Bajaj Finance sees new earnings cycle as AUM growth and credit costs improve

Investment View and Earnings Cycle

Motilal Oswal Financial Services Limited's July 31, 2026 results update argues that Bajaj Finance has moved beyond earnings normalisation into a phase of structurally higher earnings growth. The broker upgraded the stock to BUY with a target price of Rs 1,300, based on 4.8 times FY28E book value per share.

The thesis rests on a turning credit cycle that should reduce credit costs and lift earnings, simultaneous growth across core lending, digital platforms, gold loans and new businesses, and scope for earnings upgrades and valuation support.

Strong 1QFY27 Operating Performance

Bajaj Finance reported an all-round strong 1QFY27, broadly in line with Motilal Oswal's estimates. PAT rose 28 per cent year-on-year to about Rs 6,080 crore, NII increased 23 per cent to about Rs 12,570 crore, and pre-provision operating profit rose 19 per cent to Rs 10,140 crore.

Credit costs of about Rs 1,990 crore were around 10 per cent below the broker's estimate. Annualised credit costs fell around 10 basis points sequentially to 1.54 per cent, including Rs 296 crore of prudent management and macroeconomic provisions. Adjusted credit costs, excluding these provisions, were about 1.3 per cent.

AUM Growth and Customer Additions

AUM grew 24 per cent year-on-year and 7.2 per cent quarter-on-quarter to Rs 5.47 lakh crore. Rural sales finance and urban sales finance grew 49 per cent and 38 per cent year-on-year, respectively, supported by both organic volumes and higher SKU prices.

MSME growth was subdued at 2 per cent as Bajaj Finance continued portfolio pruning begun in July 2025 under risk-calibration measures. Management expects MSME growth momentum to resume by 3QFY27 as delinquency trends in business loans show early improvement.

New customer additions were about 51 lakh in 1QFY27. Management raised its FY27 customer-addition expectation to 1.8 crore to 2 crore, from 1.5 crore to 1.7 crore previously.

Margins and Asset Quality

Margins remained resilient, with calculated NIM rising about 3 basis points sequentially to 9.51 per cent. The cost of borrowings was stable at 7.4 per cent.

Asset quality also improved, with gross and net NPA at 0.96 per cent and 0.4 per cent, respectively, as of June 2026. Provision coverage on Stage 3 assets was about 60 per cent.

Management said vintage performance across three-, six- and nine-month-on-book cohorts was at or better than pre-Covid levels. However, it will wait another quarter before revising FY27 credit-cost guidance. Motilal Oswal forecasts credit costs of 1.5 per cent in FY27E and 1.45 per cent in FY28E, compared with about 1.9 per cent in FY26 before accelerated ECL provisions.

Growth Initiatives and Management Outlook

Management expects FY27 growth momentum and further asset-quality improvement. Key initiatives and targets include:

• Gold-loan AUM of about Rs 29,000 crore to Rs 31,000 crore and around 2,800 gold-loan branches by the end of FY27.
• Digital platforms facilitating Rs 40,000 crore to Rs 45,000 crore of business in FY27, with a medium-term ambition of Rs 1 lakh crore.
• Launch of two new business lines by January-February 2027.
• Use of AI initiatives to improve underwriting efficiency, customer acquisition and disbursements.

Risks and Constraints

Management highlighted high competition from PSU banks, private banks and NBFCs. It also expects a modest upward bias in funding costs amid geopolitical and liquidity uncertainty, along with continued NIM moderation of around 10 to 15 basis points in FY27.

Estimates and Valuation

Motilal Oswal raised its FY27E and FY28E EPS estimates by 4 per cent and 2 per cent, respectively, reflecting higher AUM growth and lower credit costs.

At the report CMP, Bajaj Finance traded at 3.9 times FY28E price-to-book and about 20 times FY28E P/E. The broker's target price of Rs 1,300 is based on 4.8 times FY28E book value per share.