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Bernstein begins coverage on Bajaj Finance, IndusInd Bank and Muthoot Finance
In a recent note, global brokerage Bernstein highlighted that the Indian banking sector remains robust, with strong credit growth, benign asset quality and healthy margins continuing to fuel impressive compounding stories.
While large private sector banks are seen as clean composition stories due to their continued deposit market share gains and emerging benefits of scale, niche lenders, typically operating as Non-Banking Financial Companies (NBFCs) and Finance Companies Housing (HFCs), also present equally attractive presentations. composed stories, he noted.
Expanding coverage of India’s financial sector, the brokerage initiated coverage on three stocks – Bajaj Finance (BAF) with Market-Perform rating; IndusInd Bank (IIB), and Muthoot Finance with superior performance ratings.
According to the brokerage, large segments with a healthy credit demand that is not satisfied by traditional banking products and niche lenders with innovative credit products and business models adapted to these segments have proven to be a perfect match. This combination has driven strong NBFC growth (10-year loan CAGR of 14 percent vs. banks <10 percent) to a size that matches 75 percent of private sector banks, while delivering stellar returns to shareholders along the way, he noted. Bernstein is optimistic about niche lenders that are delving deeper into mass market segments through well-established and differentiated operating models.
Although regulatory arbitrage between NBFCs and banks is on the decline, NBFCs that focus on serving niche segments, especially mass market segments, still have a long growth runway thanks to the still low debt penetration in India, mentioned the broker.
Furthermore, he also stated that niche lenders also offer an effective way to keep up with industry trends. A shift from the consumption cycle to an investment cycle in the economy, a slowdown in consumer credit growth even as selected segments focused on the mass market remain attractive, the start of a rate easing cycle (which favors NBFCs versus banks) and greater regulatory scrutiny within the sector, believes Bernstein. He expects the increased intensity of regulatory scrutiny to continue, but sees that smaller, well-established franchises that drive true financial inclusion will be better positioned in this environment.
In short, it prefers NBFCs that serve an attractive segment/sub-segment through a well-established operating model that is distinct from the traditional banking model.
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Bajaj Finance (Market Performance TP: ₹6,800): According to the brokerage, BAF has been a true star in the Indian lending scene, with impeccable execution, but much of that is included in its rich valuations. Enthusiasm for BAF arises from the company’s stellar earnings trajectory (35% EPS CAGR over the decade) thanks to its focus on an attractive and underserved niche in the consumer lending segment. It has shown tremendous execution discipline, delivering over 30% loan book growth over the last decade without any damage to its immaculate asset quality track record.
Management aims to maintain the current level of profitability (ROA of 4.6%-4.8%) and at the same time manage growth of 25-27 percent in the medium term. The broker believes that this would be a challenge even considering BAF’s super execution power.
While BAF anticipates still healthy growth in the future, Bernstein sees room for consensus profit cuts given several headwinds. Weaker growth or lower profitability will lead to an adjustment in valuation multiples which currently imply a high probability of the lender returning to its days of 30%+ EPS growth (30x PE vs. last decade average of 35x) . In short, the company’s business model and execution will remain as strong as ever, but may not be enough to meet very high expectations, he said. Bernstein expects an earnings CAGR of 21 percent (FY24-26) and values BAF at PE (24x FY25E EPS).
IndusInd Bank (Top Performer, TP: ₹1,800): Bernstein sees IndusInd as a quasi-NBFC, given its NBFC-like loan portfolio composition and weak deposit franchise. The bank is well positioned for a potential rate easing cycle and has high exposure to attractive segments (commercial vehicles, microfinance).
“When seen as a niche lender (almost NBFC) that has significant exposure to the vehicle segment (25% of its loan book) and microfinance (>10% of loans and 20% of its profits), it looks attractive against many NBFCs, despite a short-term slowdown, would see a huge benefit from the recovery of the investment cycle, while the microfinance segment would gain from the benefits of economic growth spreading across the income pyramid and the policy focus tilting further. towards the ‘Bharat’ segment (i.e. beyond the urban rich)”, explains Bernstein.
The broker also highlighted that, compared to its banking peers, it is the one that will benefit most from a possible rate cut, given its higher percentage of fixed rate loans on the asset side, as well as a higher percentage of loans/deposits wholesale in its liabilities. side. It expects lower risk from its corporate segment, given its gradual shift towards higher-rated companies and the current benign phase in corporate asset quality. Between FY24 and 26E, Bernstein estimates IIB’s ROE at 15 to 16 percent and loan growth at 18 percent and values it at PBx (1.9x FY25E BVPS).
Muthoot Finance (Top performance, TP: ₹2,000): Bernstein sees a long and bright road ahead for gold lending, a unique segment in India that arises from Indian families’ insatiable love for gold and its use as collateral for loans, and Muthoot is the best option in this segment.
“Muthoot is a pure play gold loan lender with gold loans forming over 80% of its loan book and has the best operating metrics compared to its peers in the segment. It has delivered very healthy returns over the last decade , as it maintains its focus on a product that has very attractive returns and a healthy growth trajectory (even if cyclical)”, he stated.
In the coming years, Bernstein expects the gold lending segment to benefit from healthy gold prices and a slowdown in alternative lending sources such as unsecured digital loans. In the gold loan segment, growth of public sector banks is seen to moderate, given the review of their operational practices, while one of the largest NBFC (IIFL) is expected to register moderate growth, given the recent regulatory action. Healthy growth would mean that the current cyclically elevated valuation multiple will sustain longer than expected by consensus and therefore our Target Price versus consensus higher, he added.
Bernstein also expects an earnings CAGR of 19% (FY24-26E) and values it at PE (15x FY25E EPS).
Disclaimer: The opinions and recommendations made above are those of individual analysts or brokers and not Mint. We advise investors to consult certified experts before making any investment decision.
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