Bajaj Finance, Auto-matic Growth


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 is an NBFC on a growth path. It is a leader in auto and consumer durables loans, but customers are spread across Retail 60% and SME/ Corporate 40%. Key strengths are all India reach; strong ‘Bajaj’ brand and rapid entry into new growth segments. Revenue, NII, Net Profit and EPS have grown at 28-41% CAGR over 7 years, and performance did not slow in 2011. Gains can accelerate in a falling interest rate scenario. Invest in this potential multi bagger.

JainMatrix Investments published this report to Subscribers (31/01) and all readers (1/03)

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.
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Fig 1 – Bajaj Finance – Business Segments (click to enlarge)

  • 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.
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Fig 2 – Bajaj Finance – Shareholding Pattern (click)

  • 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.
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Fig 3 – Chart with Quarterly Net Income, Profit

  • 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.
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Fig 4 – Chart with Quarterly Income, EPS

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

  • 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.
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Fig 6 – Price and PE Chart

  • 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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Fig 7 – Price and EPS Chart

  • Of late, BF has improved asset quality. Its net non-performing asset (NPA) ratio stood at 0.25% in FY12 Q3 as against 0.33% in Q2. Current net NPA is the lowest for the company in the last five years.
  • PEG is at 0.29 – indicates undervalued status

Peer Benchmarking and Financial Estimates till FY14

  • BF in this comparison shows better growth characteristics. See Exhibit 8.

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  • BF is also superior due to multiple customer segments – a de-risked business model.
  • Three-year projections of BF financials indicate a robust ramp up of revenues and profits, Exhibit 9.

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  • Interest rates unpredictability. This will affect our growth projections for BF.
  • Hyper competition.  An excessive ramp up/new entrants of NBFCs & Banks can affect BF performance
  • Promoter driven consolidation. Bajaj group has financial firms like Bajaj Allianz (Insurance), Bajaj Financial Solutions (Wealth mgt) and Bajaj Finserv (Holding Co). Consolidation will change the outlook.
  • Unpredictable events like a European sovereign default, some new media issue/ bad publicity or any governmental charge sheet, etc. can occur that can mar equity performance for short periods.
  • Past performance is no indication of future results

Opinion, Outlook and Recommendation

  • Indian market is underserved for loans and financial services. Quick calculations show BF has 5-7% market share among listed Indian NBFCs (non Bank). While small, this indicates a big market for BF to grow.
  • In the last three years, BF has embarked on a business trajectory that, if sustained, can make it a top 3 NBFC in 4-6 years. In essence it may move from mid-cap to large-cap, and shareholders could be holding on to a ten bagger.
  • Invest now and systematically for long-term out-performance.

The projection/ targets for Bajaj Finance are

  • March 2013   –  1750  –  140% appreciation
  • March 2014  –  2700  – 270% appreciation


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