High Valuation Despite Strong Growth

Bajaj Finance announced strong fourth-quarter results for FY26, with its consolidated net profit jumping 22% year-on-year to Rs 5,464.57 crore. This earnings growth was fueled by a 20% increase in net interest income to Rs 11,781 crore and a 21% rise in pre-provision operating profit. The company's assets under management (AUM) grew 22% to Rs 5.10 lakh crore, with 12.89 million new loans added, a 20% increase from the previous year. However, the company's stock valuation remains a talking point. Bajaj Finance currently trades at a price-to-earnings (P/E) ratio of 30-34 times its trailing twelve-month earnings. This is significantly higher than major banks like HDFC Bank (around 15.8x) and ICICI Bank (around 18.4x). Competitors such as Cholamandalam Investment and Finance Company and Shriram Finance also trade at lower P/E ratios (around 27x and 22x, respectively). This premium suggests investors expect high growth, which could be challenging to maintain given recent trends.

Asset Quality Worsens Slightly

While profit growth shows effective operations, asset quality has shown signs of stress. The proportion of gross non-performing loans (GNPL) rose to 1.01% from 0.96% in the previous quarter. Although net NPAs improved slightly to 0.41%, the rise in gross bad loans could signal future problems. This contrasts with peers like ICICI Bank (GNPL around 1.40%) and HDFC Bank (GNPL around 1.15%), which reported stable or better asset quality. Bajaj Housing Finance, a subsidiary, maintained strong asset quality with a GNPL of 0.27%. The broader NBFC sector is expected to grow 15-17% in FY26, supported by consumer spending and MSME lending. However, the microfinance and unsecured loan sectors are facing pressure, and rising funding costs are a concern for the entire sector. Bajaj Finance must manage these rising credit costs to justify its high valuation.

Dividend Payout Hits Multi-Year Low

Adding to the mixed picture, Bajaj Finance declared a final dividend of Rs 6 per equity share for FY26. This is the lowest dividend payout since July 2019. The payout includes a small special dividend of Rs 0.60 per share from the sale of its stake in Bajaj Housing Finance. Historically, Bajaj Finance's dividend yield has been low, often below 1%. This reduction may indicate a strategy to retain more capital for growth, strengthen its balance sheet amid rising NPAs, or signal a more conservative view on future earnings. This decision comes despite modest stock performance over the past year.

Key Risks to Consider

Despite profit growth, several risks warrant attention. The increase in gross NPAs, even if slight, points to rising credit risk in a competitive market where funding costs are increasing and competition from banks is intensifying, putting pressure on margins. Bajaj Finance's high valuation, significantly above its banking peers and some NBFC competitors, makes its stock vulnerable if growth slows or asset quality worsens. Analysts at MarketsMojo have described the stock as "very expensive," noting that its price appreciation might be outstripping earnings growth. Like other NBFCs, the company relies on borrowed funds, exposing it to liquidity and interest rate risks. While the NBFC sector is expected to grow, specific areas like unsecured loans and microfinance are facing challenges that could affect Bajaj Finance. The sharp cut in the dividend, the lowest in seven years, might also signal management's caution about future profits or a shift towards using capital internally rather than for immediate shareholder returns, which could be unpopular with income-focused investors.

Analyst View: Mostly Positive, But Valuation is a Concern

Analysts generally view Bajaj Finance positively, with a consensus 'Buy' rating from 35 analysts. Of these, 23 recommend buying, 6 suggest selling, and 6 advise holding. The average 12-month price target is around Rs 1,047.17, suggesting a potential upside of approximately 13.37%. Some analysts recently highlighted strong Q3 FY26 performance and the impact of the company's FINAI transformation initiative. A key growth driver analysts watch for the Bajaj Finserv group is Bajaj Finance's AUM growth exceeding 25%. However, the company's high valuation remains a significant point of discussion among analysts, with some calling it 'very expensive'.