Why Jefferies sees limited upside in Bajaj Housing Finance despite its fast-growing loan book

Bajaj Housing Finance’s loan book may expand faster than most large rivals, but Jefferies says investors have already paid for much of that growth. The brokerage initiated coverage with a Hold rating and a Rs 92 price target, implying just 9% upside from its reference price of Rs 84.29.

“Premium valuations at 2.6x Mar-27 BV cap the upside,” Jefferies analysts Bhaskar Basu, Kamal Mulchandani and Prakhar Sharma said in a report.

The valuation is the central constraint in an otherwise robust investment case. Jefferies forecasts a 23% compound annual growth rate in assets under management over FY26-FY29 and 20% earnings-per-share growth over the same period. It also expects Bajaj Housing to maintain a return on assets of about 2% and lift its return on equity to 13.6% by FY29.

Still, the housing financier trades at 2.6 times estimated March 2027 book value and about 24 times projected FY27 earnings, a premium to most housing finance companies, including smaller affordable-housing lenders.

While its scale, growth and asset quality justify a premium, “scope for further re-rating seems limited” given an expected return on equity of 13%-14% through FY29, Jefferies said. Its Rs 92 target is based on 2.4 times estimated September 2028 book value, broadly in line with affordable housing financiers offering similar growth.

Also Read | Bajaj Housing Finance Q1 Results: Net profit jumps 23% YoY to Rs 715 crore, AUM surges 24%

Bajaj Housing Finance share target price

The brokerage’s scenario analysis underscores the risk-reward constraint. Its upside case values the shares at Rs 103, or 22% above the reference price, assuming 24% AUM growth and stronger margins. Its downside case of Rs 73 implies a 13% decline if growth slows and net interest margins are weaker.The caution comes despite Bajaj Housing’s position as India’s second-largest housing finance company. The lender, 86.7% owned by Bajaj Finance, had assets under management of about Rs 1.5 trillion in June. Jefferies expects that figure to reach almost Rs 2.6 trillion by FY29, supported by a 22% CAGR in disbursements.

Growth is already tracking ahead of that trajectory. AUM increased 24% year-on-year (YoY) in the June quarter as disbursements climbed 30%. Management has guided for medium-term AUM growth of 24%-26%, including 21%-23% in FY27.

Jefferies expects 23% growth to be achievable in FY27 and to remain broadly steady through FY29 as the comparison base normalises.

The lender’s operating model supports that expansion. Bajaj Housing focuses on mass affluent and more premium borrowers, with an average home loan ticket size of Rs 4.9 million. Salaried borrowers account for 83% of its home loan customers, helping keep delinquencies low.

Home loans make up 54% of AUM, followed by lease rental discounting at 23%, developer finance at 12% and loans against property at 10%. The lower home loan share relative to several peers allows the company to balance growth with higher yielding products.

Its sourcing network includes relationships with 608 developers and more than 9,800 approved project finance developments, which act as a funnel for housing loans. Competitive funding costs, supported by its parentage and AAA credit rating, also allow the lender to compete with banks in prime home loans and lease rental discounting.

Bajaj Housing is seeking to accelerate growth by raising its share of industry home loan originations to 5% from 2.6%. It is also targeting an increase in non-prime loans to 20% of the home loan book from about 15%.

“The lender’s Sambhav unit, which focuses on emerging and affordable borrowers, is expected to play a larger role. Management is targeting monthly disbursements of more than Rs 6 billion by the end of FY27, compared with Rs 4.5 billion to Rs 4.7 billion in the June quarter.”

That shift can support yields, but margins remain the most immediate earnings headwind.

Bajaj Housing’s spreads have declined by 23 basis points since the start of the rate-cut cycle. Reported yields fell by almost 90 basis points, only partly offset by a 67-basis-point reduction in funding costs.

Management has guided for a 20- to 25-basis-point YoY decline in spreads in FY27 and a further reduction of about 6 to 10 basis points from June-quarter levels. Jefferies expects net interest margins to moderate by 30 basis points in FY27 as new home loans originated at lower rates and competition forces repricing of the existing book.

The balance sheet is also sensitive to rate movements. More than 90% of loans carry floating rates, while 35% of liabilities are fixed. That structure means yields can fall faster than borrowing costs during a rate-cut cycle, although an increase in rates could help margins recover.

Operating leverage and low credit costs are expected to absorb part of that pressure. Jefferies forecasts net interest income to grow at a slower 16% CAGR through FY29, compared with 23% AUM growth. Lower operating expenses relative to assets and stable provisions should nevertheless support 20% earnings growth.

Operating expenses as a share of AUM have declined to about 0.8% from roughly 1% over FY22-FY26. Jefferies expects the ratio to fall to 0.64% by FY28 as the benefits of scale and the lender’s digital, branch light model offset investment in new markets and the Sambhav business.

Asset quality remains the strongest part of the franchise. Jefferies described it as “best in class,” with stage-three assets of 0.29% and stage-two assets of 0.32% in June, among the lowest levels across housing-finance peers.

Home loans and lease-rental discounting reported no gross bad loans, while developer finance had negligible stress. Jefferies expects credit costs to remain at about 13 basis points annually over FY27-FY29, compared with 17 basis points in FY26.

The combination of fast growth, low credit costs and operating efficiency makes Bajaj Housing a high-quality franchise. But its returns remain below those of some peers trading at much lower valuations, weakening the case for further multiple expansion.

Jefferies identified stronger loan growth and higher interest rates that lift margins as the main upside risks. Slower housing demand, intense competition, balance-transfer pressure, deeper margin compression, and stress in developer finance or loans against property are the key downside risks.