Bajaj Finance – An Introduction
Somewhere in February of 2018 I got a hat tip from Amitayu Ghosh to look at Bajaj Finance. I was not able to get myself together on this topic all this while. Finally I managed to look at Bajaj Finance.
Below is a visual introduction to Bajaj Finance. Please note that the visual introduction is an abridged version. Please go through the below text for a complete coverage on Bajaj Finance:
The below figure depicts the business model diagram of Bajaj Finance the way I see the company. Every person visualizes a company using their on tinted glasses. The below diagram represents my perspective of the company.
Let us try to understand the above business model diagram.
Company Structure: Bajaj Finance takes care of bulk of the lending operations i.e. Consumer loans, SME loans, Commercial loans and Rural lending operations. Bajaj Finance has two subsidiaries:
- Bajaj Housing Finance Limited: In FY18 the company formally setup a subsidiary for all mortgage finance operations under Bajaj Housing finance. BHFL is registered with National Housing Bank as a housing finance company and focusses on ‘mass affluent and above’ customers. All housing finance activities for Bajaj Finance, post February 2018, are handled by BHFL.
- Bajaj Financial Securities Limited: This subsidiary was formed (or carved out of BHFL) in Q2 FY19. BFSL will be responsible for handling operations related to Demat, Broking and Loan against Securities.
Customer Segments: Bajaj finance predominantly addresses ‘mass affluent and above’ customers. Even in rural areas, they look for customers who are relatively well-off. This, to some extent, cushions the loan accounts from ‘near-certain’ defaults. The company lends to both rural and urban customers. The company caters to about 30 million customers (as of Q2 FY19). The company lends to individuals as well as to institutions (like SME and construction companies).
Customer Acquisition Channels: There are three major ways in which the company seems to be acquiring new customers.
- Bajaj Finance Branches: The Company is now spread across 1600 locations and customers can walk into any of these branches to avail loans.
- Third Party Stores: Customers can approach Bajaj Finance agents at any of the third party stores (like a Grocery Super market or a two wheeler showroom).
- Online e-commerce stores: The Company has presence on many e-commerce sites. A customer can opt for a 3-months, 6-months or 12-months EMI option and choose Bajaj Finance as their preferred credit supplier.
- There are other methods to avail the loan as well, for example, via customer care channels.
Value Proposition (USP): The value proposition of Bajaj finance is the instant loan approval that the company has (apparently) mastered in. It uses different data analytics tools and machine learning techniques to asses and approve loan requests. Additionally, the company provides Existing Member Identification (EMI) card to all its existing borrowers. Using this card, customers can avail loans merely by swiping these cards. This avoids all the hassles of loan processing and cuts time. On the other hand this flexibility virtually hooks the customer to Bajaj Finance as the customer is just one swipe away from new loans.
- The EMI cards seem to be an invention of Bajaj Finance. As of Q2 FY19 the company has 15.4 million EMI cards in force (i.e. active). The company has tie-up with close to 70,000 stores that accept these EMI cards.
- If you are looking for a Moat in Bajaj Finance, then I believe these EMI cards are like a pseudo moat. The EMI cards reduce the hassle of going to a bank branch, fill up loan application documents for every new loan that a customer intends to take. EMI cards act like Credit cards that are distributed to a customer segment that cannot avail credit card facility.
Revenue Stream: The Company currently has four major streams for income generation, namely:
- Consumer Loans: Bajaj Finance has a plethora of options for consumer loans. It lends money to people for their needs like consumer durables, digital products, lifestyle products, two and three wheelers and used cars. The company lends money to store hopping customers as well as e-commerce shoppers. These loans are available for both rural and urban consumers. The company also offers personal loans to existing customers (holding EMI card) or salaried new customers. Additionally in rural areas the company provides gold loans. The housing finance subsidiary provides home loans and loan against property to the salaried segment.
- SME loans: The small and medium enterprises have their own needs, for example, working capital requirements or larger loans to run their establishments. The company provides loans to meet these needs. It also provides loans to cater to the needs of professionals like chartered accountants, Engineers, Doctors etc. When a company needs larger loans, Bajaj finance provides them an option to go for secured enterprise loans wherein these companies have to provide some kind of collateral in lieu of the loans.
