Bajaj Finance announced the Q3 FY19 results towards the end of January 2019. We have started to track the company this year. Let us have a look at the results. But before going through the results I will recommend you to look at the following links

You can also watch the below video for a visual review of Bajaj Finance results for Q3 FY19. Note that the video is an abridged version of the complete review.

Financial Analysis

Bajaj Finance Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Revenue 4995.26 3374.10 48.04%
Expenses 3359.59 2310.34 45.41%
PBT 1635.67 1063.76 53.76%
PAT 1059.56 690.03 53.55%
  • Revenue: The revenue growth at 48% was extremely good and in line with the expectation that Bajaj Finance has set for itself. The revenue comprises of the EMIs paid by the customers as well as other income. In case of Bajaj finance, the other income includes: service and admin fees when the loan is processed, penalty income (ex: late payment penalty), foreclosure charges (i.e. Charges levied when a loan is closed prematurely), service income earned by selling insurance products, distribution of co-branded credit cards, fees earned while issuing EMI cards. Out of this fee income close 45% is related to processing fees at the time of loan origination. Management is confident of retaining this level of fee income and it sees scope to increase the fee income, especially for cross-sell products (ex: insurance products). Note that one cannot get the split between interest income and fee income in quarterly results. We will have to look at this when we look at the annual report of the company.
  • Expenses: Growth in expenses was slower compared to revenue growth. This shows that the company is efficient in its operations.
  • PAT: Since the company was able to contain its expense growth, the company was able to show an excellent PAT growth at about 53%. These are really good numbers considering the fact that the company already has a large AUM base.

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

Expense Item Q3 FY19 (Crores) Q3 FY18 (Crores) Growth (%)
Finance Cost 1786.11 1178.76 51.52%
Employee Cost 510.91 387.80 31.74%
Other Expense 567.71 438.79 29.38%
Loan losses and Provisioning 453.77 278.21 63.10%
  • Finance Cost: For any lending firm, the finance cost is generally the largest component of its expenses. Bajaj Finance is no exception. The growth in finance cost is higher than the revenue growth. This could be due to the higher costs resulting from fewer low cost borrowing opportunities due to the NBFC crisis.
  • Employee Cost: The growth in employee cost was moderate in comparison with the revenue growth. Unlike software development companies where human expertise is a prerequisite, Bajaj Finance relies heavily on technology, hence human expertise is not a prominent factor.
  • Other Expense: Growth in other expenses was moderate.
  • Loan loss and provisioning: There was a noticeable rise in the loan losses and provisioning numbers for the company. A 63% rise is not comforting. This shows that some of the assets might be under stress. When quizzed about this, Rajiv Jain informed that their IL&FS account has slipped into NPA in this quarter. This could have possibly led to higher provisioning. We will look at this further when we analyze the NPA numbers. By the way the total IL&FS exposure for Bajaj Finance is about 225 crores and 20% of this has been provisioned by the company (54 crores which involves provisioning of 42 crores for the principal and 12 crores for the interest).

Overall, the expenses seemed tad higher and higher provisioning was a little disappointing.

EPS:

EPS growth (both non-annalized and 9 months ending Q3) are shown below. Clearly the EPS growth in Q3 has followed the PAT growth. The nine months EPS growth at about 56% is eye-popping indeed.

EPS Q3 FY19 (Rs.) Q3 FY18 (Rs.) Growth (%)
EPS (non-annualized) 18.4 12 53.3%
EPS (nine months) 48.9 31.3 56.23%

Footprint

The company performs its lending operations in two modes. One is via its branch network and the other is through the 3rd party retail stores (like Croma etc). The table below shows the growth in branches and presence in 3rd party stores.

  Q3 FY19 Q2 FY19 FY18 FY17 FY16 FY15
Branches (Urban Locations) 867 862 730 318 193 161
3rd Party Retail Stores (Urban Locations) 71,600 63,000 57,000 29,000 17,500 14,500
Branches (Rural Locations) 869 751 602 538 397 232
3rd Party Retail Stores (Rural Locations) 13,100 11,000 8,200 5,500 3,500 1,500

Note: Additionally the company has a 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. By the way the management is guiding a 25-7% growth in AUM in FY20.

