Company Overview:

Bajaj Finance Limited is a subsidiary of Bajaj Finserv Limited and is one of the leading asset finance NBFCs. The Company has a diversified lending portfolio across retail, SMEs and commercial customers. Bajaj Finance also operates through a 100% subsidiary called Bajaj Housing Finance Ltd.

It focuses on broadly 5 categories:

  1. Consumer Lending –

Lending in consumer electronics, lifestyle products and financing Bajaj Auto’s 2-wheeler and 3-wheeler segments. Forms 39% of the total AUM.

  1. Rural Business –

Engaged in Rural B2C and B2B lending. Forms 9% of the total AUM.

  1. SME Business –

Offers unsecured working capital loans to SME and self-employed professionals. Forms 13% of total AUM.

  1. Commercial Business –

Offers short, medium and long term financing to mid-market corporates. Forms 9% of total AUM.

  1. Mortgages –

Provides housing finance. Forms 30% of total AUM.

Company Performance:

Under the leadership of Mr. Rajeev Jain, the company has made a strong comeback after seeing very turbulent times post the 2008 financial crisis. Bajaj Finance has posted a revenue growth of 40% CAGR over the last 10-year period. In layman terms, revenue grew more than 30 times in this period. In the same period, PAT grew at 60% CAGR.

Bajaj Finance’s AUM grew from Rs.32000 Cr. in FY15 to Rs.1.47 lakh Cr. currently, growing at 38% CAGR. It was on course to deliver AUM of Rs.1.52 lakh Cr. prior to lockdown announcement. It has consistently kept its NIM to ~11%, among the highest in the industry. It has a very high ROA of 4.5%.

Company has done so well as it entered consumer and rural lending when other NBFCs were not willing to enter these spaces. Rural lending is the fastest growing segment with AUM growing 50% over the 12-month period. It has a rural penetration advantage over its peers. Bajaj Finance is present in 2179 locations in India with active distribution network of 1.07 lakh+.

Consumer lending AUM grew by more than 33% over the last 12-months with Auto finance business growing 51%. Its consumer finance business is the biggest piece of the pie and the company follows a very robust model in this segment. It provides 0% EMI options to its users and charges the interest from the product manufacturers. It also derives fee income from EMI cards issued to its users. EMI card franchise stood at 20.5mn. This is a win-win situation as it provides consumers with greater flexibility. Bajaj Finance has large volumes of consumer loans but the ticket sizes are very small, thus reducing the risk profile of the segment. Company has made customer experience its priority by providing 30-sec loan approval options.

Another big portion of its business comes from housing finance. This segment grew 44% over the past 12-month period. Company has managed the downside very well as 89% of its Housing loan book is to salaried professionals.

Having such a big basket of products, company has a big advantage of cross-selling. Total customer franchise stands at 42.6mn (24% growth YoY) and Cross-sell franchise stands at 23.48mn. In FY20, Bajaj Finance gave 65% of its loans to its existing customers.

BFL is considering onetime provisioning of potential impact of Covid-19. This will create some degree of suspension on the balance sheet. It has also estimated Opex cut of 7-8% for FY21. Company can mitigate the Covid-19 risks better than its peers as it has consolidated cash position of Rs.15,800 Cr. on its hands.

Consolidated Gross and Net NPA as of 31 December 2019 stood at 1.61% and 0.70%, respectively, which are among the lowest in the industry. Auto finance business performed the worst with Net NPA of 2.6%. Provisioning coverage ratio was at 57% as of 31 December 2019.

Risks:

Moving into smaller geographic locations could expose BFL to a high proportion of new-to-credit customers, who may not have disciplined banking behaviour.

Growing competition from banks and financial technology players in the retail lending space is another key risk.

Final Thoughts:

Bajaj Finance has proven that it is a high quality business with a lot of growth potential. Its excellent performance demands a premium valuation in the market. Its high growth can justify these valuations. So the dip in the market might be a good time load up on this stock.