Bajaj Finance - Buy

A diversified lending mix has paid off for Bajaj Finance, one of the leading non-banking finance companies. From financing only Bajaj Auto vehicles, the business now spans consumer finance, SMEs and commercial lending. Despite a slowing economy, traction in the consumer finance space has helped Bajaj Finance deliver healthy growth. Besides, strong loan growth, good asset quality, prudent provisioning norms and strong return ratios are positives.

At the current price of ₹1,525, the stock trades at 1.6 times its one-year forward book value, which is at a 38 per cent discount to its peer Mahindra and Mahindra Financial Services. Investors with a two-to-three-year investment horizon can buy the stock at current levels.

After the demerger from Bajaj Auto, Bajaj Finance underwent a major restructuring in 2007. Improving affordability in rural and urban areas as well as Bajaj Finance’s expansion into new product lines have led to quadrupling of loans from 2009-13.

The company now has a broad product portfolio, with consumer finance contributing 40 per cent and SMEs 52 per cent of the total loan book. Within the consumer finance segment, the company is the largest two-wheeler lender in India, financing 30 per cent of Bajaj Auto’s two-wheeler sales. It is also the largest consumer electronics financier, with 14 per cent market share.

Beginning January 2013, the company started offering home loans to the salaried class. The consumer finance business continued to deliver strong growth in the December quarter. Barring the two-wheeler segment, which declined 15 per cent, other businesses continued to grow at a healthy pace.

The three-wheeler business, which finances 22 per cent of Bajaj Auto’s three-wheeler sales, provides a hedge against the declining two-wheeler business. The consumer durable and lifestyle finance business grew a healthy 25 per cent in the December quarter.

This was the result of network expansion and addition of new product lines. The year-old home loan business has more than doubled on a small base.

Within the SME business, the company offers loans to companies clocking average annual sales of ₹25 crore.

Of the entire lending within this segment, about 80 per cent is secured. The SME loans grew a robust 51 per cent in the December quarter.

Commercial lending business, which consist of asset-backed financing and corporate financing, constitutes 8 per cent of the total business. This segment continues to remain sluggish owing to the stress in the infrastructure sector.

Overall, Bajaj Finance grew its total lending by 33 per cent in the December quarter. With its focus on consumer finance and SME business, total loans are expected to grow at 25-27 per cent annually over the next two years.

Bajaj Finance has been able to deliver strong return on equity over the years, thanks to growth in the high-yielding consumer finance business.

The company also has a good funding mix. In spite of the tight liquidity and weak money market, Bajaj Finance was able to maintain stable cost of funds in the December quarter.

In the coming year, the company may see some moderation in margins with a shift in loan book towards secured and mortgage lending (lower yields). But in the long run, the return on equity will remain healthy at 20 per cent. Lending in a big way will drive an earnings growth of 25 per cent over the next two years.

Bajaj Finance has stayed its course even in challenging times with low loan delinquencies.

The company’s gross non-performing assets stood at 1.15 per cent as of December quarter. According to the recommendations of the Usha Thorat committee, the classification of loans into non-performing assets for NBFCs is proposed to be brought on a par with banks.

Currently, for NBFCs a loan becomes an NPA if it is not serviced for 180 days. There is a proposal to bring this down to 90 days in a phased manner.

As a matter of prudence, Bajaj Finance has adopted the norms ahead of the regulatory requirement. During the December quarter, the company made additional provisioning to align the two-wheeler business to the 90-day mark. With this, 95 per cent of the total business has moved to the 90-day cycle.

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