  Q3 FY19 (Crores) Q2 FY19 (Crores) FY18 (Crores) FY17 (Crores) FY16 (Crores) FY15 (Crores) FY14 (Crores)
AUM 1,09,930 1,00,217 84,033 60,196 44,229 32,410 24,061
AUM Growth 30.8% (w.r.t FY18) 9.7% (Q-o-Q) 38% (w.r.t Q2 FY18)

 

 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. All the segments of the housing finance arm are growing at a breathtaking pace!

BHFL AUM breakup Q3 FY19 (Crores) Q4 FY18 (Crores) Growth (%)
Housing Loans 9,723 2,906 234.5%
Loan Against Property 2,115 452 367.9%
Lease Rental Discounting 1,211
Developer Financing 573 69 730%
Others 418

Cost of Funds

In Q3 FY19 the cost of funds was about 8.2% for the company. Even with NBFC crisis the company managed to maintain its cost of funds. The table below captures the cost of funds for the past seven years.

Q3 FY19 (%) Q2 FY19 (%) FY18 (%) FY17 (%) FY16 (%) FY15 (%) FY14 (%) FY13 (%) FY12 (%)
Cost of Funds 8.2% 8.2% 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 Q2 and Q3 of FY19. On a longer term the company has moved away from high cost bank loans to the relatively lower cost NCD and Deposits. An interesting point to note with respect to ECB guidelines. In January 2019, RBI issued new guidelines for External Commercial Borrowings (ECB) and Bajaj Finance can now avail this facility. I think this is a very positive development for the company as foreign currency borrowings come at a relatively lower rate. BHFL and BFL can borrow up to $750 million each. So FY20 should see the company probably hitting close to $1.5 billion dollars of ECB. I will be keenly watching more information on this part.

Borrowing Source Q3 FY19 (%) Q2 FY19 (%) FY18 (%) FY17 (%) FY16 (%) FY15 (%) FY14 (%) FY13 (%) FY12 (%)
Banks 32% ~34% ~31% ~35% ~48% 54% 58% 53% 58%
NCD 36% 35% 43% 40% 38% 33% 25% 35% 31%
Subordinated debt (Unsecured high interest loan) 5% 5% 6% 7% 3% 4% 3% 4% 3%
Short Term Borrowing 12% 11% (CP -> 9%) 8% 10% 5% 5% 13% 8% 9%
Deposits (Retail) 14% ~15% ~12% ~8% ~6% 4% 1% 0% 0%

Deposits

Deposits are an excellent source of low cost funds. Deposits for 14 percent of the borrowing profile and it is still on the lower end. The table below captures the growth in retail deposits garnered by the company. When asked about this, Rajiv acknowledged that retail deposits have dropped from 15% in Q2 FY19 to 14% in Q3 FY19.  In Q2 the 15% deposits was split into 10% retail deposits and 5% wholesale deposits. Now in Q3 FY19, due to the NBFC crisis, the wholesale guys withdrew some of their deposits to meet their cash crunch issues (I am guessing these could be real estate and infrastructure developers). This led to a drop in wholesale deposits. On the other hand the Retail deposit growth remained strong. I feel going forward, as the NBFC crisis gets put to rest, the deposit growth should pickup further (fingers crossed). The aim of the management is to achieve a borrowing mix with deposits making up 20-22% by the end of 2020.

  Q3 FY19 (Crores) Q2 FY19 (Crores) FY18 (Crores) FY17 (Crores) FY16 (Crores) FY15 (Crores)
Deposits 11,489 10,651 7,569 4,128 2,243 983

Non-Performing Assets

The table below captures the Net Non-Performing Assets (NNPA) for Bajaj Finance over Q3 FY19 as well as for the past seven years. Bajaj finance has had a frenzied growth that increases the level of uneasiness and when one sees the GNPA at 1.55% and NNPA at 0.62% the uneasiness goes a notch higher. Now, in Q3 FY19 the IL&FS account turned into an NPA leading to higher NPA numbers. The company had a higher provisioning as well for this account.

Non-Performing Assets Q3 FY19 Q2 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12
NNPA 0.62% 0.53% 0.38% 0.44% 0.28% 0.45% 0.28% 0.19% 0.12%

Let us now try to split the Net-NPA numbers segment wise and try to evaluate the parts of the business that have contributed to the increase in NPAs. You will notice that in all the businesses there has been a drop in the NPA percentage except the Mortgages business and IL&FS account is part of this Mortgages business. Hence the spike in NNPA numbers. If you remove the IL&FS account from the numbers the NNPA drops to 0.45%.

