Bajaj Finance Slips After FY25 Earnings Estimate Cut On Margin Impact, High Costs

Brokerages have trimmed FY25 earnings estimates for Bajaj Finance Ltd., citing moderating net interest margin, a decline in fee income, and elevated credit costs, even as the NBFC reported an inline net profit in the fourth quarter.

Bajaj Finance's stock fell as much as 5.79% on Friday morning to Rs 6,872.70 apiece on the NSE. It was trading 5.48% lower at Rs 6,895 apiece, compared to a 0.45% advance in the benchmark Nifty 50 as of 9:22 a.m.

The company's standalone net profit rose 20% year-on-year to Rs 3,402 crore for the quarter ended March 2024, according to an exchange filing on Thursday. Analysts polled by Bloomberg had predicted a net profit of Rs 3,546 crore.

The management's guidance for FY25 is below its long-term guidance on multiple metrics such as AUM growth, credit costs, RoA, and RoE. Bajaj Finance's key product segments have been the secular growth segments, according to Motilal Oswal Financial Services.

"However, its foray into multiple newer products such as cars, tractors, CVs, and potentially MFI could (in the future) make its growth vulnerable to cyclicality despite having a well-diversified product mix,"  the research firm said in an April 16 note.

• Total income rises 31% to Rs 12,764 crore (YoY).

• Gross NPA stage 3 at 1.05%.

• Net NPA stage 3 at 0.46%.

• Net profit up 20% at Rs 3,402 crore (YoY).

Bajaj Finance's net interest income surged 29% in Q4 to Rs 7,340 crore, as compared with the same period last year. The total revenue from operations increased 31.3% to Rs 12,760 crore in the quarter ended March, from the corresponding period a year ago. Other income for the lender rose 107% to Rs 3.94 crore.

• Citi maintains 'buy' with a target price of Rs 8,675 apiece, implying an upside of 19% from the previous close.

• Earnings are in line with the forecast despite being impacted by 4% due to regulatory restrictions.

• Trims fiscal 2025 guidance on moderation in net interest margins and elevated credit costs.

• The pivot towards secured assets and funding costs is peaking to impact the NIM.

• Building in 30 basis points of NIM compression.

• Credit cost of 1.7–1.8% and 26–27% AUM growth.

• Cuts earnings estimates by 7% each for fiscals 2025 and 2026.

• The research firm maintains a 'buy' with a target price of Rs 8,000 apiece, implying an upside return potential of 9.7%

• HSBC Global Research cut our EPS estimates by 6.5-7.8% for FY25-27 to factor in margin impact, sticky costs, and higher credit costs. The primary reasons were lower growth, sustained pressure on cost of funds, stickier cost ratios, and progressively higher credit costs.

• As the stock remains in an earnings cut cycle, it will be difficult to find re-rating triggers, but it could still compound.

• Incrementally, an adverse movement in the loan mix (lower rural B2C, urban B2C segments) has further impacted NIM's outlook.

• Credit costs are higher than expected, despite an 8 basis point credit cost in the housing finance subsidiary in FY24. "Any normalisation in this would further impact provisions".

• Going forward, HSBC believes funding cost pressures may persist for longer too. Therefore, the company's earnings may be under pressure for some quarters.

• Among NBFCs, Bajaj Finance is likely to have the fewest funding constraints and can avail funding at the most competitive costs.

• Additionally, across its loan segments, Bajaj Finance's market share remains low, and its ability to compete effectively and win market share is high.

• Therefore, the research firm thinks Bajaj Finance would be able to sustain relatively higher AUM growth versus peers.

• Jefferies has maintained its 'buy' rating with a target price of Rs 9,260, implying an upside of 27%.

• Loan growth should moderate in FY25 towards 26-28%, reflecting macro and regulatory trends, and as Jefferies factors these into their estimates, it leads to a 2-3% cut to the research firm's earnings estimates for FY25–26.

• Jefferies notes that Bajaj Finance could secure funds through ECBs and expects its share of overall funds to rise over the next 12–15 months, compensating for a slower rise in domestic sources. "The trend in terms of credit costs and margin compression is largely in line with our estimates.".

• Bajaj Finance continued to see strong AUM growth of 34% during the fourth quarter, and it was broad-based across segments, whereas growth has slowed in the rural B2C segment (ex. gold loans, it grew only 6%).

• Morgan Stanley maintains an 'overweight' rating with a target price of Rs 9,000 apiece.

• Bajaj Finance has been slowing its rural unsecured loan growth due to elevated loan losses.

• Morgan Stanley forecast cost / income will decline by 30 basis points in FY25, vs. guidance of 20–40 basis points and trim profit after tax forecasts of 2% each for FY25 and FY26 and 1% for FY27.

• The research firm sees end-FY26 AUM growth at 25% and has not assumed any interest rate cuts (a potential upside risk) for FY26.

• Motilal Oswal Financial Services downgrade the stock to 'neutral' with a target price of Rs 7,800

• The downgrade to 'neutral' rating on the stock is predicated on: the near-term headwinds on AUM growth as the company is cutting down business in rural B2C, and slower AUM growth in the B2B business due to the RBI ban on e-commerce and Insta EMI card.

• NIM compression of 35bp (vs. ~20bp earlier) in FY25E due to the expected rise in the cost of borrowings, difficulty in passing on the interest rate hikes to customers, and change in product mix; elevated credit costs from the B2C portfolio in almost all of FY25E.

• The RBI revoking its ban on ‘E-com’ and ‘Insta EMI Card’ could be a trigger for the stock. Beyond that, Motilal Oswal does not see any catalysts for this stock, which is trading at 4.0 times FY26E P/BV and 20x P/E.

• Bank Of America reiterates 'buy' on Bajaj Finance with a target price of Rs 7,295 apiece.

• The research firm sees profit growth converge with AUM growth in fiscal 2026.

The stock has risen 13.85% in the last 12 months. The relative strength index was at 44.53.

Out of 38 analysts tracking the company, 30 have a 'buy' rating, five recommend 'hold' and three suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside 16.8%.