Analysts Predict Earnings Downgrade and De-Rating for Bajaj Finance

Analysts Predict Earnings Downgrade and De-Rating for Bajaj Finance

VoM News Desk | January 17, 2024 | 01:45 PM IST | Breaking News | Follow on Google News

Analysts Predict Earnings Downgrade and De-Rating for Bajaj Finance

Analysts Predict Earnings Downgrade and De-Rating for Bajaj Finance

Bajaj Finance is anticipated to face an earnings downgrade and a de-rating of its multiples in the future, according to analysts. UBS, in particular, suggests that the market might be overestimating Bajaj Finance’s ability to sustain historical growth in Assets Under Management (AUM) while maintaining Return on Assets (ROA) amidst heightened competition and its substantial size.

UBS initiated coverage of Bajaj Finance with a Sell rating and set a target price of ₹6,800 per share, indicating a potential 9% downside from the recent closing price. The firm expects Bajaj Finance’s yields to be under pressure in its urban consumer financing business, constituting a significant portion of its standalone AUM and core income.

The entry of Jio Financial Services in the consumer loan sector is seen as a potential challenge for Bajaj Finance, impacting yields and market share in manufacturer subvention. UBS projects a contraction of 80 basis points in Bajaj Finance’s Net Interest Margin (NIM) from FY23 to FY26 due to a combination of lower yields and higher funding costs.

UBS also raises concerns about the quality of Bajaj Finance’s customer base, suggesting that it might be peaking, especially as the company targets the mass affluent with a total of 77 million customers. The incremental growth is expected to come from cross-selling new lending products to high-end customers, a strategy that may take time to gain traction and could dilute ROA.

While Bajaj Finance shares currently trade below its long-term average at 5.5x one-year forward Price-to-Book Value (P/BV), UBS foresees a potential de-rating in the future. Despite Bajaj Finance’s historical outperformance in earnings (excluding Covid-19 years), UBS predicts an earnings downgrade, a decline in Return on Equity (ROE), and an overall de-rating for the company.

As of 1:20 pm, Bajaj Finance shares were trading 1.46% lower at ₹7,363.60 apiece on the BSE.

VoM News Desk

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