A customer counts Indian rupee notes at a store in the Dadar wholesale flower market in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Why Analysts Have Turned Cautious On Bajaj Finance

Bajaj Finance Ltd. had gained the most among Nifty 50 peers till the beginning of September. Then fears of liquidity crunch spilled over from the debt to the equity market.

Shares of the non-bank lender, known for financing appliances to furniture for consumers, tumbled 24.7 percent this month—its worst monthly decline in a decade. Analysts retain faith in the fundamentals of the business. Yet, tight funding environment and steep valuations could pose a risk, Morgan Stanley and Kotak Institutional Research said.

Non-banking financial services stocks fell this week as a string of defaults by IL&FS and its group firms triggered fears of a contagion. Analysts at UBS, Jefferies, Credit Suisse and Kotak Institutional Research expect higher borrowing costs for such lenders and a moderation in growth and valuation multiples.

“We see wholesale funding markets normalising (base case), but expect Bajaj Finance’s high growth rates to moderate, and we cut our estimates,” Subramanian Iyer, analyst at Morgan Stanley, wrote in a report. “A bear case, though not a high probability, could be severe for both EPS and multiples.”

Morgan Stanley lowered the loan growth forecast for the consumer financier from 40 percent to 30 percent annualised growth rate in three years through March 2021. The investment bank expects the company to slow growth in home mortgages and loans against property, the segments that offer lower margins.

“The correction is not an opportunity yet,” Subramanian said. He reduced the price target on the lender from Rs 2,875 to Rs 2,300, retaining ‘Equalweight’ stance.

The consensus 12-month price target on the stock is Rs 2,560 apiece, according to estimates compiled by Bloomberg. That implies a return potential of 14.4 percent from the current level.

To be sure, Bajaj Finance is not among the non-bank lenders with a higher asset-liability gap that analysts said could be most at risk to a liquidity squeeze. Baja Finance’s assets maturing in less than a year are 28 percent more than its debt repayments during the period, according to Jefferies. That makes it one the least vulnerable NBFCs to funding and refinancing risks.

While the share of market borrowing for Bajaj Finance is relatively higher at 54 percent of its total debt, its paper is AAA-rated and is backed by a strong parent. Morgan Stanley said the company screens reasonably well on all four important parameters used to gauge NBFCs in this tough environment: granularity and diversity of loan book, credit rating, asset-liability discipline and pricing power.

It has a diversified loan book across consumer, small business, rural and commercial lending segments. Loans to consumers comprise nearly 40 percent of its total lending.

“Many of its loan categories are of a shorter tenor which is great in a tough liquidity environment,” Morgan Stanley’s Subramanian wrote.

Yet, for Kotak Institutional Research, concerns stem from steep valuations of Bajaj Finance. The stock trades at 5.7 times its estimated book value for financial year 2019-20. That’s higher than its historical valuations and also peers.

Kotak changed its recommendation from ‘Buy’ to ‘Sell’, with a price target of Rs 2,000 on the stock. Currently, 54.5 percent of the analyst tracking the stock have a ‘Buy’ rating on Bajaj Finance, according to estimates compiled by Bloomberg.

“Bajaj Finance remains the best franchise in the sector, though its rich valuations drive our stock (Sell) call,” Nischint Chawathe, analyst at Kotak Institutional Research, wrote in a note. “We continue to await better entry points.”