- Commercial loans: The Company is active in commercial loan space as well. For example, it provides loans against securities, loans to auto component manufacturers, companies that are involved in light engineering, companies that manufacture specialty chemicals. The company provides warehouse receipt financing as well (i.e. loans against commodities stored in warehouse). The housing finance arm is engaged in developer finance and Bajaj Financial securities would be handling the loan against securities segment.
- Services: The Company markets third party insurance products (life, general and health insurance plans) which generates fee income for the comapny. It is involved in marketing co-branded credit cards (As of Q2 FY19, there are 663,000 credit cards that are in circulation. The company has partnered with RBL bank for co-branded credit card scheme) and co-branded digital wallets (As of Q2 FY19 there are 3.3 million active users of these wallets. The company has partnered with Mobikwik and has an equity investment in Mobikwik).
Footprint
The branch footprint forms an essential part of the growth plan for the company. The table below captures the details on its branches as well as its presence in 3rd party retail stores (like Croma etc).
| Q2 FY19 | FY18 | FY17 | FY16 | FY15 | |
| Branches (Urban Locations) | 862 | 730 | 318 | 193 | 161 |
| 3rd Party Retail Stores (Urban Locations) | 63,000 | 57,000 | 29,000 | 17,500 | 14,500 |
| Branches (Rural Locations) | 751 | 602 | 538 | 397 | 232 |
| 3rd Party Retail Stores (Rural Locations) | 11,000 | 8,200 | 5,500 | 3,500 | 1,500 |
Assets under Management (AUM)
The company has grown its asset under management at a very healthy rate. The table below captures the AUM and its growth rate over the past five and half years.
| H1 FY19 (Crores) | FY18 (Crores) | FY17 (Crores) | FY16 (Crores) | FY15 (Crores) | FY14 (Crores) | |
| AUM | 1,00,217 | 84,033 | 60,196 | 44,229 | 32,410 | 24,061 |
| AUM Growth | 38% (w.r.t H1 FY18)
|
39.6% | 36.1% | 36.5% | 34.7% |
It would be interesting to see the segment was AUM growth. The table below captures this metric. For me, this is an important piece of information that informs us on the areas in which the company is laying more emphasis on.
| Segment wise AUM | Consolidated AUM as of Q2 FY19 (Crores) | Growth in AUM with respect to Q2 FY18 (%) | Contribution to the total AUM (%) |
| B2B Auto finance | 7,676 | 42% | 8% |
| B2B Sales finance | 12,347 | 30% | 12% |
| Consumer B2C Businesses | 18,684 | 44% | 19% |
| Rural Business | 7,439 | 71% | 7% |
| SME Business | 13,370 | 33% | 13% |
| Securities Lending Business | 6,472 | 15% | 6% |
| Commercial Lending Business | 5,288 | 81% | 5% |
| Mortgages (ex: Home Loans etc) | 28,851 | 32% | 29% |
| Total Value è | 1,00217 | 38% (Avg growth) | 100% |
Some observations from the above table:
- Clearly Mortgages (comprising of housing loans and other mortgage based products) makes up a major chunk of the business.
- Within the Mortgages business Home Loan and Loan against property make up 25,000 crores (This should include assets managed by Bajaj finance as well as Bajaj Housing Finance). Home loan business has grown at 46% Y-o-Y! The LAP has grown slower at 6%.
- Consumer B2C business that should comprise of lifestyle, ecommerce, consumer durables lending has shown a very good growth of about 19%.
- Some businesses like Rural and Commercial business have shown huge growth albeit with a lower base. I expect the pace of growth for these two segments to tone down to a moderate level in the coming quarters.
- Within the Commercial lending space, loans provided to Auto components manufacturers (at 3100 crores) makes up a major chunk of the segment (60%)
- I could not gather more information on Securities Lending Business, but I am assuming that this should be the ‘Loan against Securities’ business. If true, then this segment would become part of the second subsidiary that the company started in August, i.e. Bajaj Financial Securities Limited.
