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Operationally strong; capital raise will offset organic NIM pressure

NIM (calc.) contracted ~9bp QoQ; gold loan slippages are transitory in nature

* Bajaj Finance’s (BAF) 2QFY27 PAT grew 29% YoY to ~INR63.7b (in line). NII in 2QFY27 grew 24% YoY to ~INR133.3b (in line). Non-interest income stood at ~INR26.4b (up 11% YoY). Opex grew ~23% YoY to ~INR52.7b (in line). PPoP stood at INR107b (in line) and grew 21% YoY.

* Credit costs stood at ~INR21.7b (in line). Annualized credit costs were broadly stable QoQ at ~1.56% (PQ: ~1.54% and PY: ~2.05%). 2QFY27 includes a prudent management overlay of INR3.4b for macroeconomic risks. Excluding this provision, credit costs declined 12% YoY to INR18.3b, translating into ~1.32%.

* BAF highlighted that the vintage credit performance across 3MOB, 6MOB, and 9MOB continues to reflect significant improvement. Management remains optimistic on the FY27 credit cost outlook, expecting full-year credit costs to remain within the 1HFY27 range, supported by improving portfolio performance, proactive underwriting, and prudent overlays. We model credit costs of ~1.5% each in FY27/FY28.

* BAF upgraded its FY27 AUM growth guidance to 26-27%, supported by improving traction across business segments, while reiterating its long-term growth guidance of 23-25%. Growth momentum remained strong across segments, except MSME, where management expects growth to recover to double-digit levels in 2HFY27. We model AUM growth of 26% over FY26-28E.  Management shared that it has submitted its feedback on the proposed RBI restrictions on revolving credit and expects a balanced framework, as a complete ban could temporarily impact AUM, NIMs, and profitability. On proposed insurance commission changes, the company is evaluating options to mitigate the impact on fee income and margins.

* BAF has moved beyond earnings normalization and is entering a phase of structurally stronger earnings growth. The combination of strong loan growth, operating efficiencies to offset margin pressure, improving asset quality, and declining credit costs are expected to drive a meaningful acceleration in profitability.

* We raise our FY27/FY28 EPS estimates by ~1%/4%, factoring in stronger AUM growth and benefit on NIM from the proposed equity capital raise of ~INR175b, which we expect to be completed by Dec’26. We model PAT CAGR of ~30% over FY26-FY28E and RoA/RoE of 4.1%/20% in FY28E. We reiterate our BUY rating on the stock with a TP of INR1,250 (premised on 4x Sep’28E BVPS). Key risks:

1) Potential asset quality deterioration due to weak monsoons, El Nino, and elevated oil prices

2) impact on AUM growth and NIM pressure if the RBI’s proposed restrictions on revolving credit are implemented in their current form

3) lower fee income due to proposed IRDAI regulations on insurance commissions

Strong and broad-based AUM growth; NIM (calc.) contracts ~9bp QoQ

* Total AUM grew 26.5% YoY/6.9% QoQ to INR5.85t. QoQ AUM growth was driven by Gold Loans (+14%), Rural Sales Finance (+7%), Consumer Sales Finance (~6%), LAS (~15%), MFI (~8%), and Car Loans (+6%).

* New customer acquisition stood at ~4.4m in 2QFY27. BAF targets 60-62m new loans and 18-20m customer additions to its franchise in FY27. Management indicated that FY27 (organic) NIM contraction could be marginally higher than the initial 10-15bp guidance, driven by an expected increase in funding costs in 3Q/4QFY27 in a rising interest rate cycle. We expect BAF to deliver ~26% AUM CAGR over FY26-28, with NIM of ~9.7%/9.6% in FY27E/FY28E. (FY26: 9.7%).

Minor deterioration in asset quality; credit costs stable QoQ

* As of Sep’26, GNPA and NNPA stood at 1.06% (increased ~10bp QoQ) and 0.42% (increased ~3bp QoQ), respectively, as of Sep’26. PCR on Stage 3 assets was broadly stable QoQ at ~60%.

* Stage 2 and 3 assets increased ~INR16b in 2QFY27, including ~INR10.5b increase in Stage 2 gold loan due to short-tenor schemes that are no longer being offered. The company does not expect the transitional increase in Stage 2 gold loans to impact credit costs. Adjusting for this transient movement, S2 and S3 loans improved to 1.88% of loans from 1.90% in 1QFY27.

Highlights from the management commentary

* BAF is closely monitoring early-vintage performance and tightening originations where 3MOB metrics indicate emerging stress. Self-employed unsecured borrowers are viewed as more vulnerable to inflation and elevated oil prices, with stress testing prompting additional Stage 1 and Stage 2 provisions for nonsalaried unsecured borrowers amid risks from El Nino, monsoons, and oil prices.

* The company discontinued short-tenor schemes in August and is reverting to longer-tenor products of 12 months, with options for monthly or quarterly interest payments. Around 55% of the elevated Stage 2 balance has already been resolved, with no material credit cost or auction impact expected.

Valuation and view

* BAF delivered a healthy quarter, with broad-based growth across segments and continued improvement in asset quality, supported by strong vintage performance and stable credit costs. While there was some marginal asset quality deterioration, largely driven by gold loans, management remains confident of negligible ultimate credit losses. Margins declined during the quarter and could witness further (organic) contraction due to expected rise in borrowing costs.

* BAF trades at 3.3x FY28E P/BV and ~19x P/E (after incorporating the expected equity capital raise through QIP and preferential allotment of warrants). We model a PAT CAGR of ~30% over FY26-FY28E and RoA/RoE of 4.1%/20% in FY28E. We believe the company is entering a phase of sustainable earnings compounding, driven by broad-based growth, resilient profitability, and improving asset quality. We reiterate our BUY rating on the stock with a TP of INR1,250 (premised on 4x Sep’28E BVPS).

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