The NBFC reported 24% year-on-year growth in assets under management (AUM) and 23% profit growth for the quarter, but Bernstein has maintained an “Underperform” rating on the stock. Gundlapalle noted that while the results appear robust, deeper analysis shows signs of structural slowdown.
“The headline growth looks strong, but underlying trends suggest longer-term concerns,” Gundlapalle told ET Now. “Growth is increasingly coming from lower-yielding and cyclical segments such as gold loans and microfinance, while net interest margins (NIMs) have stayed flat.”
Credit costs and asset quality still a worry
Bernstein’s report highlights that credit costs are likely to stay elevated for a longer period as provision coverage ratios decline.
“We expect credit costs to stay higher for longer — around 200 basis points may become the new normal,” Gundlapalle said.
Although Bajaj Finance management termed the slight uptick in NPAs as seasonal, Bernstein believes the scale of AUM growth and falling coverage ratios could keep asset quality under pressure.
Margins under pressure, growth quality diluting
According to Gundlapalle, Bajaj Finance’s need to maintain growth momentum at its large scale is forcing it to sacrifice margins and expand into lower-yielding products like mortgages.“At nearly ₹5 trillion in scale, it’s hard to be tactical,” he said. “To chase growth, you end up passing on margin benefits to customers or entering lower-yield segments.”
Bernstein has set a target price of ₹140, valuing the stock at 20x trailing PE, compared with 30x earlier, citing weaker EPS visibility and moderation in growth expectations.
MSME segment stress could be limited to NBFCs
While Bajaj Finance flagged rising stress in the MSME book, Gundlapalle believes the pain will remain largely contained within the NBFC space.
“Most banks focus on secured MSME loans, so we don’t see a systemic spillover,” he explained. “The impact will likely be restricted to large NBFCs like Bajaj Finance.”
Past rally driven by sentiment and leadership continuity
Bajaj Finance’s sharp rally earlier this year was driven by expectations of rate cuts, consumption revival, and the continuation of CEO Rajeev Jain, which boosted investor confidence.
However, Gundlapalle warns that valuation multiples may now need a reset.
“Either through price correction or stagnation, we expect a valuation reset as growth normalizes,” he said.
Key takeaways
- Headline growth strong, but underlying concerns on quality and sustainability remain.
- Credit costs likely to remain around 200 bps — not fully priced in yet.
- Margins under pressure as Bajaj expands into lower-yielding loans.
- EPS growth expected to moderate to ~20%; Bernstein cuts multiple to 20x trailing PE.
- MSME stress contained to NBFCs, not likely to hit large banks.