Bajaj Finance Ltd (CMP – Rs. 2760, M Cap – Rs. 1,63,500 crores, P/Bv 5.8x FY21E ) is hands down one of the biggest value creators during recent times. And kudos goes to Sanjiv Bajaj for putting in place an institution which has disrupted the financial landscape and made consumerism affordable for the teeming millions with its revolutionary EMI offerings. Not only is BAF one of the fastest growing businesses in India but they have managed the business superbly with carefully chosen business leaders, keeping asset quality in check and earning superior return ratios. They have delighted employees, customers and share holders alike which are the pillars for sustainable growth.
For prospective investors who would like to buy shares of this company they need to evaluate two factors before buying this stock. What kind of returns will they get from the current price and over what period of time will these returns accrue?
It is pertinent to note that markets have rewarded the stock price with high valuations and currently the stock trades at a P/Adj BV of 5.7X for FY21. When compared to peers in the BFSI space the stock appears expensive and hence to have more comparative analysis we have done a scatter plot and taken a equivalent of the PEG ratio P/Adj BV/g (by dividing the BV by the growth in book value).
Its amply evident that given that the stock has best in class RoE, it would be trifle more expensive compared to its smaller peers. And this growth has come about without compromising on efficiency and quality as depicted by the following chart set of charts.
Further the diversified lending mix and low average ticket size of loan – granularity would mean lower probability of the entire portfolio quality deteriorating.
The story has been good so far but where are we headed.
To answer this question we have to move to a higher level and scan the landscape to understand the size of the market and long term growth prospects.
Its a no brainer that that we are an under banked country and there is a long runway of growth available. Banks, NBFCs and other alt-lending business models can thrive as the market expands. Market expansion can be rabid given that a large portion of the demographics is young representing the pent up demand.
As the economy expands and we move up the J curve of the PPP, affordability and consumerism will only expand.
Large categories of consumer durables are experiencing huge traction with improving penetration in the larger towns. The story will soon move into the smaller consumption centres as infrastrucutre booms, cities grow and masses upgrade their lifestyle as they get wealthier.
Government’s recent policy measure to boost the rural economy viz
- Policies aimed at Doubling farm income
- The PMAY for affordable housing
- Ayushman Bharat
- Digital connect with the Gram Panchayats
- DBT measures, along with
can be the nemesis of faster rural growth and a consumer boom of unprecedented proportions. Especially migration to urban centres is expected to usher in sustained demand.
So whats in store for BAF
At INR 84,000 crores AUM, BAF has all but just scraped the surface of the gargantuan potential. The fact that notable peers are also in high growth phase and competitive intensity is low augurs well for high growth to sustain.
We draw comfort from the fact that the Private Banks and HFCs (Housing Finance Companies) continue to grow at high growth rates despite the competitive intensity and having been present for a substantial period.
Going ahead there is no reason why BAF should not sustain its hyper growth. And as it segments the market further through its innovative offerings, new previously untapped opportunities are only expected to abound. Case in point is the recent tie up with Bata for footwear financing and its recent foray into loans for marriage. We expect the high growth to continue well into the next decade.
Business model is a moat in itself
The business model is a fusion of the best practices of different types of lenders and digital product companies.
- the liability size is structured like a Bank and its enviable cost of funds is akin to that of Banks.
- Technology is the back bone of the its offerings which has helped it to lower the loan TAT to less than 5 minutes. Whats creditable is the fact that BFL is doing this with nouveau clients and is miles ahead of its banking competition who lend only to internal clients after due diligence. This helps the lender earn high yields given the usecured nature of its product portfolio.
- Its technologically enabled deep feet on street network is similar to that of a micro-lender where collections are critical to successful culmination of a loan deal. This along with its score card based risk profiling has enabled maintaining best in class asset liability despite the unsecured nature of lending.
- The granular nature of its lending book, lower tenure, diverse range of product offerings and razor sharp analytics has helped build a diversified asset book which is yet robust.
- Large customer pool for cross-sell and repeat business.
- Partnerships are its new found love which will accelarate customer acquisition. Tie ups with marquee brand names only helps strengthen the brand equity besides being a faster route to market share gains.
Products portfolio addresses all high yield businesses
- Consumer Financing: Offers financing of products such as two/three wheelers, consumer durables, digital products, lifestyle products, personal loans, E-commerce consumer finance, retailer finance, urban gold loans etc.
- SME Financing: Focused on affluent SMEs with annual turnover of Rs.10-12 crore. Aims to offer secured and unsecured working capital and growth capital to SMEs.
- Commercial Lending: Provides loan against securities to HNIs, vendor financing, corporate finance to large companies, and lending to NBFCs. Focuses on lending to companies in segments such as auto components & light engineering, warehouse financing, large value LRD etc.
- Rural Lending: Offers 9 loan products in rural locations in consumer and MSME business segments with a hub and spoke business model. Offers consumer durable, digital products, personal loans, gold loans, working capital and mortgage loans.
Further bulk of the growth has come from only a few geographic centres. As BFL expands geographically its market share should also improve sharply. Currently bulk of its business comes from the top 15 cities and the intent is to spread geogrphically to not only tap new markets but outflank competition as it maintains its high growth journey.
At these heady valuations is there any value still left?
By no means is the stock cheap and to value the stock we have chosen the DCF methodology given that
- there is high revenue visibility, and
- the institutional nature of the lending business, coupled with moat and portfolio granularity provide stability to the business model.
Based on our DCF based valuation we still believe that there is substantial upside potential
Based on our DCF Valuation we believe that there is still head room for 16% appreciation from current levels.
So what are the risks?
- Bulk of the consumer durables finance business is based on the the discounts offered by the manufacturers. Any downward re-negotiation can stress the business model of zero cost EMIs
- Fintech space has seen the entry of the maximum number of incumbents. Disruptions abound and BFL is not insulated from this risk.
- Keyman Risk in the event of exit of Rajeev Jain the CEO who has scripted the growth story exists. However we believe that the succession planning has been actively addressed by the company.