DevenChoksey Research has maintained its "ACCUMULATE" rating on Bajaj Finance Ltd. following the company's Q1FY26 earnings announcement, setting a target price of Rs 1,040 per share against the current market price of Rs 933, indicating an 11.5% potential upside. While the non-banking financial company demonstrated resilient core performance with 22.3% year-on-year Net Interest Income growth, emerging stress in unsecured portfolios, particularly MSME and rural segments, has prompted management to implement calibrated risk mitigation strategies including a significant pullback in Karnataka operations.

Financial Performance Delivers Strong Fundamentals Despite Headwinds

Bajaj Finance showcased robust operational metrics in the first quarter of fiscal 2026, with Net Interest Income expanding to Rs 102.3 billion, representing a healthy 22.3% year-on-year increase and 4.3% sequential growth. The company's Assets Under Management (AUM) reached Rs 4.41 trillion, marking a 24.6% annual expansion, though moderating from the previous year's 26.1% growth trajectory.

Pre-Provision Operating Profit demonstrated remarkable resilience, climbing 22.2% annually to Rs 84.87 billion, while net profit sustained its upward momentum with 21.8% year-on-year growth to Rs 47.65 billion. These figures aligned closely with analyst estimates, underscoring the company's ability to maintain earnings consistency despite challenging market conditions.

The company's customer acquisition strategy continued yielding dividends, with 4.7 million new customers added during the quarter, expanding the total franchise to 106.5 million. Management projects adding 14-16 million new customers throughout FY26, reflecting sustained demand across product categories and distribution channels.

Asset Quality Deterioration Signals Industry-Wide Stress

Asset quality metrics revealed emerging stress patterns, with Gross Non-Performing Assets (GNPA) increasing from 0.86% in Q1FY25 to 1.03% in Q1FY26, while Net NPA expanded from 0.38% to 0.50%. Despite this uptick, Bajaj Finance maintains among the industry's lowest delinquency rates, demonstrating superior underwriting standards.

The company's MSME portfolio, valued at Rs 500 billion and entirely unsecured, experienced broad-based stress across 13 of 17 tracked sectors, with three sectors reporting outright contraction. This portfolio includes Rs 150 billion exposure to medical professionals, reflecting the company's calibrated approach to high-yielding segments.

Loan losses and provisions increased substantially to Rs 21.2 billion, representing a 26% year-on-year surge from Rs 16.85 billion in Q1FY25, primarily driven by elevated stress in unsecured lending segments, particularly two-wheeler and three-wheeler financing portfolios.

Strategic Geographical Recalibration Addresses Political Risk

Management implemented significant operational adjustments in Karnataka, reducing business volumes by 40-50% in the state following political developments that disrupted rural verticals. Given Karnataka's 11% contribution to the overall balance sheet, this calibrated pullback demonstrates proactive risk management.

The company exited select product lines in the state while maintaining vigilant monitoring across other geographies. This strategic recalibration reflects management's commitment to preserving portfolio quality over short-term growth metrics.

Geographic expansion continued with the addition of 85 new gold loan branches and four new microfinance institution branches during the quarter, extending the company's presence to 4,192 locations nationwide.

Funding Optimization Drives Margin Resilience

Cost of funds improvement provided operational leverage, declining 20 basis points sequentially to 7.79% in Q1FY26 through strategic refinancing of high-cost debt and accessing incremental borrowings at competitive rates. Management expects further moderation to 7.60-7.65% range for FY26, excluding potential rate cuts.

The company maintained a robust liquidity buffer of approximately Rs 150 billion, ensuring adequate preparedness for near-term obligations while supporting growth initiatives. This prudent treasury management reflects the organization's disciplined approach to balance sheet optimization.

Net Interest Margins contracted slightly to 9.5% from 9.7% in the previous quarter, primarily due to mutual fund deployment timing, though management anticipates 5-10 basis points improvement during FY26 contingent upon monetary policy developments.

Subsidiary Performance Reinforces Diversification Strategy

Bajaj Housing Finance delivered exceptional performance with 21% year-on-year net profit growth while maintaining healthy Return on Assets at 2.3%. Asset quality remained stable, reflecting disciplined underwriting and robust risk management across the housing finance portfolio.

Bajaj Financial Securities demonstrated strong momentum with 37% annual net profit growth and AUM reaching Rs 61 billion. The platform added 77,000 new customers during the quarter, indicating increasing penetration across digital investing and broking services.

Investment Outlook and Target Levels

DevenChoksey Research's valuation framework employs 4.8x March 2027 Adjusted Book Value methodology, resulting in the Rs 1,040 target price. The research house revised FY26E/FY27E Adjusted Book Value estimates by -1.0%/0.2% respectively, incorporating higher AUM growth expectations from proposed GST rate reductions while accounting for elevated provisioning requirements.

Risk Mitigation and Future Trajectory

Management's structured portfolio monitoring through vintage tracking at 3MOB, 6MOB, and 9MOB intervals enables early stress identification and proactive intervention. The company continues offering selective restructuring support to creditworthy customers, balancing risk containment with customer-centric solutions.

Technology-driven productivity enhancements and AI-led analytics support operational efficiency while the diversified product suite and expanding distribution network position the company favorably for long-term structural opportunities across lending, digital ecosystems, and financial services convergence.

Despite near-term headwinds in MSME and auto segments, Bajaj Finance's strong balance sheet, disciplined risk controls, and calibrated business strategy provide the foundation for navigating current challenges while capitalizing on India's evolving financial services landscape.