Bajaj Finance stock may face near-term pain as it marches ahead on growth, seeking wider market share

Bajaj Finance Ltd laid out its long-range strategy for 2025-29, building on the framework of last year’s 2024-28 strategy. Among the key goals, the non-banking financial company expects to increase its share in the total credit market to 3.2-3.5% by FY29, representing a significant rise from 2.1% at September-end.

It expects the retail credit market share to rise to 3.8-4% by FY29 from 2.7% at September-end. Over the same period, it also aims to expand its customer franchise to 190-210 million, up from 92.1 million.

Bajaj Finance’s historical transformation over BFL 1.0 (2008-2016) and BFL 2.0 (2017-2024) has laid the groundwork for BFL 3.0. During BFL 1.0, it diversified its offerings, increasing its assets under management (AUM) to ₹44,229 crore from ₹2,478 crore.

BFL 2.0 marked a digital pivot, with AUM surging to ₹3.3 trillion and the customer base growing to 83.6 million from 20.1 million, supported by an expanded digital footprint.

Now, under BFL 3.0, Bajaj Finance aims to position itself as the lowest-cost financial services provider, serving 200 million customers by FY29. The company’s management highlighted its vision that Bajaj Finance will be a FINAI company with AI-enabled technology architecture, integrating AI across all its processes.

This is expected to improve customer engagement, grow revenue, lower operating expenses, reduce credit costs and enhance productivity.

The company has identified three new megatrends – green finance, multi-cloud and zero trust, taking its total megatrends to 28. It expects to start by financing solar and electric vehicle products to retail and micro, small and medium enterprise customers in the March quarter (Q4FY25). It is targeting ₹2,000 crore of green finance in FY26.

Lofty targets

Under zero trust, which it defines as a security framework that operates on the principle of “trust but always verify,” it will invest deep and in critical security policies in the next 12-18 months. Ultimately, it aims at a 25% profit after tax compounded annual growth rate and a return on equity (RoE) of 20-22% by FY29. The RoE in H1FY25 was 19.4%.

Multi-cloud is its strategy to make applications cloud agnostic.

“Its targets are lofty. However, with impeccable execution skills, we believe the same are achievable,” analysts from Anand Rathi Share and Stock Brokers said in a report on 11 December.

Bajaj Finance maintains it is on track to deliver its target of doubling AUM to ₹4 trillion by FY25 from levels in FY22. In the September quarter (Q2FY25), its AUM increased 29% year-on-year to ₹3.74 trillion.

Even so, for investors in the Bajaj Finance stock, 2024 is likely to be a forgettable year, with the shares dropping by 2% so far. Surging credit costs have been a sore spot, hurting profit growth, which stood at about 13% in Q2 vis-à-vis 14% in Q1 and 26% in FY24.

Post-Q2 results, the management revised its credit cost guidance to about 2.05% of assets in FY25 versus earlier estimates of 1.85%-1.95%.

Shweta Daptardar, an analyst at Elara Capital, projected Bajaj Finance’s AUM growth at a 25% CAGR over FY24-FY27, driven mainly by the company’s focus on diversifying its portfolio and income streams.

“However, the medium-term outlook is somewhat uncertain as sustained elevated credit costs and a continued stress in the unsecured retail credit market pose challenges,” she added.

A bright spot is that valuations now seem reasonable. The stock trades at almost 21 times FY26 estimated earnings, according to Bloomberg data. However, triggers for sharp upsides appear limited in the foreseeable future.

“We do not anticipate any significant upside catalysts until it successfully navigates the asset quality challenges in its B2C loan book and makes concerted efforts to improve the proportion of secured loans in its loan mix,” said Motilal Oswal Financial Services’ analysts.