Segment wise NNPA Q3 FY19 Q3 FY18
B2B Auto finance 2.11% 2.63%
B2B Sales finance 0.26% 0.20%
Consumer B2C Businesses 0.38% 0.49%
Rural B2B Business 0.32% 0.34%
Rural B2C Business 0.63% 0.68%
SME Business 0.34% 0.54%
Mortgages (ex: Home Loans) 0.96% 0.51%
Total NNPA (including IL&FS exposure) 0.62% 0.57%
Total NNPA (excluding IL&FS exposure) 0.45% 0.57%

Now, regarding the IL&FS account, I am not sure how much of it has been marked as NPA (and hence counted as part of GNPA) and how much has been written off (and hence is part of the NNPA numbers). When I look at the break-up of GNPA and NNPA I see that there was an addition of about 220 crores in the “roll forwards to NPA” numbers and 135 crores was written off. I am guessing that part of the IL&FS loan is being treated as an NPA and part of it is being written off.

Q3 FY19 (Crores) Q2 FY19 (Crores)
Roll forwards into NPA 702 480
Write-offs 285 150

Return on Equity

The company strives to achieve a return on equity of 18-21%. The table below shows the 9m ROE for the company. 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%. The company has already crossed this number within the first nine months and by the end of the year the company should show a very healthy ROE.

9M FY19 9M FY18
Return on Equity (Non-Annualized) 16.4% 14.5%

Return on Assets

The ROA (annualized) for Q3 FY19 was 4% (The non-annualized ROA stands at 1%). The company has managed to generate a higher return on assets for quite some time now. ROA is a metric that measures profits earned with respect to the average assets for the company.

Q3 FY19 FY18
 Return on Assets (Annualized) 4.0% 3.9%

Capital Adequacy Ratio (CAR)

The capital adequacy ratio for the company stands at 21.38% which has dropped from 22.13% as seen in Q2 FY19. The Tier 1 capital was at 16.80 compared to 17.17% in Q2 FY19. The historical CAR is captured in the table below. The company seems to be raising money whenever its Tier-I drops to around 14% or the leverage ratio comes closer to its threshold of 7. Baja Finance appears to be hitting this number once every 2-3 years. Considering the fact that the Tier-I capital is at around 17% and the leverage ratio is around 6.2, I am guessing they will hit the primary market sometime towards the calendar year 2020 or the beginning of 2021.

CAR Q3 FY19 Q2 FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12
Tier 1 Capital (Regulatory Norm 10%) 16.80% 17.17% 19.86% 14.56% 16.06% 14.15%% 16.2% 18.7% 15%
Tier II Capital 4.58% 4.9% 5.0% 5.7% 3.4% 3.8% 3.0% 3.3% 2.5%
CAR Combined (Regulatory Norm 15%) 21.38% 22.13% 24.71% 20.30% 19.5% 17.95%

Partnerships

The company has partnered with RBL bank (for Credit Cards) and Mobikwik (for Wallets) businesses. I believe the company earns a fee income by selling the cobranded credit cards. So the interest income goes to RBL bank and the fee income goes to Bajaj Finance. The table below captures the growth in user base that uses these products. Very interesting numbers. Especially if you look at the growth in active users who have linked their EMI cards to the Mobikwik wallet it is just staggering! 65 lakh active wallet users who avail loans via Bajaj finance EMI cards for their spending… that’s very interesting statistics. These wallets are an interesting product for Bajaj Finance as well because they bring in the repeat business from the customers. I wish I could get details on the terms of the partnership between Bajaj Finance and Mobikwik. I would love to understand the quantum of business that Bajaj Finance is able to generate from these wallet users. Rajeev Jain made an interesting point on the reason why the partnership with Mobikwik is important. Mobikwik is becoming a proxy to the EMI card. Whenever a customer wants to use the EMI card the shop will need a machine to swipe it and if the shop does not have it, it causes a friction between the customer and the shop. By linking the EMI card with the MobiKwik wallet, the user is now free to use the MobiKwik app and the money gets transferred via the EMI card linked to the MobiKwik account. By this method the company and the customer are able to utilize the EMI card effectively.

