Shares of Bajaj Housing Finance Ltd faced a steep decline, dropping 4.12% to ₹144.40 in early trading on October 7, making it the top loser of the hour. The drop came shortly after brokerage firm HSBC initiated coverage on the recently listed housing finance arm of Bajaj Finance Ltd with a “reduce” rating and set a price target of ₹110, indicating a potential downside of 27% from Thursday’s closing.
HSBC’s Key Concerns and Outlook
- Valuations and Growth Expectations: HSBC highlighted that the current valuation of Bajaj Housing Finance, at 5.5 times its FY26 price-to-book ratio and 44 times its FY26 price-to-earnings ratio, indicates steep growth expectations in Assets Under Management (AUM) and earnings.
- AUM Growth: In the September quarter, the company’s AUM crossed ₹1 lakh crore, representing a 26% growth from last year. However, HSBC believes the Return on Assets (RoA) for Bajaj Housing Finance is at its peak and anticipates a slowdown in Earnings per Share (EPS) growth due to a potential dip in AUM growth, Net Interest Margins (NIMs) pressure, and normalized credit costs.
Threats to Valuation
- Projected Return on Equity (RoE): HSBC projects an RoE of 14.6% for Bajaj Housing Finance, which is lower than the implied valuation of a 17% RoE and 10% long-term growth.
- Comparison with Peers: The brokerage sees a competitive disadvantage when compared to larger NBFC peers with higher RoE, a stable growth outlook, and a steep valuation discount.
Potential Upsides and Risks
HSBC pointed out some upside risks that could potentially mitigate the pressure on Bajaj Housing Finance’s valuation:
- Lower Credit Costs: A reduction in credit costs could help stabilize the company’s financials.
- Operating Leverage: Faster realization of operating leverage could positively impact profitability.
- NIM Compression: A minimal impact on NIMs, provided that the cost of funds moderates quickly, may also present an upside.
Current Market Sentiment
The negative sentiment around the stock stems from the brokerage’s view that the valuations imply overly optimistic growth projections and that the company may face challenges in maintaining its current pace of growth in earnings and returns.
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