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This report was updated on 23rd Jan 2014, find the new report on Link.

• Date: 31st Jan 2012
• CMP: Rs 723                     Mid Cap with Market Cap Rs 2534 crores
• Advice: Invest                  Target: 1750 by 03/13 and 2700 by 03/14

Bajaj Finance – Description and Profile

• Bajaj Finance (BF) is a NBFC promoted by Bajaj Auto over 23 years ago. Post a 2008 restructuring, Sanjiv Bajaj is handling the financial services business of Bajaj Auto group, including Bajaj Finance.
• BF was set up as a captive financier of Bajaj Auto’s 2 & 3 wheelers. It has now expanded to related areas such as loans for Consumer Durables, Against Property, Small Business, Construction Equipment, Against Securities, Personal Loans, and Insurance Services, see Fig 1.

• About 60% of its business is consumer oriented – B2C, while rest is B2B, with a SME focus. The largest Segments are Consumer durable and 2/3 wheelers. BF is diversified across customer segments and geographies; this de-risks operations and inspires a confidence in continued growth.
• BF has a network of 4000 distribution partners/ dealers and 225 points of presence. It has 5 million customers across the country.
• In 2011, BF added 603 permanent employees, taking total employees to 1657. This is a sign of business confidence and investments in expected growth.
• Funds sourcing – CRISIL has rated it at FAAA/Stable for FDs, indicating a high safety with regard to timely payment of interest and principal.
• The company has just launched a new loan product specially designed for SMEs, called “flexisaver”. This could be an excellent offering for this segment.
• BF has a capital adequacy ratio at 17.5%. This is good. Even so, to fund rapid growth, BF is expected to raise Rs 750 crores in 2013 through a QIP or Private equity route.
• Management intends to raise its equity holding to 75% from the current levels. This indicates high ownership, which is good. See Fig2.

• Another positive is the stake holding from Mutual Funds, FIIs and DIIs.

Industry Note

• There are a large number of NBFCs in India (>10,000). These are relatively unregulated companies, unlike Banks that are governed by RBI. In this fragmented market, there is tremendous opportunity to offer Loans and Financial services in a fast growing economy of India, to Individuals (Retail), SME and Corporates.
• RBI has projected a 16% growth in loans for Banks; NBFCs should have higher industry growth rates.
• Current projections – of fall of interest rate cycle, and lower inflation, is positive for this sector. See article on this Trend.

Unique strengths:

• Strong ‘Bajaj’ brand; BF also shares in the growth of Bajaj Auto through the Auto loans service. Also a leader in Consumer Electronics/ durables loans with presence in showrooms of top Retail chains.
• With Sanjiv Bajaj at the helm, there is clarity in management succession. He is also a talented and ambitious finance professional and promoter.
• A strong distribution network, spread nationally with presence across customer segments, industries and geographies. The BF strategy is to diversify loans with a 30% segment cap. This will provide a de-risked business model.
• The group financial services ambitions and new initiatives are going to be routed through BF.

Stock Evaluation, Performance and Returns

• Listed long back, BF has shown excellent performance over the last 5-7 years, as seen in the charts.
• The Net Profit, Net Interest Income and NII plus Other Income have grown at 28-38% CAGR over 7 years. Growth has really accelerated since 2008. See Fig3.

• Revenues rose over a 7 year period at 41% CAGR; and EPS at 28% CAGR, see Fig 4.
• The share has appreciated by 22% CAGR over 7 years. However, post the 2009 fall, the appreciation has been very steep at 112% CAGR.

• In 3 years, Share Price & dividends have appreciated (Fig 5); P/BV is not too high

• Price and PE chart shows that PE is currently at all time lows even though the Price has risen to 700+ levels. It seems the full effect of the Earnings improvement is not yet reflected in the Price, see Fig 6.

• ROCE is 12% and ROE is 19.7%, these are good ratios.
• The EPS growth has accelerated since 2008, (Fig 7). This is an excellent chart of the firm’s growth.
• Its asset under management stood at Rs 11,919 crore as in Dec’11; as against Rs 6,868 crore a year back (up 74% YoY). The overall credit growth of the company is significant at a time when the entire industry is experiencing a slower credit off-take.

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