It helps to evaluate own invested company performance against sectorial peers and becomes ‘legally required’ (), if you are pitched against someone as formidable as a Bajaj Finance.
Here is quick summary, almost consistent >30% CAGR revenue growth for both of them. Attained largely by identifying profitable gaps within the structured financial system.
What differentiates a boy from a man is just evident from ROA metric. While Bajaj has maintained (and improved actually) a ROA of >3. Whereas CapitalFirst has ROA of approx. 1.5 for FY17. Key point to notice is that there is gradual improvement in ROA for Capital First.
What is driving this disparity in ROA? Much before the Net margin level view, even at Operating margin level both of them got an evident gap. This gap can be understood best by understanding the underlying loan book composition for each of them.
Bajaj with its innovative wide range of product offering and distribution reach has created a virtuous auto propelled growth path within the consumer fiancé business. Siblings Bajaj Auto and Bajaj Finance providing perfect symbiotic support to each other and stand to benefit in the process. Same goes with white good distributor alliance and on-line partnerships.
Whereas Capital First still trying to pivot away from its heritage. As of now, 14% of total revenue from consumer durable and 11% from 2W. Majority (45%) comes from LAP.
Most significant part to be called –out (and that will explain the disparity in operating/net margin) is that LAP has an IRR ~10.50 % whereas consumer durable finance and 2/3W finance got ~25% IRR.
Now is the time to apply a little beyond type 1 thinking (however, not exactly a level 2).
- Other key metric from a landing business entity perspective is NII. Bajan finance got NII of 10.30% whereas Capital First is just shy to it at 9.30% (no typoes, they are very close).
- Not to forget, growth engine is firing on all cylinders and have shown directional resolve by improving retail loan book from 10% of total AUM in FY10 to >90% that too when the AUM has increased by a whopping 20 items within these 7 years.
- Being consistent with the narrative, they have shown a growth of 62% in the lucrative consumer durable finance for the FY’17. Likewise, 44% growth in 2W finance and 22% in Home Loan.
- On one hand this pivoting towards better IRR accretive business will improve the yield on the other hand the cost of funds are expected to come down from consistent rating improvement. Within FY'17 they have improved the long term credit rating from AA+ to AAA. Positive on both tails is expected to improve the NII further.
- What I see is that Bajaj Finance quoting at trailing 10.59 times book whereas Capital First at 3.15 times book.
- Another very interesting point is related to the balance sheet composition:
What I see here is that for Capital First, comparatively higher % of assets (as % of balance sheet) are in long term asset category. Also, on the other hand they have higher mix of current liabilities as compared to long term liabilities. Thinking aloud, this appears to be best strategy in a falling interest rate market where you locked your lending for a longer duration with a higher interest rate and are also stand to benefit with each subsequent slide in interest rate while borrowing.
In conclusion, this is not other Bajaj Finance for sure. However, banking on the growth and move towards margin accretive business can make this an interesting story down the line.
As always, counter views, different perspective invited.
Disc: Invested, no transaction in last 6 months.