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Bajaj Finance Limited

CMP â 1250, TTM PE â abt 10, (low NPA â 0.12 % as per AR fy 12)

Growth of past 5 yrs has been excellent, more than 30%. The company is having a diverse product portfolio, has good presence in rural markets and has the option to expand to other cities. Also, the company is using the credit history of customers in one segment (auto loan, consumer fin etc) to cross sell other products. I feel that going forward the company should be able to grow at abt 20 - 25%. I consider it as a safe stock with limited downside. Views are biased as I own the stock.

I noticed bajaj finance in safirâs picks and got interested. In present scenario I am little biased towards finance stocks.

**Business **: The company is promoted by Bajaj finserv which is into insurance ( in joint venture with Allianz group Bajaj Allianz life ins and general ins) and lending ( bajaj finance) and other financial verticals â wealth mgmt etc. Though the profit of Bajaj finserv insurance is not growing much but it is still making good profits and has good amount of cash as investments on its books. Some of the cash/investments is to cover liabilities arising from claims and some as policy holderâs investments but even if we exclude these , the company still has good amount of cash.

So fund raising for bajaj finance should not be a problem. Recently â 26 Jan, a right issue has been declared @ Rs 1150 which will lead to equity dilution by abt 16% .

Auto finance : bajaj finance has an advantage of providing finance to customers of bajaj auto. Bajaj auto as we know is a big and high quality company. Here bajaj finance has a small moat of getting access to customers at very low investment.

Business verticals

Loan disbursement is well diversified.

Consumer Finance (deployment 45 %) : auto loans(17%), consumer durables(23%), personal loans, co-branded credit card

SME Finance (deployment 28 %) â Mortgage, business loans, loan against securities

**Commercial lending **(deployment 27 %)â Construction equip finance, Infrastructure fin, vendor financing.

**Management **: for me analyzing the mgmt. is the most difficult part.

Here I ASSUME that mgmt. is of good quality, bajaj is a reputed group , annual report is informative, chairman is Rahul Bajaj which gives some comfort, however nothing can be guaranteed.

**Financials : **For the last 5 yrs growth is very good but we cannot extrapolate it into future. NP margin is abt 18-19%, ROE for last year abt 24%.

Competition : There are so many companies and doing well too. But the other good companies like hdfc, gruh are trading at high valuations. M&M fin is trading at trailing PE of abt 15, the past growth is very good and NP margin is excellent abt 22-23% as compared to bajaj fin 18-19%. But M& M fin is deriving 80% + rev from auto finance and it is more expensive than bajaj fin.

Extracts from AR

The companyâs current provisioning standards are more stringent than RBI prudential norms.

The new initiatives include :

-launch of an Existing Member Identification Card (EMI Card) for its consumer durable customers,

-expansion of unsecured loans to salaried customers,

-launch of a co-branded credit card with Standard Chartered Bank and

-a flexible loan proposition for its SME finance and commercial lending business lines.

-The company also launched an extension of its â0%â interest offering for customers desirous of acquiring lifestyle products such as furniture, home furnishings, fitness equipments, luxury watches etc.

CRISIL has re-affirmed the highest rating of âFAAA/Stableâ for the fixed deposit programme

of the company. The company also enjoys the highest rating of âCRISIL A1+â from CRISIL and â(ICRA) A1+â from ICRA for short term debt programme for 2,000 crore and 1,500 crore respectively. The long term non-convertible debentures have been assigned âCRISIL AA+/Stableâ rating by CRISIL and â[ICRA] AA+(Stable)â rating by ICRA

In FY2012, Bajaj Finance emerged as one of the largest two-wheeler financier in India. It operates at 571 Bajaj Auto dealerships as well as over 1,700 of its sub-dealers across the country.

**Present in the top 79 cities of the country, **Bajaj Finance is now the largest consumer durables financier in India. It helped finance 10% of all consumer electronics sold in the year. The company acquired more than 1.45 million new customers, and is currently present in over 2,500 points of sale across the country.

