Rapid AI Implementation And Airtel Partnership Will Improve Efficiency And Expand Customer Reach

Key Takeaways

• Strategic AI implementation and proactive risk management aim to enhance operational efficiency and maintain low credit costs, improving net margins.
  
• Partnering with Bharti Airtel, Bajaj Finance targets revenue expansion through new financial products to reach a broad customer base.
  
• Rising credit costs, discontinuation of co-branded cards, and increasing delinquencies threaten Bajaj Finance's profitability and asset quality amid operational and management challenges.

Catalysts

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

• Bajaj Finance plans to enhance its productivity and operational efficiency by rapidly implementing AI capabilities, which could help reduce operating expenses and improve net margins.
  
• The strategic partnership with Bharti Airtel aims to reach a new customer base of roughly 200 million, potentially expanding revenue opportunities through new financial products.
  
• The company is on course to cross the milestone of 100 million customers by the end of the fiscal year, which should support future revenue growth.
  
• With stabilized loan losses and proactive risk management measures, Bajaj Finance aims to maintain credit costs below 2% in the coming quarters, thereby positively impacting net margins.
  
• There is potential for revenue growth from fee income through new products and partnerships, particularly leveraging the recent Airtel partnership, despite the discontinuation of co-branded credit card growth.

Bajaj Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bajaj Finance's revenue will grow by 32.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.6% today to 37.8% in 3 years time.
• Analysts expect earnings to reach ₹314.4 billion (and earnings per share of ₹495.25) by about March 2028, up from ₹159.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, down from 34.3x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.52%, as per the Simply Wall St company report.

Bajaj Finance Future Earnings Per Share Growth

Risks

• Rising credit costs indicated by Rajeev Jain could put pressure on net margins, as credit cost remains a critical factor affecting profitability and returns.
  
• The management's decision to discontinue the co-branded credit card business with RBL Bank and DBS could affect future revenue streams from this segment, potentially impacting earnings.
  
• Increasing delinquencies, particularly in the used car portfolio, where default rates are elevated, could negatively affect the company's asset quality and net interest margin.
  
• Operational challenges and pricing pressure in segments like loans against property could lead to future constraints on revenue growth and profitability.
  
• The transition in management, particularly the ongoing succession planning, may introduce uncertainties that could impact strategic decisions and the company's future earnings trajectory.

Valuation

• The analysts have a consensus price target of ₹8903.606 for Bajaj Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹11000.0, and the most bearish reporting a price target of just ₹6290.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹830.9 billion, earnings will come to ₹314.4 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 16.5%.
• Given the current share price of ₹8866.05, the analyst price target of ₹8903.61 is 0.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.