loan Compound Annual Growth Rate (CAGR) of approximately 14 per cent, surpassing that of banks which typically register CAGRs below 10 per cent.

As a result, NBFCs now command a market presence equivalent to about 75 per cent of the private sector banks, all while delivering exceptional returns to shareholders, Bernstein noted.

That apart, Bernstein analysts noted that niche lenders provide a strategic avenue to capitalise on emerging sector trends. These include the transition from a consumption-oriented to an investment-driven economic cycle, a deceleration in consumption credit growth alongside continued attractiveness of specific mass market segments.

Against this, Bernstein has rated IndusInd Bank as 'Outperform' as it sees the lender as a quasi-NBFC due to its composition resembling that of a non-bank financial company, coupled with a weaker deposit franchise.

Bernstein highlighted the bank's strategic positioning to benefit from a potential rate easing cycle and strong exposure to lucrative segments like commercial vehicles and microfinance.

Therefore, analysts project IndusInd Bank achieving a return on equity (RoE) of approximately 15-16 per cent and loan growth of 18 per cent between FY24 and FY26. Bernstein values IndusInd Bank stock at a price-to-book (PB) ratio of 1.9x FY25 estimated book value per share (BVPS), with a price target of Rs 1,800 -- upside of 20 per cent from Tuesday's closing price.

On the other hand, Muthoot Finance was assigned an 'Outperform' rating. Bernstein analysts project Muthoot Finance to achieve a robust compound annual growth rate (CAGR) of 19 per cent in earnings from FY24 to FY26. Analysts value the company based on a price-to-earnings (PE) ratio of 15 times the estimated earnings per share (EPS) for FY25, setting a price target (PT) of Rs 2,000, an upside of 14 per cent.