Its been a healthy infact superb growth inspite of disruption during first 3-4 weeks of July due to GST.
how did you find that it is 10-15% ? could you articulate please
Highlights of Q2 Concall:
- The company is witnessing good festive season-related demand for semi urban and rural areas.
- The company exhibited strong 38% loans growth to Rs 72,139 crore end September 2017 over September 2016. The loan mix between Consumer : SME : Commercial : Rural stood at 46.9% : 33.4% : 13.3% : 6.4%
- The company has exhibited marginal improvement in net NPA to 0.51% (3 months overdue). Provisioning coverage ratio rose to 70% end September 2017.
- The borrowings of the company stood at Rs 52,891 crore with a mix of 30 : 60 : 10 between banks, money markets and deposits end September 2017. Deposit book stood at Rs 5517 crore end September 2017 at 10% of overall borrowings book.
- The customer base of the company jumped 28% to 22.99 million end September 2017 from 18.0 million end September 2016. During the quarter, the company acquired 1.32 million new customers.
- The new loans booked surged 48% to 3,231,078 in Q2FY2018 from 2,176,798 in Q2FY2017.
- Capital adequacy ratio (including Tier-II capital) as of 30 Sep 2017 stood at 25.42%. The Tier-I capital stood at 19.86%. During the quarter, the Company raised Rs 4500 crore by way of equity capital through Qualified Institutions Placement (QIP).
- The Company has entered into an agreement with One Mobikwik Systems on 8 August 2017, and has invested an amount of Rs 225 crore in the equity shares and cumulative compulsorily convertible preference shares of Mobikwik.
- Loan losses and provisions galloped 38% to Rs 228 crore in Q2FY18.
- The company has made accelerated provisions of Rs 30 crore in Q2FY2018 related to the impact of demonetization and GST. The outstanding cumulative general provisions of the company stood at Rs 350 crore end September 2017.
- The fresh slippages in the LAP segment were largely from large-ticket loans, while the company has defocused from large ticket loans and proposes to further granularize its loan book.
- The company has started investing for building brand, and invested Rs 37-40 crore in Q2FY2018.
- The company expects major investments in areas such as new product lines and expansion to new locations.
- The company has added 85 new cities in H1FY2018, while aims to reach 2000 cities in the next 2-3 years.
- The company expects pressure on its cost-to-income ratio from the cost related to implementation of BFL 2.0 strategy, which include new product rollout and channel expansion.
- As per the company, the top 20 cities contributes 35% of AUM, while the company expects the AUM share of top 20 cities to decline to less than 20% in next five years.
- Bajaj Finance and RBL Bank tie up has issued 1.35 lakh co-branded credit card end September 2017, while it aims to be amongst 4-5 largest cobranded distributors in next 3 years.
- The company proposes to improve the co-branded credit cards count to 1 million in next 4-6quarters.
- In the rural lending segment, the company is focusing on lending to mass affluent customer, while the segment is independent of agriculture-cycle.
- The company has generated non-interest income of Rs 250 crore in Q2FY2018, of which cross-sell income is Rs 130-150 crore and rest relates to penal charges and investment income. As per the company, about 90% of non-interest income is core and would grow in line with AUM growth.
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Hi Buddy, having invested in this space for the past 7-8 years and being one of the earliest investors in this story in 2011, I will try to provide an answer to your queries. But even before I start answering your question, I would request you to look at the valuations of Gruh Finance and what the share has done over the past 1 year. The point is that for companies like Gruh Finance, Bajaj Finance, Avenue Supermarts, Page Industries. Eicher Motors, Tasty Bite Eastables…You should not anchor yourself to the valuation ranges because the quality of growth is so beautiful and the visibility of growth is so so strong. Anyone who has built a business or operates a large business will know how incredibly difficult it is to build businesses of such high quality. Rather than using vanity metrics like P/E and P/B, I would request you to think about it on an outright cost basis. How much will you be willing to pay for buying this company outright if you had the means to do it.
