Sorry I sounded like I formed an opinion. I am a newbie in NBFI space, I am still trying to understand how you value such companies. You have majorly mentioned why it is a good story, given the growth expected, and not how to value it.
I primarily agree that it is a high growth stock, however, how do we know P/B going forward? We can only speculate this part, and my opinion here is - it will continue to rerate/maintain as long as bull market is there. However, in bear, it might not be the case.
Holes in thesis from valuation perspective I am looking for, and not from growth perspective. Growth is clear, valuation is not.
@goyal_nike No Problem buddy. I tried to give you the perspective and hoped to help you in learning the art of FI Valuations as requested. Wish you all the best in your investing journey. Cheers!!
Leta say we drop Bajaj’s P/B to 4x (Respectable for the pedigree ?). What happens is that the PE drops to 19x, PEG goes to 0.55x, Div Yield goes to 0.65%.
All this for a company growing Sales at 35%, Profits at 39% and a RoE of 21.7%. with NPA’s at 0.40%. I am sure anyone (FII, DII, Retail, HNI, you name it) would sell thier house and BUY the stock right ?
Just some food for thought on the always debated factor ‘Valuations’
Also felt your arguement for stocks is like saying I wont buy it during a bull market because its expensive & i wont touch it in a bear market because i cant predict how cheap it will become.
Looks like I am getting judged left, right and center today.
Need to work on my communication skills. I am not the kind of guy who never buys and keep cribbing
Ok, coming back, why I am stuck on valuation. BFL has increased its book value by 2.5 times in the last 3 years. Given the situation it is in, lets assume its book value can become 3 times in the next 3 years.
From current book value per share of 186, the book value per share will increase to 558. If I take P/B of 4x, in 3 years the stock price will be 2232. Current share price is 1833. This represents a return of just 7% per annum.
@furkanalam has a point though. In a bull market - while growth expectations and mgt quality driving that growth remain unchanged - there is a tendency to extend the runaway period to unrealistic levels. The flip is also true - value investors in general tend to be pessimistic despite contrary evidence and growth investors tend to be optimistic because growth can easily be dragged indefinitely into the future. To find a balance is tricky and only an analysis of the industry and the relative position of the company with respect to rivals can help in making sense of the valuation.
All valuation is not created equal and some companies find themselves in a position of strength.
Any NBFC that increases their BV 3x in 3 years i.e a 45% CAGR will command super premium multiples in the market today & 3 years down the line as well.
P/B is what I cannot figure out. I could not find a finance company which continue to command 11-12 P/B value for 5-7 years straight. If it does, it will indeed a good pick. I cant feel it will continue to be rated so for so long.
In my opinion, NBFC sector will most likely be growing at much faster pace in near future:
As one can see that even after demonetization and GST the two wheeler,four wheeler, companies have seen sales growth and the consumer product industries have also seen profits in q2 this year.
So once the overall impact of demonetization subsides the growth will be at much faster rate.
Funny thing: BFL gives you more return than their personal loan which is at 12%.
(Except for the year 2011-12).
i.e if you would have taken 1000INR personal loan from BFL on Jan 1 of a year and invested in BFL shares and sold them at the end of the year on 31st Dec the same year, you would have been giving back them their money earned by their money by investing in their money. (by saving the same amount for yourself )
And you can see that since 2009 till now the market has corrected couple of times. So in my view even if the market turns bearish and corrects you would still make money at the end of the day given that BFL business performs the way it has.
The direct rival to this business is Capital First. Though they are growing fast too, their ROA, ROE and their loan book size, reach, distribution etc. are not like Bajaj Finance. Hence they are trading at lower valuations as compared to BFL. So they are effectively trying to get where Bajaj Finance is and by the time they get there, BFL will be way ahead of them. Also I agree with @maverickroger and his assessment on valuation. The PE/PB isn’t going to crash on a company that is poised to grow their loan book and profits north of 30% for the next 3 years (maybe even 5). After all markets pay for clarity and certainty. The growth looks certain, only if it falters badly the valuations will drop (how heavily is anyone’s guess). In constant state valuations may go slightly lower / higher or maintain steady state. Steady state this should be a 25-30% compounder. Goes lower it’s a 17-19% compounder. I guess no one will be complaining if it goes higher! All guesstimates on compounding for the next 3 odd year period.
