Foreign brokerage HSBC has began coverage on the new debutant Bajaj Housing Finance Ltd with a 'Reduce' rating, stating that the risk-reward is unsustainable given the home finance company's current value, which suggests high expectations for profits growth and assets under management. 

HSBC indicated a target price of Rs 110 for Bajaj Housing Finance. Aside from an earnings downturn, HSBC sees two potential risks to Bajaj Housing Finance's present values.  According to the Gordon Growth model, Bajaj Housing Finance's present value indicates 10% long-term growth and a 17% return on equity (ROE). Furthermore, HSBC believes that NBFC peers with greater ROE, a stable growth outlook, and a significant valuation discount are superior choices. 

"We employ the Gordon growth model to assess Bajaj Housing Finance. Our target price of Rs 110 is 4x FY26e PB and 27% lower than the current market price. "Begin at a Reduce rating," it suggested.

On the BSE, HFC stocks were trading 0.4% lower at Rs 150 each. Earlier today, Bajaj Housing Finance said that its assets under management (AUM) exceeded Rs 1,00,000 crore in the second quarter of FY25. The AUM increased by 26% to Rs 1,02,550 crore as of September 30. This compares to Rs 81,215 crore as of September 30, 2023. According to the HFC, the AUM increased by Rs 5,480 crore in value terms in Q2FY25, as it had in the preceding two quarters.

HSBC feels that Bajaj Housing Finance is valued at 44 times FY26 PE due to its outstanding AUM growth record. This is fueled by a 41% CAGR in its non-home loan (non-HL) sector (loan against property, developer finance, lease rental discounting, etc.), while its house loan (HL) segment increased at a 30% CAGR in FY21-24.

Furthermore, while HL would still outperform the System, additional acceleration would be difficult. "We expect AUM growth to decrease to around 26% CAGR during FY24-27e," it stated.

HSBC predicts that additional pressures on RoA may emerge in the future: The 2.4 percent RoA as of FY24 was the result of an optimized AUM mix, operating leverage, and low credit costs. However, margins are projected to fall and loan costs will normalize in the future, according to HSBC.

"Operating leverage would be insufficient to counterbalance this strain, and RoA would contract as well. The core RoE of prime home loans (58 percent of AUM) is 11 to 12 percent. Diversification allows for a sustained RoE of 13-14%. Overall, we anticipate EPS growth of around 17% over FY24-27e, compared to 41% during FY21-24," it stated.