Widely read:
Bajaj Finance Limited (BFL) started in 1987 as Bajaj Auto Finance, which largely catered to the needs of Bajaj Auto’s customers. It has come a long way since then to have a range of offerings such as consumer durable loans, loan against property construction equipment loans, loan again securities and others to manage Rs 11,900 crore assets under management. BFL has nine product lines with a strategy to focus on mass affluent customers in consumer businesses and affluent and HNI customers in small businesses, through a judicious mix of lower risk and lower returns products, for building scale and stability and moderate risk and higher return products, for profit maximisation.
Strengths
Strong lineage: Coming from the legendary Bajaj Auto group, BFL has proven business credentials. Bajaj Auto is one of the largest manufacturers of two-wheeler and three-wheeler in the world. BFL was launched to strategically gain from Bajaj Auto’s 2-wheeler and 3-wheeler customer base. It further got into cross-selling high yielding financial products such as personal and small business loans.
Strong distribution: BFL has a strong distribution network in over 225 location and more than 4,000 distribution partners and dealers across India. The company provides 2-wheeler financing across 351 Bajaj Auto dealer locations and 1,170 sub-dealers locations across the country. Currently, BFL is financing one out of every five LCD and plasma TVs in the country, and finances products of all leading consumer durable companies.
Diversified business: BFL lends across nine product lines with mortgage accounting for a high 32 per cent business followed by 2-wheeler and 3-wheeler lending that adds up 22 per cent. Consumer durable financing make up for 12 per cent business, personal loans 6 per cent besides small business loan of 8 per cent and loans against securities at 3 per cent. The total AUM of Rs 11,900 crores is well diversified with the company being a leader in several segments that it operates in.
Low cost diversified borrowing: BFL raises funds from diversified sources that include term loans from banks, non-convertible debentures, fixed deposits and commercial paper. It has one of the lowest borrowings cost amongst peers, highlighting its ability to raise funds at competitive rates as it enjoys high credit rating of AA+ from CRISIL and LAA+ from ICRA. While the cost of funds has been inching up; the growth rate is slow compared to current borrowing cost due to longer maturity borrowings in last two years, thanks to its conservative asset-liability management in earlier years. Management has indicated that the cost of fund is 9.5 per cent.
Quality Assets: In Q3FY12, gross non-performing assets (NPA) stood at 1.28 per cent whereas net NPA stood at 0.25 per cent, which is amongst the lowest in the industry. These figures have been the lowest for the company in the past five years. The provisioning coverage ratio (PCR) stood at a healthy 81 per cent against the 77 per cent in the previous year.
Adequately Capitalised: Compared to the mandated 12 per cent by the RBI, BFL’s capital adequacy ratio including current quarter’s profits and Tier-II capital stood 17.3 per cent.
Concerns
Economic condition: A deteriorating economic environment leads to falling credit disbursals on one hand and rising non-performing assets, on the other. Several domestic and international economic signals do not clearly point towards the end of the market turmoil and economic stability. Any adverse economic events would have significant impact on the NBFCs.
Non-performing assets: At present BFL’s asset quality is robust. However, historically non-performing loans have been higher giving rise to increasing NPAs. The looming bad phase for the industry will emerge is when the RBI accepts the Usha Thorat committee recommendation of recognising gross NPA post 90-day overdue instead of the current 180-day norm, which could have a one-time bearing on the gross NPA figures.
Capital infusion: BFL is adequately capitalised. To continue the growth momentum, either the promoters need to infuse capital or raise it from the markets. The promoters plan to infuse additional capital in CY12 which would be enough to support growth over the next 3-4 quarters. Future capital infusion from the stock market will depend on the overall market sentiments and economic conditions prevailing at that time, which could also lead to equity dilution by the promoters.
Competition: Any increase in the level of competition in 2- and 3-wheeler financing segment would adversely impact BFL as it forms a major chunk of its revenues.
Financials
Over the past five years AUM has grown at 37.65 per cent CAGR to touch Rs 13,000 crore in FY12E. For the same five year period; EPS clocked an annual growth of 49 per cent. BFL registered a healthy 26 per cent return on equity for the 9M-FY12, owing to benign environment and a better credit performance. Going forward, management has been conservative in its guidance which is pegged at 20 per cent RoE. Current debt-equity ratio of 6.92 is expected to come down post the fresh capital infusion in CY2012. The diversified borrowing mix and high credit rating has helped BFL keep its cost of funds at 9.5 per cent and clock a higher net interest margin.
Valuations The current PE multiple of 8 is at a steep discount of more than 50 per cent compared to its median PE of 16.7. Moreover, an EPS CAGR of 49 per cent translates into an attractive peg ratio of 0.16 with 1.25 per cent dividend yield. BFL’s price to book value, which is one the most important valuation parameter for financing companies is 1.78 compared to 2.0 for peer company Shriram City Union Finance. We find BFL as the best bet in the NBFC space in the wake of high disbursal growth, its foray into new business areas, improving asset quality and resulting RoE expansion. We recommend a buy at current market price, in a staggered manner, with a time horizon of three-five years.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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