Bajaj Finance may maintain 20-25% growth but 4.5x-5x one year forward price to book multiple at risk: Binod Modi (2024)

Binod Modi, Portfolio Manager, Sharekhan by BNP Paribas, says that for the kind of guidance which Bajaj Finance is giving, the credit cost has been almost 175 to 185 bps. That looks a little bit on the higher side. There are some concerns in terms of asset quality to me as of now. However, as far as growth is concerned, the company should continue to maintain 20% to 25% growth despite RBI restriction.

How are you reading into Bajaj Finance numbers?
Binod Modi: The broad numbers look to be quite in line with what was being anticipated. So, overall, the kind of AUM growth of Rs 3.3 lakh crore looks to be very impressive and the kind of traction that we have been seeing in the overall number of customer-franchisee of the company again looks quite impressive. In terms of growth perspective, it looks to be quite good.

What about the new loan books? According to the recent update by the company, the new loan books during the quarter were lower on accounts of restrictions placed by the RBI on the company, on sanction and disbursal of loans under eCOM and Insta EMI card. What is the picture likely going to be going forward for this one?
Binod Modi: That was already being anticipated because in November last year, RBI had banned Insta EMI card as well as e-commerce transactions. The full impact would have come in this quarter. So that was broadly anticipated. But at the same time, the other headwinds which I am finding about the company is the kind of the delinquencies that we have been seeing for last the couple of quarters, especially from the B2C segment in urban as well as rural market.

That is a bit of concern to me and at the same time, the kind of guidance which the company is giving, the credit cost has been almost 175 to 185 bps. That looks to me a little bit on the higher side. These are some concerns in terms of asset quality to me as of now. However, as far as growth is concerned, the company should continue to maintain 20% to 25% growth despite RBI restriction. My overall view in terms of growth looks to be good as of now but asset quality concerns might be there going ahead.

How have you read into the FY25 AUM growth which the management has indicated that they are cautiously optimistic and it is going to slow down to about 26% to 28%? Does it merit this kind of a crack in the stock price?
Binod Modi: Over 26% kind of growth looks to be reasonable. As far as earnings is concerned, it is more or less in line with the expectation that we saw. But more than earnings, I believe the forward expectation does not look to be great to me. The reason is that the kind of the cost from the credit cost guidance which the company had given 175 to 185 basis points. To me, it looks to be on the higher side and at the same time, there has been a kind of scenario where some delinquencies were witnessed in the rural B2B and B2C side.

I believe these are the things which do not bode well over the medium-term perspective. At the same time, we have seen the recent action taken by RBI in terms of unsecured consumer financing. I believe the company might be looking to focus more upon the secured portion going ahead, so that may have some sort of impact overall.

These are the concerns which the Street is looking for as of now for the company and I believe even 25% growth looks reasonable but considering the asset quality, the opex part is a kind of concern to me and probably that is the reason the over 4.5x one year forward price to book multiple that the company is getting, might be at risk.

A lot of peers of Bajaj Finance like Poonawalla, Jio Finance are scaling up the technology lendings while Bajaj Finance is now cautioning, prepping the Street for probably lower growth trajectory. In this confluence of factors, is there a case that Bajaj may not garner the same premium valuations which it used to historically. Could there be some structural derating from 6-8 time price to book to 4-5 time?
Binod Modi: That is the thing we have been sensing for the last couple of quarters and technology is a part which in addition to Bajaj Finance, other companies are also focusing on aggressively. Definitely, Bajaj Finance expects that 25% of overall business flow should be happening through technology. Going ahead, maybe two-three years down the line, that may have some sort of quality rub off on the overall efficiency and margin levels.

We should not forget that Jio Finance already has strong financial muscle and if the number of companies increases in this segment, the 30% growth which we have been witnessing in this company might show softness and that may weigh into the premium multiple valuations of the company.

So, definitely 4.5x to 5x one year forward multiple looks to be slightly higher to me and there is a kind of risk of valuation re-rating.

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