Axis Securities has reiterated a BUY call on Bajaj Finance Ltd., assigning a target price of Rs 1,160, implying an upside of ~25% from current levels. Bajaj Finance is entering a structurally stronger growth phase, supported by improving asset quality, disciplined underwriting, and a pivot toward high-growth segments such as gold loans, CVs, and tractors. Despite near-term moderation in MSME and captive auto financing, the company’s long-term trajectory remains intact, with AUM expected to grow at 22–24% annually. Margin compression appears manageable, while declining credit costs and AI-led operational efficiencies are set to drive profitability. With a projected earnings CAGR of 27% through FY28 and RoA sustaining above 4.4%, Bajaj Finance continues to reinforce its position as a high-quality compounding franchise.

Investment Thesis: Scaling with Precision and Technological Edge

Bajaj Finance is transitioning into a phase of calibrated expansion, where growth is not merely volume-driven but increasingly efficiency-led. The company’s strategic emphasis on FINAI—its AI-led transformation platform—signals a decisive shift toward scalable, technology-driven operations. This transformation is expected to unlock productivity gains, optimize cost structures, and enhance customer engagement.

The franchise continues to outperform system-level growth, gaining market share consistently. For every incremental Rs 1 trillion in AUM, Bajaj Finance captures ~25 basis points of additional share, reflecting its ability to grow nearly twice as fast as the broader financial system.

Asset Quality Inflection: Entering a Favorable Cycle

Asset quality trends are turning decisively positive, with sequential improvements across key delinquency buckets. The company reported lower GNPA and NNPA levels at 1.01% and 0.41%, respectively, reflecting disciplined underwriting and portfolio recalibration.

Credit costs are expected to moderate to 1.45–1.6% in FY26, with further normalization likely thereafter. This improvement is supported by the gradual wind-down of the higher-risk captive financing book and stabilization in the MSME segment.

Additionally, management’s conservative provisioning strategy—highlighted by strengthened PCR levels—provides a robust buffer against potential macro shocks. The bottom-up, product-level ECL framework ensures that risk assessment remains dynamic and responsive.

Growth Engines: New Segments Driving the Next Leg

While legacy segments such as MSME and auto financing have seen temporary moderation, emerging verticals are rapidly gaining traction. Gold loans, microfinance, CVs, and tractors are now key incremental growth drivers.

Gold loan portfolio expected to expand from ~3.5% to ~5% of total mix
CV & tractor segments clocking triple-digit growth on a low base
MSME expected to rebound to double-digit growth from FY27

Overall AUM growth is projected at 22–24% for FY27, underpinned by both legacy stabilization and new segment scaling.

Operational Performance: Strong Momentum with Controlled Costs

Bajaj Finance delivered a resilient operational performance in Q4FY26.

AUM grew 22% YoY to Rs 5,100 billion
Net Interest Income rose 20% YoY to Rs 117.8 billion
Net profit increased 22% YoY to Rs 55.5 billion

However, PPOP growth marginally missed expectations, reflecting elevated operating expenses amid ongoing investments.

Below is a snapshot of key quarterly metrics:

Margins remained stable despite a slight contraction in NIM to 9.48%, supported by declining cost of funds.

Profitability Outlook: Earnings to Outpace Balance Sheet Growth

The company is poised to deliver a robust earnings CAGR of ~27% between FY26 and FY28. This acceleration will be driven by:

Operating leverage benefits
AI-led cost efficiencies
Declining credit costs

Return metrics remain industry-leading, with RoA expected at 4.4–4.5% and RoE at 19–21% over FY27–FY28.

Importantly, management expects earnings growth to outpace AUM expansion, indicating improving profitability per unit of asset deployed.

FINAI Transformation: The Structural Differentiator

FINAI is emerging as Bajaj Finance’s most critical long-term moat. The company is rapidly scaling its AI capabilities:

AI workforce expected to grow from 203 to 363 by June 2027
Deployment of 800+ autonomous AI agents across functions
AI-driven call centers operating at one-third the cost of human agents

This transformation is not merely incremental—it is structural, enabling scalable growth with lower marginal costs.

Valuation Framework and Target Levels

The stock currently trades at ~3.6x FY28E ABV, below its historical premium range. Axis Securities values the company at 4.5x ABV, reflecting confidence in sustained growth and superior return ratios.

Target Price: Rs 1,160
Current Price: Rs 930
Upside Potential: ~25%

Key Risks to Monitor

Despite a strong outlook, certain risks could temper performance:

Slower-than-expected credit growth amid macro uncertainty

Execution challenges in scaling new business verticals

Behavioral risks from new-to-credit customer cohorts

Any deviation in asset quality trends could also impact profitability projections.

Final Word: A High-Quality Compounder with Reinforced Growth Drivers

Bajaj Finance remains one of the most compelling stories in India’s NBFC space. With a rare combination of growth visibility, improving asset quality, and technological innovation, the company is well-positioned to sustain its premium valuation over the medium term.
The BUY recommendation reflects confidence in its ability to compound earnings while maintaining industry-leading return ratios.