Bajaj Finance Earnings Likely Near End Of Weak Phase, HSBC Says
The brokerage expects recovery in consumer loan growth and credit costs, aided by stable net interest margin and controlled expenses to support profit
(The Corner Office Journal) -- HSBC upgraded Bajaj Finance Ltd. to Buy from Hold and raised its target price to 7,740 rupees from 7,080 rupees per share as it believes the company’s earnings are nearing the end of their weak phase.
“There could be a gradual recovery in profit growth,” the brokerage said in an investor note. “A recovery in consumer loan growth and credit costs, aided by stable NIM (net interest margin) and controlled expenses could support profits.”
HSBC said it reduced its FY25/FY26 earnings estimates for the Indian non-bank lender by around 20% since the beginning of CY24 and its estimate is 5% below consensus view.
“We do not currently see material downside risks to our earnings estimates,” it added.
HSBC said it believes Bajaj Finance’s earnings may be nearing the end of their weak phase due to the following reasons:
=> NIM Likely To Stabilize: Bond rates are softening for AAA-rated entities like Bajaj Finance. Cost of funds seems to have peaked for banks as well as non-banking financial companies and any reductions in funding costs would help keep NIM stable.
=> Credit Costs Peaking Out: Bajaj Finance’s 1HFY25 credit costs were around 2.1% and its FY25 guidance is 2.05%. The company’s Gross Stage 2 ratio declined in the quarter, suggesting lower inflows from Stage 1 loans. As a recovery in consumer loans takes shape, credit costs might gradually decline from current levels.
=> Controlled Operating Expenses: Bajaj Finance has controlled its cost/income ratio at 33%- 34% and has reduced its cost/assets under management ratio to 4% as of 2QFY25 (down 60 basis points over eight quarters). Continued control of costs would aid return on assets (ROA).
The brokerage also said the company’s valuations are not pricing in any recovery and appear attractive. It expects FY24-FY27 EPS CAGR of 21%, average ROA of 3.9%, and return on equity of 20%-21%.
“Once the weak earnings phase has firmly passed, the stock price could compound at the rate of EPS growth,” HSBC said.
Bajaj Finance rose 0.4% to 7,021.90 rupees on the National Stock Exchange in early Mumbai trading today.
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