Should investors worry about the slowing AUM growth at Bajaj Finance?

Recent price correction in Bajaj Finance's stock, strong growth outlook, peaking of rates, and potential to enter credit cards market, make risk-reward favourable, analysts said

Investors have been worried about the slow pace of growth at Bajaj Finance for some time now. From a compounded annual growth rate (CAGR) of 40 per cent between FY09-FY22, investors expect the next decade to see asset under management (AUM) growing at around 25 per cent CAGR.

This near 50 per cent drop in the growth rate, however, should not worry investors, said analysts in a post Q4FY23 results note. The non-bank finance company (NBFC), they said, has grown its loan book from Rs 40,000 crore at the start of the previous decade to about Rs 2.5 trillion now, and remains on a fundamentally strong footing from a long-term perspective.

"With a 20 per cent growth, they are still adding Rs 50,000 crore as AUM annually. This is much higher than what Bajaj Finance was doing at sub-Rs 1 trillion loan book. Thus, a slowdown in growth rate, on a relative basis, with the AUM swelling, is nothing to be worried about," said Aditya Shah, founder and Chief Investments Officer (CIO) of JST Investments.

In the January-March quarter of FY23 (Q4FY23), AUM grew at 7 per cent QoQ/ 25 per cent YoY, with core AUM rising 29 per cent YoY to Rs 2.47 trillion.

During a post result analysts' call, the management said it expects consolidated AUM to grow 28-29 per cent in FY24. Besides, they are also targeting to regain some market share in the subvention market, and ramp-up new segments like used-car loans and loan against property (LAP) for MSME customers, new auto loans, MFI, and other segments may include tractor finance and emerging corporate business.

"Bajaj Finance's commentary has doused emerging concerns pertaining to growth/competition in B2B business, slowdown in housing portfolio, growth trajectory in new loan bookings/cross-sell, and the impact of inevitable net interest margin (NIM) moderation on return on asset (RoA)," said Rajiv Mehta of YES Securities, who has increased his AUM growth forecast, leading to FY24/25 earnings upgrade by 4-5 per cent.

Analysts believe the company is heading towards a granular AUM growth mix against seasonal momentum, led by diversified assets. Further, the management intends a customer franchise of around 120 million, reflecting a 22 per cent CAGR growth, with 2.5 per cent of India’s credit market share and a RoE of over 20 per cent by FY27. It aims to have a market share of 3 per cent of payments gross merchandise value (GMV), and have 3-4 per cent of total credit and 4-5 per cent of retail credit market.

"Customer acquisition’s momentum will only get stronger ahead, with the digital ecosystem – app, web platform and full-stack payment offerings – in place. BAF should be able to offset the NIM compression in FY24 with lower operating cost ratios and credit costs. Our FY24/FY25 estimates have seen a minor increase to factor in the higher AUM growth guidance. We expect BAF to deliver a PAT CAGR of 24 per cent over FY23-FY25, and a RoA/RoE of 4.6 per cent/24 per cent in FY25," said Motilal Oswal Financial Services.

That said, analysts remain divided on the stock's premium valuation. Sameer Bhise of JM Financial, for instance, believes Bajaj Finance remains well placed to drive growth. Thus, current valuations at P/BV of 4.3x FY25E BVPS, and P/E of 19x FY25E earnings are reasonable.

"The recent price correction in price, strong growth outlook, peaking of rates, and potential to enter credit cards market, make risk-reward favourable," concurred Prakhar Sharma of Jefferies.

Those at Kotak Institutional Equities, however, opine that the current valuations cap upside as incremental risk, including the inevitable conversion to the banking format, the risk of sustaining high growth, in light of a large balance sheet size, are not priced in.  

On the bourses, shares of Bajaj Finance advanced 2.4 per cent on the BSE, as against 0.58 per cent rise in the benchmark S&P BSE Sensex, and 0.55 per cent gain in the S&P BSE Financial Services index.