Bajaj Finserv’s insurance bet fails to impress investors

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The muted response reflects deeper concerns about Bajaj Finserv’s strategic direction. As a diversified financial conglomerate, it has a sprawling presence across lending, broking, mutual funds, and digital marketplaces. Yet, most of its earnings are driven by its flagship lending arm, Bajaj Finance.

The question remains: Does absorbing full control of the insurance businesses enhance shareholder value, or is it another layer of complexity in an already intricate structure? Investors seem sceptical, particularly given the stock’s sustained underperformance over the past three years.

While the buyout gives the Bajaj group complete ownership of the insurance businesses, Bajaj Finserv is only marginally increasing its stake from 74% to 75%. The bulk of the acquisition is structured through its holding company, Bajaj Holdings, and Jamnalal Auto.

Diversified or distracted?

Bajaj’s insurance arms have some of the industry’s strongest solvency ratios—3x and 3.7x—backed by a combined premium base of over ₹40,000 crore. Yet, strong solvency ratios don’t necessarily translate into shareholder value. The bigger question is whether Bajaj Finserv’s sprawling financial empire enhances shareholder returns—or dilutes focus.

Bajaj Finserv has interests spanning housing finance, broking, digital marketplaces, healthcare solutions, mutual funds, and alternative investments. Through Bajaj Finance, it holds a 45.5% stake in housing finance and 51.3% in broking.

Yet, its core earnings remain heavily reliant on its lending arm. This raises a critical question: Are its other ventures value-accretive or merely distractions? History suggests that sharper focus can unlock greater value—Bajaj Finserv itself emerged as a stronger entity after its demerger from Bajaj Auto in 2007. With the recent trend of strategic spin-offs gaining traction, some investors may view its insurance buyout as a step in the opposite direction.

For those bullish on insurance, a pure-play like HDFC Life or SBI Life is a more compelling bet than a diversified entity with multiple business lines. Moreover, despite boasting strong solvency ratios, Bajaj’s insurance arms contribute to a drag on return on equity (ROE), further dampening enthusiasm.

This may explain the market’s tepid reaction to the buyout. Investors remain unconvinced that consolidation within a complex structure will drive meaningful value creation.

Market leader, yet falling behind

Bajaj Finserv’s underperformance is not recent—its stock has consistently lagged the sectoral index for the past three years.

This disconnect is striking given that its lending arm, Bajaj Finance, remains the undisputed leader among non-government non-banking financial companies (NBFCs). With assets under management (AUM) nearing the ₹4 trillion mark as of December 2024, it stands well ahead of its closest peer, Shriram Finance.

The company’s AUM has grown at a remarkable 36% CAGR between FY08 and FY24, with net income keeping pace at 34% CAGR. Operational efficiencies and improved asset quality have fuelled even stronger net profit growth, clocking an impressive 50% CAGR over the same period.

The lender currently holds 2.2% of total credit market share and 2.75% of retail credit, with an ambitious goal of expanding these figures to 3.2–3.5% and 3.8–4.2%, respectively, by FY29. It also aims to more than double its income in the next five years.

Yet, despite its dominance, Bajaj Finance’s stock remains under pressure—partly due to regulatory headwinds that have reshaped the lending landscape.

Navigating regulatory upheaval with resilience

After repeated warnings about the post-pandemic surge in retail lending, the Reserve Bank of India stepped in, increasing risk weights on loans to NBFCs, microfinance, credit cards, and personal loans. By raising capital requirements, the central bank effectively curbed credit growth to these riskier segments.

Bajaj Finserv, however, was better positioned to weather the storm. With less than 30% of its borrowings coming from banks, it remained relatively insulated when liquidity from banks to NBFCs tightened. The recent reversal of these risk weights has now reopened bank credit as a viable funding source, easing some pressure.

On the demand side, Bajaj Finserv’s diversified loan book helped soften the impact of rising stress in retail lending. Its gross non-performing assets (NPAS) inched up only marginally—from 0.95% in December 2023 to 1.12% in December 2024—a manageable increase given the broader industry trends.

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Additionally, during the multi-year monetary tightening cycle that lasted until early last month, Bajaj Finserv’s floating-rate loan structure allowed it to pass on rate hikes more effectively than many competitors. Its deposit base (20% of total borrowings) also helped mitigate the impact of high interest rates. As rates trend lower, the lender stands to benefit more than banks, whose reliance on low-cost CASA deposits limits margin expansion. That said, peers focused on fixed-rate assets may see an even greater advantage in a declining rate environment.

Competition and the digital gap weigh on the stock

Despite its 17-year strong track record—built on cross-selling, a diversified borrower base, and ambitious growth targets—Bajaj Finserv has been losing ground in recent years.

The competitive landscape has intensified, particularly with fintech players capturing over 75% of personal loan sanctions between April and September 2024. Even traditional lenders, including capital-heavy public-sector banks, have aggressively expanded their retail loan portfolios. The entry of new deep-pocketed players like Jio Financial has further dampened sentiment.

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In the credit card segment, regulatory changes have eroded Bajaj Finance’s advantage. The RBI’s decision to allow NBFCs to issue credit cards without banking partners has opened the floodgates for competition, undercutting Bajaj’s existing partnerships with RBL and DBS. The lender has also been losing market share in personal loans, with its AUM growth slowing, and its latest earnings failing to impress.

Adding to concerns, Bajaj Finserv has ventured into lower-yield, cyclical segments like microfinance and vehicle financing. Meanwhile, uncertainty around leadership has also weighed on the stock, as managing director Rajeev Jain’s tenure nears its end.

Another challenge is Bajaj’s lagging digital adoption. While the company brands itself as a fintech, only 60% of its customers transact via its apps, compared to 95% for peers. The RBI’s temporary embargo on its digital lending operations in FY24 further underscored process gaps. 

That said, Bajaj is working to bridge this gap—having addressed regulatory concerns and recently partnered with Bharti Airtel to distribute lending products through the Airtel Thanks app.

The worst may be behind us

The pressures of rising credit costs and stress in retail lending may be nearing their peak, offering some relief for Bajaj Finserv. At the same time, the lender’s venture into EV financing could unlock long-term growth opportunities.

For more such analyses, read Profit Pulse.

Concerns over leadership transition have also eased, with Rajeev Jain reassuring investors that he will remain involved in some capacity. Meanwhile, despite solid business fundamentals, the stock has remained stagnant. But with its valuation now at 4.33 times book value, it appears far more attractive than before.

Ananya Roy is the founder of Credibull Capital, a Sebi-registered investment advisor. X: @ananyaroycfa

Disclosure: The author does not hold any shares of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.