Bajaj Finance maintained margin discipline, despite rising rates, driving the earnings beat in Q3FY23. We continue to expect strong (23% CAGR during FY2023-26E) loan growth. However, the shift to secured loans due to limited scope in existing unsecured segments and challenges in new segments may temper earnings growth. Following the correction, we upgrade a notch to Reduce from Sell; FV `6,150.
n Retain strong growth plans. Bajaj Finance targets to increase at a CAGR of 24-25% over the next four years, as articulated in its long-term business plan. Apart from going deep across India and covering 110-120 households (66 mn currently) by growing at faster-than-industry level across current business lines, the company intends to enter into the new segments of auto finance (mostly cars), CVs, microfinance and agri loans. The company has presence in 3,700 locations; it believes that it is ripe to enter above-mentioned new segments. However, we believe that the new businesses are in the unorganised and below prime segments, unlike its current focus on mass affluent customers.
Secured over unsecured. We expect Bajaj to continue to gain share in existing business segments. Focus will likely be on secured segments such as mortgages and LAP. It has about 55% market share in consumer durable loans; share of B2B loans is down to 12% in 3QFY23 of its AUMs and will likely decline due to faster growth elsewhere.
Bajaj has 7% market share in unsecured/personal loans; ~45% among NBFCs. According to management, it has 23-24% market share in the unsecured SME segment; these loans comprise about 4-5% of total MSME credit of `23 tn.
Bajaj remains a small player in home loans (1.3% market share), in which we find significant scope for growth. It will now focus on LAP in the parent and subsidiary, with a huge runway for growth at `150 bn (2.2% market share) in FY2022.
We are revising our estimates up 4-6%, reflecting higher margins and lower operating expenses. In our view, Bajaj is likely to deliver a CAGR of 22-23% in core PBT over FY2023-26E, lower than the 24% loan book CAGR, with 22-23% RoE. We believe that Bajaj’s eventual conversion to the banking format poses a risk of de-rating, which is not reflected in the above.Bajaj Finance reported 7% q-o-q and 27% y-o-y AUM growth in Q3FY23 to `2.3 tn, lower than the pre-covid levels of 8-9% q-o-q growth. The auto finance, B2C and SME businesses posted strong growth, whereas growth in the mortgage business has moderated sequentially. Commercial business grew faster than other segments. Bajaj Finance already has high market share in the unsecured segments such as consumer durable loans , personal loans and SME loans . The penetration in secured segments is low and presents an opportunity for growth. We expect LAP and home loans to drive future growth. Although these secured segments have lower yields, improvements in cost ratios should lead to Bajaj Finance maintaining overall RoE at 23%.
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