Bajaj Housing Finance IPO analysis

Bajaj Housing Finance IPO will open for subscription on September 9, 2024 and close on September 12, 2024. Here's a breakdown of the housing financier's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Bajaj Housing Finance IPO in a nutshell

• Quality: It reported a three-year average ROE of nearly 14 per cent during FY22-24. It recorded an average gross NPA (non-performing assets) of 0.3 per cent over the same period.
  
• Growth: During FY22-24, its AUM (assets under management) and profit after tax grew 31 per cent and 56 per cent per annum.
  
• Valuation: The stock will be valued at a P/E and P/B ratio of 33 and 3.2 times, respectively, compared to its peers' median P/E and average P/B of nearly 24 and 3 times.
  
• Overview: Housing demand is expected to remain buoyant backed by increasing disposable income, the nuclearisation of families, and government aid. This in turn will make credit demand for housing strong and benefit financiers like Bajaj Housing Finance.

About Bajaj Housing Finance

Bajaj Housing Finance is engaged in mortgage lending since FY18. It provides home loans and loans against property with a primary focus on individual retail housing loans. But its customers range from individual home buyers to large-scale developers. Its average loan ticket size of Rs 46 lakh is the highest in the industry.

Strengths of Bajaj Housing Finance

• Prudent lending norms: Bajaj Housing Finance has the highest share of salaried customers at 87 per cent in its customer mix, underlining its cautious approach to lending. Its average GNPA (gross non-performing assets) ratio was as low as 0.3 per cent during FY22-24.
  
• Diversified products and presence: It is the most diversified player in the industry in terms of its offerings and market presence. The company has a comprehensive mortgage lending product suite, which includes home loans, loans against property and those for developer finance, among others. With 215 branches, it is present in 20 states and three union territories spread across 174 locations.

Weaknesses of Bajaj Housing Finance

• High loan-to-value ratio (LTV): Bajaj Housing Finance has a high LTV ratio (70 per cent as of Q1 FY25) as compared to its peers. LTV ratio is the proportion of the collateral's value that the lender is financing through the loan. A high LTV means that the lender has higher risk in case the asset price (collateral) declines.

Risk report

Management

• Is Bajaj Housing Finance free from regulatory penalties?
  Yes. The management is free from regulatory penalties.
  
• Does the company provide for its non-performing assets (NPAs) adequately? Specifically, is the provision-to-gross NPAs ratio more than 50 per cent?
  Yes. Its provision coverage ratio stood at 59.4 per cent as of June 30, 2024.
  
• Do the top five managers have stock as a significant part of their compensation (more than 50 per cent)?
  Yes. ESOPs (employee stock ownership plans) constitute a major part of the top-level management's remuneration.

Financial strength and stability

• Does it have a fresh slippage-to-total advances ratio of less than 0.25 per cent?
  Yes. The ratio of net slippage to total advances stood at 0.2 per cent for nine months-ending June 2024. Fresh slippages are loans that become NPAs in a financial year.
  
• Did the company generate a current return on equity (RoE) of more than 12 per cent and a return on assets (RoA) of more than 1 per cent?
  Yes. The company reported an ROE and ROA of 13.6 and 2.3 per cent, respectively, for 12-months ending June 2024.
  
• Has the company increased its loan book by 20 per cent annually over the last three years?
  Yes. It has increased its loan book by 31 per cent annually between FY22 and FY24.
  
• Has the company increased its net interest income (NII) by 20 per cent annually over the last three years?
  Yes. Its net interest income grew around 38 per cent per annum between FY22 and FY24.
  
• Is there a direct relationship between the increase in the loan book and the increase in net interest income (NII)?
  Yes. The growth in net interest income has exceeded the growth of advances, primarily due to increasing spreads (the difference between the yield on advances and the cost of borrowings).
  
• Is the company's capital adequacy ratio more than 15 per cent?
  Yes. It reported a capital adequacy ratio of nearly 24 per cent as of June 30, 2024.
  
• Can the company run its business without relying on any external funding in the next three years?
  Yes. Its capital adequacy ratio was 24 per cent as of June 30, 2024. The financial strength, coupled with the IPO proceeds, would ensure the sustainability of business operations without external help.
  
• Did the company generate an average net interest margin (NIM) of over 3 per cent in the last two years?
  Yes. Its average three-year net interest margin (NIM) stood at 4.2 per cent.
  
• Are the company's three-year average gross NPA and net NPA ratios below 1 per cent and 0.5 per cent, respectively?
  Yes. It reported an average gross NPA ratio of 0.3 per cent and an average net NPA of 0.1 per cent in the last three years.
  
• Does the company have a cost-to-income ratio of less than 50 per cent?
  Yes. It reported a cost-to-income ratio of 24 per cent in FY24.

Growth and business

• Will the company be able to scale up its business?
  Yes. Rising disposable incomes, the nuclearisation of families, and government support will help housing demand and by extension credit demand for housing sustain, helping the company scale up its business.
  
• Does the company have a loan book of more than Rs 1,00,000 crore?
  No. It reported an AUM of Rs 97,071 crore as of June 30, 2024.
  
• Does the company have a recognisable brand truly valued by its customers?
  Yes. The company's brand is recognisable given it is a part of a large conglomerate. However, the brand is of little value in the NBFC industry due to the undifferentiated nature of products.
  
• Does it have a credible moat?
  No. It operates in a commoditised market.
  
• Is the level of competition faced by the company relatively low?
  No. There are many banks, SFBs and NBFCs present in the housing finance industry. There is a high chance that banks (with the lowest cost of funds) will compete aggressively in this market.

Valuations

• Is the company's price-to-earnings ratio lower than its peers' median level?
  No. It is valued at a price-to-earnings ratio of 33.3 times, lower than its peers' median level of nearly 24 times.
  
• Is the company's price-to-book ratio lower than its peers' average level?
  No. It is valued at a price-to-book ratio of 3.2 times, lower than its peers' median level of 3 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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