The company has entered into a strategic partnership with Standard Chartered Bank and

launched a co-branded credit card (âPlatinumâ and âWorld Cardâ) for customers with a good repayment track record.


Same as in finance sector â high interest rates, risk of default â increase in NPA, increase in borrowing cost , any adverse change in RBI policy, decline in GDP growth, decline in consumer spending, decline in auto segment.

Criticism invited.

DISC : Invested in the stock, views are biased.

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Seems a solid story to back upon.

Manish has done a good work.

So can one get an extra allotment if he applies for extra shares in right issue of bajaj Finance closing tomorrow?

[ >>its time to book profits in most of the stocks that have run 3-4 times and making qip/ofs etc… ]

I did not liked allotment ofpreferential share to promoter in 2011. If I am investor in company that means I have faith in company’ business and will be willing to participate right issues. Thesepreferentialallotment with 25% initial payment to me looked very unfair.

When promoters have more then 50% shareholding of the company coming up with right issue at high price does not looks a problem to me … this extra reserve will keep company’ credit rating up so cost of fund at lower level.

While I am worried about general landing market, growth opportunities with out much risk for somequarter to come. They have been cautious in landing is some segment recently.

(I hold this stock)

Any idea abt the extent of oversubscription ? Generally what’s the allotment ratio in RI.

the date for right issue was 26 jan , so if you buy after that date, you will not be entitled for rights.

i also dont like when warrants are issued (i hate it). But here i dont see warrants being issued frequently. Also the warrants were issued to parent company - bajaj Finserv, so all the share holders of bajaj finserv get the benefit and not just the promoters of bajaj.

Also, in a finance company the raw material is capital and as the business grows company needs further capital to grow. In the case of bajaj finance, it should not have problem in raising capital due to backing of Bajaj Finserv.

Having said that, if the promoters issue warrants again say in 2013, i would most likely reduce or sell my stake. However, the risk of warrants is there in all undervalued companies.

Is Bajaj Finance having any chance of getting a bank license or will that surely go to Bajaj Finserv?

Also would getting a bank license be such a big lottery for a well performing NBFC like Bajaj Finance or more of a drag due to statuary RBI requirements?

NOT Bajaj Finanace but it’s parent company Bajaj Finserv is in the race for banking licence.

Bajaj Finserv has around 62% stake in Bajaj Finance. It has 74% stake in Life and Health Insurance (Bajaj Allianz), some wealth management andfinancing related companies and 138 windmills in Maharashtra.

In my opinion Bajaj finserv is better than Bajaj Finance. If Bajaj finance continues to perform well, it will help finserv financial too (after discounting some 30% due to Holding company). Beside, Insurance + Other financial services + Banking Licences makes it more attractive. It’s trading at around 8PE FY13 as Q4 results are always good due to Insurance profit/premium are taken into account in Q4.

I chose Bajaj finance over finserv, because

)- in insurance business there is very tough competition, almost all the big corporate houses - tatas, birla , reliance n then hdfc, icici, n all psu banks n yes LIC are there fighting. In insurance brand value helps, if premium is same my guess is that the client is more likely to buy insurance from LIC, sbi life, or hdfc , icici.

)- bajaj finserv appears like a holding company.

issue of bank license will definitely help but cannot be taken into consideration for valuing the stock.

Also as told by my friend (hearsay) that some products in some shops are financed only by bajaj finance. One of my friend bought an LED tv on the bajaj finance smart card without any hassles. These things help in retaining customers. Also this freind was not planning to buy the tv - impulsive buying.

Updates from AR Fy 2013

net NPA is 0.19% (last year 0.12%)

Capital adequacy as on 31 March 2013 stood at 21.95%. This should take care of the fund requirement atleast for the next couple of years. The company should be able to grow at 30% PROVIDED the demand is there.

