The quarter's performance reflects a troubling divergence between topline growth and bottom-line pressure. Whilst net sales grew 5.13% sequentially to ₹21,213.89 crores and posted a robust 17.63% year-on-year expansion, rising interest costs and operational expenses compressed profitability. The company's PAT margin contracted sharply to 19.47% from 24.90% in the previous quarter, marking one of the weakest margin performances in recent quarters.
The market's positive reaction despite deteriorating fundamentals suggests investors may be focusing on the company's resilient topline growth and long-term franchise value. However, the sharp profit decline warrants closer scrutiny of the company's cost structure, asset quality, and competitive positioning in an increasingly challenging operating environment for NBFCs.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | PAT Margin |
|---|---|---|---|---|---|
| Dec'25 | 21,213.89 | +5.13% | 3,977.85 | -18.41% | 19.47% |
| Sep'25 | 20,178.90 | +3.35% | 4,875.36 | +3.74% | 24.90% |
| Jun'25 | 19,523.88 | +5.78% | 4,699.61 | +4.91% | 24.75% |
| Mar'25 | 18,456.85 | +2.34% | 4,479.57 | +5.49% | 25.05% |
| Dec'24 | 18,035.11 | +5.52% | 4,246.54 | +6.17% | 24.43% |
| Sep'24 | 17,091.48 | +6.16% | 3,999.73 | +2.24% | 23.98% |
| Jun'24 | 16,100.05 | — | 3,911.98 | — | 24.84% |
Financial Performance: Margin Compression Overshadows Revenue Growth
Bajaj Finance's Q3 FY26 results revealed a concerning dichotomy between revenue momentum and profitability. Net sales in Q3 FY26 reached an all-time high of ₹21,213.89 crores, representing sequential growth of 5.13% and a healthy 17.63% year-on-year expansion. However, this topline strength failed to translate into bottom-line growth, as consolidated net profit contracted sharply to ₹3,977.85 crores from ₹4,875.36 crores in Q2 FY26, marking an 18.41% quarter-on-quarter decline.
The profit decline was primarily driven by escalating interest costs and operational expenses. Interest expenses in Q3 FY26 surged to ₹7,338.71 crores, up 4.67% from ₹7,011.28 crores in the previous quarter. On a year-on-year basis, interest costs jumped 14.93%, significantly outpacing revenue growth and indicating deteriorating cost of funds. Employee costs also climbed 4.44% sequentially to ₹2,250.13 crores, reflecting the company's continued investments in talent acquisition and retention amid competitive pressures.
The margin compression was stark and unmistakable. PAT margin plummeted to 19.47% in Q3 FY26 from 24.90% in Q2 FY26, a contraction of 543 basis points. Operating margin (excluding other income) also declined to 63.57% from 69.82% in the previous quarter. This represents one of the weakest margin performances in recent years, raising questions about the sustainability of the company's business model in the current interest rate environment.
On a nine-month basis for FY26 (April-December 2025), the company reported net sales of ₹60,916.67 crores, up 19.26% from ₹51,126.64 crores in the corresponding period of FY25. However, consolidated net profit for the nine-month period stood at ₹13,552.82 crores, representing growth of only 7.00% compared to 12.67% profit growth in the same period last year. This deceleration in profit growth relative to revenue expansion underscores the mounting pressure on profitability.
Margin Pressure Alert
The 543 basis point quarter-on-quarter contraction in PAT margin to 19.47% represents one of the sharpest declines in recent history. Rising interest costs (up 4.67% QoQ) and employee expenses (up 4.44% QoQ) are significantly outpacing revenue growth, indicating structural challenges in maintaining profitability in the current environment.
Operational Challenges: Rising Costs Erode Capital Efficiency
Whilst Bajaj Finance maintains a respectable average Return on Equity (ROE) of 18.15%, which reflects strong capital efficiency relative to many financial sector peers, the recent quarter's performance raises concerns about the sustainability of this metric. The company's ROE in Q3 FY26 stood at 17.73%, slightly below the long-term average, suggesting that profitability pressures are beginning to impact returns to shareholders.
