Robust Growth,Great Prospects

The non-banking finance companies (NBFCs) continue to grow and make their presence felt in the financial services industry in India. The sector has seen robust growth during the last decade. The total credit disbursed by NBFCs in FY2006 stood at 9.4 per cent, which went up to 13.1 per cent in FY15. India Ratings expects the share of NBFCs to grow to 17 per cent by FY19. Until some years ago, NBFCs were a small part of the financial services business with a small resource base. Today, the equity of leading NBFCs is comparable with or larger than many mid–sized banks. The combined market capitalisation of the top 10 NBFCs is now twice that of mid and small–sized public sector banks.

Bajaj Finance is the consumer finance lending arm of Bajaj Finserv. It is the most diversified NBFC in the country and the largest financier of consumer durables in India, making it one of the most profitable firms in the category.

The USP of the company is its stronghold in the under penetrated consumer durable and lifestyle product financing business where it does not have major competition. Bajaj Finance has a diversified product mix, robust volume growth, prudent operating cost management and an effective risk management. It focuses on six broad categories, which includes consumer lending, SME lending, commercial lending, rural lending, fixed deposits and value added services.

Although demonetization is expected to have an impact on the country’s GDP and is going to affect the financial services industry in the medium to short term, the impact on the company will be restricted to two-wheeler and threewheeler loans. According to Umang Shah, Research Analyst at Emkay Global, “Bajaj Finance has been an outlier among NBFCs, outpacing industry growth for a long time while maintaining credit quality despite challenging environment. The current demonetisation drive is likely to create some hiccups in the interim period on growth as well as on asset quality front. However, a welldiversified product portfolio, lower individual product market shares and strong risk management practices makes Bajaj Finance relatively well-positioned and should restrict the adverse impact of demonetisation on earnings and the medium term outlook for the company remains positive. Rapid expansion in its distribution reaches and continued investments in distribution and technology have been key to the company’s robust and qualitative growth. Since FY13-YTD FY17, the company has increased its footprint from 91 branches to 801 branches and from 7,000-plus touchpoints to over 33,700 touchpoints.

As a result, the new customer addition at Bajaj has remained strong and it provides potential to cross-sell and grow its book rapidly while maintaining quality.”


FINANCIALS

On the financial front, the gross sales of the company stood at Rs.7,304.31 crore, an increase of 36 per cent YoY. Its PBIDT stood at Rs.4,979.79 crore showing an increase of 36 per cent. The PAT of the company increased 42 per cent to Rs.1,278.63 crore. The balance sheet of the company is strong. Its reserves and surplus has increased by seven per cent YoY.

The quarterly results of the company are excellent. The net sales of the company stood at Rs.2,180.2 crore, an increase of 36.94 per cent YoY. Its PBIDT stood at Rs.1,581.24 crore, showing an increase of 41.87 per cent as compared with Q2FY16. The PAT stood at Rs.407.76 crore, an increase of 45.95 per cent as compared with the corresponding quarter of the previous fiscal.

According to Sampath Kumar, Analyst at IIFL Institutional Equities, “the only negative surprise in the reported performance was sharper increase in operating expenses. Also, the efficiency gains that the company expected to achieve through direct-to-customer initiatives did not fructify fully in Q2FY17. Its asset quality improved YoY on a comparable basis suggesting stable performance. As a result, the provision for loan loss declined. Loan loss provision did not include any contingency provisions. Bajaj Finance has continued to add one million (new to Bajaj) customers each quarter. This, coupled with a large existing customer base, provides a clear runway for sustaining 20-25 per cent AUM growth over the long term. Also, the addition of home loan products has significantly enhanced market opportunity for the group”

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 Bajaj Finance has market cap of Rs.46,150.19 crore and maintains a dividend yield of 0.29 per cent. The company has consistently seen a profit growth of 38.94 per cent and has a low interest coverage ratio. The trailing 12-month P/E of the company stands at 29.57 which is high as compared with the industry P/E of 20.92. The trailing 12-month EPS stands at Rs.28.38. The company maintains the current ratio of 1.54 which is considerably good as compared to its peer. The price-to-book value stands at 5.36, while the ROE stands at 21.09 per cent which is healthy as compared to its peers. 

CONCLUSION 

Bajaj Finance continues to be one of the largest consumer durables lenders in India. With a presence in 192 cities across India and approximately 9,200 dealer counters across the country, it disbursed Rs.12,972 crore in FY2016 , registering a growth of 29 per cent over the previous year. 

SME lending business of the company offers secured and unsecured loans to its customers. Secured lending is done through three product offerings: loan against property, lease rental discounting and home loans. During the year, the company transitioned its retail mortgage business to a 100 per cent ‘Direct-to-Customer’ model in order to benefit from lower costs and create sustainable return on equity. Bajaj Finance has a well-diversified portfolio of products and therefore the risk is very well-diversified with its large customer business.

 According to Pankaj Pandey, Head – Retail Research, ICICI Securities, in the last three years, Bajaj Finance has reported a strong performance with more than 30 per cent credit growth (led by consumer finance business), robust margins of ~10 per cent and healthy asset quality with GNPA ratio at 1.6 per cent. This allowed the company to clock sturdy return ratios of 20 per cent RoE and 3 per cent RoA. Such a strong performance in a weak economic scenario led to higher investor interest. This is reflected in its P/ABV multiple,which increased from 1x in September 2013 to more than 4x now. The company’s November numbers show the consumer loan disbursements remains strong. Volumes in the CD segment (13 per cent of the book) increased 10 per cent YoY in November 2017 as against 34 per cent in Q2FY17”. Looking at the strong financials of the company and the ability of Bajaj Finance to take the economic shocks in its stride, we recommend our reader investors to BUY the stock at current levels.