At a trailing PE of abt 12 and a CAR of ABT 22 % and a well diversified loan portfolio, i feel the downside risk is less unless the full financial sector sees a meltdown.

Auto finance )- Bajaj Finance continued to remain the largest two-wheeler lender in the country.The Company operates at 578 Bajaj dealers and at over 2,130 of its sub-dealers ( last year 571 dealers n 1700 sub dealers).

Consumer finance )- It maintained its position as the largest consumer durables lender in India and helpedfinance 13% (last year 10 %) of all consumer electronics sold in the year. it acquired 1.9 million customers andoperated across 4,500 points ( last year 2500 ) of sale in the country.

**personal loan cross-sell -**it focuses on customers with a goodrepayment history of their two-wheeler and/or consumer durables loans to cross-sell apersonal loan. this segment grew by 47%.

Loans against collateral of property grew by 34%.

Home loans grew by 94% to ` 1,410 crore .

Working capital loans to relatively affluent small business customers, including doctors andother professionals, increased by 38%.

Financing of auto component manufacturers was ` 2,483 crore , steady.

Construction Equipment Finance and Infrastructure Finance, facing headwinds and portfolio pressure and is not showing any growth. No loans were issued for infra finance.

While, there were changes in the policy rates in FY2013 amounting to a total reduction of 100
bps, the cost of borrowings did not reduce at the same pace because of reluctance on the partof banks to transmit the entire reduction.

BFL has a unique and innovative product offering called the EMI (Existing MemberIdentification) card for its existing consumer durable customers.
the number of EMI cards inforce exceeds 1 million.

New products launched during the year -

âKisan Mitraâ for farmers, where repayments of instalments are synchronised torealisations from crops.

last year BFL started apersonal loan offering for salaried employees. The business targets relatively affluentemployees above a threshold salary range working for leading companies.
And to broaden its customer acquisition engine, the Company launched Indiaâs fastest online
personal loans in August 2012. This facility allows the customer to obtain an approval for a

loan up to ` 15 lakh in 15 minutes using a digital medium.

it was natural to extend the existing âZero per centâ interestoffering for consumer durables to financing lifestyle products like furniture, home furnishings,fitness equipment, luxury watches and so on. Bajaj Finance has tied-up with premium brandslike: @home, Evok, Durian, Reliance Living, StyleSpa, Damro, Hometown, Proline, YamahaMusic, Ethos Watches and Apple. FY2013 was the first year of this launch. It saw over 37,000disbursements across over 1,000 retailer stores spread among 25 locations.

A new product offering called Flexisaver for SME, HNI’s, introduced in the last fiscal year, has been wellaccepted and attracted over 150 affluent customers. This offering gives such customers theflexibility to âdraw when they wantâ and âpay when they wantâ.

Positive triggers can be - reduction in interest rate - borrowing costs, however that seems to be unlikely in short term.

If Bajaj auto gets approval for launch of quadricycles ( RE 60 ) ( it will take sometime) that should help the auto finance segment of Bajaj finance also.

Downsides can be - due to reduction in demand ( low GDP growth, hgih CAD, reduction in investments , reduction in capex etc),

auto sector is facing headwinds,

increasing in borrowing costs.

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Hi Manish,

Am a new member,so don’t mind if I ask stupid questions.

Your analysis is really well detailed.They have done a smart thing to limit NPAs& BFL looks very good indeed.First,what is Capital Adequacy? How much is considered good? Second,I think M&M Finance too is in the auto loan biz.Recently I

heard the M&M Finance management & they said that demand is very good for loans for 2nd hand automobiles.So how is BFL doing on this front?

Regarding the ‘downsides’,I don’t feel BFL would be badly affected by auto slowdown since they seem to have a well diversified loan portfolio.The interest rates too are bound to come down,possibly when Rupee stabilises against the Dollar.Do you see any other area that could have a negative impact?

hi sagar,

i am not a finance or banking expert but will try to explain CAR. Will request other members to correct where i am wrong.

