Investors Punish Bajaj Finance Despite Strong Quarterly Performance
Bajaj Finance Ltd witnessed a sharp 8% decline in its stock price on Tuesday, creating waves in the financial markets. This significant drop occurred despite the company reporting healthy growth in its assets under management during the September quarter of FY26. The market reaction highlights growing investor concerns about elevated credit costs that have become the company's Achilles' heel.
Credit Costs Exceed Guidance, MSME Portfolio Under Pressure
On a consolidated basis, Bajaj Finance reported a credit cost of 2.05% in Q2FY26, which represents an increase from the 2.02% recorded in Q1FY26. More importantly, this figure exceeded the company's guided range of 1.85-1.95%, raising red flags among analysts and investors alike.
The primary drivers behind these elevated credit costs were identified as the micro, small and medium enterprises portfolio, which constitutes 11% of the total AUM, and the captive two- and three-wheeler financing segment, accounting for 1.5% of AUM. The MSME segment faced multiple challenges including overleveraging by borrowers, weak business recovery in specific small business pockets, and intense competition from fintech companies.
In response to these asset quality concerns, Bajaj Finance has adopted a more conservative approach by reducing its FY26 AUM growth guidance to 22-23% from the previous 24-25%. This strategic shift prioritizes risk management over aggressive growth, with the company already cutting 25% of its unsecured MSME volumes.
Quarterly Performance Highlights and Growth Segments
Despite the challenges, Bajaj Finance delivered impressive operational metrics in Q2FY26. The company's total AUM grew by 24% year-on-year to reach ₹4.62 trillion, while profits increased by 23% to ₹4,948 crore. The quarter also saw the addition of 4.13 million new customers, with the company booking 12 million loans driven by strong festive demand.
Gold loans emerged as a standout performer, with AUM surging 85% year-on-year. Bajaj Finance is aggressively expanding in this segment, with 1,272 branches now offering gold loans. The company's current gold loan book stands at ₹11,789 crore and is expected to reach ₹16,000 crore by FY26-end, potentially touching ₹35,000-37,000 crore by FY27.
Other segments also showed robust growth: loan against securities increased by 26% year-on-year, commercial lending grew by 27%, and the rural business-to-customer segment expanded by 44%. This diversified business mix provides Bajaj Finance with a less cyclical growth engine.
Market Reaction and Future Outlook
The management's conservative approach, while prudent from a risk perspective, dampened market sentiment and led to earnings downgrades by various brokerages. PL Capital specifically cut its FY26/FY27 earnings-per-share estimates by 4%/5% and warned of a higher credit cost of 2% for FY26.
Asset quality showed some weakening as the gross non-performing asset ratio increased to 1.24% from 1.06% in Q2FY25, while net NPA rose to 0.60% from 0.46%. However, net interest income grew by 22%, and cost efficiency improved with opex-to-net income falling to 32.6%.
Looking ahead, management remains confident of achieving the revised AUM growth target of 22-23% for FY26, supported by strong performance in gold loans, loan against securities, loans against property, and commercial lending. The company expects FY26 credit costs to remain within its guidance range of 185-195 bps and anticipates a material decline in credit cost by FY27.
Despite the recent setback, Bajaj Finance stock has gained around 45% so far this calendar year, supported by steady AUM growth and improving cost efficiency. However, analysts at Emkay Global Financial Services caution that the stock's premium valuation multiple compared to lending peers is likely to narrow given the growth moderation and competitive pressures.
