Bajaj Finance to see earnings downgrade, market share loss on Jio Financial entry, says UBS; assumes coverage with Sell

The market is likely overestimating Bajaj Finance’s ability to keep growing AUM at its historical pace while maintaining ROA despite increased competition and its large size, according to analysts at UBS.

UBS assumed coverage of Bajaj Finance with a Sell rating and a target price of ₹6,800 per share, implying a downside of 9% from Tuesday’s closing price.

It expects Bajaj Finance’s yields to be under pressure in urban consumer financing business, which formed 37% of standalone Assets Under Management, 45% of interest earned and over 60% of core fee income in FY23.

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UBS believes Jio Financial Services (JFS) may disrupt Bajaj Finance’s core consumer business as the Reliance Industries-backed NBFC would begin to compete directly with Bajaj Finance in the medium term. 

“Reliance Retail’s network of 18,650 stores, Jio’s 460 million customers base and Jio Financial’s ₹24,300 crore equity base could drive expansion of Jio Financial’s loan book,” UBS said.

Jio Financial Services has launched products for consumer durables and personal loans (PL), areas where Bajaj Finance usually leads other non-bank financial companies (NBFCs). JFS also has autos, home loans and business loans in its pipeline. 

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Given Bajaj’s high market share in consumer loans and PL, there are risks of market share losses and growth deceleration.

“For Bajaj Finance, Jio Financial Services’ entry could lower yield on consumer loans and loss of share in manufacturer subvention, where Bajaj has a roughly 60% share currently. We expect Bajaj’s NIM to contract 80 bps in FY23-26E due to a mix of lower yields and higher cost of funds,” UBS said.

UBS believes that the quality of Bajaj Finance’s customer base is peaking, with a total of 77 million customers and 47 million cross-sell customers given it targets the mass affluent.

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It further said that Bajaj Finance’s incremental growth should be driven by cross-selling new lending products to high-end customers, which may take time to ramp up and may dilute ROA.

Bajaj Finance shares are trading at 5.5x one-year forward P/BV, which is below its long-term average. Barring the Covid-19 years, Bajaj Finance’s earnings have outperformed consensus but the magnitude of subsequent earnings upgrades has declined. UBS forecasts earnings downgrade and ROE decline and also expects a de-rating ahead for Bajaj Finance.

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

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 17 Jan 2024, 01:19 PM IST