We are in a bull market which is clearly led by consumption and financial stocks. Now, I have have always believed that Bajaj Finance is the best way to play the consumption story in India. There are many ways to skin the cat. You want to play the consumption story, you can buy the consumer durables companies, the automobile companies, the telecom companies, the resort and travel comapnies, but guess what, all these sectors are extremely competitive. So, you will get growth in all these sectors, but only very few companies will be able to manage decent RoEs. But, Hey!! There is this financier, which is funding all of these purchases, and operating in a monopoly (OK may be an oligopoly) market. So, money will keep gushing in through the gates. You only need to visit any of these electronics retail chains or Malls in any of the major city and you will find the ubiquitous Bajaj Finance guy seated in a corner and underwriting tons of loans in 5 minutes flat. How are the banks ever going to penetrate this kind of a moat?
Now, coming to valuations, if you go by the standard metrics of P/B and P/E, it looked expensive at P/B of 5,7,9 and now 10. To paraphrase Peter Lynch in this context " More money has been lost in preparing for a correction then in the correction itself". Having said that, would I advocate fresh purchase at this price? Yes, if your return expectation is 20-30% CAGR. For people who hold this share, will I advise them to sell their holdings? No Way. The stock is in a state of blissful equilibrium. I partially agree with your contention that at this valuation, may be, just may be, there is no further scope for valuation expansion. But who knows, again. I have been tracking, investing, working and staring businesses in this sector all of last decade, and who are we to say that P/B of 10 is expensive or P/B of 15 is expensive or P/B of 5 is expensive. All I have figured out is that these are all vanity metrics. The best way to judge the valuation is how much would you pay to buy it outright. Then your start thinking about all the possibilities/ limitations in the business model.
Now let me tell you a small story. I was one of the early investor here. I bought this gem in 2011 at an adjusted price of Rs.70 right before the explosive growth. Me and my colleague had done a study on the NBFI sector and figured out (as luck would have it) that this is the fastest growing company with the best asset quality in this space. But next year, as the economic conditions began to deteriorate and there was a bit of a cautionary commentary, we booked out at around 50% gain. The price anchoring in my mind ensured that I could never get back into it and lost out on a 30 bagger and counting story. Jesse Livemore was absolutely right " It is not the buying which makes you big money, you get that. It is always and always the sitting"
…Therefore, my friend, IMHO, these kind of stories are wonderful compounding stories and don’t freak yourself about the valuations. Even if the current valuation acts as a gravity and hypothetically, lets assume that it does not expand, it will keep giving you the annual 30-35% growth, equivalent to its earning growth (plain and simple). By 2020, it will surely be more than Rs.4000, pure, simple mathematics. So why am I not buying it? Simple, I still believe I am extremely stupid and a part of me still has this exaggerated judgement of my ability to keep doubling my portfolio every year for which Bajaj Finance may not be the right candidate. But this stupidity has costed me every year and every year from 2011 till date, my CAGR has been less than Bajaj Finance CAGR.
P.S.: I am extremely excited about BF 2.0 and I think this is going to propel the company to the next orbit. The great thing about this management is that they know what they need to do to stay relevant and thrive and they are always a step ahead of the game.
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Good notes.
Anyhow BFIN CEO in an interview to BloombergQuint post Q2, has given a guidance of 30%+ PAT growth this FY.
Disc Invested at lower level.
Agree with you completely.
I think this is an EPS compounder @30-35% for many more years.
Price is market dependent.
Your input has instilled some more confidence.
Where can we find the conference call transcript?
absolutely brilliant.Very well articulated.Everytime we think it is expensive it will keep going up. We may crib about valuation and people who buy will keep making money. The choice is clear. Thank you again
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Nice perspective.
The legendary Benjamin Graham had said, “Analysts have recently been acting in Wall Street pretty much as they always have, that is to say, with one eye on the balance sheet and income account, and the other eye on the stock ticker”.
In other words, this above question sounds like the right to ask but is very tricky to answer without an eye on the stock price.
For eg the June 2015 QIP pricing was set by the Promoters, seemed expensive, but the price shot up by 15-20%, soon after. I was at the AGM and the Chairman Mr Rahul Bajaj expressed displeasure and said the issue could have been priced better. Sanjiv Bajaj argued otherwise. In other words even the best valuers who would have answered best, the above question of replacement, got it wrong, in hindsight.
Disc: no material position
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Thanks folks for your kind words. Its humbling. @diffsoft , as they say " Beauty lies in the eyes of the beholder". That’s what makes a market. Two founders or co-founders can always have a different view on the right valuations of their company. Happens all the time. It depends on your world view and how much value do you think you will represent to an acquirer
You know the only fundamental law I have learnt in this market is that valuation measures are all vanity metrics. Liquidity and momentum changes everything. I remember in 2014-15, the cream de la cream of financials used to be valued at P/B of 3x-3.5x. Now, the valuation range has doubled.
