Whalesbook
CLSA Elevates Bajaj Finance to Top NBFC Pick
Global brokerage CLSA has thrown its weight behind Bajaj Finance, reiterating an 'Outperform' rating and naming it its top pick among non-banking financial companies (NBFCs). The firm argues that recent price declines have created an attractive entry point, setting a price target of ₹1,200, which suggests a potential 27% appreciation from current levels.
Bajaj Finance shares experienced a roughly 13% decline since the company's November earnings announcement. This correction was largely attributed to market anxieties surrounding a moderation in loan growth and potential margin pressures. CLSA, however, views this market reaction as excessive, asserting that the current valuation presents a compelling investment opportunity.
Growth Concerns Seen as Overblown
CLSA acknowledges that Bajaj Finance's assets under management (AUM) growth has moderated to around 22% from previous quarters' 25-26% pace. The brokerage attributes this slowdown primarily to a deliberate reduction in the company's captive two- and three-wheeler financing book. Additionally, temporary factors like asset quality concerns in MSME lending and higher repayments in home loans have played a role.
These headwinds are expected to dissipate by FY27. While growth in urban B2C segments might see a measured pace, CLSA anticipates a rebound in MSME and home loan segments. This dynamic is projected to drive consolidated AUM growth to approximately 23% in FY27, building on an estimated 22% in FY26.
Margin Stability and Profitability Strengths
The brokerage forecasts that core pre-provision operating profit (PPOP) margins will remain broadly stable over the next two years. CLSA noted that while Bajaj Finance has faced some net interest margin compression and fee pressure due to partnership changes and service charge adjustments, these pressures are likely to ease. Fee income is expected to accelerate from around 14% to nearly 20%, aided by operating leverage and disciplined cost management. CLSA anticipates a 20 basis point reduction in the expense ratio over the next two years, contributing to a healthy 22% compound annual growth rate in core PPOP.
Bajaj Finance's strong return metrics remain a key differentiator. The company has consistently delivered a return on assets (ROA) between 4-4.7% and a return on equity (ROE) of 20-23% over the past four years, even amidst increasing competition in the NBFC sector. At approximately 19 times forward earnings, CLSA deems the stock an attractive proposition for a lender characterized by diversified operations, robust profitability, and relatively lower cyclicality compared to its peers.