November 2, 2024

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Bajaj Housing Finance shares stare at 27% downside! ‘Reduce’ exposure, says HSBC

Bajaj Housing Finance shares stare at 27% downside! ‘Reduce’ exposure, says HSBC

Foreign brokerage HSBC has initiated coverage on the recent debutant Bajaj Housing Finance Ltd with a ‘Reduce’ rating, saying the risk-reward is unreasonable as the housing finance company’s prevailing valuation implies steep expectations in terms of earnings growth and asset under management.

HSBC suggested a target price of Rs 110 on Bajaj Housing Finance. Apart from an earnings slowdown, HSBC sees two other threats to Bajaj Housing Finance’s current valuations. As per the Gordon Growth model, Bajaj Housing Finance’s current valuation implies a 10 per cent long-term growth and 17 per cent return on equity (ROE). Besides, NBFC peers with higher ROE, stable growth outlook and at a steep valuation discount are better alternatives, HSBC said.

“We use a Gordon growth model to value Bajaj Housing Finance. Our TP of Rs 110 implies 4x FY26e PB and 27 per cent downside from current market price. Initiate at Reduce rating,” it said.

The HFC stock was trading 0.4 per cent lower at Rs 150 apiece on BSE. Earlier today, Bajaj Housing Finance said its assets under management (AUM) crossed Rs 1,00,000 crore in the second quarter of FY25. The AUM grew 26 per cent to Rs 1,02,550 crore as of September 30. This is against Rs 81,215 crore as on September 30, 2023. The AUM in Q2FY25 grew Rs 5,480 crore in value terms, in line with the previous two quarters, the HFC said.

At 44 times FY26 PE, HSBC believes the market is valuing Bajaj Housing Finance for its strong AUM growth performance. This is driven by the 41 per cent CAGR in its non-home loan (non-HL) segment (loan against property, developer finance, lease rental discounting, etc.) while its home loan (HL) segment grew at 30 per cent CAGR in FY21-24.

“In 1QFY25, HL growth moderated to 25 per cent YoY. Further, the share of housing-related loans required to maintain the HFC license is 61 per cent, versus a minimum requirement of 60 per cent. Hence, growth in non-HL would gradually converge to the level of growth in HL, in our view. Further, while the growth in HL would still be higher than the System, further acceleration would be challenging. We estimate AUM growth to slow to c26 per cent CAGR over FY24-27e,” it said.

HSBC believes there could be several pressures on RoA that may materialise going ahead: The 2.4 per cent RoA as of FY24 was on the back of an optimised AUM mix, operating leverage and muted credit costs. But margins would likely compress, and credit costs would normalise going ahead, HSBC said.

“Operating leverage would not be enough to offset this pressure and RoA would compress as well. The core-RoE of prime home loans (58 per cent of AUM) is 11-12 per cent. With diversification, a RoE of 13-14 per cent is sustainable. Overall, we expect EPS growth of c17 per cent over FY24-27e compared to 41 per cent over FY21-24,” it said.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

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