Another interesting way of looking at valuations is how much will an acquirer be willing to pay because that’s when all the intangibles come into the equation. The most pertinent example is the valuation ascribed to BFIL in the IndusInd deal. Despite all the gloominess in MFI sector, it is still getting acquired at around 34x FY18 expected earnings (P/B of 5.5x). So, BFIL independently may have been value at only about 3.5 P/B, but suddenly due to all the value it brings to a bank like IndusInd, it is valued at 5.5-6x P/B. Something to chew on!!
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Very keen on bajaj finance. Bought at 1500 levels and sold at 1950 last week before results. Honestly did not want to trade but started looking at the valuations. Now after a correction it is still at 50 x earnings and 10 x Price/Book. Will add more around 1700 level though I doubt the market will give me the opportunity. This is a classical mistake whereby trading a compounding machine like bajaj finance, and then looking to re enter but thinking its expensive.These scrips are best bought and left alone.
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We need to be careful to avoid beguiling ourselves. There is a difference between saying, ‘how much will I be willing to pay if I could buy the whole firm’ and ‘how much do I think someone else will be willing to pay’.
It is the slippery slope of ‘the stock is a buy because I think someone else will be willing to buy at a higher price’. An independent standard of valuation is given up in favor of the hope that there will be a buyer at a price higher than what I bought it at. The upward cycle continues, creating its own momentum and its own justification for the price, till it no longer can.
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@diffsoft u got the message wrong here mate. Not for a moment am I advocating buying an asset on the basis of what somebody else is willing to way. All I am trying to do here is to show you different vantage points on how the valuation of a company should be looked at. Price is what you see, Value is what you get. Its always good to see the valuation from different lens and not be rigid about seeing it only through your lens. Off course, the first step is to do an independent valuation.
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Super analysis! Thank you. I will be adding bajaj finance on declines!!
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Correct, we are no one to ascertain what P/B will market assign to this company going forward. It can be higher true, but also lower. Higher during bulls, and lower during bear. We cannot determine when it may go down.
On within company valuation, I believe BFL has capability of doubling the book every 2-3 years. As long as the valuations are supported (bull markets continue to exist), however, as soon as bear markets come (cannot determine), the P/B will reduce, CAGR 20-30% might not be possible.
Again, its a question of how long the bull run will continue. 
Thanks
Banking is not only about lending but collecting too. Management has shown amazing execution capabilities in that areas.
Seems now on almost all threads discussion is more towards supporting the high valuations and finding reasons to justify high valuations…not just this company but many more have the same discussion,…
FII’s selling almost 30000 crore since Aug is not ringing any alarm bells with retail investors… More and more SIP and direct MF money entering markets…
I would just suggest some caution here …I agree this is a great company but justifying such high valuations is not value investing…
I would be a little more cautious at the moment as bull markets make us more arrogant and forget value investing principles…
Disc : - Not Invested
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Nikhil, I am reminded of these words going by your reponse:
“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him.”
― Leo Tolstoy, The Kingdom of God Is Within You
Your response sounds more like someone who has already formed an opinion that Bajaj Finance is expensive and must be sold off, rather than someone who is a newbie to NBFI/Financial Institution valuations and wants to learn about valuation (as could be inferred from your original questions to the board where in you wanted to learn about the holes in your thesis and could not understand why BF is trading at these valuations)
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@furkanalam: It is really sad state of affairs that even now (despite sustained domestic flows), we are looking at FII selling/buying as a barometer for market attractiveness/ unattractiveness.
Are you inferring that domestic money is dumb money and only FIIs can value Indian equities properly…and last I checked , this forum is not a forum for purely value investors. I believe value investors, growth investors, momentum investors, technical investors, turnaround specialists etc… everybody can put forward their views as long as you can defend your hypothesis.
Both FII and DII buying/selling numbers should be immaterial to us as and more focus/efforts should go into understanding business models of companies that one is tracking. On a side note, you ain’t seen anything yet on the domestic fund flows. Despite all the noise, less than 6% of domestic savings is coming in to equity markets. Imagine the impact if this increase to 10-12%. In fact as I write this, financialization of savings is one the biggest themes playing out in this bull market.
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