The housing finance business has been hived off as a wholly owned subsidiary of the company. This subsidiary is called Bajaj Housing Finance Limited and Atul Jain, a veteran of the company who was previously handling the rural business, has been made the head of this subsidiary. Let us take a quick look at the AUM breakup for the housing finance arm as of Q4 FY18. Please note that these numbers are the incremental loans post the creation of BHFL in February 2018. Effectively, you are looking at the numbers for 2 months. The portfolio before the creation of BHFL may still be part of BFL.
| BHFL AUM breakup | Q4 FY18 (Crores) |
| Housing Loans | 2,906 |
| Loan Against Property | 452 |
| Developer Financing | 69 |
| Rural MSME Loans | 36 |
| Unsecured Loans | 126 |
Now, let us probe further into each of these lending Segments to identify the growth drivers.
| Lending Category | Subcategory | |
| Consumer Lending | Consumer Durables
& Digital Products |
· FY18: 9.9 Million Products were financed (Growth of 38% over FY17). |
| Two Wheeler Loans | · FY18: Rs. 5300 crore worth of loans disbursed (Growth of 18% over FY17) | |
| Lifestyle Products | · FY18: 315K loans disbursed (Growth of 33% over FY17) | |
| E-Commerce Loans | · FY18: 702K loans disbursed (Growth of 320% over FY17!) | |
| Personal Loan | · FY18: Personal Loans (Cross Sold) increased by 42% over FY17
· FY18: Personal Loans (Salaried) increased by 56% over FY17 |
|
| Home Loan | · FY18: AUM has grown by 90% (w.r.t Feb 2018 when BHFL was incorporated as a subsidiary) | |
| Healthcare Loans | · FY18: The Company has started providing loans for elective and non-elective procedures. | |
| SME Lending | Business Loans | · FY18: Rs. 8,432 crores AUM with a growth of 43% over FY17
· Secured SME loans are very competitive. Company concentrating only on direct-to-customers. · Unsecured business loans are competitive in the top 40 markets. Company is looking at markets beyond the top 40. |
| Professional Loans | · FY18: Rs. 3,109 crores AUM with a growth of 79% over FY17.
· Loans are predominantly sourced on “direct-to-consumer” without intermediaries (this reduces the sourcing cost) |
|
| Commercial Lending | Loan Against Securities,
Financial Institution Group lending, Warehouse Receipt Financing, Auto Component business, Light Engineering, Specialty chemical |
· FY18: Rs. 12,375 crores AUM with a growth of 57% over FY17 (Cumulative for all the six business lines put together). |
| Rural Lending | Consumer and MSME loans | · FY18: Rs 6,131 crores AUM with a growth of 100% over FY17 |
| Services | Insurance Products,
Co-branded Credit Cards, Co-branded Wallet |
· FY18: I could not find the revenue/AUM numbers for this line of business.
· In FY18 the company had 663,000 co-branded credit cards in collaboration with RBL bank. · In FY18 the company invested 225 crores to buy a 12.38% stake in MobiKwik Wallet. The company has 3.3 million wallet accounts |
Loan Tenures
Bajaj Finance gives loans with different tenures. Below are some of the loan types and the corresponding loan tenures for these loans:
| Loan Tenure | Loan Type |
| One Month | Categories like Retailer Financing, Purchase order financing etc. |
| Three Months to eight months | Loans availed through EMI schemes by the retail customers |
| Eight months to a year | Financing the auto components manufacturers, loan against securities |
| One/Two/three years | Personal loans, two wheeler loans, unsecured SME loans |
| Three to Five years | Commercial loans |
| Longer duration loans (up to fifteen or twenty years) | Housing loans |
Cost of Funds
In Q2 FY19 the cost of funds was about 8.2% for the company. The table below captures the cost of funds for the past seven years.
| Cost of Funds | Q2 FY19 (%) | FY18 (%) | FY17 (%) | FY16 (%) | FY15 (%) | FY14 (%) | FY13 (%) | FY12 (%) |
| 8.2% | 8.2% | 9.0% | 9.5% | 9.9% | 9.9% | 9.7% | 9.1% |
Borrowing Profile
To maintain the above cost of funds the company needs to have a prudent mix of sources of borrowings. The borrowing profile for the company, for the past seven years, is as below. Most of the sources of borrowings have seen fluctuations however there has been a steady growth in deposits which indicates that the company has been steadily increasing its share of borrowings by offering deposits instruments (like Fixed deposits) to retail and corporate customers. There seems to be a co-relation between the decreasing cost of funds and the increasing contribution from deposits. Also note that, over the past couple of years, the bank lending rates were decreasing this could have also contributed to the lower cost of funds.
