Fintech Rivalry And Regulation Will Diminish Market Share Despite Digitalization

Key Takeaways

• Accelerating fintech competition and evolving consumer preferences threaten Bajaj Finserv's traditional lending model, risking loss of relevance, slower growth, and compressed profitability.
  
• Increased regulatory scrutiny and aggressive expansion in unsecured lending may drive up compliance costs and credit risk, further limiting margin and earnings growth potential.
  
• Strategic investments in digital platforms, robust insurance capitalization, and full control of subsidiaries position the company for resilient growth, risk mitigation, and enhanced diversification.

Catalysts

Through its subsidiaries, engages in the provision of financial services in India.

• Despite ongoing digitalization and formalization in the Indian economy, the rapid proliferation of agile fintech startups and big tech firms creates significant disruption risk; Bajaj Finserv may lose relevance and market share, leading to structurally slower revenue growth over the coming years.
  
• The company's aggressive expansion in consumer financing and growth in unsecured lending heightens the risk of rising delinquency rates and credit quality deterioration, especially as economic inequality and stagnant wage growth begin to constrain the expansion of the addressable market, thereby compressing net margins and future earnings.
  
• Heightened regulatory scrutiny on lending practices, data privacy, and consumer protection is likely to drive up compliance costs and limit operational flexibility, resulting in persistent operating expense pressures and muted margin expansion in Bajaj Finserv's key lending and insurance verticals.
  
• Intensifying competition from new-age fintechs, public and private sector banks, and the disintermediation potential from payment platforms may erode traditional lending and insurance products, putting pressure on both net interest margins and non-interest income, and capping long-term earnings growth.
  
• The growing shift in consumer behavior toward alternative lending models such as Buy Now, Pay Later solutions and direct-to-customer insuretech platforms risks undermining the traditional product demand for Bajaj Finserv, which could stall expansion of the loan book and limit growth in customer wallet share, placing long-term revenue growth at risk.

Bajaj Finserv Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bajaj Finserv compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bajaj Finserv's revenue will grow by 10.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.7% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach ₹137.8 billion (and earnings per share of ₹88.3) by about July 2028, up from ₹88.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, down from 36.6x today. This future PE is lower than the current PE for the IN Diversified Financial industry at 28.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.16%, as per the Simply Wall St company report.

Bajaj Finserv Future Earnings Per Share Growth

Risks

• Bajaj Finserv's businesses are benefitting from long-term secular trends such as the digitalization of the Indian economy and rising financial product penetration in under-served urban and rural markets, both of which support ongoing growth in revenues and customer acquisition.
  
• The company's lending and insurance arms continue to grow faster than industry averages in key segments like motor, commercial, and retail health insurance, highlighting the strength and resilience of its diversified business model, which should help sustain earnings momentum and mitigate risk from sectoral slowdowns.
  
• Bajaj Finserv is investing heavily in digital ecosystems (such as the Finserv App and FinAI) and scalable new platforms in health and asset management, which increase customer retention, drive cross-sell opportunities, and lower operating costs, strengthening medium-to-long-term profitability and net margins.
  
• Both Bajaj Allianz General and Life Insurance have strong solvency ratios and surplus capital positions, providing the company with balance sheet flexibility and capacity to withstand external shocks, enabling sustained investment in growth and reducing risk of capital shortfalls affecting earnings.
  
• The impending 100% ownership of the insurance subsidiaries after Allianz's exit gives Bajaj Finserv the strategic flexibility to pursue new high-value initiatives including international expansion and new product lines, supporting future top-line expansion and further diversifying its long-term revenue streams.

Valuation

• The assumed bearish price target for Bajaj Finserv is ₹1535.88, which represents two standard deviations below the consensus price target of ₹2080.53. This valuation is based on what can be assumed as the expectations of Bajaj Finserv's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2430.0, and the most bearish reporting a price target of just ₹1340.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹1789.4 billion, earnings will come to ₹137.8 billion, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 14.2%.
• Given the current share price of ₹2036.0, the bearish analyst price target of ₹1535.88 is 32.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.