Bajaj Finance Limited

Even after this correction it is trading at 7 times book. At 1600, it’s going to be about 5.5 times book. Historic P/B pre 2014 is 2 times book and circa 2016 is 4 times book. The RoE has stayed between 18%-20% from FY11 to FY17. In FY18, it seems to have dropped to 16% which is ironic as this is the period which saw insane valuations of 10 times book. If it reverts to mean, I think 1200 is a possibility (4 times P/B). Interestingly, that’s where I see strong technical support as well. It could take some time to get there though.

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Are you sure ROE has come down ? I just checked in Ratestar + Screener…it is still above 20%.

http://www.ratestar.in/company/bajfinance/500034/Bajaj-Finance-Ltd-100034

https://www.screener.in/company/BAJFINANCE/

Overvaluation is a separate issue.

I feel, we need to give data with lot of responsibility

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If interest rates have not moved and BF has no major liquidity issues I don’t think it would give a major negative surprise in results. For coming it to 1600 to 1000 levels how bad results should be? Or do we have upcoming global/local events to take it to value level in next 20-25 days? More importantly should someone wait for q3 results irrespective of outcome of q2 results ? For me it’s a gradual buy at every major fall.

I think it may be incorrect to compare book value of BFL with the book value of say an HDFC Bank or a Kotak Bank.

One needs to take into account higher spread, higher expected growth rate, higher re-investment rate of capital etc.

Few years back I was astonished to see Gruh at PB of 10+ compared to peers at 3-5 PB. Then when you take into account all these factors plus Dividend payout ratio - Gruh slices it’s book value by paying most of the interest earned as dividend. It has a RoE of 30%. That’s why it’s PB is 10+.

Now as an investor do you want to reward a company for paying more dividend or do you want to punish it.

I have personally come to the conclusion that PB is not the best measure for guaging valuation of such strong companies, perhaps PE or adjusted PE is a better measure.

Coming back to BFL, even if one considers reduction in spread, increase in credi costs and moderation in growth rates - I feel one can arrive at expected earnings growth rate of 20-25% easily for the foreseeable future.

Now it’s FY 19 expected PE is around 35, which is 6 months from now. Are there many better opportunities for this kind of growth at this kind of price? Not to forget excellent management and execution in the last decade or so as well as widening customer base and increasing repeat sales.

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Have a look at the detailed MO report. RoE has never dipped below 20% in past 6-7 yrs.

I did the calculation on my own, so perhaps I have erred somewhere but would like to be corrected.

I calculated it as PAT/Shareholders equity which I presume is the right way.

From the AR, PAT for FY18 is Rs. 2647 Cr.

Total equity is Rs.16518.29 Cr

So RoE = 2647/16518.29 = 16%

If I am wrong, please do point out.

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Hi

Well I think @phreakv6 mentioned FY 18.

I am unsure how MOSL has calculated ROEs to be honest. On the contrary if you use balance sheet and pnl to calculate in the last 10yrs only 1 year it has 20% ROE. These numbers are inline with screener calculations.

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Shareholder’s Equity 1,088.74 1,152.54 1,358.11 2,012.25 3,351.98 3,990.86 4,799.70 7,324.61 9,600.31 16,518.29
Net Profit 33.91 89.41 246.96 406.44 591.31 719.01 897.87 1,278.52 1,836.55 2,646.70
ROE 3.11% 7.76% 18.18% 20.20% 17.64% 18.02% 18.71% 17.46% 19.13% 16.02%
MOSL ROE 21.90% 19.50% 20.40% 20.90% 21.60%

Now if Ratestar is showing 20% current ROE, I think its an extrapolation of Jun 18 earnings. In this case (833.73/16518.29)*4= 20%

Rgds

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Take avg Eqty pls…esp as there was a large qip in sep17.

Rgds
RR

The denominator. You guys are taking closing shareholders funds as the denominator. It should be average of opening and closing.

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Hi

Well yes you are right. But even if you take the average of shareholders equity across equity share, spa, reserve fund, general reserve, infra reserve, surplus pnl the MOSL number is not the same as what you will get when you calculate eg fy2017.

Anyways objective it to have consistency in data analysis nothing else. Most of us use screener and using one metric within an industry (with similar calculation methods) provides consistency I believe.

disc: i am no expert on fsa!

rgds

@deevee @phreakv6 thank you for highlighting this. I generally used to look at research reports and didn’t cross-check. I attach reports from others which is in line with MO. It seems we are missing something here. JMFinancail_Q1FY19.pdf (620.9 KB)
IDirect_BajajFinance_Q1FY19.pdf (515.0 KB)
KRChoksey_Q1FY19.pdf (649.3 KB)

Sometime it seems more easy to go with simple idea…no body knows where this price correction would stop…but everybody know it will stop some time…then stock would consolidate…then will give indication to go up…then would move up…ao when the stock resumes it up trend…start accumulation…looks simple but very difficult to follow…but with practice it should be possible…in between…keep following fundamental but buy decision of share can be made simple with above cycle that every body knows…just my view…it changes when we have stock and when we don’t have…

FY18ROE = ((FY17 Equity + FY18 Equity)/2)/PAT FY18

FY18ROE = ((9600.31+16518.29)/2)/2647
FY18ROE = 20.27%

FY18ROE of 20.27% matches to the last decimal with screener and ratestar :grinning:

Most of us know that taking average equity in numerator is a better way to gauge for ROE metric.

Thanks,
Amit

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To all those dreaming much lower valuations for Bajaj finance, consider this:

Bajaj Finance would stay at top of NBFCs and banks, so for BF to come to 4x book, likes of indusind(just an example) needs to move much lower too: AAA, 30-35% sales growth and 20% roe needs to be a lot more expensive than a AA, 20-25% growth and 16% roe.

Even on a 3 year forward basis Bajaj Finance needs to stay quite above indusind.

Disc: Invested

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People who portray as valuation calculation masters “speculating” on future trends, they should tell all what they hold/held this year. How their theory of calculations has served them well this year. That will make a complete story with benefit to all rather than selectively speculating on downfall of some companies…with no gain to anyone.

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Valuation wise everyone would be entitled to have their own views. But charts of bajaj finance seem to be very interesting with the price poised at a very interesting level. Comments on chart.

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A 40% earnings growth with a 30% price fall results in a 50% valuation compression. Think about it. !!

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Bajaj has been confident of this 30-40% growth even in the latest conference call… lets see what they have to say later this month during q2 results. I personally see no major change in that stance.

Market becomes fearful sometimes, and some perpetually fearful people make huge gains as they had been sitting on cash all along. People having cash , and people with fear don’t make the entire market.
I say 40 PE for 40% growth is fine with me.

I wonder what the post-default recovery practices (and their effectiveness) are of Bajaj Finance, especially with respect to consumer durable loans & unsecured personal loans. Anybody have any idea?
Disc: Invested