| Borrowing Source | Q2 FY19 (%) | FY18 (%) | FY17 (%) | FY16 (%) | FY15 (%) | FY14 (%) | FY13 (%) | FY12 (%) |
| Banks | ~34% | ~31% | ~35% | ~48% | 54% | 58% | 53% | 58% |
| NCD | 35% | 43% | 40% | 38% | 33% | 25% | 35% | 31% |
| Subordinated debt (Unsecured high interest loan) | 5% | 6^ | 7% | 3% | 4% | 3% | 4% | 3% |
| Short Term Borrowing | 11%
(CP -> 9%) |
8% | 10% | 5% | 5% | 13% | 8% | 9% |
| Deposits (Retail) | ~15% | ~12% | ~8% | ~6% | 4% | 1% | 0% | 0% |
Deposits:
Deposits are an excellent source of low cost funds. The aim of the company is to achieve a borrowing mix with deposits making up 23-25% of the borrowing profile. The table below captures the growth in retail deposits garnered by the company over the past five years (in number terms).
| Q2 FY19 (Crores) | FY18 (Crores) | FY17 (Crores) | FY16 (Crores) | FY15 (Crores) | |
| Deposits | 10,651 | 7,569 | 4,128 | 2,243 | 983 |
I was able to get the split of the deposit for FY18. Below table captures the details. This data is important because longer tenure deposits would mean that the company would be able to support longer tenure loans by borrowing long and lending long as well. From the table it is clear that the company has a good mix of short and medium term deposits (up to 5 years).
| Deposit Type | Deposit Duration (Months) | Number of Customers who deposited the amount (as of FY18) | Amount Deposited by the customers (Crores as of FY18) |
| Fixed Deposits | 12-23 months | 12,703 | 1,952 |
| 24-35 months | 18,310 | 1149 | |
| 36-60 months | 70,169 | 2604 | |
| Inter Corporate deposits | – | – | 1864 |
When I was looking at the deposit numbers for Bajaj Finance, I couldn’t help but compare the deposit numbers for the other NBFC that we track, i.e. PNB Housing. I was surprised to see that PNB Housing has not been able to grow its deposits whereas Bajaj Finance has shown a steady increase over the past few years. Below is the table that shows the numbers for PNB Housing. How disappointing!
| PNB Housing | Q2 FY19 (%) | FY18 (%) | FY17 (%) |
| Deposits (as a % of borrowing profile) | 17.7% | 19.4% | 25.8% |
| Deposits (Absolute Numbers Crores) | 12,394 | 11,568 |
Non-Performing Assets
A lender of this kind attracts apprehensions on delinquencies. Moreover the frenzied pace at which the company is growing, adds to the level of uneasiness. The table below captures the Net Non-Performing Assets (NNPA) for Bajaj Finance over the past seven years. The numbers between FY15 to FY19 have an interesting story linked to them. Between FY15 and FY18 RBI has modified the definition of NNPA three times. In FY15 all loans overdue beyond six months were treated as NNPA, where as in FY16 this criteria was tightened to five months. In FY17 the criteria was further tightened to four months and in FY18 RBI ruled that any overdues beyond three months should be treated as NNPAs. This change in guidelines is bound to impact the NNPA categorization. Moreover in FY17 the country witnessed demonetization which would have thrown a lot of people out of gear. This is reflected in the sudden rise in NNPA in FY17. In FY19 the companies moved from GAAP to IndAS accounting system which would impact the numbers. For example in FY19, up to Q2 FY19, the company has an NNPA of 0.53% (under IndAS). If this was computed using GAAP the number for H1 FY19 would have been a little different.
| Non-Performing Assets (GAAP) | Q2 FY19 | FY18 | FY17 | FY16 | FY15 | FY14 | FY13 | FY12 |
| NNPA | 0.53% | 0.38% | 0.44% | 0.28% | 0.45% | 0.28% | 0.19% | 0.12% |
It would be interesting to check the main contributors of the NNPA. The table below breaks down the NNPA at a business segment level. It is quite clear that the vehicle finance segment has the maximum NPA. This was acknowledged by the management as well and they have gone slow in loan disbursals to this segment.
