Jio Financial Services vs Bajaj Finance: Which stock to pick for long term?

Jio Financial Services (JFS), which was demerged from Reliance Industries Ltd (RIL), was listed on the Indian stock exchanges on August 21, 2023. With a market capitalisation of ₹1.68 lakh crore at listing, the firm was already the 33rd most valuable company in India and 3rd largest NBFC after Bajaj twins - Bajaj Finance and Bajaj Finserv.

As a new entrant in the NBFC space with such a high valuation, does the firm pose a challenge to already established firm Bajaj Finance? Let's see between Jio Financial Services and Bajaj Finance, which stock offers better long-term investment opportunities.

Stock Price Trend

Since Jio Financial Services was just listed this Monday, there is not much data available to analyse. But for this week, after a decent debut, shares of JFS have consistently hit 5 percent lower circuit for 4 straight sessions from August 21-24 on the back of profit booking. However, it rose a little over a percent on the last day of the week today, August 25.

The stock listed at ₹265 on the BSE and ₹262 on the NSE, just a little higher than its discovered price of ₹261.85 after the special pre-open session held on July 20, 2023. Since listing, the stock has shed over 18 percent in just 1 week.

According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the selling pressure on the stock comes from institutions that have to exit from the stock before it is removed from the indices. Further weakness in the stock will open up opportunities for long-term retail investors to buy the stock, he added.

Since, for the first 10 days post the listing, the stock will trade in the T Group segment on both BSE and NSE, the upper and lower circuit limit of the stock would be limited to 5 percent, restricting any major movement in the scrip. This also means that shares can be traded only on a compulsory delivery basis and intraday trades will not be possible. An investor cannot buy and sell shares of JFS on the same day, or before the shares are credited to the demat account. In that case, the order will be rejected.

On the other hand, Bajaj Finance has been flat but in the red in the last 1 year, down a little over 1 percent. However, in 2023 YTD, it has gained over 9 percent, giving positive returns in 5 of the 8 months so far in this current calendar year.

Earnings

In the June quarter (Q1FY24), the demerged entity of Reliance Industries said that its consolidated net profit after tax stood at ₹331.92 crore on a total income of ₹414.13 crore.

On a standalone basis, net profit for the quarter came in at ₹145.47 crore and total income at ₹214.57 crore.

Meanwhile, in Q1FY24, Bajaj Finance reported a 32 percent year-on-year rise in net profit at ₹3,437 crore versus ₹2,596 crore in the same quarter last year. Its net interest income (NII) for the quarter also rose 26 percent YoY to ₹8,398 crore compared with ₹6,640 crore in the corresponding quarter last year. New loans booked were up 34 percent to 99.4 lakh in the June quarter compared with 74.2 lakh in the year-ago quarter. This was the highest-ever new loan in a quarter.

Which stock has better long-term investment opportunities?

Jignesh Shial, Director - Research and Head of BFSI Sector at InCred Capital, has picked Bajaj Finance over Jio Financial Services.

We will choose Bajaj Finance over Jio Financial Services due to BAF’s experienced management, wide reach and process-driven lending approach. The company already has an AUM of ₹2.5 lakh crore and has a target of achieving an AUM of ₹4tn by FY25F which we believe is an achievable target. The company already has customer franchises of more than 600 crore with cross-sell franchises of more than 50 percent. BAF makes an ROA of 4.5 percent and RoE of 23-25 percent which is probably highest among large lenders. JIO has a decent capital base, however, has to demonstrate its growth and expansion plan post which, we can take a call about its profitability.

Suman Bannerjee, CIO, Hedonova, a US-based hedge fund, also likes Bajaj Finance between the two.

I think Bajaj Finance is a good option for the long term. It's been around for a while and has done well. It offers a variety of financial services which is a positive sign. While Jio Financial Services has potential, being newer, it comes with more uncertainties.

In a contrarian view, Vinit Bolinjkar, Head of Research, Ventura Securities, has chosen Jio Financial Services.

Reliance Industries has separated its financial services division, with value of Jio Financial Services at over ₹1,30,000 crore. Jio Financial Services intends to venture into various sectors, including retail lending, asset management in collaboration with BlackRock, insurance, and digital payments. This move is poised to disrupt the financial services sector, particularly affecting significant players like Bajaj Finance.

Despite being a relatively young company founded in 2016, Jio Financial Services has experienced rapid growth.

It's worth noting that Jio Financial Services is trading at a P/B of 1.6x, while Bajaj Finance is trading at a significantly higher P/B ratio of 7.5x.

The NBFC retail sector's assets under management (AUM) were approximately ₹14 lakh crore as of March 2023. It is projected to grow at a faster rate of 18-20 percent in FY24, compared to the previous estimate of 12-14 percent. In the last fiscal year, NBFC-retail AUM expanded by a robust 26 percent, primarily due to a 44 percent increase in unsecured loans with an anticipated 10-12 percent growth in infrastructure and other wholesale loans.

Unsecured loans have shown a consistent growth rate of 27 percent over the past five years, while secured loans grew at 11 percent during the same period. Unsecured loans are expected to continue driving growth in the current fiscal year.

InCred Equities: The brokerage is bullish on both stocks.

JFS can opt for a wide variety of financial service businesses including the lending business, digital broking, insurance, mutual funds, payments, etc. However, we do not remain alarmed by the threat for existing players as we believe loan origination through an existing set of customers is important however other factors such as cost of funds, appropriate risk assessment as well as prudent recovery mechanism also play an important role for the success of a lender.

Meanwhile, for Bajaj Finance, the brokerage has an ‘add’ call on the stock with a target price of ₹9,000, indicating an upside of 26 percent. BAF is a pure-play retail lending franchise equipped with a diversified funding mix and a strong capital base. The stock is currently trading at ~5.5x BV/24x EPS for FY24F (PEG ratio >1), offering an attractive risk-reward ratio, said the brokerage.

"An elevated mortgage portfolio coupled with competitive pricing will keep the margin trajectory for BAF under check, but a gradual easing of excess liquidity can deliver margin surprise. However, we believe improving operating leverage along with low credit cost remains key to profitability.

We are building in 25 percent CAGR in PAT for FY23-26F with best-in-class RoA of 4.5 percent and RoE of 24.5 percent for FY24F/25F," it forecasted.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.