Bajaj Finance Warns of Margin Compression; Analysts Predict 33% Upside
Bajaj Finance's recent earnings call highlights potential margin challenges, yet analysts remain optimistic about significant stock growth.
Bajaj Finance anticipates worsening margin compression due to repo rate hikes.
Despite challenges, analysts project a 33% upside for the stock, with a target of ₹1,270.
The company has raised its full-year AUM growth guidance to 26%-27%.
Bajaj Finance has issued a cautionary note regarding potential margin compression that may intensify in the latter half of the financial year, primarily due to an increase in the repo rate by the Reserve Bank of India. The company indicated that the margin compression could exceed the previously guided range of 10-15 basis points, following a five basis points decline observed in the first half of the year. This announcement came during their earnings call, which followed the release of their quarterly results on October 21.
In the September quarter, Bajaj Finance reported a 23.6% year-on-year increase in Net Interest Income, amounting to ₹13,335 crore. The net profit also saw a significant rise of 28.7%, reaching ₹6,367 crore. Operating profit for the quarter stood at ₹10,699 crore, reflecting a 23.2% growth compared to the same period last year. However, the gross Non-Performing Assets (NPA) rose to 1.06% from 0.96% in the previous quarter, while the Net NPA increased to 0.42% from 0.39%.
The management has proactively set aside additional macroeconomic provisions totaling ₹337 crore during the second quarter. They noted an uptick in stage 2 and stage 3 assets due to transitional gold loans but maintained that these factors would not significantly impact credit costs. The reported credit cost rose to 1.56% from 1.32% a year earlier, with expectations for the second half of the financial year to remain stable.
In terms of broader implications, Bajaj Finance is closely monitoring monsoon-related stress across 720 districts and is selectively reducing its exposure to microfinance institutions and B2B sectors. The company has also announced plans to raise up to ₹17,500 crore through a Qualified Institutional Placement (QIP) and convertible warrants for its promoters. Furthermore, there are no immediate plans for a stake sale in Bajaj Housing Finance, as the company aims to transition towards prime and near-prime customers.
Looking ahead, analysts from HSBC and Nomura have maintained a 'buy' rating on Bajaj Finance, with price targets set at ₹1,270, suggesting a potential upside of 33%. The overall consensus among 39 analysts indicates that 30 have a 'buy' rating, while four recommend selling. Despite the recent stock decline of 2.3% to ₹935, the optimistic outlook from analysts reflects confidence in the company's growth trajectory and ability to navigate upcoming challenges.
