Bernstein initiates coverage on Bajaj Finance, IndusInd Bank, and Muthoot Finance

In a recent note, global brokerage house Bernstein highlighted that the Indian banking sector remains robust with strong credit growth, benign asset quality, and healthy margins, continuing to foster impressive compounding stories.

While large private sector banks are seen as clean compounding stories due to their continuous deposit market share gains and emerging scale benefits, niche lenders, typically operating as Non-Bank Financial Companies (NBFCs) and Housing Finance Companies (HFCs), also present equally compelling compounding stories, it noted.

Expanding coverage of the India financials sector, the brokerage has initiated coverage on three stocks – Bajaj Finance (BAF) with a Market-Perform rating; IndusInd Bank (IIB), and Muthoot Finance with Outperform ratings.

As per the brokerage, large segments with healthy credit demand that is not met by traditional banking products and niche lenders with innovative credit products and business models tailored for these segments have proven to be a perfect match. This combination has driven the NBFCs’ strong growth (10-year loan CAGR of 14 percent vs. banks <10 percent) to a size that is 75 percent of the private sector banks while delivering stellar shareholder returns along the way, it observed. Bernstein is bullish on the niche lenders that are going deeper into the mass market segments through well-established and differentiated operating models.

While the regulatory arbitrage between NBFCs and Banks is declining, NBFCs that focus on catering to niche segments, especially the mass market segments, still have a long growth runway thanks to the still low debt penetration in India, mentioned the brokerage.

Moreover, it also said that niche lenders also offer an effective way to play the trends in the sector. A shift from the consumption to investment cycle in the economy, a slowdown in the consumption credit growth even as select mass market-focused segments remain attractive, the start of a rate easing cycle (that favors NBFCs vs the banks) and the increased regulatory scrutiny within the sector, believes Bernstein. It expects the increased intensity of regulatory scrutiny to continue, but sees the well-established and smaller franchises that drive true financial inclusion to be better positioned in this environment.

In sum, it prefers NBFCs that cater to an attractive segment/sub-segment through a well-established operating model that is distinct from the traditional banking model.

Stocks

Bajaj Finance (Market-Perform TP: ₹6,800): As per the brokerage, BAF has been a true superstar in the Indian lending landscape with flawless execution but much of that is priced into its rich valuations. The ardor for BAF arises from the company’s stellar earnings trajectory (35 percent EPS CAGR over the decade) thanks to its focus on an attractive, underserved niche within the consumer lending segment. It has shown tremendous execution discipline delivering over 30 percent loan book growth over the last decade without any damage to its pristine asset quality track record.

The management aims to maintain the current level of profitability (ROA of 4.6%-4.8%) while managing a growth of 25-27 percent in the medium term. The brokerage believes this would be challenging even considering BAF’s execution superpower.

While BAF sees a still healthy growth ahead, Bernstein sees room for consensus earnings cuts given several headwinds. in. A weaker growth or lower profitability will lead to an adjustment in valuation multiples that currently imply a high probability of the lender returning to its over 30 percent EPS growth days (30x PE vs. past decade’s average of 35x). In sum, the company’s business model and execution will remain as strong as ever, but it might just not be enough to meet the very high expectations, it said. Bernstein expects an earnings CAGR of 21 percent (FY 24-26) and values BAF on PE (24x FY25E EPS).

IndusInd Bank (Outperform, TP: ₹1,800): Bernstein sees IndusInd as a quasi-NBFC given its NBFC-like loan book composition and a 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 viewed as a niche lender (quasi-NBFC) that has significant exposure to vehicles segment (25 percent of its loan book) and microfinance (>10 percent of loans and 20 percent of its profits), it does look attractive vs. many NBFCs. The CV/CE segment, despite a near-term slowdown, would see a big benefit from the investment cycle picking up while the microfinance segment would gain from the benefits of economic growth trickling down the income pyramid and from the policy focus leaning more toward the ‘Bharat’ segment (i.e. beyond the urban affluent),” rationale Bernstein.

The brokerage further pointed out that compared to its banking peers, it stands to benefit the most from an eventual rate cut given its higher share of fixed-rate loans on the assets side as well as a higher share of borrowings/wholesale deposits on its liability side. It expects lower risk from its corporate segment given its gradual shift towards higher-rated corporates and the current benign phase in corporate asset quality. Between FY24-26E, Bernstein estimates IIB’s ROE to be 15-16 percent and a loan growth of 18 percent and values it on PBx (1.9x FY25E BVPS).

Muthoot Finance (Outperform, TP: ₹2,000): Bernstein sees a long and shiny road ahead for gold loans, a unique segment in India arising from Indian households’ insatiable love for gold and its use as collateral for borrowing, and Muthoot is the best play in the segment.

“Muthoot is a pure-play gold loan lender with gold loans forming >80 percent of its loan book and has the best operating metrics vs peers in the segment. It has delivered very healthy returns over the last decade as it maintains its focus on one product that has very attractive returns and a healthy (even if cyclical) growth trajectory,” it said.

Over the next few years, Bernstein expects the gold loan segment to benefit from healthy gold prices and a slowdown in alternate borrowing sources such as digital unsecured loans. Within the gold loan segment, it sees the growth for public sector banks moderating given the review of their operating practices while one of the larger NBFCs (IIFL) is likely to see muted growth given recent regulatory action. The healthy growth would mean that the current cyclically high valuation multiple will sustain for longer than what the consensus expects and hence our higher Target Price vs. consensus, it added.

Bernstein also expects a 19 percent earnings CAGR (FY24-26E) and values it on PE (15x FY25E EPS).

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.