The company's leverage position remains elevated, with an average net debt to equity ratio of 3.85 times, characteristic of the NBFC business model but nonetheless representing significant financial risk. This high leverage amplifies the impact of rising interest rates on profitability, as evidenced by the 14.93% year-on-year increase in interest expenses to ₹7,338.71 crores in Q3 FY26. The cost of funds has clearly become a critical headwind, and management's ability to manage this through improved asset-liability management will be crucial.
The company's balance sheet expansion continues unabated, with shareholder funds growing to ₹96,692.87 crores in FY25 from ₹76,695.35 crores in FY24, representing a 26.07% increase. Current liabilities surged to ₹3,70,580.97 crores from ₹3,00,071.58 crores, indicating robust business growth but also highlighting the scale of funding requirements. Investments grew to ₹34,440.84 crores, up 11.53% from the previous year, suggesting the company is diversifying its asset base.
Operating efficiency metrics paint a mixed picture. Whilst the company has demonstrated strong long-term growth with a five-year sales CAGR of 22.69% and EBIT growth of 26.28%, the recent quarter's flat financial trend indicates a potential inflection point. The company's ROCE (Return on Capital Employed) stood at 10.48%, which, whilst positive, lags the ROE figure, suggesting that the company's asset base is growing faster than its ability to generate returns from those assets.
Cost Inflation Concern
Interest expenses have grown 14.93% year-on-year, significantly outpacing net sales growth of 17.63%. This indicates deteriorating spread management and raises questions about the company's pricing power and ability to pass through higher funding costs to borrowers without impacting loan growth.
NBFC Sector Context: Navigating a Challenging Environment
The Indian NBFC sector is currently navigating a complex operating environment characterised by persistent inflation, elevated interest rates, and increasing regulatory scrutiny. Bajaj Finance's Q3 FY26 results reflect many of these sector-wide challenges, particularly the pressure on net interest margins as funding costs remain elevated whilst competitive intensity limits pricing flexibility on the asset side.
The broader NBFC sector delivered a one-year return of 20.78%, outperforming Bajaj Finance's 14.53% return over the same period. This underperformance of 6.25 percentage points suggests that investors are becoming more discriminating within the sector, favouring companies with better asset quality metrics and more stable earnings trajectories. The sector's premium valuation relative to historical averages reflects expectations of continued credit growth, but individual company performance is diverging based on execution capabilities.
Bajaj Finance's market leadership position—as the largest company in the NBFC sector by market capitalisation at ₹5,89,549 crores—provides certain competitive advantages, including better access to capital markets, stronger brand recognition, and economies of scale. However, this leadership position also attracts heightened scrutiny from investors and regulators, and any signs of operational weakness tend to be magnified in market perception.
Sector Dynamics
The NBFC sector's one-year return of 20.78% has outpaced Bajaj Finance's 14.53%, indicating relative underperformance. This divergence reflects investor concerns about the company's margin trajectory and suggests that the market is rewarding NBFCs with more resilient profitability profiles in the current high-interest-rate environment.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| Bajaj Finance | 32.80 | 5.82 | 18.15 | 3.85 | 0.58 |
| Shriram Finance | 20.58 | 3.11 | 14.00 | 3.87 | 0.78 |
| Jio Financial | 105.96 | 1.24 | 1.18 | 0.08 | 0.19 |
| Muthoot Finance | 19.93 | 4.43 | 20.04 | 3.76 | 0.72 |
| Tata Capital | 40.08 | 4.05 | — | 0.00 | — |
| Cholamandalam Inv | 29.61 | 5.53 | 17.68 | 7.23 | 0.12 |
Bajaj Finance trades at a P/E ratio of 32.80 times trailing twelve-month earnings, representing a significant premium to peers such as Shriram Finance (20.58x) and Muthoot Finance (19.93x). This valuation premium of approximately 50-60% relative to comparable NBFCs has historically been justified by superior ROE (18.15% versus peer average of approximately 13%), stronger brand equity, and a more diversified product portfolio. However, the recent profit decline and margin compression challenge the sustainability of this premium valuation.
Valuation Analysis: Premium Multiple Faces Pressure
Bajaj Finance's current valuation metrics suggest the stock is trading at elevated levels relative to both historical norms and peer group comparisons. The stock trades at a P/E ratio of 32.80 times, substantially higher than the NBFC sector average P/E of 22 times, implying a valuation premium of approximately 49%. The price-to-book value ratio of 5.82 times also ranks amongst the highest in the sector, reflecting investor expectations of sustained high returns on equity.
