India’s consumer lending giant is front-loading provisions in a bet that pessimism today beats nasty surprises tomorrow. Investors aren’t convinced—yet.
Bajaj Finance delivered a textbook example of financial prudence. Net profit fell 6% year-on-year to Rs 40.7 billion in the December quarter as provisions surged 77%, driven by what Philip Capital describes as an “accelerated ECL provision of Rs 14.06 billion across stages.” Management calls it strengthening the provisioning framework with minimum loss-given-default floors across all businesses. The market calls it a red flag.
That reaction misses the point. “In our view, BAF is well capitalised and has enough liquidity to weather any event risk,” notes Philip Capital, pointing to a tier-1 capital ratio of 20.6% and liquidity reserves of Rs 151 billion. This seems like a company choosing to build higher walls before the storm arrives.
The strategy makes sense given where India’s credit cycle sits. Asset under management growth of 22% year-on-year to Rs 4.84 trillion sounds healthy until you notice the deceleration from the prior quarter, “largely driven by SME and consumer B2C business,” according to Philip Capital. Management guided to 22-23% AUM growth for the full fiscal year—respectable, but down from the breakneck pace of recent years.
Margin Squeeze
However, operating profit rose just 16% to Rs 90.5 billion as operating expenses climbed 25%, outpacing 21% growth in net interest income. Philip Capital flags a one-time labour code provision of Rs 2.65 billion, but the bigger story is structural: “With granular fee income growth at 14% YoY, total income grew more at 19% YoY with opex at 25% YoY.”
Calculated spreads did tick up 10 basis points sequentially to 10.7%, but management expects fiscal 2026 cost of funds at 7.55-7.60%. “To optimize cost of funds, the company is reducing reliance on deposits in FY26,” Philip Capital notes from the conference call.
Growth Reset
The company’s fiscal 2027 outlook requires reading between the lines. Management expects business-to-business segments to grow in the mid-teens while other portfolios hit 20%-plus. Microfinance “will normalise in FY27.” More encouragingly, “new car financing will grow 30%+, used car financing will grow more in 2HFY27.”
Philip Capital highlights management’s guidance for “24-25% PAT growth in FY27” with loan losses to average assets “in the corridor of 1.65%-1.75%…The company is observing improvement in early vintages across all portfolios except MSME,” the brokerage notes.
Valuation Trap
Here’s where things get interesting. Philip Capital cut its December 2027 target price to Rs 1,250 from Rs 1,300, reducing fiscal 2026-28 estimates by 5-7% “for lower spreads.” Yet it maintains a Buy rating, arguing the stock trades at 4.0 times December 2027 book value for a fiscal 2028 return on equity of 21.9%.
That’s not expensive for a franchise that has navigated “multiple cycles and come out with lower than expected credit costs through each,” as Philip Capital puts it. The brokerage emphasizes “a diversified funding base, AAA rating, positive ALM in less than one-year bucket and a high churn book” as compelling arguments.
Track Record Counts
“The hallmark of any credit business is credit cost and risk management,” Philip Capital writes. “The collection architecture of BAF is very granular and efficient.” New technology initiatives add potential growth vectors, though quantifying their impact remains guesswork.
What’s not guesswork is this: Bajaj Finance is choosing to take pain now to avoid worse pain later. “Expect Rs 3-4 billion of additional provisions in FY27,” management told analysts. That cascading impact will maintain higher provision coverage ratios even as the company grows.
The strategy amounts to a bet that markets will eventually reward conservatism over optimism. Given India’s consumer credit market is slowing after years of exuberance, that seems like the right wager. Whether investors have the patience to wait for vindication is another question entirely. At current multiples, seems like the good behavior is already priced in.
