Neutral Bajaj Housing Finance Ltd for the Target Rs.95 by Motilal Oswal Financial Services Ltd
Steady quarter; slight margin vulnerability in rate hike cycle Reported NTI stable sequentially; AUM growth remains strong
* Bajaj Housing (BHFL)’s 2QFY27 PAT grew 18% YoY to ~INR7.6b (in line). NII grew 10% YoY to ~INR10.55b (in line) in 2QFY27. Other income grew 42% YoY to ~INR2b (inline). NTI grew ~14% YoY to INR12.5b (in line). Opex rose ~12% YoY to INR2.4b (inline) and PPoP grew 15% YoY to INR10.1b (inline).
* Net credit costs stood at INR348m (~10% lower than our est.). This translated into an annualized credit cost of ~10bp (PQ: ~5bp and PY: ~18bp).
* BHFL’s AUM grew 25% YoY to ~INR1.6t, while disbursements grew ~25% YoY to ~INR199b. Sambhav loans surpassed a monthly disbursement run rate of ~INR5b and contributed ~16% to overall home loan originations in 2Q.
* BHFL reiterated its FY27 AUM growth guidance of 21-23%, with management adopting a wait-and-watch approach amid uncertainty around competitive pricing on fresh originations and potential BT-led attrition in the prime housing segment. A slower-than-expected passthrough of repo rate hikes by banks in new loan acquisitions could intensify competitive pressure. We model AUM growth of ~24% over FY26- 28E.
* Management expects ~80% of repo-rate hikes to transmit to its CoB. While repricing of the existing portfolio is expected to cushion NIM pressure, a lag in passing on higher funding costs in new loan acquisitions could result in an additional (relative to its guidance) 1-3bp NIM compression. We model an NIM of 3.7%/3.6% in FY27/FY28E (vs. 3.9% in FY26).
* We continue to remain confident in management's ability to deliver strong disbursement and AUM growth. However, the rising cost of borrowings and potential delays in passing on higher funding costs to new originations could exert slight pressure on margins, while competitive intensity in the prime housing segment poses minor risk to AUM growth. We believe the company’s ability to scale its Sambhav franchise and maintain disciplined execution will be key to sustaining earnings growth and achieving its medium-term targets.
* We estimate BHFL to post a CAGR of ~24%/21% in AUM/PAT over FY26- 28, with an RoA/RoE of ~2.1%/13.5% in FY28. We reiterate our Neutral rating with a TP of INR95 (based on 2.5x Sep’28E BVPS), as current valuations largely factor in the medium-term growth and profitability potential.
Yields dip ~10bp QoQ; reported NTI stable sequentially
* BHFL’s reported yield declined ~10bp QoQ to ~8.8% while CoB declined ~20bp QoQ to ~7%. Spreads rose ~10bp QoQ to 1.8%. Reported NTI was stable QoQ at 3.7% and NIM (calc.) improved ~7bp QoQ to ~3.1% in 2QFY27.
* Management highlighted that CoF declined ~20bp QoQ, driven by the refinancing of maturing high-cost borrowings at lower rates, the conversion of a portion of legacy fixed-rate borrowings to floating rates, and a higher share of relatively lower-cost money-market funding. The decline in CoF supported gross spread expansion during the quarter.
Asset quality stable; credit costs remain benign
* Asset quality was largely stable with GS3/NS3 at 0.3%/0.1%. PCR improved ~140bp QoQ to ~59.8% (PQ: ~58.4%).
* Home-loan GNPA increased marginally to 36bp, while LAP GNPA improved to 61bp. Developer-finance GNPA remained stable at 12bp. LRD GNPA increased to 2bp following the migration of one retail account from Stage 2 to Stage 3. Excluding this account, portfolio quality remained strong. We model credit costs of ~11bp/13bp for FY27/FY28E.
Valuation and view
* BHFL delivered a steady quarter, supported by broad-based growth across its key business segments. While portfolio yields remained under pressure and declined QoQ, the moderation in CoF more than offset the impact, resulting in gross spread expansion. Asset quality remained healthy, with credit costs stable at benign levels.
* Given these dynamics, the current valuation of 2.4x FY28E already reflects its medium-term growth and profitability potential. We reiterate a Neutral rating on the stock with a TP of INR95 (based on 2.5x Sep’28E BVPS).
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