Brokerages bullish on Bajaj Finance despite margin and regulatory risks

Bajaj Finance's Q2FY27 profit rose 29% to Rs 6,370 crore, with strong loan growth and higher AUM guidance supporting brokerage optimism despite regulatory and margin risks

Non-banking financial company Bajaj Finance reported strong performance in the September quarter (Q2FY27) with confident growth guidance despite headwinds like elevated oil prices, El Niño risks, a rising interest rate cycle and adverse regulatory changes. 

Net interest margin (NIM) contracted slightly quarter-on-quarter (Q-o-Q). The company reported slippages in gold loans, which it termed transitory. Its investments in artificial intelligence (AI) and branch expansion are underway. A proposed equity capital raise of ₹17,500 crore, targeted for completion in Q3, will drive growth and return targets. 

Bajaj Finance’s profit after tax (PAT) grew 29 per cent year-on-year (Y-o-Y) to ₹6,370 crore, in line with consensus estimates. Net interest income (NII), the difference between interest earned and interest expended, rose 24 per cent Y-o-Y, while non-interest income rose 11 per cent. Pre-provision operating profit rose 21 per cent Y-o-Y to ₹10,700 crore. Annualised credit costs remained stable Q-o-Q at 1.56 per cent after the firm added an overlay of ₹340 crore to provide for macroeconomic risks. Excluding this, credit costs fell 12 per cent Y-o-Y to around 1.32 per cent. Gross non-performing assets stood at 1.06 per cent, up 10 basis points (bps) Q-o-Q, while net NPAs rose 3 bps to 0.42 per cent. The provisioning coverage ratio on Stage 3 assets was stable sequentially at 60 per cent. Stage 2 and Stage 3 assets rose by ₹1,600 crore in Q2, including a ₹1,050 crore rise in Stage 2 gold loans.   

The company expects full-year credit costs to remain close to the H1FY27 range. It has raised its FY27 assets under management (AUM) growth guidance to 26-27 per cent, while retaining its long-term growth guidance at 23-25 per cent. Growth momentum remains strong across segments, except  MSMEs. 

A key overhang is the Reserve Bank of India’s (RBI’s) proposed restrictions on revolving credit. A complete ban could affect AUM growth, NIM and profitability. Proposed changes to commissions could also weigh on fee income, prompting it to reassess its strategy. Medium-term fee income growth is likely to be in the 15-18 per cent range. 

The company hopes the RBI will adopt a balanced approach to its proposed framework. It is also awaiting finalisation of the Insurance Regulatory and Development Authority of India’s (Irdai’s) proposed changes to insurance commissions and is evaluating scenarios. 

The FinAI team has expanded to 328 employees, with 129 AI agents and 65 agentic applications. AI bots handle 75 per cent of do-it-yourself customer service volumes. Digital disbursements grew 111 per cent Y-o-Y. Early assessments of a customised business-to-business (B2B) risk model being tested across 500,000 accounts indicate the potential for a 15-20 per cent improvement in risk outcomes. The model could subsequently be extended to business-to-consumer (B2C) lending. 

Total AUM grew to ₹5.85 trillion, with Q-o-Q growth led by gold loans (up 14 per cent), loan against securities (up 15 per cent), rural sales finance (up 7 per cent), consumer sales finance (up 6 per cent), micro­finance (up 8 per cent) and vehicle loans (up 6 per cent). MSME growth was lower at 3 per cent Q-o-Q, but it expects a rebound in H2. 

 

Bajaj Finance acquired 4.4 million customers in Q2 and targets 60-62 million new loans and 18-20 million customer additions in FY27. NIM is expected to remain close to FY26 levels of 9.7 per cent. But the company said the contraction could exceed its initial guidance of 10-15 bps because of the rising interest rate cycle. It discontinued short-tenure gold loan schemes in August and said 55 per cent of the elevated Stage 2 balance had been resolved, with no material credit costs expected. Bajaj Finance is pruning its captive vehicle loan portfolio to reduce credit costs. Its gold loan AUM stands at ₹24,000 crore, which is 4 per cent of total AUM. 

Strong loan growth and operating efficiencies should help offset margin pressures. Improving asset quality and a potential decline in credit costs could accelerate profit growth. The stronger growth guidance may also prompt brokerages to raise earnings estimates. PAT could grow at close to 30 per cent annually through FY28, with management guiding for a return on equity (RoE) of 19-21 per cent in FY28. Though macroeconomic headwinds and regulatory changes remain key risks, Bajaj Finance is better placed than most peers to weather the situation. 

According to Bloomberg, 24 of the 32 analysts polled in October were bullish on the stock, while four each were bearish or neutral. Their one-year target price was ₹1,175, compared with Wednesday’s BSE closing price of ₹925.10.

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The writer is New Delhi-based independent journalist