| Segment wise NNPA | AUM of the Segment (Crores) as of Q2 FY19 | NNPA within the segment (Crores) | NNPA within the segment (%) |
| B2B Auto finance | 7,676 | 172 | 2.24% |
| B2B Sales finance | 12,347 | 40 | 0.3% |
| Consumer B2C Businesses | 18,684 | 87 | 0.46% |
| Rural Business | 7,439 | 48 | 0.64% |
| SME Business | 13,370 | 60 | 0.44% |
| Securities Lending Business | 6,472 | – | – |
| Commercial Lending Business | 5,288 | – | – |
| Mortgages (ex: Home Loans) | 28,851 | 115 | 0.46% |
| Total Value è | 1,00217 | 522 | 0.53% |
One of the painful part of NPA is when a company cannot recover the loan and decides to write off the loan. The table below captures the write-offs that the company has done over the past few quarters. We can clearly see that the write off as a percentage of AUM has been coming down. If we look more carefully and introspect, we realize that the quarters where the write-offs were higher were the ones that got riled with demonetization. As the effect of demonetization waned, over the past few quarters, the number of write-offs have gone down as well. This was definitely a very interesting piece of information that I could gather.
| Write-offs | Q2 FY19 | Q1 FY19 | Q4 FY18 | Q3 FY18 | Q2 FY18 |
| AUM (Crores) | 1,00,217 | 93,314 | 84,033 | 77,970 | 72,139 |
| Write-offs (Crores) | 150 | 146 | 188 | 171 | 170 |
| Write-off as a % of AUM | 0.14% | 0.15% | 0.22% | 0.22% | 0.23% |
Sometimes a company sells the loan collaterals when the borrower is unable to repay the loans (assuming the loan was backed by a collateral). The table below captures the realization (i.e. amount recovered) on selling the collateral. Clearly Bajaj Finance does not get much money by selling the collaterals. The better option for the company is to cajole the borrower to start repaying back. The last row captures this information on the amount of loans that the company managed to get some EMI from borrower so that the asset could be moved out of NPA bucket and back to the regular bucket. Again, note that during demonetization, this conversion of NPAs to regular account was less, people did not have money to pay back. But in the subsequent quarters the company started receiving EMIs and many loans were rolled back to normal status.
| Q2 FY19 (Crores) | Q1 FY19 (Crores) | Q4 FY18 (Crores) | Q3 FY18 (Crores) | Q2 FY18 (Crores) | |
| Realization on sale of NPA receivables | – | – | 64 | 17 | – |
| Roll back to standard | 141 | 117 | 140 | 96 | 96 |
Return on Equity
The management has indicated that the company aims to achieve a return on equity of 18-21%. The table below confirms that the company has been able to live up to its goal. A thumb rule is that the return on equity should be higher than the cost of capital. In India the cost of capital is roughly about 15%, hence an ROE of 20% is a very healthy number. I have not seen many NBFCs maintain a higher ROE over a longer period of time.
| Return on Equity | FY18 | FY17 | FY16 | FY15 | FY14 | FY13 | FY12 |
| 20.5% | 21.6% | 20.9% | 20.4% | 19.5% | 21.9% | 24% |
Return on Assets
The company has managed to generate a higher return on assets for quite some time now. Since ROA is a metric that measures profits earned with respect to the average assets for the company, a higher value indicates that the company is able to generate more profit from its assets (i.e. loans). Again, Bajaj Finance is one of the few NBFCs that has consistently maintained a higher ROA.
| Return on Assets | FY18 | FY17 | FY16 | FY15 | FY14 | FY13 | FY12 |
| 3.9% | 3.7% | 3.5% | 3.3% | 3.6% | 4.1% | 4.2% |
Capital Adequacy Ratio (CAR)
As of Q2 FY19, the Capital adequacy ratio for the company stands at 22.13% with the Tier 1 capital at 17.17%. The historical CAR for the past seven and half years is captured in the table below.
| CAR | Q2 FY19 | FY18 | FY17 | FY16 | FY15 | FY14 | FY13 | FY12 |
| Tier 1 Capital (Regulatory Norm 10%) | 17.17% | 19.86% | 14.56% | 16.06% | 14.15% | 16.2% | 18.7% | 15% |
| Tier II Capital | 4.9% | 5.0% | 5.7% | 3.4% | 3.8% | 3.0% | 3.3% | 2.5% |
| CAR Combined (Regulatory Norm 15%) | 22.13% | 24.71% | 20.30% | 19.5% | 17.95% | 19.2% | 22% | 27.5% |
| Notes | Tier 1 capital raised (Rs. 4,500 Cr by issuing 26,627,218 equity shares)
3,938 crore Tier II Capital raised |
2060 Crore Tier 2 Capital raised
Initiated Tier 1 Capital Raise process |
Tier 1 capital raised | Initiated Tier 1 Capital raise process | Tier 1 capital raised | Initiated Tier 1 Capital raise process |
The table above reveals the following information:
- The company has raised Tier 1 capital three times in the past seven years. So the company has seen equity dilution three times in the past seven years. Due to the frenzied growth, the tier 1 capital seems to be coming down drastically once every two-three years leading to an equity dilution. Not a very good sign for an existing shareholders as the EPS does not grow at the same rate as profit growth. This was one big disappointment for me from the analysis of the company. The table below captures the EPS growth that the existing shareholder lost in those three years when the company resorted to equity dilution.
