Bajaj Finance may face problem of scaling amid intense competition in home loan market, says Ambit

Domestic brokerage firm Ambit has initiated a 'sell' call on Bajaj Finance. Citing Bajaj Finance as the 'most expensive lender' in the country', it said that high growth and return on equity are already built into its valuations. 

Notably, Bajaj Finance shares have corrected 22 per cent in the last 6 months, erasing a wealth of around Rs 2.83 lakh crore of investors. 

Ambit said that it sees further downside of 18 per cent in the counter as it tagged 'sell' call for a price target of Rs 5,028 per share.

The brokerage said that Bajaj Finance is facing multiple challenges to gain scale amid strong competition in the home loan market. 

It said that the company has a large market share in MSME/personal loans within NBFCs where competition is increasing from banks. 

The lender, it said, is trading at a 'significant' premium to other housing finance companies, non-banking finance companies and large-cap private banks. 

Bajaj Finance growth is slowing down mainly due to size and competition. The company has already a 23 per cent CAGR which no other Indian bank, NBFC or HFC has witnessed in the last couple of decades, and it has a 45 per cent market share amongst NBFCs in commercial/personal loans wherein competition is increasing from banks. The cost of funds is likely to be 250 bps higher than large banks which makes BAF uncompetitive. 

As growth slows down to around 20 per cent for Bajaj Finance over FY25-42, expect the valuation premium over banks to reduce, it said.

Bajaj Finance's one-year forward valuation implies a 25 per cent AUM growth with a 20 per cent RoE over the next decade, according to the brokerage. However, growing at a 25 per cent CAGR requires surpassing market leader HDFC's current market share over the next decade which might be impossible, said Ambit. 

Ambit anticipates a 30 per cent CAGR in earnings per share in fiscal 2022-25, with an average return on equity of about 22 per cent. Throughout the fiscal years 2025–2042, it is building a 19 per cent loan growth and 20 per cent RoE. 

Meanwhile, shares of its parent firm Bajaj Finserv, the parent company of Bajaj Finance, have also corrected nearly 26 per cent in the last 6 months. Bajaj Finserv's shares last closed at Rs 1328.85 on Tuesday.