Bajaj Finance's board has given the green light to a substantial ₹17,500 crore capital infusion, a strategic move aimed at bolstering its financial capabilities and supporting future expansion. This significant capital raise is structured through a combination of an ₹11,700 crore Qualified Institutional Placement (QIP) and a ₹5,800 crore preferential issue of convertible warrants to its promoter, Bajaj Finserv.
Robust Q2 Performance Exceeds Expectations
The capital infusion announcement follows a strong second-quarter business update from Bajaj Finance, India's largest Non-Banking Financial Company (NBFC). The company reported a 26.5% year-on-year growth in its assets under management (AUM), reaching ₹5.85 lakh crore. This performance also represents a 6.9% sequential increase from the previous quarter and surpassed J.P. Morgan's estimate of 24.6% growth.
Despite a delayed start to the festive season, industry checks indicate healthy momentum in consumer durable and sales finance businesses through July and August. The broad-based AUM growth was further supported by stable asset quality across consumer-facing segments and rapid expansion in newer areas like gold loans. New customer additions soared by 7% year-on-year, bringing in 4.4 million new clients and underscoring the strength of Bajaj Finance's customer acquisition platform. The company's deposit base also saw a sequential increase of 1.8% to ₹69,800 crore.
Brokerages Anticipate Upgraded Guidance
With first-half performance comfortably exceeding management's existing targets, J.P. Morgan anticipates that Bajaj Finance will raise its FY27 growth and customer acquisition guidance when it releases its full second-quarter results. Customer additions have already reached 9.52 million against an FY27 target of 15-17 million.
Credit trends also provide comfort, with stable bounce rates and collection efficiency observed despite a challenging macroeconomic environment. This has led J.P. Morgan to expect credit costs to remain broadly stable sequentially. The brokerage has consequently raised its AUM growth estimates by 50-180 basis points for FY27-FY29, projecting FY27 growth at 25.8% (up from 24%). This translates to approximately 1% higher earnings estimates, partially offset by anticipated margin pressures.
Impact of Capital Raise on Estimates and ROE
The capital raise is expected to shift investor focus towards net interest margins (NIMs). Higher wholesale funding costs could pressure NIMs across the NBFC sector, including Bajaj Finance, although the company's use of market instruments like OIS might cushion some impact. J.P. Morgan forecasts a 12-basis-point sequential contraction in NIMs for Q2, reflecting increased borrowing costs, changes in AUM mix, and dividend payment effects.
HSBC Global Research maintained a 'BUY' rating on Bajaj Finance, viewing the capital raise as a positive development. Assuming an issue price of around ₹950 per share, HSBC estimates the infusion could increase the share count by roughly 3%. While this may lead to some near-term dilution, it is expected to strengthen the balance sheet, increase book value per share by about 7.6%, and raise the Tier-1 capital ratio by approximately 170 basis points from its current 20%.
HSBC projects that Return on Equity (ROE) could moderate to around 19-20% during FY27-FY29, compared to earlier estimates of 21-22%. However, concerns over ROE dilution are considered minor, given Bajaj Finance's ability to grow AUM faster than its post-money ROE. Its consistent loan book expansion across market cycles should allow it to effectively deploy the additional capital and gradually rebuild ROE to previous levels.
Strategic Timing for Future Growth
Despite an already strong Tier-1 capital ratio of approximately 20%, HSBC believes the capital raise is strategically timed. Bajaj Finance is aggressively expanding into several newer businesses, including vehicle finance, tractor loans, microfinance, gold loans, and affordable housing, all of which will require significant capital as they scale. A potential acceleration in SME lending over the next year could further increase capital demands.
The fundraise also provides enhanced financial flexibility ahead of an expected leadership transition next year, allowing management to prioritize growth initiatives rather than future capital-raising efforts. HSBC notes that, at current valuations, this transaction is among the less dilutive large-cap financial sector capital raises in India, with sufficient growth opportunities to absorb the additional capital over the medium term.