Bajaj Finance: What capital infusion, Q2 business update tell us about AUM forecasts, ROE dilution

Country's largest NBFC Bajaj Finance’s strong second-quarter business update is likely to support an upgrade to its FY27 growth and customer acquisition guidance, while the recently announced capital raise should provide additional headroom for expansion across newer businesses, according to brokerages. Subsequently, the stock was the top Sensex and Nifty gainer, rising 5% today.

Bajaj Finance’s board has approved a Rs 17,500 crore capital infusion through a combination of a Rs 11,700 crore qualified institutional placement and a Rs 5,800 crore preferential issue of convertible warrants to promoter Bajaj Finserv.

Growth outlook 

JP Morgan expects the company’s growth momentum to remain strong, following a better-than-expected Q2 performance. Bajaj Finance’s assets under management rose 26.5% year-on-year and 6.9% sequentially to Rs 5.85 lakh crore, rising from 23.9% growth in the first quarter and exceeding J.P. Morgan’s estimate of 24.6%.

The performance comes amid the delayed start to the festive season this year. Industry checks also indicate that momentum in the consumer durable and sales finance business remained healthy through July and August.

The strong AUM growth appears to have been broad-based, supported by stable asset quality in the consumer-facing businesses and faster expansion in newer segments such as gold loans. New customer additions rose 7% year-on-year to 4.4 million, reinforcing the strength of Bajaj Finance’s customer acquisition platform.

The company’s deposit base also increased 1.8% sequentially to Rs 69,800 crore. However, Bajaj Finance continues to favour other borrowing channels where funding costs are relatively more attractive.

With first-half performance comfortably ahead of management’s existing targets, JP Morgan expects Bajaj Finance to raise its FY27 growth and customer acquisition guidance when it reports its second-quarter results. Customer additions reached 9.52 million against the FY27 target of 15-17 million.

Credit trends are also providing comfort. Industry checks point to stable bounce rates and collection efficiency despite a challenging macroeconomic environment, leading JP Morgan to expect credit costs to remain broadly stable sequentially.

How fund raise could affect estimates   

The key focus for investors is likely to shift towards net interest margins. Higher wholesale funding costs could put pressure on NIMs across the NBFC sector, including Bajaj Finance. The company’s use of market instruments such as OIS could help cushion some of the pressure, although it remains exposed to higher bond yields and the possibility of interest-rate increases.

J.P. Morgan factors in a 12-basis-point sequential contraction in NIMs for the second quarter, reflecting higher borrowing costs, changes in the AUM mix and the impact of dividend payments. The brokerage has raised its AUM growth estimates by 50-180 basis points for FY27-FY29, with FY27 growth now projected at 25.8%, up from 24% earlier. This translates into roughly 1% higher earnings estimates, partly offset by the expected pressure on margins.

J.P. Morgan has raised its price target by 1.2% to Rs 1,310 per share and retained Bajaj Finance as its preferred pick among Indian NBFCs.

Capital raise adds further growth flexibility

HSBC Global Research has also maintained its BUY rating on Bajaj Finance with a target price of Rs 1,270, describing the company’s planned capital raise as a positive development. It noted that its current estimates do not yet incorporate the impact of the proposed capital raise.

Assuming an issue price of around Rs 950 per share, HSBC estimates that the capital infusion or fund raise could increase the share count by roughly 3%. While the fundraise would result in some near-term dilution, it is expected to strengthen the company’s balance sheet and provide greater capacity to fund its expansion plans.

HSBC estimates that the capital infusion could increase book value per share by around 7.6% and raise the Tier-1 capital ratio by approximately 170 basis points from its current level of around 20%. However, ROE could moderate to around 19-20% during FY27-FY29, compared with 21-22% earlier.

As per HSBC, concerns over the ROE dilution are unlikely to be significant because Bajaj Finance is growing its AUM at a faster pace than its post-money ROE. The company’s ability to consistently expand its loan book across market cycles should allow it to deploy the additional capital and gradually rebuild ROE towards its earlier levels.

Why raise capital despite a strong capital position

Although Bajaj Finance already has a Tier-1 capital ratio of around 20% and does not appear to require capital simply to sustain its existing growth rate, HSBC believes the fundraise is strategically timed.

The company is expanding several newer businesses, including vehicle finance, tractor loans, microfinance, gold loans and affordable housing, all of which will require additional capital as they scale. A potential acceleration in SME lending over the next year could further increase capital requirements.

The fundraise also provides greater financial flexibility ahead of the expected leadership transition next year, allowing management to focus on growth rather than raising capital at a later stage.

At current valuations, HSBC estimates that the proposed transaction would be among the less dilutive large-cap financial-sector capital raises in India. Even with the estimated share-count dilution of around 3%, the brokerage believes Bajaj Finance has sufficient growth opportunities to absorb the additional capital over the medium term.