The company's valuation has been categorised as "Very Expensive" by market analysts, having transitioned to this designation from "Expensive" on January 2, 2025. This valuation grade reflects concerns that the current market price of ₹964.75 significantly exceeds intrinsic value based on fundamental metrics. The stock is trading 12.49% below its 52-week high of ₹1,102.45 but remains 22.43% above its 52-week low of ₹788.02, indicating substantial volatility in investor sentiment over the past year.
The EV/EBITDA multiple of 18.89 times and EV/EBIT multiple of 19.25 times are both elevated relative to historical averages, suggesting limited margin of safety at current prices. The PEG ratio of 1.78 indicates that investors are paying ₹1.78 for every unit of expected earnings growth, which is above the typically acceptable threshold of 1.0-1.5 for value-conscious investors. The dividend yield of 0.58% provides minimal income support, with the company having declared a dividend of ₹44 per share with an ex-dividend date of May 30, 2025.
Based on fundamental analysis incorporating the recent earnings disappointment, deteriorating margins, and elevated interest rate environment, a fair value estimate for Bajaj Finance would be in the range of ₹850-900 per share, implying potential downside of 7-12% from current levels. This fair value estimate assumes normalisation of margins to the 22-23% PAT margin range over the next 12-18 months and applies a more conservative P/E multiple of 28-30 times, still at a premium to the sector but reflecting moderated growth expectations.
Shareholding Pattern: Institutional Confidence Remains Steady
The shareholding pattern in Bajaj Finance reveals a stable ownership structure with minimal volatility across investor categories. Promoter holding in Q3 FY26 stood at 54.70%, up marginally by 0.04 percentage points from 54.66% in Q2 FY26. This stable promoter base, led by Bajaj Finserv Limited with a 51.32% stake, provides strategic direction and long-term commitment to the company's growth trajectory.
Foreign Institutional Investor (FII) holdings decreased slightly to 19.34% in Q3 FY26 from 19.48% in the previous quarter, representing a reduction of 0.14 percentage points. However, on a year-on-year basis, FII holdings have increased substantially from 17.77% in Q3 FY25, indicating overall confidence from international investors despite near-term headwinds. The sequential decline may reflect profit-booking following the stock's strong performance in earlier quarters or portfolio rebalancing in response to the disappointing Q3 results.
| Quarter | Promoter | FII | Mutual Funds | Insurance | Other DII |
|---|---|---|---|---|---|
| Dec'25 | 54.70% (+0.04%) | 19.34% (-0.14%) | 9.09% (+0.20%) | 4.24% (-0.04%) | 3.78% (-0.02%) |
| Sep'25 | 54.66% (-0.07%) | 19.48% (+0.19%) | 8.89% (0.00%) | 4.28% (-0.28%) | 3.80% (+0.23%) |
| Jun'25 | 54.73% (0.00%) | 19.29% (+0.38%) | 8.89% (-0.11%) | 4.56% (-0.22%) | 3.57% (-0.06%) |
| Mar'25 | 54.73% (+0.03%) | 18.91% (+1.14%) | 9.00% (-0.52%) | 4.78% (+0.16%) | 3.63% (-0.42%) |
Mutual fund holdings increased to 9.09% in Q3 FY26 from 8.89% in Q2 FY26, representing an addition of 0.20 percentage points. This uptick suggests that domestic institutional investors view the current valuation as presenting accumulation opportunities, potentially anticipating a recovery in profitability metrics in subsequent quarters. The presence of 49 mutual funds holding stakes in the company indicates broad-based interest from the domestic institutional community.
Insurance company holdings declined marginally to 4.24% from 4.28%, whilst other Domestic Institutional Investor (DII) holdings decreased slightly to 3.78% from 3.80%. The combined institutional holding of 36.44% remains substantial and reflects confidence in the company's long-term fundamentals despite near-term operational challenges. The absence of any promoter pledging further strengthens the ownership quality and eliminates concerns about financial stress at the promoter level.
