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Stable core amid MSME headwinds; caution to rule the roost

NIMs (calc.) contracted ~10bp QoQ; minor deterioration in asset quality.

* Bajaj Finance’s (BAF) PAT grew 22% YoY to ~INR47.6b in 1QFY26 (in line). The company’s 1QFY26 NII grew 22% YoY to ~INR102.2b (in line). Non-interest income stood at ~INR23.8b (up 16% YoY), aided by higher income from investments in mutual funds.

* Opex grew ~19% YoY to ~INR41.2b (in line). PPoP stood at INR84.9b (in line) and grew 22% YoY. 1QFY26 RoA/RoE stood at 4.5%/19%.

* BAF’s 1QFY26 NIM contracted ~10bp QoQ to ~9.53%. Management highlighted that the CoF declined ~20bp QoQ to ~7.8%. Looking ahead, it expects a further reduction of 15-20bp, with CoF likely to settle at around ~7.6-7.65% by the end of FY26, without factoring in any additional rate cuts. This moderation in funding cost could support a slight positive bias to margins, with management guiding for ~10bp expansion in NIMs. We estimate NIM of ~9.7%/9.8% in FY26/FY27.

* Management highlighted that consumer leverage remains a key area of concern, prompting the company to implement corrective measures across certain product lines to limit exposure to borrowers with multiple active loans.

* Credit costs were notably higher in the 2W/3W and MSME segments, with stress in the MSME portfolio becoming evident since Feb’25. Given these headwinds, the company expects growth in both segments to moderate significantly from 2Q onwards. BAF guided for credit costs of ~1.85-1.95% in FY26. We model credit costs (as a % of loans) of 1.9%/1.85% in FY26/FY27E.

* The company further shared that the MSME segment is expected to exhibit the slowest growth in FY26. Disbursements in the MSME segment are projected to remain flat or even decline over the course of this fiscal year.

* Our FY26/FY27 PAT estimates remain broadly unchanged, and we believe that credit costs have now peaked and will remain below the upper end of the guided range. We estimate a CAGR of ~24%/25% for AUM/PAT over FY25-FY27 and expect BAF to deliver an RoA/RoE of ~4.1%/21% in FY27.

* The stock trades at 4.4x FY27E P/BV and ~23x FY27E P/E. Despite a healthy PAT CAGR of ~25% over FY25-FY27E and an RoA/RoE of 4.1%/21% in FY27E, we see limited upside catalysts given the rich valuations and a lack of nearterm re-rating triggers. Reiterate our Neutral rating on the stock with a TP of INR1,000 (premised on 4.5x Mar’27E BVPS).

AUM grows ~25% YoY; auto loans portfolio continues to decline

* Total customer franchise rose to 106.5m (up 21% YOY/5% QoQ). New customer acquisitions stood at ~4.69m (vs. ~4.47m YoY and ~4.7m QoQ). New loans booked rose 23% YoY to 13.5m.

* Total AUM grew 25% YoY and ~6% QoQ to INR4.41t. QoQ AUM growth was driven by Gold Loans (+20%), SME Finance (+4%), Urban Sales Finance (+13%), Rural Sales Finance (+11%), and Commercial Loans excluding LAS (+18%). Auto Finance declined ~9% QoQ.

Minor deterioration in asset quality; MSME exhibiting stress

* Asset quality exhibited minor seasonal deterioration, with GNPA rising ~7bp QoQ to ~1.03% and NS3 rising ~6bp QoQ to ~0.5%. PCR declined ~170bp QoQ to ~52%.

* Credit costs stood at ~INR21.2b (vs. MOFSLe of INR22b). Annualized credit costs stood at ~2.02% (PQ: ~2.33% and PY: ~2%). Management highlighted that the macro environment remains challenging. Of the 17 key MSME-linked industries tracked by BAF, 13 are showing signs of a slowdown, while three are in outright contraction. This weakness is largely attributed to the broader economic deceleration and subdued credit demand across segments.

Highlights from the management commentary

* Karnataka, which accounts for 11% of the total balance sheet, has exhibited vulnerabilities. The company acknowledged that recent developments in the state have had an unintended impact on portfolio performance. In response, it has scaled back disbursements by 35-40% across the urban, rural, and 2W/3W segments in the state.

* The next leadership transition is expected to take place only closer to Mar’28, indicating that succession planning will remain internal and is unlikely to be disclosed until closer to the MD/CEO change. Rajeev Jain (MD) has been asked to present a management succession plan to the Board and NRC within six months.

* The company extended restructuring support to loans worth ~INR2.2b (primarily in the MSME segment) despite these accounts being standard. Management further guided that an additional INR1.5b in loan restructuring in the MSME segment may be undertaken in 2QFY26.

Valuation and view

* BAF reported a healthy performance for the quarter, driven by strong AUM growth. While credit costs rose sequentially primarily due to stress in the MSME and Auto Loan segments, asset quality witnessed only a marginal deterioration. Looking ahead, growth in the MSME segment is expected to remain subdued in FY26 due to ongoing macro headwinds.

* The stock trades at 4.4x FY27E P/BV. Despite a healthy PAT CAGR of ~25% over FY25-FY27E and RoA/RoE of 4.1%/21% in FY27E, we see limited upside catalysts due to rich valuations and a lack of near-term re-rating triggers. Consequently, we reiterate our Neutral rating on the stock with a TP of INR1,000 (premised on 4.5x Mar’27E BVPS).

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