Bajaj Finance, India’s most valued non-banking finance company (NBFC), has been buzzing in trade, and rightly so. The company’s stock has gained over 7% since its board unveiled plans to raise additional funds on September 22. Foreign brokerage Jefferies believes that this capital raise is an advance move, to support its growth ambitions.
Bajaj Finance registered over 30% growth in its assets under management (AUM) for the second consecutive quarter in FY24. In Q1FY24, urban B2B and B2C, and commercial books were both strong.
Rajeev Jain, Managing Director of Bajaj Finance, raised some flags on growth, however, "I agree it's been a good quarter. But I outlined even in my fourth quarter call that we are a little troubled about the level of leverage in the system - the amount of personal loan growth is troubling us".
The NBFC now serves a massive clientele of over 75 million. Despite its strong track record, the stock has underperformed the Nifty financial services index in the past year.
Bajaj Finance has trailed behind Nifty Financial Services over the past year
This lag is due to its elevated valuations and the listing of Jio Financial Services. Many see Reliance Industries’ ability to dominate the market and the vast customer network of its telecom and retail units as threats to the supremacy of Bajaj Finance. The entry of this behemoth is definitely Bajaj Finance’s biggest threat in many years – but these are still early days for Jio Financial, and it is yet to prove its mettle.
Bajaj Finance hopes to strengthen its risk cover with the proposed fundraise
The company’s board has approved a fundraise of Rs 10,000 crore. According to the plan, Bajaj Finance will receive Rs 8,800 crore through a qualified institutional placement and the remainder will be sourced from a preferential issue of warrants (convertible into equity) to Bajaj Finserv. Notably, this is still subject to shareholder approval.
The firm aims to use 80% of the proceeds to repay its outstanding debt, and the remaining 20% for general corporate purposes. The fresh equity capital will become part of the tier-1 capital. This means Bajaj Finance will have sufficient resources to manage any losses from its future lending activities.
However, the increase in equity capital may impact the company’s return on equity ratio, which is currently in the 23-24% range. Bajaj Finance had also raised Rs 8,500 crore via a QIP in November 2019.
Bajaj Finance has kept up an impressive pace of growth
Bajaj Finance’s net interest income and net profit have seen robust growth over the past five years. Its profit jumped over 4X between FY18 and FY23, supported by both interest income and fee incomes. Its share price reflected this strong performance, and tripled over the same period.
Bajaj Finance sees strong growth in its NII, driven by higher AUM
Bajaj Finance has seen the rapid expansion of its asset base. The growth in assets under management was led by consumer loans (both in rural and urban areas), the mortgage business, and commercial lending.
New customer additions fuel Bajaj Finance’s asset base surge
The company hasn’t compromised on asset quality despite growing at a fast pace. Bajaj Finance’s gross NPAs have consistently declined over the past eight quarters, owing to its strong risk management practices and a slight fall in the share of unsecured loans.
Bajaj Finance’s asset quality improves over 8 quarters
Now, with an impressive AUM base of Rs 2.9 lakh crore, a pressing question remains: Can Bajaj Finance continue its impressive growth, especially in an increasingly competitive financial landscape?
Bajaj Finance sets sights on new products to drive growth
Bajaj Finance plans to launch several new products to help its future performance. The company is charting its course into emerging domains like corporate lending, microfinance, and tractor finance in the coming year. Building upon its existing foothold in the used car loan segment, it introduced new car financing in Q1FY24.
Its strategic expansion into microfinance and tractor finance should solidify its position in India’s remote areas. The rural segment has improved its share of the AUM pie over the past five years, especially on the consumer side.
Bajaj Finance boosts mortgage and rural business in its asset mix
The microfinance sector provides an interesting opportunity for the company. CRISIL Research expects the industry to grow at 18-20% CAGR between FY22 and FY25. With a significant portion of the microfinance industry yet to be tapped, and improved infrastructure making rural India more reachable, the sector holds robust growth potential. But investors should approach with caution, considering the high-risk nature of these loans.
Bajaj Finance is also building its credit cards business via partnerships. Its collaboration with DBS Bank to launch a co-branded credit card in FY23 has already driven an uptick in its fee and distribution income. Gold loans is another growth area for Bajaj Finance. It plans to expand this book to Rs 5,000 crore from Rs 3,200 crore in Q1FY24.
Bajaj Finance looks to capture a larger share of the Indian credit pie
Bajaj Finance sees a tremendous opportunity to scale up its credit operations in India. The Indian credit market is set to grow at a CAGR of 13% in the next four years. The company is looking to capture 2.5-2.75% of this market, and hopes to grow at twice the industry’s pace Its long-term aim is to command 3-4% of the Indian credit market.
Bajaj Finance hopes to outpace industry’s asset base by twofold
So, how does the company plan to beat its competitors and achieve this goal?
Rajeev Jain says, “I would work towards realising our ambition of 100 million consumers, and take a disproportionate share of these consumers' payments and financial products.” The management basically seeks to create a high-quality client base and focus on cross-selling its products.
The company's progress is evident. Its client base expanded by 11% in H1FY24 compared to FY23. It is also strengthening its omnichannel presence to retain customers. Bajaj Finance disbursed personal loans worth over Rs 12,000 crore via its mobile app between Q1FY23 and Q1FY24.
Brokerages like BOB Capital Markets and Nomura are bullish on Bajaj Finance, projecting its AUM to rise at a CAGR of 27-28% over the next 2-3 years. According to Forecaster estimates, the company’s top line and bottom line may grow at a 25% rate between FY23 and FY25, in line with the rise in its loan book.
Bajaj Finance to sustain its growth trajectory in the next two years
Having proved itself as an impressive wealth multiplier over the past decade, delivering a staggering 50% CAGR to its investors, Bajaj Finance's consistent, drama-free performance over 35 years speaks volumes. As the company gears up to face intensifying competition, its growth journey and its strategies to maintain its momentum will be interesting to watch.
This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.