Bajaj Housing Finance will give subpar returns, says Motilal Oswal: Here’s why

Shares of Bajaj Housing Finance Ltd (BHFL) have limited upside and could give subpar returns going forward, Motilal Oswal Financial Services said, initiating coverage on the counter with a neutral rating. Analysts cautioned that moderation in growth and subdued return ratios may limit stock performance despite the lender’s strong franchise and asset quality.

The brokerage expects BHFL’s return on equity (RoE) to remain modest at 12–14% over the medium term, weighed down by stiff competition in the prime home loan market and lower yields compared to banks. At the same time, valuations appear stretched. The stock trades at 3.6x FY27 price-to-book and about 29x FY27 estimated earnings — nearly 60% above its IPO price.

“While BHFL has delivered stellar growth in the past, we believe the combination of high valuations and a moderate RoE profile could result in subpar returns going forward,” the domestic brokerage said in a note dated September 11.

Growth is also likely to cool from the breakneck pace seen in recent years. The company’s assets under management (AUM) expanded at a 29% CAGR over FY20–25, reaching Rs 1.2 lakh crore by June 2025. Motilal Oswal now models AUM and profit after tax rising at 22% CAGR each over FY25–28, as the large balance sheet and rising competition from banks begin to bite.

Net interest margins (NIMs) may face pressure in a declining rate cycle. BHFL’s spreads have already shrunk by around 90 basis points over the past three years, reflecting higher borrowing costs that the company has been unable to fully pass on. However, Motilal Oswal expects NIMs to stay stable near 3.3% over FY26–27 as borrowing costs ease.

Live Events

The brokerage also suggests that non-interest operating income is likely to soften this year. This moderation will be led by lower investment income as FY25 investment income was boosted by surplus capital from the fundraise and higher reinvestment yields, and muted assignment income, as heightened competition is expected to limit loan growth.As for positives, the note said that the housing financier has built a granular and low-risk loan book, with nearly 85% of borrowers being salaried and most having CIBIL scores above 750. Asset quality remains among the best in the industry, with gross NPAs guided at 0.6–0.8% and credit costs at just 15–20 basis points.Motilal Oswal has set a target price of Rs 120 per share, implying an upside of just 7% from the current market price of Rs 112. At about 9:55 am, shares of the company were trading 0.7% higher, an intraday high of Rs 112.95. Bajaj Housing Finance shares have declined over 30% in the last one year.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)

Add as a Reliable and Trusted News Source



_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}