When the stock price rises up and up, it is often my observation that valuation is built to justify the price. Happened too many times in my investing career to not pay heed to it. I recall the Indian IT bell weather quoting at a similar or higher multiples in 2000s and remaining flat for the next about 10 years even as earnngs compounded 25%+ annually. IBM was considered invincible quoting at a multiple of 50 in its hey days before it fell to 10 in some time (late 60s iirc). Earnings may continue to grow but if the ‘environment’ deflates, the same earnings may now, for no justifiable reason, be given a lower multiple.
No one from the Dhirubhai days would have conceived Relaince to remain flat for about 8-10 years. No one can now imagine that HUL was available at a 14 ~ 16 multiple about a decade or so ago, and was a pariah. Most businesses are foggy beyond the horizon and no one hows they will pan out. Suppose the contingent liability of ₹ 1147 cr claim of service tax against Bajaj Finance is upheld, DoCA nullifies or controls interest subvention to consumers purchasing durables under financing, or the market for personal credit slows down as durable purchases slow etc etc (the unknown unknowns)…in effect space needs to be given for new and hitherto unforeseen brakes on the businesses in valuation. The margin of safety.
A higher and higher valuation, which gallops at multiples of earnings growth, automatically attracts interest, but those interested may have to bear in mind that they will already have paid for a substantial part of future growth. So having bought they could well be witness to all the business growth they paid for, but without material movement on the price needle.
@diffsoft While I respect your right to express your views and differ on the right valuation for a company, I would request you to not distort historical facts. If I go by the valuations of the companies and instances you have quoted, Bajaj Finance can become a 6 bagger from here. In 2000, Infosys was the IT bellweather and is was trading at 350x. Bajaj Finance is currently at around 45x. IBM at its peak contributed around 8 percent of S&P 500’s market cap. What should be Bajaj Finance’s market cap to match that.
The example of HUL is the most abused example in the history of Indian stock markets. When folks give this example, I ask them to check the data on sales growth and PAT growth for that 10 year period. It was less than inflation. Obviously, the share did not move. Infact it should have fallen. The business was struggling and it is only the dividend yield that saved the share price. As their business started performing, the share started galloping. Same was the case with Reliance.The point is that markets are slave of earnings. As long as there is earnings growth, the valuation will keep on increasing, whether we like it or not and no matter how much we intellectualize this. I can see a clear runway and a very long runway for BF. You may not, which is perfectly fine and I respect your opinion on that. Ultimately, different view points make a market. But let’s not distort the historical facts please and put things in the right context.
A good way to test your conviction - if you hold the stock- is to imagine that the stock market is going to shut down and re-open after 5 years. And the company gives you an offer to exit or enter at the current valuation one last time.
Everything else remains the same and the co will continue to make the announcements related to its business through the usual route just that there will be no share price quotes for the next 5 yrs. The next quote will be after 5 years.
The same offer is simultaneously made available for all cos on the stock exchange and you have 30 days to decide. In these 30 days the share price will not move and be frozen at the current level.
Will you buy more or will you sell or do nothing?
What should be the PE ratio of a company that growing its earnings at a rate of 10% v/s one that is growing its earnings 30%?
A company growing at an unexciting rate of 10% but having a very strong competitive position difficult to dislodge for lets say 30 years is far more valuable than a 25% grower whose competitive position is not going to last for more than 3 years.
Creating competitive distance takes time but the benefits of understanding the sources of this advantage are immense for investors. This is value investing according to me. Arent the little things that the company does much more effectively than its rivals - the real source of value? Isnt it then more useful to focus energies towards identifying these things?
Only after you have a handle on this can you really set out to calculate the “fair” value of a company which is really the last leg. It is unadvisable to make it the first leg in your investment process.
With all this hullabaloo over valuations - I wonder if people have missed recalculating the Book Value post the QIP in Q2 which now becomes Rs. 261 by my calculations.
So currently trading at P/B 6.6 - still not cheap by any parameter but not insane either.
And looking from an earnings perspective - did 1850 cr PAT in FY17 and at current runrate of 35% CAGR should be ~2500 cr PAT in FY18 which is ~40x earning multiple.
Now surely buying a financial company at 40x earnings and 6.6 P/B may seem a bit unreasonable and has pretty low MoS but for a bull market leader these valuations don’t sound frothy in any sense. I believe Gruh has been trading 4.5-5x P/B for a long time well before this bull market began and now at 15-16x P/B sounds pretty insane - so you have a good example of what markets are willing to pay for leadership companies and businesses in a not so bullish environment as well.
