Bernstein expects Bajaj Finance shares to fall by more than 20%; Here’s Why

Synopsis: Bernstein expects Bajaj Finance to lag the market due to slowing customer and AUM growth, limited profitability expansion, and EPS likely underperforming expectations, assigning a Rs. 750 target, implying a 21% potential downside.

The company is one of India’s leading financial services companies, offering 26 product lines and 51 variants for retail, MSME, and commercial customers, with innovations like the EMI card and Flexi is now in the spotlight after Bernstein gave an underperforming target.

With a market capitalisation of Rs. 5,91,447 crore, the shares of Bajaj Finance Ltd closed at Rs. 950.50 per share, up 0.4 percent from its previous close of Rs. 946.10 per share. The stock generated a 31% return over the past year, 3% over the last six months, and declined by 5% in the past month.

The reason

The recommendation on the stock is “Underperform”, which means Bernstein expects Bajaj Finance to perform worse than the broader market or its sector in the near to medium term, and the analyst has set a target price of Rs. 750, implying a potential downside of 21% from current levels. The “Maintain” note indicates that Bernstein is continuing its existing stance rather than upgrading or downgrading from a previous rating.

Moderating Customer & AUM Growth

Bajaj Finance has historically seen strong growth in its customer base and Assets Under Management (AUM), which is a measure of the total assets the company manages (primarily through loans and financial products). Bernstein notes that this growth is slowing down, which could limit the company’s ability to expand revenues rapidly.

Limited Headroom for Profitability Expansion and Slower EPS Growth

Profitability expansion refers to the company’s ability to improve margins or increase earnings at a faster rate than before. Bernstein suggests that Bajaj Finance does not have significant scope left to improve profits, perhaps because its costs are rising, interest spreads are narrowing, or regulatory constraints are in play.

EPS (Earnings Per Share) growth is expected to slow to less than 20% over the next few years. This is a notable moderation because financial companies like Bajaj Finance often post high double-digit EPS growth in good times. A slowdown indicates the company’s earnings will grow at a more modest pace.

Bernstein projects that Bajaj Finance’s EPS growth will be materially below market expectations (consensus) and the company’s own long-term guidance. This gap usually signals that the stock may disappoint investors who are expecting stronger results.

The combination of slowing growth, limited profitability expansion, and earnings likely to fall short of expectations leads Bernstein to believe there is significant downside risk to the stock, meaning it could decline further from the current price.

Bajaj Finance Ltd is one of India’s leading non-banking financial companies (NBFCs), known for its strong presence in consumer finance, lending, and wealth management. The company offers a wide range of products, including personal loans, home loans, business loans, consumer durable financing, fixed deposits, and digital financial services.

The company demonstrates solid financial performance with an ROCE of 11.4% and ROE of 19.2%, along with an attractive PEG ratio of 0.97. It has delivered strong profit growth at a CAGR of 25.9% over the last five years, maintained a healthy dividend payout of 17.4%, and achieved a robust median sales growth of 30.9% over the past decade.

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