Stock Performance: Recent Strength Masks Underlying Volatility
Bajaj Finance's stock performance has been characterised by significant volatility over various timeframes, reflecting shifting investor sentiment about the company's growth trajectory and valuation. The stock delivered a one-day return of 6.68% on February 3, 2026, significantly outperforming the Sensex's 2.54% gain, resulting in an alpha of 4.14 percentage points. This surge followed the Q3 FY26 results announcement, suggesting that the market may have been positioned for even worse results or is focusing on the company's revenue growth rather than profit decline.
Over a one-week period, the stock generated returns of 5.44% compared to the Sensex's 2.30%, delivering an alpha of 3.14 percentage points. However, the one-month performance tells a different story, with the stock declining 2.56% against the Sensex's 2.36% fall, resulting in marginal underperformance. The three-month return of -7.49% significantly lagged the Sensex's -0.29% decline, indicating that the stock has been under sustained selling pressure over the quarter.
| Period | Bajaj Finance Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Day | 6.68% | 2.54% | +4.14% |
| 1 Week | 5.44% | 2.30% | +3.14% |
| 1 Month | -2.56% | -2.36% | -0.20% |
| 3 Month | -7.49% | -0.29% | -7.20% |
| 6 Month | 10.01% | 3.89% | +6.12% |
| 1 Year | 14.53% | 8.49% | +6.04% |
| 2 Years | 40.89% | 16.17% | +24.72% |
| 3 Years | 60.50% | 37.63% | +22.87% |
| 5 Years | 83.85% | 66.63% | +17.22% |
| 10 Years | 1,412.03% | 245.70% | +1,166.33% |
The six-month return of 10.01% outpaced the Sensex's 3.89% gain by 6.12 percentage points, whilst the one-year return of 14.53% exceeded the benchmark's 8.49% by 6.04 percentage points. However, these returns underperformed the broader NBFC sector's one-year return of 20.78%, indicating relative weakness within the sector. The two-year return of 40.89% and three-year return of 60.50% demonstrate the stock's strong medium-term performance, with alpha generation of 24.72 and 22.87 percentage points respectively.
From a long-term perspective, Bajaj Finance has been an exceptional wealth creator, delivering a ten-year return of 1,412.03% compared to the Sensex's 245.70%, resulting in alpha of 1,166.33 percentage points. This extraordinary outperformance reflects the company's transformation from a vehicle finance-focused NBFC to a diversified consumer finance powerhouse with strong digital capabilities.
The stock's technical indicators present a mixed picture. The current trend is classified as "Mildly Bullish" as of February 3, 2026, having changed from "Mildly Bearish" on the same day. The stock is trading below all major moving averages—5-day (₹921.71), 20-day (₹944.54), 50-day (₹983.28), 100-day (₹1,005.07), and 200-day (₹958.29)—indicating technical weakness despite the recent bounce. The stock's beta of 1.07 suggests it is more volatile than the broader market, with a risk-adjusted return of 0.58 over the past year compared to the Sensex's 0.74.
Investment Thesis: Quality Franchise Facing Temporary Headwinds
Bajaj Finance's investment proposition rests on four key pillars: valuation, quality, financial trend, and technical factors. The current assessment across these parameters reveals a mixed picture that warrants a cautious approach for investors.
From a valuation perspective, the stock is categorised as "Very Expensive," trading at a P/E ratio of 32.80 times compared to the sector average of 22 times. This 49% premium valuation leaves limited room for disappointment and suggests that much of the company's growth potential is already priced in. The price-to-book ratio of 5.82 times is amongst the highest in the NBFC sector, reflecting investor expectations of sustained high returns on equity that may prove challenging to maintain given the current margin pressures.
The quality assessment remains "Excellent," supported by the company's impressive five-year sales growth of 22.69%, EBIT growth of 26.28%, and average ROE of 18.15%. These metrics underscore the company's strong franchise value, market leadership position, and historical execution capabilities. The high institutional holding of 36.44% and absence of promoter pledging further reinforce the quality credentials. However, quality alone does not justify valuation, and the recent profit decline raises questions about whether historical quality metrics can be sustained.
The financial trend is classified as "Flat" for Q3 FY26, reflecting the stagnation in profitability despite continued revenue growth. This represents a deterioration from the "Very Positive" trend observed in earlier periods and signals that the company is facing structural challenges in translating topline growth into bottom-line expansion. The 18.41% quarter-on-quarter decline in consolidated net profit and 543 basis point contraction in PAT margin are particularly concerning.