- By the way the company seems to plan equity dilution when the Tier 1 capital drops to around 14.xx%. I believe we are about two years away from the next round of dilution.
| Q2 FY19 | FY18 | FY17 | FY16 | FY15 | FY14 | FY13 | FY12 | |
| Tier I Capital Raised | No | YES | No | YES | No | No | YES | No |
| PAT Growth | 46% | 43% | 42% | 24% | 22% | 45% | 64% | |
| EPS Growth | 38% | 40% (ESOPS?) | 34% | 24% | 6%! Why? | 22% | 64% |
Risks
By nature the company finances many discretionary products which are either unsecured or backed by rapidly depreciating assets (two-wheelers, consumer durables). Hence, it is but natural to be concerned about the risks associated with such loans. Below are some things one needs to note about Bajaj Finance:
- The debt of the company has a credit rating of AAA/Stable from CRISIL, ICRA, CARE and India Rating.
- The company was able to either rollover its Commercial Paper or secure new Commercial Paper during the recent NBFC crisis in October-November 2018. This shows that credit providers are confident about Bajaj finance’s capability to service its debt obligations.
- The NNPA for FY18 is 0.38% and the company has managed to keep its NNPA less than 0.5% for many years.
- The Asset Liability Mismatch has a positive tilt towards the liabilities which indicates that the company has funds to take on more assets.
- The company offers multiple products with a strict cap on disbursement limit on each type of loan product. If a stress/delinquency is seen in a specific product, the company immediately de-prioritizes the product. For example, the Company deprioritized unsecured rural MSME loans as soon as it saw higher than anticipated delinquencies. With a product suite of more than thirty eight products, the company is able to do dynamically adjust its capital allocation strategy.
- The company provides loans only to the mass affluent and above customers and actively looks to cross-sell loans to the same customers so that new loans can be provided to existing customers with whom the company has some level of comfort. This is one more reason why the company is able to grow its business with lower NPAs.
Am I saying that there are no risks. No, definitely not. I have my apprehensions of how things can go wrong. There is an element of risk in the company due to the fact that it has a sizeable loan book comprising of loans for discretionary items with probably no collaterals. There is no denying that I do get uneasy about this. Moreover the element of trust by the management on Artificial Intelligence based algorithms for lending decisions adds another layer of uneasiness to my already apprehensive mind. I keep my fingers crossed on this company.
P&L Numbers
Let us now look at the P&L numbers. Since Bajaj finance has two subsidiaries we will look at the standalone numbers for the parent and the numbers for its subsidiaries separately. And to keep it simple, let us look at annual numbers for FY18 v/s FY17
| Bajaj Finance | FY18 (Crores) | FY17 (Crores) | Growth (%) |
| Revenue | 13329 | 9989 | 33.4% |
| Expenses | 9273 | 7171 | 29.3% |
| PBT | 4056 | 2817 | 44% |
| PAT | 2647 | 1837 | 44% |
From the numbers we can see that the revenue growth is very decent at 33%. PAT growth is very healthy at 44%. Let us try to dissect the expense numbers for the company.
| Expense Item | FY18 (Crores) | FY17 (Crores) | Growth (%) |
| Finance Cost | 4585 | 3803 | 20.6% |
| Employee Cost | 1401 | 932 | 50.3% |
| Other Expense | 2155 | 1561 | 38% |
| Provisioning and Write-offs | 1030 | 804 | 28% |
The finance cost are contained. The other expenses are sizeable for the company. Employee cost growth seemed to be higher in percentage terms. I could not make out the reason for a higher growth in the employee expense. I may have to dig more.
