Bajaj Finance Stock: 3 Factors That Show Bajaj Finance’s Glory Days May Be About To End
At a recent conference, Rajiv Jain, Managing Director of Bajaj Finance, told investors, âThis is how we are going to do business now. This is how we will manage the business from now on. Everything we do, from a consumer perspective, will go through this business transformation initiative, transitioning to this whole new application ecosystem of five apps that we are launching.
Bajaj Finance’s transformation from a traditional non-bank lender accepting deposits upon entry into the competitive fintech space on Tuesday was long overdue. The transformation sparked investor enthusiasm, with shares of the company rising more than 50% on the year through October before losing some of those gains in a recent correction.
But as the company enters the age of fintech, skeptics grow. Three months ago, only two of 27 analysts covering the stock had a sell rating. As of Monday, the number had more than doubled to five, including CLSA India.
The foreign broker, who hosted the conference call in which Jain made the comments, was quick to suggest that the fintech dream that investors have built for Bajaj Finance may not live up to. of his expectations. âWe believe the foray into fintech is a catalyst for sustaining 20-22% growth in assets under management, rather than being a value driver beyond that,â said CLSA, while she launched a cover with a sell note and a target price of Rs 6,000 on the Stock.
ALBATROS OF EXPECTATIONS
Investor expectations of Bajaj Finance are not simply a function of the ongoing bull market, where even zero-income companies benefit from valuations traditionally reserved for year-over-year profit-makers. Investors are caught in the same psychological phenomenon as HDFC Bank: recency bias.
Before the pandemic, Bajaj Finance was making up its assets under management at 35% per annum – the kind of pioneering growth that is the envy of its peers and the admiration of its investors. This helped its share price to appreciate by over 11,000% over a 10-year period.
If the company and its management managed to put on the show by providing such numbers, it’s fair to assume that they will in the future as well. Doubts arose along the way, especially during the March 2020 crash, as some analysts saw the pandemic and its lockdown as a trigger for a long winter for the company, which could last at least a few years. Yet careful risk management has enabled Bajaj Finance to triumph and become a market share-eating juggernaut.
âThe next five years will not be as rosy as the last five, nor as rosy as what investors have priced in the stock. Due to a number of factors, we do not expect current valuation levels to hold up over the medium term, âsaid CLSA India.
GRAY CLOUDS ON A SUMMER DAY
Jain, the chief executive of the company, said the company’s digital transformation, coupled with improving the dynamics of the economy, in the absence of a third wave of the pandemic, would prepare it for a âReasonably strong growthâ over two or three years and beyond.
But look beyond the horizon and you’ll notice dark clouds gathering above Bajaj Finance. The major non-bank lender is struggling to convince its clients to take out new loans due to the growing competitive intensity in the consumer lending arena. The share of Bajaj Finance clients taking out a new loan reached 35%, compared to a record 58% in 2018-2019. It had fallen to less than 30% at the height of the pandemic, as households avoided new debt and focused on paying off loans.
Additionally, Bajaj Finance has lost its momentum in the mortgage finance industry, a key driver of the company’s meteoric growth over the past decade. Unlike other housing finance companies, CLSA noted that Bajaj Finance experienced the biggest deterioration in mortgage finance growth, which only recovered to less than half of the execution rate before. the pandemic.
Bajaj Finance has always been highly regarded, given the exponentially higher growth rates it has generated. After the digital transformation was announced, investors began to rate the company as a fintech, which pushed its valuations further into the stratosphere.
As a perspective, Bajaj Finance’s book value premium over retail lending giant HDFC Bank has risen to 180% in the past year, from 60% before the pandemic engulfed the world. âThis premium expansion was driven largely by investor expectations for the company’s transformation plan,â said CLSA.
Jain said at the conference, âWe don’t want to be relegated to a balance sheet company. We want to own the customer. This is basically the view I have, that customers go digital, so we have to go digital. We have the capital, we have the direction, and our tech stack is organized to scale much faster than most people in the fintech space are capable of. ”
In CLSA’s view, only 40 percent of Bajaj Finance’s loan portfolio merited fintech ratings. The downgrade margin for the valuation was high given that investors have already rated the fintech business on a par with industry giant Paytm (six times the customer base), CLSA added.