Technical indicators show a "Mildly Bullish" trend as of February 3, 2026, with the stock bouncing from recent lows. However, the stock remains below all major moving averages, suggesting that technical resistance exists at higher levels. The weekly MACD is "Mildly Bearish" whilst the monthly MACD is "Bullish," indicating conflicting signals across timeframes. The high beta of 1.07 suggests elevated volatility, which may not be suitable for risk-averse investors.
Key Strengths & Risk Factors
✅ KEY STRENGTHS
- Market Leadership: Largest NBFC by market capitalisation (₹5,89,549 crores) with strong brand equity and distribution reach
- Revenue Momentum: Net sales grew 17.63% YoY to ₹21,213.89 crores, demonstrating robust demand for financial products
- Strong ROE: Average ROE of 18.15% reflects superior capital efficiency and profitability relative to sector peers
- Long-term Growth: Five-year sales CAGR of 22.69% and EBIT CAGR of 26.28% demonstrate consistent execution
- Diversified Portfolio: Broad product range across consumer durables, personal loans, SME finance reduces concentration risk
- High Institutional Holding: 36.44% institutional ownership provides liquidity and signals confidence from sophisticated investors
- Stable Promoter Base: 54.70% promoter holding with zero pledging ensures aligned interests and strategic stability
⚠️ KEY CONCERNS
- Profit Decline: Consolidated net profit fell 18.41% QoQ and 6.33% YoY, indicating serious operational challenges
- Margin Compression: PAT margin contracted 543 bps QoQ to 19.47%, one of the weakest performances in recent years
- Rising Interest Costs: Interest expenses up 14.93% YoY, significantly outpacing revenue growth and pressuring spreads
- Premium Valuation: P/E of 32.80x represents 49% premium to sector average with limited margin of safety
- High Leverage: Debt-to-equity ratio of 3.85x amplifies risk in rising interest rate environment
- Sector Underperformance: One-year return of 14.53% lagged NBFC sector's 20.78%, indicating relative weakness
- Flat Financial Trend: Recent quarter classified as "Flat" represents deterioration from previous "Very Positive" trends
Outlook: What to Watch
POSITIVE CATALYSTS
- Interest Rate Cuts: Any monetary policy easing would reduce funding costs and improve margins
- AUM Growth: Continued expansion in assets under management would drive revenue growth
- Digital Initiatives: Technology investments improving customer acquisition costs and operational efficiency
- Asset Quality: Stable or improving asset quality metrics would support investor confidence
- Market Share Gains: Continued leadership in key product categories driving competitive advantages
RED FLAGS
- Further Margin Decline: Additional compression in PAT margin below 19% would signal structural issues
- Credit Costs: Rising provisioning or deteriorating asset quality would pressure profitability
- Funding Pressure: Inability to access low-cost deposits would keep interest expenses elevated
- Competitive Intensity: Increased competition from banks and fintechs could limit pricing power
- Regulatory Changes: Tighter NBFC regulations could constrain growth or increase compliance costs
The Verdict: Quality Franchise, But Wait for Better Entry
Score: 65/100
For Fresh Investors: Not recommended for fresh purchases at current levels. The 18.41% quarter-on-quarter profit decline, 543 basis point margin contraction, and "Very Expensive" valuation create an unfavourable risk-reward profile. Wait for either a significant price correction (towards ₹850-880 levels) or demonstrable improvement in profitability metrics over the next 2-3 quarters before initiating positions.
For Existing Holders: Continue to hold given the company's excellent quality credentials, market leadership position, and long-term wealth creation track record. However, closely monitor quarterly results for signs of margin stabilisation and profit recovery. Consider partial profit-booking if the stock approaches ₹1,050-1,100 levels without corresponding improvement in fundamentals.
Fair Value Estimate: ₹875 (9.3% downside from current levels)
Rationale: Whilst Bajaj Finance remains an excellent quality company with strong franchise value and market leadership, the recent profit decline, margin compression, and premium valuation create a challenging entry point. The 49% valuation premium to sector peers appears difficult to justify given the flat financial trend and rising cost pressures. The stock warrants a HOLD rating, with fresh buying opportunities likely to emerge at more attractive valuations following either operational improvement or price correction.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results, and all investments carry risk of loss.
