Noting that its current expensive valuations pose a downside risk to Bajaj Housing Finance, Kotak Institutional Equities has initiated coverage on the stock with a ‘sell’ rating and a target price of Rs 100. This signals a potential downside of 21% in the stock, it said.
“Bajaj Housing Finance trades rich (4.7X book and 39X earnings FY26E), posing a downside risk (21% to our fair value of Rs 100) and drives our ‘sell’ rating,” the domestic brokerage firm said, adding that a high growth runway, parent Bajaj Finance’s exceptional execution track record, and a clean asset quality over the years are the key positives for the firm.
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“Bajaj Housing Finance has reported robust asset quality performance with gross stage 3 of 0.3% in FY24, low non-performing loans (NPLs) in the non-retail segments set it apart from large peers with volatile track record. We expect credit costs to remain moderate at 7-17 bps over FY25-27E,” the brokerage said.
It expects Bajaj Housing Finance to deliver an earnings growth of 25% CAGR (16% EPS CAGR) over FY24-27E on the back of 24% AUM growth, stable margins, lower operating expenses, and inch-up in credit costs. “Recent capital issuance will offset the pressure on cost of borrowings, leading to flat margins, reduce leverage while growth remains strong. Hence, the near-term return on equity (RoE) may remain range-bound at 13-14%, with expectations of mid-teen RoEs over the medium term,” it said.
The housing finance company’s low-risk profile is aided by a focus on the salaried mass affluent segment, and a diversified business mix that includes home loans, lease rental discounting, loan against property, and developer loans, the brokerage said.
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The key risks to Bajaj Housing Finance’s business include effective execution of its business strategies to sustain high growth; risk to net interest margin (NIM) from migration to EBLR or sharp rate movements; and intense competition in the prime segment, it added.
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