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Exuding confidence to drive growth; credit costs peak

Management transition and the current CEO’s future role to remain in focus

*Bajaj Finance (BAF)’s reported PAT grew 18% YoY to ~INR43.1b (~5% beat) in 3QFY25. NII grew 23% YoY to INR93.8b (in line). Other operating income at INR22.9b rose 39% YoY (6% beat), driven by improvement in fee income and income from the sale of services.

*BAF’s 3QFY25 NIM was steady QoQ at ~9.7%. The company sees a limited (~4-5bp) room for improvement in its CoF, irrespective of potential rate cuts in the current year. BAF aims to maintain stable margins as it enters the next fiscal year. However, any NIM compression can be mitigated by orchestrating its levers on fee income. We estimate NIM to remain largely range-bound at ~9.8-9.85% over FY26/FY27.

*BAF continued to take proactive risk actions by cutting segments and pruning exposures. Management shared that GS3 at ~1.1% as of Dec’24 remains well below the long-term guidance of GS3 of ~1.2-1.4%. Additionally, the company highlighted a notable improvement in collection efficiency in Dec’24 and Jan’25. BAF guided for credit costs of ~2.0%-2.05% in 4QFY25.

*BAF continued to take proactive risk actions by cutting segments and pruning exposures. Management shared that GS3 at ~1.1% as of Dec’24 remains well below the long-term guidance of GS3 of ~1.2-1.4%. Additionally, the company highlighted a notable improvement in collection efficiency in Dec’24 and Jan’25. BAF guided for credit costs of ~2.0%-2.05% in 4QFY25.

* Management exuded confidence that, given that its credit costs have peaked, it would look to accelerate AUM growth in the (Rural) B2C segment in the foreseeable future. In addition, BAF’s partnership with Bharti Airtel has the potential to become huge over the medium term, given there are ~200m non-overlapping Airtel customers that can be targeted by BAF.

*BAF had announced a comprehensive 15-month transition plan for the senior leadership, and it expects the Board to take a view on the management transition by 4QFY25. The MD, Mr. Rajeev Jain’s, current tenure ends in Mar’25. He shared that he intends to remain with BAF and will be actively involved in developing the strategic vision for the company and driving its subsidiaries, subject to the direction of the Board and the NRC.

* For FY26, management guided an AUM growth of ~25%, credit costs of <2%, and PAT growth of ~22-23%, contingent on a stable external environment. We broadly maintain our FY26/FY27 PAT estimates as credit costs have now peaked and will remain below the guided outer range. We estimate a CAGR of ~27%/23% in AUM/PAT over FY24-FY27 and expect BAF to deliver an RoA/ RoE of ~4.1%/21% in FY27.

*Valuations at 3.4x P/BV and 18x FY27E P/E are not inexpensive, and the focus now will shift to the management transition and the role that Mr. Rajeev Jain will play in the company from Apr’25 onwards. We expect asset quality to stabilize from 4QFY25 onwards, allowing BAF to navigate this mini-credit cycle effectively. However, we do not see any significant upside catalysts in the near term given that the management transition will be very keenly watched until more clarity emerges. Reiterate Neutral with a TP of INR8,300 (premised on 4x Sep’26E P/BV).

AUM up ~28% YoY; healthy new customer acquisitions

* BAF’s total customer franchise increased to 97.1m, up 21% YoY and ~5.5% QoQ. New customer acquisitions stood at ~5.03m (vs. ~3.85m YoY and ~3.98m QoQ). The company is well on course to cross ~100m customer franchises by Mar'25. New loans booked rose ~22% YoY to ~12.1m (vs. ~9.9m in 3QFY24).

* Total AUM grew 28% YoY and ~6% QoQ to INR3.98t. The sequential AUM growth was driven by Urban B2C (+8%), Rural B2C (+7%), Rural B2B Sales Finance (+9%), SME (+6%), and Commercial (incl. LAS) (+9%). However, the Auto finance business was flat QoQ, given that the company has stopped doing Bajaj 2W/3W financing.

Minor deterioration in asset quality; GNPA rises ~5bp QoQ

*BAF’s GS3/NS3 witnessed minor deterioration in asset quality with GNPA/NNPA rising ~5bp/2bp to ~1.1%/0.5%, respectively, and the Stage 3 PCR remaining stable QoQ at ~57%.

*Net credit costs in 3QFY25 stood at ~2.12% (PQ: ~2.1% and PY: ~1.7%). During the quarter, stage 2 assets increased by ~INR1b, while stage 3 assets rose by ~INR6b. The net increase in Stage 2 & 3 assets was ~INR6.1b. However, management shared that the net growth in Stages 2 &3 has now stabilized. We model net credit costs of 1.9%/1.8% in FY26/FY27E.

Highlights from the management commentary

*The company’s leverage analysis based on Jun’24 bureau data suggests that customers having three or more live unsecured loans are showing a higher propensity to default and lower collection efficiencies. BAF has reduced the share of such customers significantly in new disbursements in line with preCovid levels.

*Delinquencies are relatively higher, and BAF continues to remain cautious in the used cars segment. Within used cars, elevated losses are in refinance and that's where BAF has taken sharp cuts in new volumes. Like all consumption loans, the refinance of used car loans is under pressure. The bounce rate in the used car portfolio was 10-11%, and the same in the new car portfolio was ~3.0-3.5%.

Valuation and view

* BAF reported a robust performance during the quarter driven by healthy AUM growth, while higher non-interest income and well-contained credit costs led to an earnings beat. BAF’s key product segments (until now) have been the secular growth segments. However, its foray into multiple new areas, such as cars, tractors, CVs, and MFI, could (in the future) make its growth and credit costs vulnerable to cyclicality, despite having a well-diversified product mix.

*Despite a healthy PAT CAGR of ~23% over FY24-FY27E and RoA/RoE of 4.1%/21% in FY27E, we see limited upside catalysts. Consequently, we reiterate our Neutral rating with a TP of INR8,300 (premised on 4x Sep’26E BVPS).

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