FinAI And Digital Inclusion Will Redefine India's Lending Landscape

Key Takeaways

• Executive restructuring and expanded AI deployment are set to boost efficiency, drive transformative margin gains, and accelerate earnings well beyond current market forecasts.
  
• Digital innovation and a growing addressable market will enable robust customer acquisition, outsize revenue growth, and strong competitive positioning in consumer lending and fintech.
  
• Intensifying digital competition, sustained margin pressure, elevated credit costs, and rising operating expenses threaten Bajaj Finance's profitability, asset quality, and future shareholder returns.

Catalysts

Operates as a deposit-taking non-banking financial company in India.

• Analysts broadly agree that management changes and the creation of Deputy CEO positions will improve efficiency and productivity, but this restructuring, combined with a broadening executive talent base, could actually accelerate the company's ability to scale new verticals and drive transformative increases in operating leverage, resulting in substantial improvements to net margins and accelerating earnings growth well ahead of expectations.
  
• The consensus expects the FinAI transformation and deployment of 100+ AI applications to enable strong cost efficiencies, but the integration of advanced AI in underwriting, risk management, and customer engagement could lead to industry-best process automation, unlock hyper-personalized cross-selling at scale, drive a step-change reduction in credit costs, and significantly expand both margin and revenue growth beyond current market estimates.
  
• The rapid adoption of digital financial services and UPI in India, along with government-led financial inclusion initiatives, are dramatically enlarging Bajaj Finance's addressable market-enabling structurally higher long-term customer acquisition, transaction volumes, and digital loan growth, which will support an upward trajectory in core revenues and fee income for years to come.
  
• With India's ongoing urbanization and a rising middle class, demand for structured consumer lending is likely to surge at an even faster pace, positioning Bajaj Finance to far outgrow system credit expansion by leveraging its brand, product breadth, and digital distribution, translating into outsized, compounding AUM and revenue growth.
  
• Bajaj Finance's increasing focus on building a proprietary digital financial ecosystem and super-app, coupled with continuous investment in product diversification, positions it to capture a disproportionate share of both consumption-driven credit and new fintech adjacencies, fostering higher lifetime customer value, improving retention, and supporting a sustained premium on net interest margins and profit growth.

Bajaj Finance Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Bajaj Finance compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Bajaj Finance's revenue will grow by 35.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 44.9% today to 40.0% in 3 years time.
• The bullish analysts expect earnings to reach ₹365.3 billion (and earnings per share of ₹58.34) by about July 2028, up from ₹166.4 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 bullish analyst cohort, the company would need to trade at a PE ratio of 29.9x on those 2028 earnings, down from 36.1x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 28.1x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.0%, as per the Simply Wall St company report.

Bajaj Finance Future Earnings Per Share Growth

Risks

• The rise of digital public infrastructure and UPI is intensifying competition from fintechs and digital-first banks, increasing pressure on lending margins and making customer retention more difficult for Bajaj Finance, which can negatively affect future revenues and net margins.
  
• Sustained margin compression is evident, with management noting stable or only slightly improving NIM projections despite expectations of lower funding costs, signaling that the company could struggle to expand net interest margins due to competitive and regulatory pressures, which could weaken earnings growth over the long term.
  
• Elevated credit costs, particularly in unsecured lending portfolios, have persisted above management's original guidance and required additional provisions, while management continues to prioritize reducing credit costs over growth, indicating greater exposure to credit risk and potential hits to net profits and asset quality.
  
• Management has reduced long-term return on equity guidance from pre-COVID levels, citing persistent surplus capital, slower profit growth, and structurally higher credit costs, suggesting challenges to sustaining high ROE and possible pressure on future shareholder returns.
  
• The expanding cost structure driven by rapid employee onboarding, branch network expansion, and investments in technology and AI may lead to operating expenses increasing faster than revenue, potentially diluting operating leverage and compressing net margins in a more competitive and commoditized lending environment.

Valuation

• The assumed bullish price target for Bajaj Finance is ₹1112.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bajaj Finance's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1112.0, and the most bearish reporting a price target of just ₹640.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹912.4 billion, earnings will come to ₹365.3 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 16.0%.
• Given the current share price of ₹968.3, the bullish analyst price target of ₹1112.0 is 12.9% higher.
• 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.