Bajaj Finance valuations reflect robust Q1 performance and outlook

Strong loan growth, improving asset quality and AI-led efficiencies support Bajaj Finance's outlook, though much of the expected growth appears reflected in valuations

Bajaj Finance (BAF) reported a strong performance in Q1FY27. There was 24 per cent year-on-year (Y-o-Y) growth in assets under management (AUM) (up 7 per cent quarter-on-quarter, or Q-o-Q) and 16.1 million new loan bookings (up 25 per cent Q-o-Q). Consumer financing saw more than 40 per cent Y-o-Y growth, gold loans were up 112 per cent, and commercial vehicle (CV) and tractor loans rose 102 per cent. A revival in micro, small and medium enterprises (MSMEs), up 2 per cent Y-o-Y, was also positive.

 

The guidance is for 22–24 per cent Y-o-Y growth, with a target of 60–62 million new loans in FY27. The management said it would revisit full-year FY27 guidance in Q2FY27 and may revise it upwards if current trends are sustained. Management expects the cost of funds (CoF) to remain flat or show a slight upward bias. It aims for a 25–40 basis point improvement in operating expenditure (opex) in FY27 over FY26. BAF expects to add 18–20 million new customers in FY27.

 

Bajaj is also committed to its FinAI transformation, with 400 dedicated employees in the artificial intelligence (AI) unit and another 300 to be added to digital platforms to accelerate the transformation. The company estimates that if it can reach a customer base of 200 million (currently 124 million), customer acquisition and net credit costs are likely to fall below historical averages, improving return on assets (RoA) and return on equity (RoE). The AI text and bot system generated Rs 2,500 crore of disbursements in Q1FY27 and aims to reach Rs 11,000–12,000 crore in FY27.

 

Asset quality improved, with credit costs (1.51 per cent) in line with guidance. Despite a larger base (AUM of Rs 5.5 trillion), BAF believes it can deliver annual loan growth of 23 per cent and an RoE of 20–21 per cent. This is due to faster customer acquisition, a cross-selling model and optimisation of digital processes. 

 

Net profit stood at Rs 6,100 crore, up 28 per cent Y-o-Y and 9.5 per cent Q-o-Q. Net interest income (NII) grew 23 per cent Y-o-Y, while net interest margin (NIM) increased four basis points Q-o-Q to 9.5 per cent, with a 10-basis-point rise in yields partly offset by a six-basis-point increase in CoF.

 

Management aims to maintain gross non-performing assets (GNPAs) and net NPAs at current levels of 0.96 per cent and 0.39 per cent, respectively, representing declines of five basis points and two basis points Q-o-Q. Credit cost stood at 1.5 per cent (versus 1.6 per cent in Q4FY26). Adjusted for a management overlay of Rs 300 crore, credit cost would have been 1.3 per cent. Other income grew 19 per cent Y-o-Y, while opex rose 23 per cent Y-o-Y, resulting in pre-provision operating profit (PPOP) growth of 22 per cent Y-o-Y.

 

Branch expansion will support growth. The company expects to end FY27 with 2,700–2,800 gold loan branches and 520–550 microfinance institution (MFI) branches. At maturity, each branch is expected to generate business of Rs 14 crore annually. In Q1, BAF added 194 gold loan branches. It now has 1,701 gold loan branches and 447 MFI branches.

 

Management guided for NIM compression of 10–15 basis points in FY27. There was strong traction in rural business-to-business (B2B), which grew 49 per cent Y-o-Y and 28 per cent Q-o-Q. Rural business-to-consumer (B2C) grew 27 per cent Y-o-Y, urban B2B rose 38 per cent Y-o-Y, and urban B2C increased 19 per cent Y-o-Y. Loans against salary rose 34 per cent Y-o-Y, gold loans increased 112 per cent Y-o-Y, while the MFI business grew 60 per cent Y-o-Y. The CV and tractor portfolio rose 102 per cent Y-o-Y on a low base, while mortgages increased 27 per cent Y-o-Y.

 

In contrast, the two-wheeler/three-wheeler (2W/3W) portfolio declined 25 per cent Y-o-Y due to a calibrated run-down in the captive book. The captive 2W/3W portfolio GNPA ratio declined to 9.8 per cent from 14.4 per cent in Q4FY26. Customers increased 17 per cent Y-o-Y to 124 million, while new loans booked rose 20 per cent Y-o-Y.

 

Around 17–18 per cent of personal loan disbursements are now processed through voice bots and AI-driven systems. Around 25 per cent of gold loans originate from digital platforms. The target is for gold loan AUM to reach Rs 29,000–31,000 crore in FY27, with 25 per cent sourced digitally. BAF is also planning two new product lines. Its custom AI model is expected to generate 0.5 million new B2B customers and is scheduled to go live in Q3FY27.

 

The company continues to display strong execution, with healthy AUM growth. The ongoing digital drive should lead to higher efficiencies. Asset quality remains among the best in the sector, resulting in low credit costs. The guidance implies an RoA of 4.2 per cent and an RoE of 22 per cent, which appear achievable over the next two to three financial years. Investors, however, need to watch valuations, which already seem to reflect much of the expected growth.