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Bajaj Finance continues to deliver on what it does best – growth and profitability at scale. FY23 saw 11.54mn new customer addition (1QFY24 at 3.84mn). Importantly, growth is well diversified (after initial scale up of mortgages portfolio through 1HCY22) and is now likely to be all-round across consumer, SME and newer categories. We expect newer categories (Auto, MFI and other products) to form ~6-7% of the overall mix in the next 3 years. We had earlier highlighted that as growth mix diversifies across products (from being mortgage heavy earlier), growth in new loans (34%YoY in 1QFY24) should also trend in line with overall AUM growth (32% YoY in 1QFY24). While launch of credit cards still awaits regulatory green flag, share of unsecured book forms ~42% in the overall mix as of FY23 and is a significant profitability driver for BAF – we expect overall mix to undergo only a minor change with emergence of newer categories. It is pertinent to note that BAF continues to maintain pricing discipline in the PL segment (despite surge in competitive intensity in this product). In our view, BAF/BHFL is a key beneficiary of HDFC Ltd being now away from bond markets (BAF is the largest AAA rated pvt sector NBFC with large housing portfolio), should aid in reducing liability costs to a certain extent for BAF. BAF’s digital strategy, after a slow start, is now falling in place with clear targets w.r.t to payments market share, merchant lending, digital spends and given the strong execution track record, we expect BAF to emerge as a player to reckon within the space over the next 3-5 years. As per the management, conversion to a banking model is not on the cards over the medium-term as well. We expect BAF to report a 29% CAGR in AUMs over FY23-25 which should result into 29% EPS CAGR. We raise our target price to INR 9,500 valuing BAF at 30x FY25e EPS. Maintain BUY.

* Growth tracking well – to get even further diversified: We expect BAF to deliver AUM CAGR of 29% over FY23-25 with growth aided by addition of new categories (which could scale up of ~6-7% of the mix in next 3yrs). Despite all the concerns on unsecured loans being a strong profit contributor for BAF, we observe that share of unsecured loans has remained largely stable over the last 5 years at ~40-42%. Incrementally, BAF intends to scale up the unsecured SME piece given that this segment is relatively underpenetrated (approx. at ~15% of the entire MSME credit ~INR20-20tn) with BAF being the market leader. Amongst other growth drivers, BAF is also scaling up the LAP product across both BAF and BHFL subsidiary and believes that this product offers another growth opportunity. Credit cards remain a large opportunity given BAF’s existing EMI card database, though regulatory go-ahead is awaited on this product. With respect to auto loans, 2W loans to non-Bajaj Auto customer could potentially be the same size as the current 2W portfolio over the next 3-4 years in our view and it offers a strong riskadjusted return. Additionally, new+used car loans and tractor financing are additional levers to the vehicle loans product bouquet. MFI and gold loan businesses are being scaled up as separate SBUs with entirely different operational and risk model. This retail mix will be well-balanced by mortgages (~31% of the consol. AUM mix) as well as loans to developers (INR300m avg ticket size), LRD (INR100mn – 5.5bn ticket size)

* Credit quality strong as ever, profitability to stay intact: Given systemic trends of low incremental stress formation, BAF’s asset quality trends remain strong. Management believes that while systemic growth in unsecured loans is a trend that is monitorable, BAF remains well placed given its long-standing track record in unsecured loans, superior credit filters and granular portfolio risk metrics and deeply entrenched analytical processes. BAF’s digital strategy is now taking shape with clear targets on payments market share. While the investment phase w.r.t to digital initiatives is likely to see its peak through FY24, we expect opex to normalize by FY25 (project cost/income of 33.4% by FY25). BAF is also a beneficiary of HDFC Ltd now being away from bond markets (BAF is the largest AAA rated pvt sector NBFC with a large housing portfolio). This is likely to aid improvement in BAF’s liability costs further. We project NII/AUM at 10.4%/10.3% for FY24/FY25.

* Valuation - strong execution track record to ensure premium valuations: BAF’s transition to a bank is not likely over the medium-term, and we also expect management transition is likely to non-disruptive affair with enough bench strength created. Continued execution on growth and emergence of new profit pools should ensure premium valuations for BAF. We raise our target price to INR9500 valuing BAF at 30x FY25e EPS – we expect Avg RoEs of 25% for FY24-25 with EPS CAGR of 29% over FY23-25.

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