Domestic brokerage Kotak Institutional Equities seems divided over Bajaj Finance and Bajaj Finserve given the changes and challenging circumstances faced by these Bajaj Group companies post COVID-19 pandemic. The brokerage has downgraded Bajaj Finance to Reduce from Buy but raised the fair value of the stock to Rs 2,800 from Rs 2,700 per share earlier. It, however, recommends buying Bajaj Finserv for a target of Rs 7,150 post-roll-over to June 2020.

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The brokerage believes near-term risks to asset quality and growth persist for Bajaj Finance, while it does not find the risk-reward equilibrium in favor anymore post the sharp rally in stock price recently.

Bajaj Finance stock has risen over 78 percent since its 52-week low of Rs 1,783.10 hit on May 27, 2020. The rally was fuelled by optimism over strong business fundamentals amid the ongoing COVID-19 led disruptions.

However, Kotak Institutional Equities believes that the stock trades at rich valuation of 4.4X book FY2022E. “Even as long-term potential remains strong, current valuations are completely ignoring near-term risks to the business from higher-than-expected credit costs following the moratorium and sluggish business momentum due to the lockdown leading to pressure on growth and subsequently PPOP,” the brokerage said in a note.

Sales finance AUM are expected to decline sharply at 30 percent YoY in FY2021 due to weak disbursements in 1H and shorter tenure of the product. Additionally, the company will likely tighten credit underwriting norms in this business posy the pandemic due to high credit losses in case of default, the brokerage feels.

The brokerage suggests to book profits and play through Bajaj Finserv. It expects a more gradual improvement from here while the lockdown in select parts of the country affecting recoveries and disbursements is not ruled out either.