Intense Fintech Competition And Tighter Regulations Will Compress Margins

Key Takeaways

• Rising competition from tech-driven lenders and regulatory pressures threaten profitability and future growth prospects due to compressed margins and higher compliance costs.
  
• Heavy reliance on unsecured lending amid MSME sector stress raises the likelihood of increased loan defaults and challenges sustained expansion.
  
• Investments in technology, disciplined risk management, and diversified product expansion are driving strong growth, improved profitability, and long-term earnings stability.

Catalysts

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

• The rapid rise of digital financial services and open banking initiatives is accelerating the entry of large tech companies and nimble fintechs into the Indian lending market, threatening Bajaj Finance's ability to maintain pricing power and potentially resulting in compressed net interest margins and slower long-term revenue growth.
  
• Mounting income inequality and heightened stresses on the informal workforce are beginning to cap middle-class credit expansion, as evidenced by contraction or stagnation in 13 of the 17 MSME sectors tracked by Bajaj Finance, raising concerns about the future sustainability of loan book growth and revenue expansion.
  
• Bajaj Finance's reliance on unsecured lending, particularly within its MSME portfolio which is now showing elevated stress and deteriorating asset quality, increases the risk of rising NPAs and higher credit costs, putting long-term earnings and return on equity under significant pressure.
  
• Intensifying competition from new-age digital NBFCs and well-capitalized fintech alternatives, combined with the commoditization of consumer finance products such as buy-now-pay-later, is likely to erode Bajaj Finance's market share and fee income trajectory, with increased customer churn and diminished margins over time.
  
• Ongoing regulatory scrutiny and the potential for stricter capital, provisioning, and compliance requirements-especially as Bajaj Finance surpasses certain size thresholds-could increase operational costs and constrain future loan growth, directly impacting operating leverage and suppressing net profit growth in future periods.

Bajaj Finance Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bajaj Finance compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bajaj Finance's revenue will grow by 28.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 44.9% today to 35.6% in 3 years time.
• The bearish analysts expect earnings to reach ₹291.8 billion (and earnings per share of ₹5.33) by about August 2028, up from ₹174.3 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 25.2x on those 2028 earnings, down from 31.6x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.45%, as per the Simply Wall St company report.

Bajaj Finance Future Earnings Per Share Growth

Risks

• Despite pressure in specific segments like MSME and the ongoing wind-down of the 2-wheeler and 3-wheeler book, Bajaj Finance continues to add millions of new customers and maintain a robust customer acquisition funnel, indicating strong revenue and loan growth potential over the long term.
  
• Significant investments in technology, especially the deployment of AI across the business, are enhancing operational productivity and enabling a digital super app strategy, which improves customer stickiness and is likely to drive both revenue and net margin expansion in future years.
  
• The company's geographic and product diversification, including aggressive expansion in gold loans, affordable housing, rural and urban B2C markets, is providing new avenues for asset growth and risk mitigation, supporting long-term earnings stability.
  
• Proactive management actions such as pruning high-risk customer segments, restructuring processes, and improvements in early vintage collections demonstrate a disciplined approach to maintaining strong asset quality, which bolsters profitability and supports higher return on equity.
  
• Declining cost of funds due to favorable liability repricing, combined with deposit repricing and access to cheaper borrowing alternatives, is expected to improve net interest margins, thus positively impacting net income and overall financial health.

Valuation

• The assumed bearish price target for Bajaj Finance is ₹741.59, which represents two standard deviations below the consensus price target of ₹977.73. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1150.0, and the most bearish reporting a price target of just ₹640.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹818.6 billion, earnings will come to ₹291.8 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 16.4%.
  
• Given the current share price of ₹887.8, the bearish analyst price target of ₹741.59 is 19.7% lower.
  
• 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.