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

Customer Growth as well as Cross sell opportunities

Quantum of Loan accounts generally grows under two circumstances:

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

By the way the company sold 68 lakh loans in Q3 FY19. Out of these 68 lakh loans, 25 lakh loans were for new customers and 43 lakh loans were for existing customers. When the loans are given to existing customers, the loss rate is 1/3rd compared to the loans given to new customers and the acquisition cost of loans to existing customers is 1/10th that of loans to new customers.

The table below captures customer growth over the past few quarters.

Customer Count Q3 FY19 (Million) Q2 FY19 (Million) Q1 FY19 (Million) Q4 FY18 (Million) Q3 FY18 (Million) Q2 FY18 (Million)
Total Customer availing loans 32.57 30.05 28.28 26.22 24.81 22.99
New Customers added 2.52 1.77 2.07 1.41 1.81 1.32

The table below captures 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 Q3 FY19 (Million) Q2 FY19 (Million) Q1 FY19 (Million) Q4 FY18 (Million) Q3 FY18 (Million) Q2 FY18 (Million)
Total Customers availing cross sell products 19.69 17.82 16.55 15.43 14.37 13.21
New customers availing cross sell products 1.87 1.33 1.11 1 1.16 0.3

Bajaj Housing Finance

Bajaj housing finance is a subsidiary that has started its operations in the past 12-15 months. Within this short span, the subsidiary has been able to grow its AUM to about 14,040 crores and it has generated a profit of about 36 crores! The GNPA and NNPA for this subsidiary are 0.03% and 0.02%. I think the subsidiary is too young to be judged based on NPA numbers. Delinquencies generally start around 24 months in to home loans. Let us give the subsidiary some time before we can judge the NPA numbers.

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
Home Loan 37 Lakhs 44 Locations
Loan Against Property (LAP) 27 Lakhs 30 Locations
Lease Rental Discounting (LRD) 20 Crores 8 Locations
Developer Finance 15 – 20 Crores 8 Locations
  • ROE: The Return on Equity for Bajaj Housing finance is around 1.4 percent (non-annualized) and 2.3 percent for the nine months. Even if the company tries its best it will not be a very significant number by the end of FY19. When quizzed about this management indicated that they see the business clocking about thirteen to fifteen percent ROE in the next 24 months.
  • One should also remember that the housing finance business is currently undergoing a transition from BFL to BHFL so many accounts are in BFL so the ROW numbers are skewed. In another couple of years this should get sorted out when the old account in BFL mature and all new accounts would be part of BHFL.
  • By the way BFHL has a separate CEO and its own management team and it appears that the company plans to create a huge HFC subsidiary out of BHFL. By the way Rajeev was quizzed further on the high OPEX of BHFL. Rajeev made it clear that they are investing in the business and hence OPEX will be higher and the ROE will follow in future. My takeaway from his comments was that the company has hired staff and probably leased office space as well leading to higher expenses, however the management is confident that these expenses will be rewarded in the next 24 months with a higher ROE. Else, Rajeev Says and I quote: “If they don’t, they will automatically as a result bring down the cost.” I believe this means people will be fired if they do not deliver and justify the expenses. This is an interesting business to watch out for.
  • The other reason for higher OPEX to NIM is the fact that the company is not pushing the developer finance business yet. This is a high margin business. But the company will enter in a meaningful way only when they have tested the waters to their satisfaction.

Other Information

  • In Q3 FY19, the company was able to acquire 6.7 million new loans.
  • The company covers an entire gamut of loan products and is like a pseudo-bank. Apparently the management sits every year in November and mulls on this topic to check if it makes sense to become a bank. The current assessment of the company is to remain an NBFC.
  • There are three major growth drivers for the company: Customer (or Franchise) growth, increase in footprint by expanding in newer geographies, and new products maturing which results in more business from the matured products.

Summary

The Revenue, Profit and AUM Growth were excellent. The increase in NPA was a little disappointing. But I am sure the company will overcome the hiccups. The borrowing profile is seeing a healthy shift towards low cost deposits. The housing finance arm is showing good numbers and has garnered a sizeable AUM. Overall an excellent quarter considering this was supposed to be the quarter that saw an NBFC crisis. I hope the company is able to maintain this growth.

Resources

[1] Bajaj Finance Investor Presentation Q3 FY19

[2] Bajaj Finance Results Q3 FY19

[3] Bajaj Finance Investor Call Q3 FY19

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.