Bajaj Finance Ltd stock is down 5% in reaction to its March quarter (Q4FY25) and FY25 earnings, announced after market hours on Tuesday. The long-term target for consolidated return on average assets (RoAA) was cut from 4.6-4.8% to 4.3-4.7% and return on average equity (RoAE) from 21-23% to 19-21%. A closer look at its growth versus its elevated and complex valuation reveals what else could be making investors edgy.
Bajaj Finance is actually a combination of three separate entities – Bajaj Finance standalone and its two subsidiaries – Bajaj Housing Finance (88.75% stake) and Bajaj Financial Securities (100% stake) – so we’ll attempt to simplify the valuation.
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Bajaj Financial Securities is a stock broking firm, but it’s still relatively small at less than 1% of the net profit of Bajaj Finance standalone. So, bulk of the valuation is from Bajaj Finance standalone and Bajaj Housing Finance.
The valuation of Bajaj Housing Finance is already available in the form of its market capitalisation of ₹1 trillion. The value of Bajaj Finance’s stake in it works out to nearly ₹90,000 crore. If this is deducted from the ₹5.3 trillion market capitalisation of Bajaj Finance, Bajaj Finance standalone is valued at 30 times net profit for FY25.
Is the rich valuation justified?
Is such a high price-to-earnings multiple justified for Bajaj Finance standalone, when earnings before tax grew at just 14% in FY25? (We’re not considering profit after tax as there was tax-reversal gain.)
To answer that question, we need to understand the reason for the slow earnings growth in FY25. Core pre-provisioning operating profit (PPOP), excluding net trading gains, grew by a healthy 24% year-on-year to ₹26,671 crore, which is in-line with the 23% growth in net interest income (NII).
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However, two other factors in the standalone results merit close attention. First, net fees and commission income, after deducting the fees and commissions paid, was stagnant at ₹3,041 crore owing to a reduction in the various charges levied and discontinuation of the co-branded credit card business.
A second and even more critical factor was the jump of 72% year-on-year in provision or cost of bad debts to ₹7,883 crore. Even after excluding the additional expected credit loss (ECL)-based provision of ₹359 crore on account of annual review of trends in defaulting loans, the provision was up 65%.
Management had estimated the cost of bad debts or credit cost at 1.75-1.85% in FY25, according to its presentation, but it actually turned out to be 2.07% in terms of loan loss to average assets under finance.
Any room for upside?
Stricter lending assessment norms are expected to help contain credit cost better in FY26, with guidance at 1.85-1.95%.Net interest margin (NIM) is likely to remain stable in FY26 even after the likely fall in cost of funds by 10-15 basis points due to the interest rate cycle turning down, as some benefit will be eroded by a reduction in rates for select unsecured loans. If there is further fall in borrowing costs, there could be some upside in NIM.
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In short, many things need to fall in place for the earnings growth rate to revive, which is a tall order. Repeating FY25 loan growth of about 25% is also tough, even if a marginal improvement in NIM is factored in. Moreover, net fee income needs to gain traction and there must be a meaningful improvement in credit cost. Until then, upside triggers are limited, especially after the sharp 25% rally over the past year.