Jio Financial expansion: Sell Bajaj Finance shares, derating ahead; target Rs 6,800, says UBS

Foreign brokerage UBS initiated coverage on Bajaj Finance Ltd with a Sell rating, as it believes consensus is likely overestimating its growth- return on asset (ROA) profile, despite increased competition and its large size. In a January 16 note, the brokerage said Bajaj Finance yields will be under pressure in urban consumer financing, which accounted for 37 per cent of standalone assets, 45 per cent of interest earned and over 60 per cent of core fee income in FY23). The pressure, it said, would be exacerbated by its high market share (50 per cent in consumer durables loans, 7 per cent in personal loans) and entry of Jio Financial Services (JFS).

UBS suggested a target price of Rs 6,800 on Bajaj Finance, whose shares were trading 1.06 per cent lower at Rs 7,393.50 in Wednesday's trade. Bajaj Finance trades at 5.5 times one-year forward price to book value, below its long-term average. Barring the Covid-19 years, Bajaj Finance earnings have outperformed consensus but the magnitude of subsequent earnings upgrades has declined, UBS said. It forecast earnings downgrade and ROE decline and expects a de-rating ahead.

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"We expect Bajaj's high-yield consumer segments AUM to grow 4-6ppts below consensus in FY23-26E. Expansion of its TAM into gold and auto loans is positive, in our view, but is likely to: 1) take time to ramp up; and 2) dilute ROA. Our analysis suggests over one-third of Bajaj's fee income (28 per cent of PBT in FY23) could be pressured by competition. For EPS, we forecast a 21 per cent CAGR in FY23-26E versus 28% in FY20-24E, and our FY25/FY26 estimates are 9 per cent/15 per cent lower than consensus," UBS said.

UBS said JFS's products would compete with those of Bajaj Finance in the medium term. Reliance Retail's network of 18,650 stores, Jio's 46 crore customer base and JFS's standalone equity base of Rs 24,300 crore could drive expansion of JFS's loan book, it said.

"JFS has launched consumer durables financing and PLs, and has autos, home loans and business loans in its pipeline. For Bajaj Finance, JFS's entry could lower yield on consumer loans and loss of share in manufacturer subvention (Bajaj has a 60 per cent share). We expect Bajaj Finance's NIM to contract 80bps in FY23-26E due to mix of lower yields and higher cost of funds," it said.

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