The P&L numbers for Bajaj Housing Finance Limited is shown below. Let us have a quick look at the P&L numbers for BHFL at the end of FY18.
| Bajaj Housing Finance | FY18 (Crores) | FY17 (Crores) |
| Revenue | 148 | 3.16 |
| Expenses | 115 | 3.04 |
| PBT | 33 | 0.12 |
| PAT | 22 | 0.12 |
BHFL was formed in Feb of 2018 and within two months (i.e. by the end of FY18) the company managed to create an AUM of close to 3,500 crores with a revenue of 148 crores and a profit of 22 crores. By Q2 FY19 the company increased its AUM to 10,000 crores. This is a very interesting feature of Bajaj Finance. They are able to scale their business pretty quickly and yet maintain their NPAs! Pretty impressed with the management’s capability.
The P&L numbers for Bajaj Financial securities is shown below. It is still in its infancy and predominantly servicing clients interested in loan against security. This subsidiary aims to provide Dmat and Broking service as well. Now, Demat and Broking is a tough business to make money and there are very few broking agencies that are thriving and making money. It would be interesting to see how this subsidiary pans out.
| Bajaj Financial Securities | FY18 (Crores) | FY17 (Crores) |
| Revenue | 8.88 | 0.57 |
| Expenses | 0.08 | 0.03 |
| PBT | 8.80 | 0.54 |
| PAT | 7.05 | 0.48 |
Balance Sheet
For ay lending agency (ex: Banks, SFB, HFC & other NBFCs) its assets are the loan accounts and its liabilities are the loans taken to service its lending activities. Their fixed assets would be their office space. I don’t find any benefit in analyzing their balance sheets. So I will give it a miss.
Cash Flow
For a lending agency its cash inflow is the EMIs and the loans taken to build the assets (loan accounts) and its outflows are the loan repayments and interest repayments to its lenders. When we analyze cash flow statement, we generally try to probe if the company is able to manage its “cash flow from investing activities” with the “cash flow from operating activities”. However, I don’t find any benefit in analyzing the cash flow statement for a lensing agency as these numbers don’t server the purpose.
Other Information
- As of Q4 FY18 the company has 15,266 people on its payroll.
Summary
- Bajaj Finance has an excellent track record in growing its AUM.
- The company has an innate ability to device new loan products and grow them at a brisk pace. Please note that this is no rocket science. You look around and try to find out if people need loans for a specific activity and start lending. The knack is in coming up with ways and means to identify eligible customers, ensure the accounts do not turn into NPAs and sustain the profits over a longer run.
- The NNPA numbers are contained and the major contributor to the NNPA is the two and three wheeler loans.
- The company is spreading its base in tier-II and tier-III areas. The management realizes that there is immense competition within the top 30 cities and beyond these top tier companies, there is an untapped potential for growth that needs to be explored.
- The Tier-I capital adequacy ratio keeps dropping below its internal milestone of 14%, once every two years. This forces the company to tap the capital markets very often. This is the only drawback that I could see for shareholders. Existing shareholders loose a part of EPS growth pie for the year where there is an equity dilution.
- The cost of funds is healthy and the tilt in borrowing profile towards Deposits is leading to a lower cost of funds. The management wants to see the deposits contributing about 25% towards the borrowing profile. When the company is able to achieve this goal, it will lead to a further reduction in the cost of funds.
- The P&L growth has been very encouraging.
- The scope for growth seems to be immense, considering the size of the country and the type of products that the company has launched. Bajaj Finance deserves to be tracked closely as it is shaping into a behemoth and spreading its tentacles across India.
References
[1] Quarterly results
[2] Investor presentations
[3] Analyst call transcript
[4] Annual reports
[5] Videos and articles on the internet from different market participants (including the management)
Disclaimer
I am not a SEBI registered research analyst. The information provided above is my subjective view based on what I have read on different websites, annual reports, and quarterly reports of various companies which I assume to be accurate. The above information should not be treated as an offer/advise to purchase a specific stock/investment instrument. Since these are my subjective opinions, I could be wrong in my understanding or presentation of information. I do not claim that the above information is complete or can be relied upon as such. I cannot be held responsible for any loss or damage caused due to any inadvertent error in the above information. I will not be liable for investment decisions made by readers of this article based on the above information. I am not an investment advisor. I may or may not have position in the above company. Please consult your investment advisor for all your investment needs.
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