Bajaj Finance Ltd stock tanked 8% on Tuesday despite clocking healthy growth in assets under management (AUM) in the September quarter (Q2FY26). Elevated credit cost has been its Achilles’ heel, making investors edgy. On a consolidated basis, Bajaj Finance reported a credit cost of 2.05% in Q2FY26 versus 2.02% in Q1FY26 and 2.04% in H1FY26. This was higher than the guided 1.85-1.95%. Credit costs remained higher largely due to micro, small and medium enterprises (11% of AUM) and captive two- and three-wheelers (1.5% of AUM).
Overleveraging by borrowers, weak business recovery in small business pockets and competitive intensity from fintechs hurt the MSME portfolio. However, Bajaj Finance expects FY26 credit cost to remain within its guidance range of 185-195 bps on improving asset quality trends for loans disbursed after February 2025, management said. It expects a material decline in credit cost in FY27.
To maintain asset quality, it lowered its FY26 AUM growth guidance marginally to 22-23% from 24-25%. Here, the company is looking to prioritise risk over growth. It has already cut 25% of its unsecured MSME volumes and sees MSME AUM growth at 10-12% in FY26, versus 18% currently. But management’s conservative approach was a sentiment dampener, leading to earnings downgrades by various brokerages. PL Capital cut its FY26/FY27 earnings-per-share estimates by 4%/5% and warned of a higher credit cost of 2% for FY26.
In Q2FY26, total AUM grew 24% year-on-year to ₹4.62 trillion, profit increased 23% to ₹4,948 crore, and the company added 4.13 million new customers. It booked 12 million loans, riding the strong festive demand. Gold loans did the heavy lifting, with AUM surging 85% year-on-year. Bajaj Finance is aggressively expanding into this business, with 1,272 branches offering gold loans. Gold loans bring in walk-in customers, boost exposure in semi-urban and rural markets, and increase cross-selling opportunities. Currently, it has a gold loan book of ₹11,789 crore, which is expected to hit ₹16,000 crore by the end of FY26 and touch ₹35,000-37,000 crore by FY27.
Diversified growth engine
Loan against securities (LAS) grew 26% year-on-year, while commercial lending grew 27% year-on-year in Q2FY26. Even the rural business-to-customer (B2C) segment grew 44% year-on-year. These businesses give Bajaj Finance a diversified and less cyclical growth engine. Overall, management is confident of achieving 22-23% AUM growth for FY26, aided by gold loans, LAS, loans against property and commercial lending, which should offset the slowdown in MSME loans and mortgages.
Net interest income grew 22%, and cost efficiency improved as opex-to-net income fell to 32.6%. Net interest margin (NIM) was stable at 9.5% (on average AUM) in Q2FY26. It is expected to stay flat, versus the earlier expectation of around a 10 bps expansion in H2FY26. Asset quality weakened slightly as the gross non-performing asset (NPA) ratio increased to 1.24% from 1.06% in Q2FY25, while net NPA rose to 0.60% from 0.46%.
Bajaj Finance stock is up around 45% so far this calendar year, aided by steady AUM growth and improving cost efficiency. The company has a highly diversified business mix, but persisting weakness in select portfolios and/or lower-than-expected AUM growth could weigh on near-term stock performance. Going by estimates of Emkay Global Financial Services, the stock trades at a standalone price-to-book ratio of 5.1 for FY27.
“Against this backdrop of gradual growth moderation and intensified competition putting pressure on growth and yields, we see Bajaj Finance’s premium valuation multiple versus lending peers to likely narrow,” said the Emkay report, dated 11 November.
