Let us have a look at the results for Bajaj Finance for Q1 FY20. But before going through the results I will recommend you to look at the following links

Financial Analysis

Bajaj Finacne Q1 FY20 (Crores) Q1 FY19 (Crores) Growth (%)
Revenue 5801 3938 47.3%
Expenses 3957 2640 49.8%
PBT 1851 1297 42.7%
PAT 1195 836 42.9%
  • Revenue, Expenses, PAT: The company continues to show excellent numbers for Revenue, Expense and PAT.

Let us try to dissect the expense numbers for the company.

Expense Item Q1 FY20 (Crores) Q1 FY19 (Crores) Growth (%)
Finance Cost 2113 1359 55.5%
Employee Cost 583 444 31.3%
Other Expense 429 328 30.7%
Loan losses and Provisioning 551 327 68.5%
  • Finance Cost: Finance cost grew at a higher rate than the revenue growth. In the management discussions, Bharat Shah from ASK informed Rajeev Jain that he has done a 12 year average of the finance cost and when he compared it to the Q1, he sees that the finance cost has increased to 55% compared to the 12 year average of 40%. In response to this Rajeev informed that he is building the retail deposit base (to have long term liability profile) and this comes at a cost hence the rise in Finance cost. The company is paying a price for sustainability. Rajeev also indicated two more reasons for the rise in finance cost:
    • The cost of 3-year bonds and the commercial paper was higher in Q1, he is noticing that the cost of paper coming down. I believe what Rajeev was implying was the fact that Q1 finance cost was higher because of higher cost 3-year bonds and CP from the past issuances. But all the newer papers that are being issued are at cheaper costs, so finance cost should come down in future.
    • To maintain capital adequacy he may need to borrow more (compared to what the company used to borrow over the past twelve years). Since the source of funds were expensive over the past few months, the finance cost came in higher for Q1. Hence capital adequacy requirements probably led to more borrowing at higher costs and hence higher finance costs.
  • Employee Cost: Employee cost grew at a lower rate. As a percentage of revenue it is close to 10 percent. The company is spending substantial amount as employee cost. The fact that this is growing at a higher rate is an indication that the company needs specialized people and has to pay more to hire and retain these people.
  • Loan loss and provisioning: There was a noticeable rise in the loan losses and provisioning numbers for the company. Over the past few quarters I have seen the growth in provisioning and loan losses being higher.

Like the previous quarters, other than the higher provisioning, rest of the expenses seem to be contained.

EPS:

EPS growth is shown below. EPS growth followed the PAT growth.

EPS Q1 FY120 (Rs.) Q1 FY19 (Rs.) Growth (%)
EPS (non-annualized) 20.71 14.53 42.5%

Footprint

The company performs its lending operations in two modes. One is via its branch network and the other is through the point of sale (say, via 3rd party retail stores like Croma etc). The table below shows the growth in branches (both rural and urban) and its presence at point of sale.

  Q1 FY20 FY19 FY18 FY17 FY16
Branches (Urban Locations) 944 927 730 318 193
Branches (Rural Locations) 951 903 602 538 397
Active Distribution Network (Point of Sale) 97,000 91,500 64,300 39,600 24,800

Note: Additionally the company has presence on ecommerce websites as well.

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 .

  Q1 FY20 FY19 FY18 FY17 FY16 FY15 FY14
AUM (Crores) 1,28,898 1,15,888 84,033 60,196 44,229 32,410 24,061
AUM Growth (%) 41% 37.9% 39.6% 36.1% 36.5% 34.7%

The housing finance arm has been growing at a very fast pace. Below is the AUM breakup for the housing finance arm. The total AUM for the housing finance arm, as of Q1 FY20, is rupees 21,745 crores. All the segments of housing finance arm are growing at a brisk pace!

BHFL AUM breakup Q1 FY20 (Crores) Q4 FY19 (Crores)
Housing Loans 14,152 11,909
Loan Against Property 2,518 2,719
Lease Rental Discounting 2,272 1,705
Developer Financing 1,030 705
Others 690 532

Cost of Funds

In Q1 FY20 the cost of funds was about 8.5% for the company.

Q1 FY20 (%) FY19 (%) FY18 (%) FY17 (%) FY16 (%) FY15 (%) FY14 (%) FY13 (%) FY12 (%)
Cost of Funds 8.5% 8.3% 8.2% 9.0% 9.5% 9.9% 9.9% 9.7% 9.1%

Borrowing Profile

The borrowing profile for the company, for the past seven years, is as below. There has been no major change between Q4 of FY19 and Q1 of FY20 (except for the marginal increase in short term borrowing and a drop in NCD). Rise in short term borrowing could mean couple of things: (a) Long term financing options were not available in plenty and/or (b) The company lent more loans with a short term maturity (and hence borrowed short term).