  1. In LAYMAN terms, a finance institution generates money from 2 sources -

its own paid up capital + reserves and

borrowings ( deposits, bonds in case of banks, fixed deposits + bank borrowings , bonds and other debt in case of NBFC )

Out of this total capital, the finance institution generates returns by

)- lending it to individuals , companies etc

)- investing part of it in govt securities ( banks have to park some money with RBI - CRR credit reserve ratio)

)- other investments

It is mandatory for the finance institutions to park a certain percentage of total capital in risk free assets such as govt securities / cash. This is done to protect the depositors, investors and the system as a whole.

  1. CAR = (Tier 1 capital + tier 2 capital) / Risk weighted assets

tier 1 capital = paid up capital + reserves

tier 2 capital = any reserve created to account for expected losses + debts raised by the institution

RWA = all the assets owned by the nbfc / bank which bear risk. Different assets have different risk profiles, i dont know how to calculate this RWA.

As per RBI, minimum CAR for NBFC’s is 15 %.

Presently Bajaj finance has a CAR of abt 22%, so it has sufficient reserves / cash for next couple of years to lend it to its customers and meet the growth requirement. Over a period of time when this cash is deployed in the business and the CAR comes close to 17 %, it will need to either raise capital again or slow down the expansion plans.

)- **Regd M & M fin- **i think its a good company - Mahindra group. has better NP margins and has a good track record. However, more than 80 % of revenue comes from auto finance and hence will depend on auto sector sales. Regarding 2nd hand auto sales, I know that Shriram finance is doing quite well but dont know much about performance of M & M fin in this segment. Bajaj fin is present in Bajaj auto dealers and sub-dealers and I dont think they have significant presence in 2nd hand auto finance.

)- Negatives . With the rupees declining further and the policy logjam, it is difficult to predict when the borrowing costs for NBFC will start coming down. If the present situation persists for long the inflation will affect consumption and will hit economy and finance sector as a whole.

Bajaj finance enjoys high credit rating for its debt. If the portfolio quality deteriorates due to rise in NPA, the credit rating may suffer and borrowing cost will increase.

Today i went to Hometown and saw the price for one of the modular kitchen as 2 lacs, 0 % interest finance option was mentioned and below it was written Bajaj Finserv lending ( bajaj finance). I think venturing into financing of lifestyle products is a good idea as the company already has expertise in consumer finance and now more and more people are buying lifestyle products. Few years back there were very few showrooms in lucknow with high end products and now there are many.

Also there are very few established players in consumer finance. On googling I mainly see citi financial. I dont think banks are active in this field. As per Bajaj finance AR also the competition in this segment is limited due to low ticket size of loan and upfront investments required.

For auto-finance they have access to bajaj auto dealers and are more likely to issue loans to the prospective buyers ( same kind of moat is enjoyed by M & M fin also).


Thank u.Thank u.Thank u.Lots of hugs to you.
BFL looks really undervalued at CMP.They seem to have: good line of innovative offerings,good presence,forays into markets with great potential,great PAT & Loan growth over the years.Also,I feel the management needs to be commended on the excellent NPA they have,even in these tough economic conditions.They seem pretty conscious of maintaining their NPAs(loans to salaried employees only) too.
M&M Financial looks expensive at CMP compared to BFL.With the excellent financial performance it makes a strong case for P/E expansion.But even without that,BFL should give good returns.Great analysis.Thanks again,for answering my queries comprehensively.

Hi Manish,

Risk Weightage of assets (loans) is determined on the credit rating for a company (lower for higher rated entities ie AAA, AA & A as compared to lower rated entities BBB and below). For eg. AAA rated entities have 20% RWA while BBB rated entities have 100% RWA. For consumer finance, RWA is 125% which is applicable in case of Bajaj Finance. Also, apart from P/E, one other parameter to value a bank/nbfc is looking at their Price/Book Value. Higher the P/BV, costlier the company is.




