Bajaj Finance (BAF) can become the first non-bank lender to launch a credit card if RBI approves. According to brokerage house Jefferies, the NBFC has a huge potential to capitalize on the credit card opportunity.
This would enable BAF to take the product to deeper markets as against the Top-100 towns where it sells cards of RBL Bank/ DBS Bank and where the majority of players operate, noted the brokerage.
The brokerage predicts that if the firm achieves even 20-40 percent cross-sell to its non-delinquent client base of 40 million and even at lower transaction values, it could make around ₹900-1,700 crore in profit in 3 years.
This is just 5-10 percent of FY25E profit and would add more growth drivers," added Jefferies.
On the back of this massive potential opportunity, the brokerage has raised its target price for the stock to ₹8000 from ₹7,300 earlier, while maintaining a 'hold' rating on the NBFC.
The brokerage remains confident that Bajaj Finance's growth will continue to support its premium valuation. Upside can also arise from stronger than expected growth in consumer durable and rural financing business, and a further improvement in operating efficiencies and reduction in cost ratios, it said.
"BAF continues to deliver stronger than peer-group growth as well as profitability. Moreover, even if there is some moderation in NIMs due to a rise in funding costs, it could get compensated by the potential for operating efficiencies. These would support its premium valuations," Jefferies said in the report.
The brokerage has listed 3 reasons why credit cards would be a great opportunity for the firm:
1) Bajaj Finance can leverage its existing franchise to build on its own credit card business: As per the brokerage, India has 80 million credit cards and is much less penetrated than larger markets. If Bajaj Finance gets approval to foray here, it would be able to leverage its network of over 3,500 branches, 140k merchant relationships and 60 million customers to ramp up, stated Jefferies. Hence, an in-house credit card programme can expand the opportunity set to deeper markets where BAF is already present, highlighted Jefferies.
2) Sizing the opportunity: While BAF is targeting to double loans in 3 years, approval to roll out credit cards will add the profitable product to the suite, pointed out the brokerage. With 60 million customers of which 40 million aren't delinquent, if it can cross-sell cards to 20-40 percent of non-delinquent users and even with 40 percent lower transaction value and loan/card, it could do ₹17,000-35,000 crore in loans, calculated Jefferies. At 5 percent ROA (lower than 7 percent for SBI Cards now), it could drive ₹900-1700 crore in profit which would be 5-10 percent of our FY25 estimate and could be a long-term growth driver for BAF, added the brokerage.
3) Credit card market would add a new leg of the profit pool and deepen client engagement: As per Jefferies, the current credit card partnerships for BAF are primarily sourcing arrangements and it doesn’t get upsides from growth in transactions and EMI products, however, this could change if it launched its own credit card. But it is important for BAF to invest in platform building, expand partnerships, spend on reward programmes and design products for a wider- set of retail customers and corporates, it noted. Its biggest challenge would be the absence of bank-type customer relationships, cautioned the brokerage.
On the back of this potential opportunity, Jefferies also raised the earnings outlook for the stock. It sees a 28 percent CAGR in profit over FY23-25 (FY23 should grow fast on a low base). Strong loan book growth, driven by a higher-yielding consumer durable
loan book and rural financing, strong new customer acquisition and fast-growing cross-sell-based franchise and stable margins and asset quality are key catalysts that will drive the growth in the NBFC, noted the brokerage.
It also has listed 3 scenarios for the NBFC with different target potentials depending on different trends.
Base Case: In this case, the target price remains ₹8,000, indicating a potential upside of around 10 percent. Here are the conditions posited by Jefferies For this case to be true: 1) loan growth at 27 percent over FY23-25E, 2) NIMs of 10.5 percent in FY23-25E, and 3) Credit cost at 1.7 percent over FY23-25E.
Bull Case: In this case, the target price is ₹9,200, indicating a potential upside of around 26 percent. Here are the conditions posited by Jefferies For this case to be true: 1) loan growth at 30 percent over FY23-25E, 2) NIMs of 10.9 percent in FY23-25E, and 3) Credit cost at 1.5 percent over FY23-25E.
Bear Case: In this case, the target price is at ₹6,730, indicating a potential downside of around 8 percent. Here are the conditions posited by Jefferies For this case to be true: 1) loan growth at 24 percent over FY23-25E, 2) NIMs of 10.1 percent in FY23-25E, and 3) Credit cost at 2.1 percent over FY23-25E.
BAF is a diversified non-bank finance company with a wide portfolio of products across Consumer, SME and Commercial lending. Bajaj Finance is a pioneer in introducing interest-free EMI financing options in more than 50 categories, ranging from consumer durables to lifestyle products to groceries. The stock has been flat in the last 1 year and risen 10 percent in 2022 YTD.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
