Bajaj Finance shares: Cautious on regulatory stance; valuations look better post fall, says Kotak

Kotak Institutional Equities in its latest note said if the unconfirmed media reports on the Reserve Bank of India (RBI) granting a one-year extension to Bajaj Finance Ltd - RBL Bank Ltd credit card partnership against an anticipation of longer period are true, it would read it as the third development that may probably prompt Bajaj Finance Ltd to tweak down its high loan growth.

Kotak said it remains a bit cautious about the regulatory stance on unsecured loans and watchful of Bajaj Finance’s growth commentary in the forthcoming December quarter results. Valuations look better as the stock continues to underperform, it said while suggesting a fair value of Rs 7,400 on the counter.

Last month, the RBI asked Bajaj Finance to stop sanction and disbursements of ‘eCoM’ and ‘Insta EMI card’ (2 per cent of AUM as of H1FY24). According to Bajaj Finance, this will have no effect on the normal course of business done through dealer stores. Further, the RBI increased risk weights on bank loans to NBFCs and bank/NBFC’s sectors lending to consumer loans.

Kotak said it reads this as a regulatory signal to slow down growth. Bajaj Finance is a large player with a high share of unsecured loans (37 per cent of AUM) against 7-36 per cent for peers. Kotak said it sees the latest development as the third nudge, which may likely prompt BAF to slow down its high (33 per cent in Q2FY24) loan growth.

“Bajaj Finance has already gone slowly in rural B2C loans (up 17 per cent in 2QFY24). Management has guided for 29 per cent loan growth for FY2024 as compared to 33 per cent loan growth in Q2FY24. We are cutting our estimates by 1-2 per cent; we now model 29 per cent loan growth for FY2024 versus 31 per cent earlier. We will revisit our growth estimate after the Q3FY24 earnings call,” Kotak said.

As far as Bajaj Finance shares are concerned, Kotak noted that the Bajaj Finance’s stock continues to underperform the market. A moderation in the pace of growth across the industry in unsecured loans that may provide comfort to the regulator and remove overhang of further action will likely provide comfort to the Street, it said.

“After the recent developments, clarity on its near-to-medium growth trajectory is crucial for BAF. Valuations look better after the correction; we will revisit our stance after the earnings call,” the domestic brokerage said.