Why should you accumulate Bajaj Finance shares after the fall of 24%

It is quite uncommon to see a stock like Bajaj Finance correct by 24 percent after the results for the March quarter (Q4 FY22). For a long time, it has been a favorite among investors, especially in financial services, and the constant melting of stock prices after the results for the 4th quarter makes one think about whether everything is fine with Bajaj Finance.

The good part is that the lender remains a structurally strong player in the consumer finance area. By and large, there is little competition to destabilize its leadership position, and the lender, which has handled the pandemic reasonably well, is good for investors. But here’s the less comforting part.

For a company that grew up to 30 – 35 percent year-on-year relative to its loan portfolio, the growth rate may decline going forward. With the focus now on building its digital fortress of products, platforms (app and web) and customer retention, and Bajaj Finance’s own base swells to a point where quality should take precedence over quantity, it would make sense for investors to bake in lower valuations. Currently at 6.2 times the FY23 price to order, Bajaj Finance’s offer rate has fallen by 22 percent after results. If the trend of slowdown in the pace of customer acquisitions or new loans continues, there may be more adjustments in the valuations. Investors can use these corrections to accumulate Bajaj Finance stock. Despite slower growth, the lender’s favorable positioning in the market, which is unlikely to be challenged, makes a case of buying the stock in decline.

But here’s the catch. Can the Bajaj Finance stock be the multi-bagger it was in the last decade? Quite unlikely. Bajaj Finance is on the spot as HDFC Bank, where size will be a dominant factor. For a non-bank with almost 2 lakh crore in the loan portfolio, it will have to tread carefully with the growth here.

Business model

At a time when it was uncommon to buy air conditioners or washing machines on credit, Bajaj Finance almost made it a norm and popularized the concept of zero interest rate credit. This was in the lender’s first phase. In the second phase, also the periods of rapid growth (FY13 – FY19), when Bajaj Finance almost ten-folded its loan portfolio from 17,500 crore to 1.15 lakh crore, it took the lessons from the lending company for durable consumer goods across products. From visits to beauty salons to buying furniture to subscribing to Bjyu’s online courses, Bajaj Finance was present everywhere.

It also tied up with RBL Bank and DBS to issue credit cards jointly, although Bajaj Finance on an independent basis also gives tough fight against credit cards. This period also marked the company’s entry into the home finance area, and with this, the lender has a strong bouquet of credit products to address different segments of borrowers.

At the end of FY20, Bajaj Finance began to face competition from an unseen corner – the fintechs. Their freebies and cashbacks began to eat away at its pie of customers. The trend became prominent during the pandemic, and therefore the need to accelerate its digital penetration became important.

Bajaj Finance 3.0

In October 2020, Bajaj Finance unveiled its plans to become the ‘moment of truth’ business across all products and services, and a quarter of an hour later it chalked out into the digital space. By calling it the omnichannel framework, the intention was to operate, maintain and grow its customer base in a digital or offline mode according to the customer’s preference.

The app is aimed at retail and commercial customers and cross-selling products from its Bajaj Finserv, such as insurance and mutual funds. Bajaj Finance is in the process of copying its digital offerings on the website for better customer reach and engagement. The purpose of the digital platform is to retain the customer, and to that extent it is more of a cost model than revenue-generating. The same is the logic of the payment business, of which a complete rollout must take place in FY23. But will this accelerate the customer acquisition speed?

Way forward

The intention to strengthen the digital presence is to increase customer acquisition, a metric key to growth in loans and profitability. Since the middle of FY20, however, a slowdown in Bajaj Finance’s business has become quite apparent, although the setback led by revenge purchases (or revenge sales from Bajaj Finance’s perspective) was quite strong. However, the recovery does not last long enough as it did before – regardless of whether the periods after demonetization or GST roll out in FY17 and FY18, respectively. But would it then be wise for the lender to copy its historical growth levels? Not quite.

With a loan book size of ₹ 1.95 lakh crore in Q4 FY22, Bajaj Finance will be tasked with juggling growth, profitability and asset quality. The intention of the regulator is also that large NBFCs grow in a calibrated way. After rejecting the possibility of applying for a banking license for at least three years, struggling with a slower growth rate may be the new normal for Bajaj Finance, especially given that credit costs and depreciation remained high for a year in a row in FY22. Investors need to see FY23 as a period of healing and normalization of asset quality, which in itself may limit Bajaj Finance from ambitiously expanding its loan book. In that case, Bajaj Finance’s need to order a supernormal valuation premium will be questioned.


In the last five years, HUL has traded at up to 40 times the price in relation to earnings. Despite constant competition and periods of slower-than-expected growth, it has held on to the premium. Bajaj Finance stock is very similar to HUL. It may remain the most expensive stock in financial services. The company’s ability to raise funds at the lowest price (6.7 per cent in Q4) and maintain its total net interest margin consistently in the range of 9 – 10 per cent. is its main positive.

Yet in absolute numbers, despite the 22 percent correction in valuations, which brings the stock to 6.2 times the FY23 estimated book, there is an argument for a further valuation correction.

Investors were willing to defer top-dollar for the stock for its ability to consistently surpass peers in terms of growth. Since this factor is likely to be lacking in the short to medium term, a valuation correction is only logical. But given Bajaj Finance’s management lineage, its execution ability and leadership position, which even banks have not been able to bulge meaningfully, we recommend our readers use the corrections to accumulate the stock.

Published on

May 14, 2022

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