Bajaj Finance, one of India’s leading non-banking financial companies (NBFCs), witnessed a significant stock price drop of around 4% after releasing its Q1FY26 results. Investors have been closely watching these results and the management commentary to understand the reasons behind the decline and the company’s future prospects. This article provides a detailed analysis of Bajaj Finance’s Q1FY26 earnings, the factors influencing investor sentiment, and the strategic direction laid out by the company.
Management Changes and Stability
The quarter began with an update on management churn, which added some uncertainty to investor sentiment. Earlier in Q4FY25, Mr. Anup Shah was appointed as the MD & CEO, but he resigned for personal reasons shortly afterward. The company has clarified that Mr. Rajeev Jain will continue as MD & CEO at least until March 31, 2028, providing some stability to the leadership. This clarity is important for investor confidence, given the prominent role of management in steering the company through challenging times.
Strong Asset Under Management (AUM) Growth
Bajaj Finance reported a healthy 25% growth in Assets Under Management (AUM) in Q1FY26, equivalent to an addition of approximately ₹25,000 crore. This growth is a positive indicator of the company’s expanding customer base and its ability to scale its financing operations. The detailed segment-wise analysis reveals:
- Mortgages grew by 24%, led by sizable increases in home loans (20%), loan against property (LAP) at 31%, lease rental discounting at 26%, and developer finance at 32%.
- Urban consumer loans and MSME lending each witnessed about 30% growth.
- However, the two-wheeler and three-wheeler portfolios showed a 20% degrowth due to the rundown of legacy portfolios with elevated credit losses and provisioning.
Customer Base Expansion and Cross-Selling Strength
On the customer front, Bajaj Finance continues to expand at a robust pace. The customer base grew from 88 million to 106 million on a year-on-year basis, with 4.69 million new customers added in just Q1FY26. Cross-selling efforts are also paying off, with ratios improving sequentially, indicating higher penetration of multiple products to existing customers. This diversification supports sustainable growth beyond just loan disbursals.
Elevated Credit Costs and Non-Performing Assets (NPA) Concerns
One of the key reasons behind the stock’s negative reaction is the elevated credit costs and rising NPAs, especially in the MSME and two/three-wheeler segments. The management openly acknowledged stress in certain areas:
- MSME lending is facing some stress, particularly in Karnataka, where political risk has caused the company to cut down business by 30-40%.
- The legacy two-wheeler and three-wheeler book is being run down due to high credit losses and provisions. This rundown is expected to complete by March 2026, after which credit costs should improve.
- Sequentially, gross NPAs increased slightly from 0.96% to 1.03%, still within long-term guidance but a source of concern.
- Bajaj Finance is also taking steps to reduce over-leveraging by customers with multiple loans, following regulatory guidelines for microfinance and other product verticals.
Despite these challenges, the overall credit cost remains manageable with NPAs under control compared to peers.
Profitability Metrics and Cost Management
On the profitability side, Bajaj Finance showed:
- Net Interest Income (NII) growth of 22%, a strong indicator of core lending profitability.
- Return on Assets (ROA) stands steady at around 4.5%.
- Return on Equity (ROE) remains robust at around 19-20%, considered healthy in the NBFC industry.
- The cost-to-income ratio remained largely flat on a Y-o-Y basis but should see improvement going forward through AI-driven productivity enhancements.
- The company is shifting focus toward low-cost funding sources like Non-Convertible Debentures (NCDs) as fixed deposit renewal rates gradually decline, optimizing the cost of funds expected around 7.6-7.65% in FY26.
Business Segment Challenges and Strategic Responses
- The mortgage segment remains strong but faced some headwinds with soft real estate demand and competitive pricing.
- In Bajaj Housing Finance, guidance was revised down marginally due to softer demand and pricing pressure but remains positive over the medium term.
- Legacy two-wheeler portfolio issues, including elevated credit costs, are being managed actively with run-down plans.
- The company is emphasizing risk management and underwriting quality across all product lines to ensure profitable, high-quality growth.
- New segment explorations include personal loans, gold loans, microfinance, and green financing areas like solar, EV financing, and corporate leasing.
Long-Term Growth and Valuation Considerations
Despite short-term pressures, Bajaj Finance maintains a strong long-term growth story:
- Projected addition of 14 to 16 million new customers in FY26.
- Plans to disburse over 50 million new loans in FY26.
- Focus on profitable, quality growth with targeted market share gains in retail financial products.
- Valuation stands at approximately 6.1x Price to Book on current levels compared to a 3-year median of around 7.5x. While the stock is somewhat expensive, Bajaj Finance’s underwriting quality and consistent growth justify a premium over peers.
- Post-Covid, an increase in NBFC listings and supply has put some pressure on valuations, but sustained growth and improving credit costs could help re-rate the stock positively.
What Led to the Bajaj Finance Stock Crash?
Several factors combined to cause the stock to fall post-results:
- Management uncertainties due to CEO changes.
- Elevated credit cost pressures and incremental provisioning, especially in two/three-wheelers and MSME segments.
- Slower growth outlook and cautious commentary from Bajaj Housing Finance regarding FY26.
- Competitive pressures in mortgage and personal loan pricing.
- Increased supply of NBFC stocks post-Covid IPO boom creating selling pressure.
- General market sensitivity to rising NPAs and credit costs within NBFCs.
What Should Investors Watch Going Forward?
Investors should closely monitor:
- Quarterly trends in NPAs and credit costs, particularly in MSME and legacy vehicle financing.
- Progress on rundown of stressed two/three-wheeler portfolio by March 2026.
- Improvement in credit cost metrics post-run down and impact of regulatory changes on multi-loan customers.
- Growth and profitability trends in newer segments like personal loans and green finance.
- Execution of cost reduction plans driven by AI and distribution expansion.
- Management stability and clarity on succession post-2028.
Long-term, the core story around Bajaj Finance’s strong customer base, conservative underwriting, and diversified product portfolio remains intact despite near-term headwinds.