Borrowing Source Q1 FY20(%) FY19 (%) FY18 (%) FY17 (%) FY16 (%) FY15 (%) FY14 (%) FY13 (%) FY12 (%)
Banks 34% 34% ~31% ~35% ~48% 54% 58% 53% 58%
NCD 35% 38% 43% 40% 38% 33% 25% 35% 31%
Subordinated debt (Unsecured high interest loan) 4% 5% 6% 7% 3% 4% 3% 4% 3%
Short Term Borrowing 11% 8% 8% 10% 5% 5% 13% 8% 9%
Deposits (Retail) 16% 15% ~12% ~8% ~6% 4% 1% 0% 0%

Deposits:

Deposits are a good source of (relatively) long term funds and the company has managed to increase the deposit amount in absolute terms as well as a percentage of borrowing basket.

Q1 FY20 FY19 Q3 FY19 FY18 FY17 FY16 FY15
Deposits (Crores) 15,084 13,193 11,489 7,793 4,128 2,243 983

ECB: The company plans to raise 600 million to 750 million dollars via the ECB route in this financial year.

Non-Performing Assets

The table below captures the Net Non-Performing Assets (NNPA) for Bajaj Finance for Q1 FY20 as well as for the past seven years. In Q1 of FY20, the GNPA was 1.6% and NNPA at 0.64%. When compared to previous quarter, the numbers are fairly consistent (in percentage terms).

Non-Performing Assets Q1 FY20 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12
NNPA 0.64% 0.63% 0.38% 0.44% 0.28% 0.45 0.28% 0.19% 0.12%

With respect to NPAs the table below shows the amount that rolls forward to NPA as well as the amount written of (in absolute terms) for Q1 FY20. There was a higher amount rolling into NPA in Q1, but the write-off seems to have dropped.

Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19
Roll forwards into NPA (Crores) 697 593 702 480
Write-offs  (Crores) 196 270 285 150

Return on Equity

The company strives to achieve a return on equity of 18-21%. The table below shows the non-annualized ROE for Q1 FY20. 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%.

Q1 FY20 Q1 FY19
Return on Equity (Non Annualized) 5.9% 5.1%

Return on Assets

The ROA (annualized) for Q1 was 4.0%. The company has managed to generate a consistently higher return on assets.

Q1 FY20 FY19 FY18
 Return on Assets (Annualized) 4.0% 4.2% 3.7%

Capital Adequacy Ratio (CAR)

Capital adequacy ratio for the company has reduced to 19.48%. In FY19 the CAR was 20.7%. The leverage ratio is around 6.6x. This leverage ratio is closer to the historical value when the company generally comes out with Tier I capital raising plans. The company plans to raise a billion dollars via share sale and has roped in Kotak Mahindra Capital, JM Financial and Nomura as the investment bankers to manage the share sale process.

CAR Q1 FY20 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12
Tier 1 Capital (Regulatory Norm 10%) 15.48% 16.3% 19.86% 14.56% 16.06% 14.15%% 16.2% 18.7% 15%
Tier II Capital 4.0% 4.4% 5.0% 5.7% 3.4% 3.8% 3.0% 3.3% 2.5%
CAR Combined (Regulatory Norm 15%) 19.48% 20.7% 24.71% 20.30% 19.5% 17.95%

Partnerships

The company has partnership with RBL bank (for Credit Cards) and Mobikwik (for Wallets) businesses. I believe the company earns a fee income by selling these products. The table below captures the growth in user base that uses these products. The company leverages the Mobikwik wallet platform by linking the EMI card with the mobikwik account. So wallets  help the company grow their EMI card base as well. Moreover one need not carry the physical card. Instead one can use the mobikwik wallet to pay.

Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19 Q1 FY19 Q4 FY18 Q3 FY18 Q2 FY18
RBL (Credit Cards)  (Million Users) 1.28 1.053 0.845 0.663 0.508 0.382 0.255 0.135
Mobikwik (Million Users) 10 8.3 6.5 3.3 2.2 1.3 0.47 0

Customer Growth as well as Cross sell opportunities

Quantum of Loan accounts grow under two circumstances:

  • Addition of new customers
  • Cross selling of loan products to existing customers.

The table below captures the first aspect i.e. customer growth over the past few quarters.