So given the above, and not including any black swan events - losing money at CMP seems pretty difficult with even a short 1-2 year perspective.
So shifting the discussion to FY19, 20 and beyond business growth and potential CAGR return expectations probably makes more sense in my view.
This article offers a good understanding on where BFL is heading and some good insights into the vision of the top management driving this company forward. Certainly worth a read.
Good one @amangoklani.
I enjoyed reading this.
The confusion is which is better - Baj Finance or Baj Finserve?
Both are going great guns.
Till date I am with Baj Finance.
If it corrects further it will be still tasty.
I loved the way you brought a fresh perspective to this stock. And I agree that when quoting historical data, we tend to skew it according to our needs and the real picture remains hidden. Just bought into it.
I am not so sure that this would be the right strategy to adopt in today’s economic and global business environment. The theory that you have presented is essentially a glorified version of Warren Buffet’s theory of ‘Buy assuming that they are going to throw the keys of the market today and will reopen it after 10 years’. The economic variables are extremely dynamic in today’s world and rate at which disruption is happening is going to kill many companies and sectors. For Example, Maruti Suzuki is a great company and has been a stupendous large cap investment over the past decade. But can I afford to buy this share today using this theory of assuming that you cannot sell it over the next 5 years? No way. The markets are clearly underestimating the speed at which the evolution of Electronic Vehicles are going to hit us. Five years down the line Maruti Suzuki may be a Junk company OR if it rides out the EV wave well, it might be much more valuable than what it is today. Industry after Industry is getting disrupted. Automobile and auto ancillary industry will be completely disrupted in the next 5 years. The oil and energy industry is in the process of getting disrupted by renewables. No sane person is going to fund a new coal mining project going forward. I firmly believe the best of oil is behind it. The middle east nations obviously have realized this faster than us and have started diversifying their economy at a very aggressive pace. I wont be surprised to see Oil below 20$ on a permanent basis from FY20 onwards. Look at the pharma industry, over the next 3 years, it has the potential to get disrupted by the human genome phenomenon.So, the point I am trying to make here is that many of the index companies today may become junk over the next 5-10 years as the rate of disruption is tremendous. So, as investors, we have to evaluate our positions and investments on an ongoing basis. Moats are extremely overrated in today’s world and due to fast increasing use of technology, are getting broken and invaded faster than ever (Hint: Check out what’s happening to Gillette’s seemingly impregnable moat in the US. How fast it is losing market share to competitors who are essentially using a lot of technology). Many of the index companies today may have terminal junk value. There is a reason why the top 5 tech companies in US (Apple, Google, Microsoft, Facebook) are valued more than the entire Indian Market Cap. Think about it. It is because of the fact that the market is betting on the fact that these tech companies can potentially alter the dynamics of many industries besides tech. As I write this, Amazon is disrupting the media and entertainment industry. So, you know, this theory of buy and assume markets will close for 5 years may not really work as well as it worked in the 1970’s.
So, now, you may ask me a pertinent question that If this my view then why I am so bullish on Bajaj Finance. The Financial industry is also getting disrupted as we speak at a break neck speed, isn’t it? The point is that in my view, Bajaj Finance was one of the first fin-tech companies in India. The story of how Bajaj Finance’s profits grew more than 80x over the past 10 years is a story of how technology can be used in Finance to take away market share aggressively and create new segments. The judicious use of data, technology and analytics to give your customer an experience which was literally unheard of in India is the story of Bajaj Finance. And if you read the article shared by one of our esteemed boarders above, it has beautifully captured all the real strengths of this company. Tech, Tech and more Tech to drive decision making and risk management is going to ensure that they will not only thrive , in fact they will lead the pack. It is dangerous to be a superficial follower of Buffet.I have seen superficial followers of Buffet pledge that they will never buy an airline company or a tech company. But, guess what, the great man himself acknowledges the new world order and went ahead and bought Apple…
P.S.:I don’t have anything to say on the second part of your thesis because that’s just a summary of what has already been beautifully captured in the thread " The art of Valuation" on this very board.
There is a lot of myth around Buffett that isn’t supported by facts. Buffett’s median (not average) holding period is only around a year and he sells 30% of his holdings under 6 months and only 20% make it past the 2 year mark. He churns his portfolio like the rest of us riding the winners and cutting out the losers. So much for his favourite holding period is “forever” and buying as if the market won’t open for 5 years and so on which are counter-intuitive.
