Diversification And Tech Innovations Propel Future Growth Amid Industry Challenges

Key Takeaways

• Diversification and customer base expansion are poised to drive revenue growth, supported by operational efficiencies and technological advancements.
  
• Strategic realignment from high-risk to lower-risk financing is expected to enhance asset quality, reducing credit costs and boosting earnings.
  
• Elevated loan losses, funding challenges, asset quality concerns, and rising regulatory scrutiny may impact Bajaj Finance's margins and growth potential.

Catalysts

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

• Bajaj Finance has experienced significant AUM growth with new lines of business now contributing 2% to 3% of AUM growth. This diversification into new areas could lead to sustained revenue growth.
  
• The company expects to add 15 to 16 million new customers in FY '25, which is slightly above last year's figure. This increase in customer base is likely to drive future revenue by expanding the lending opportunities.
  
• Bajaj Finance has invested in operating efficiencies and technological advancements like GenAI, which are expected to improve productivity and reduce operational expenses, possibly enhancing future net margins.
  
• The company has strategically decided to transition away from Bajaj Auto's financing, which has higher risk costs, towards its non-Bajaj Auto 2-wheeler financing business that carries half the risk. This shift may improve long-term asset quality and reduce credit costs, benefiting earnings.
  
• Management actions to tighten underwriting norms and focus on debt management amid an uncertain credit environment could stabilize and potentially reduce future credit costs, supporting improved earnings.

Bajaj Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bajaj Finance's revenue will grow by 32.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 44.9% today to 37.4% in 3 years time.
• Analysts expect earnings to reach ₹296.0 billion (and earnings per share of ₹427.45) by about November 2027, up from ₹153.8 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 29.1x on those 2027 earnings, up from 27.8x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 3.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.76%, as per the Simply Wall St company report.

Bajaj Finance Future Earnings Per Share Growth

Risks

• Elevated loan losses have remained a concern, and there's an indication that the net loan loss to average assets may not meet earlier optimistic projections for FY '25, potentially impacting net margins and overall earnings.
  
• Cost of funds has peaked, and there is significant price competition in the lending market, which has led to slower than expected growth in the deposit book, potentially affecting revenue growth as alternative funding may be more expensive.
  
• The slight increase in GNPA and NNPA over the year signals growing asset quality concerns, especially with segments like urban B2C and SME lending showing elevated risk levels, which could lower net margins and profitability.
  
• The new AUM from recently launched business lines is only contributing marginally to overall growth but carries the inherent risk of untested markets that could adversely affect revenue if these do not perform as expected.
  
• Increasing regulatory scrutiny, such as restrictions from the RBI, could impact operational flexibility and increase compliance costs, which may affect Bajaj Finance's ability to maintain or grow its revenue and net margins effectively.

Valuation

• The analysts have a consensus price target of ₹8019.32 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 ₹10000.0, and the most bearish reporting a price target of just ₹5700.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹791.2 billion, earnings will come to ₹296.0 billion, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 15.8%.
  
• Given the current share price of ₹6904.5, the analyst's price target of ₹8019.32 is 13.9% 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.