If I am not wrong we need to look at P/B ratio rather than P/E ratio for NBFC’s and Banks.

Bajaj Finance is quoting at 2 P/B and M&M Fin @ <1 P/B. So M&M Fin is not expensive.(It might be cheap bcz it has 80% loan book in Auto loans)

Bajaj Finance has turned around in last 2-3 years as can be visible from ROE increasing from measly 3% to 22%. What is the reason for this turnaround?

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The P/B for M&M Fin stands at 3.80 at CMP.For BFL it is 2.53.

thanks Ankit for the info.

@Rohit - during market boom time - 2005-2007, i think several companies had entered into consumer finance - icici, future retail etc which had affected the business of Bajaj fin. then the recession came and the auto sector was severly affected.

When the situation started improving, Bajaj fin was able to grow very fast bcoz their CAR was abt 46 % at that time and they had plenty of money to deploy and were able to meet the demand.


My understanding of risk weighted assets is a little different (not sure whether the same is implied below). The lender has to allocate some portion of its capital (networth plus debt) towards taking care of defaults on its assets. The riskier the asset, the higher is the allocation of its capital towards it. To put it simply, assets of any lending institution are the loans it gives and the investments it makes. Each asset is assigned a risk parameter based on its nature. For eg if the lender has invested some funds in G-secs, which are considered completely safe (govt will not default), then it is assigned a risk weight of 100%. So 100 invested in G-sec is valued at 100. On the other hand, say the lender gives personal loans which are completely unsecured, then since it is riskier, it is assigned a higher risk weight, say 200%. So 100 given as personal loan is valued at 200. Higher the proportion of riskier assets, higher is the denominator and lower is the Capital Adequacy Ratio. Other loans like auto loans or mortgage loans will fall somewhere in between. Similarly loans to companies (term loans or for working capital) are assigned weights depending on the security that is held against them. Minimum Tier 1 CAR is 9% and overall CAR is 15% as required by RBI. Higher the CAR, more room is available to the lending institution to give loans/make investments and increase its earnings. Therefore higher the CAR, greater is the room to grow. As rightly said, as CAR reduces, the lender has to undertake capital raising as either equity dilution (whihc adds to Tier one capital) or loans/subordinated debt which adds to Tier 2 capital. Please correct if some part is inaccurate.


Hi Vinay,

You are correct. I will give an example to explain this. For example, a bank has equity of Rs.10.

As far as assets are concerned it has assets worth Rs.120:

Break Up of assets:

Gsecs: 20

Housing loan: 30

Consumer finance (what Bajaj Does): 20

Loan to AAA rated companies: 20

Loan to BBB rated companies: 20

Cash: 10

Risk weights: Gsec and Cash - 0, Housing Loan: 50%, Loan to AAA rated companies: 20%, Loan to BBB rated companies: 100%, Consumer finance: 125%

RWA for the bank= 0*20+50%*30+125%*20+20%*20+100%*20+0%*10 = 64

CAR for the bank = 10/64= 15.625%.

So, higher the risky assets , lower will be the CAR. For increasing CAR, banks/nbfc need to increase equity or issue hybrid issues (which have properties of debt and equity both) like perpetual bonds or subordinated debt.

According to RBI, for banks the minimum CAR is 9% while for nbfc its 12%.




Superb attempt by Ankit in explaining tricky finance concepts. Also very good attempt by Manish,vinay,sagar. Thanks guys. Really illuminating discussions. This level of discussion will sure bring in more participants both experts and novices. Have read quite a bit about banking sector, but never really understood CAR in depth or bothered about it. But today I am glad I got it.

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As per an article on Business line :

Bajaj Finserv proposes to convert its subsidiary Bajaj Finance Ltd into a bank as per the Reserve Bank of Indiaâs February 2013 guidelines.

The financial services firm applied to the RBI for a banking licence on Wednesday, June 26, said an exchange filing from the company.