Customer Count Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19
Total Customer availing loans (Million) 36.94 34.48 32.57 30.05
New Customers added (Million) 2.46 1.91 2.52 1.77

The table below captures the second aspect i.e. the number of customers to whom the company was able to cross sell loans (i.e. existing customers who availed other loan products from Bajaj Finance) over the past few quarters

Cross selling customers Q1 FY20 Q4 FY19 Q3 FY19 Q2 FY19
Total Customers availing cross sell products (million) 21.85 20.67 19.69 17.82
New customers availing cross sell products (million) 1.18 0.98 1.87

Bajaj Housing Finance

Bajaj housing finance has grown its AUM to about 21,745 crores in Q1 FY20 compared to 17,562 crores in Q4 FY19 and it has generated a profit of about 70 crores in Q1 compared to 110 crores for the entire FY19. The GNPA and NNPA for this subsidiary are 0.06% and 0.04%. The table below captures some of the salient points about the four major business segments of Bajaj Housing finance subsidiary.

Business Segment Average Ticket Size Geographical Spread Loan to Value (LTV)
Home Loan

·        Salaried – 88%

·        Self-Employed – 12%

 37 Lakhs 44 Locations 69%
Loan Against Property (LAP) 27 Lakhs 30 Locations 49%
Lease Rental Discounting (LRD) 20 Crores 8 Locations
Developer Finance 15 – 35 Crores 8 Locations

Other Information

  • In this quarter I learnt that roughly 8 to 9 percent of the customers delay their payment beyond the expected date. The company then uses either the call center or physical visit or 3rd party visit to the customer premise to remind and collect the amount\EMI pending from customers.
  • About 21 to 23 percent of the customers repay digitally and the company wants to double the digital repayments option to about 44 percent in the next five years. Digital repayments helps consumers as it is hassle-free. It also helps the company as it can serve more customers with fewer Employees.
  • In spite of the huge AUM of the company, it handles merely 1.15% of the entire credit market in India. This shows how small a player Bajaj Finance is and the scope of growth within the lending business. Very interesting point.
  • With respect to the way the company manages its costs, I learnt some very interesting points. Its OPEX seems to be extremely flexible, which in-turn, is based on demand.
    • Most of its operations are on the cloud. So if it needs to scale up due to more customers (and hence more number crunching), I guess it will buy additional Virtual Machines (say, more AWS EC2 instances) on the go. And if there is a drop in computing requests it will correspondingly use fewer cloud resources. So its computing and storage costs are very flexible.
    • Sales staff at Bajaj Finance predominantly comprises of temp employees. So if there is a higher demand for sales staff it can hire more temp employees and vice versa.
    • Customer interactions are via 3rd party call centers. If there is a sudden demand expected in the future, the company can ask its 3rd party vendor to augment additional staff with a 90-day intimation. And if the demand slows down then the staff can be cut down with a reasonable notice period.
  • I also learnt one other thing regarding Risk management of Bajaj Finance. The management always indicates that if the market is not conducive for growth, the company immediately shifts gear and moves from growth path to risk aversion path. Now, what exactly does this mean… The management has experienced that the existing customers are less delinquent compared to new customers. Hence, when the management says that they will switch to risk aversion mode, I feel it means that they will lend more to the existing customers rather than acquiring new customer. Currently the existing customer to new customer ratio is 66%. If the management decides to become risk averse, it might increase the ratio to anywhere between 70% to 75%.
  • The company is growing its rural gold loan business in a very calibrated fashion. They are gaining experience in few of the branches and plan to expand at a decent pace in the near future. At present the company has 23 gold loan branches and it plans to have a network of 500 to 700 branches dedicated to gold loans. The average ticket size is about 80,000 rupees for the gold loans. This is a clear indication that the company is concentrating on affluent rural customers for gold loans. The company has been doing gold loans for three years and it believes that it can cater to affluent customers and still grow the business at a healthy pace. Interesting insights on this part of the Business!

Summary

  • The P&L numbers continue to perform exceedingly well. The company is one Juggernaut moving at a very brisk pace.
  • The branch network and touch point base keeps growing at an equally fast pace. The company has been expanding its rural network in the past few quarters and expanding slowly in the urban areas. I think the company will continue to expand with a rural bias for some more time.
  • The liability profile is growing in the right direction. With the ECB plans being worked out, we should be seeing this new source of money making its contribution to the borrowing profile.
  • The NPA are a tad higher but they are contained. The ROE and ROA continue to be very healthy. Non-annualized ROE is 5.9% and if the company manages to sustain this rate we should see an ROE that is close to 24 which, I believe, is one of the best in the listed space.
  • The housing finance arm is growing at a breathtaking speed. With a dedicated CEO driving the business, we can expect the subsidiary to become one of the largest housing finance companies in the next few years.
  • By the way the broking business has started its operations. We should hopefully see some numbers on this business in Q2 or Q3.

Great start for the financial year. I hope the company continues to positively surprise the shareholders.

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.