Despite the sluggish growth in the economy and the fact that credit growth in the banking system slipped to 10 per cent in December, Bajaj Finance, a leading non-banking financial company (NBFC), delivered strong earnings growth of 24 per cent in the first nine months of 2014-15.

Healthy traction in consumer finance and SME lending continues to ensure the company’s loan growth is faster than that of the industry. Bajaj Finance has also been able to stay the course on the asset quality front, with low loan delinquencies.

The company is also a cut above its peers in the NBFC space in conforming to regulatory norms prescribed by the RBI recently. Bajaj Finance has adopted the higher provisioning and early recognition of non-performing asset norms, ahead of the regulatory requirement.

Surge in valuation

Over the past year, the Bajaj Finance stock has shot up 140 per cent and its valuation has hence been re-rated to three times the one-year forward book value, which is an all-time high.

But this has been on the back of a stellar performance vis-à-vis peers in the space.

Mahindra and Mahindra Financial Services, for instance, saw a sharp fall in valuation owing to a steep deterioration in its asset quality. In contrast, Bajaj Finance has a much lower bad loan portfolio and commands a healthy return on equity of 19-20 per cent.

Now that the interest rate cycle is beginning to reverse, consumer spending is likely to get a leg up, a positive for Bajaj Finance, which focuses on affluent customers in its key segments. Investors with a two-to-three year horizon can invest in the stock.

Healthy portfolio

From FY11 to FY14, the company’s loan book has more than trebled. In the quarter that ended in December, the loan book grew 37 per cent over last year.

Bajaj Finance’s consumer finance business now constitutes 38 per cent of the total loan book. The company is the largest two-wheeler and consumer electronic financier in India, with an 18 per cent market share.

Its other businesses continue to grow at a healthy pace. The consumer durable business grew by 55 per cent while life-style finance, on a small base, more than trebled over last year.

Bajaj Finance has tie-ups with leading manufacturers such as Samsung and Apple, which has aided this growth. The SME business, where the company offers business loans to companies clocking average annual sales of ₹25 crore, also continues to grow at a healthy pace.

The commercial lending business, which accounts for 6 per cent of the total, continues to be under pressure. But within this sector, the auto components business continues to grow.

Bajaj Finance has been able to deliver strong return on equity over the years, thanks to healthy growth in its high yielding consumer finance business. The company also has a good mix of funding from different sources.

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