Bajaj Finance Limited

[mrai74]

Few key observations

Q4FY20 lost 4500 Cr in 10 days - current quarter (Q1FY21) has lost 50 days & expected to loose more days

Employee Benefit Expenses have reduced drastically (Q3FY20 vs Q4FY20) - did they reduce manpower?

New loans booked during Q4 FY20 increased by 3% to 6.03 million from 5.83 million in Q4 FY19. Adjusted for lower acquisition due to lockdown, new loans booked would have grown by 21% to approximately 7.03 million.

Covid provision of 900 Cr

The Company, at this juncture, is focused on capital preservation, balance sheet protection and operating expenses management.

[Dragon]

Just in middle of the conference call.

Bajaj Finance enters Gold Financing! Lets see how its going to play out.

[Donald]

Completely blown away again - doubly convinced - Bajaj Finance is a business to stay-partnered. Managements which can talk this TRANSPARENTLY through tough times, are that much more Special !!

a) Disclosure(s) exhibited far supersede any standards/norms, or our own expectations
b) Execution focus - completely on protecting BS, maintaining liquidity, augment and accelerate Collection infrastructure, Manage Risks basically; renewed focus on Gold Loan segment for Rural
c) Cost-structure re-imagined
d) Reduced Opex by 22% plus, despite huge 1419 Cr pre-provision
e) Data-points and Metrics for everything - witness 120+ Mkts in India exhibit similar characteristics - highest likelihood of coming back fastest - not surprisingly, more rural - represents 30-40% of Consuming India

All my questions were pre-emptively answered right at first few slides covered by Rajeev Jain, in first 15-20 minutes.

Consider below - who will DISCLOSE like this - the most interestingly transparent slide for me!! Asking to compare with what is shared by HDFC Bank or Kotak Bank, will be unfair

Disclosure: Invested from much lower levels
Disclaimer: This is NOT investment buy/sell/hold advise. I am not SEBI registered. May change stance on above business anytime with new developments and/or new insights, and/or overall market conditions. May NOT be able to update periodically. Please do your own diiigence and/or take professional advise, before investing.

[rajput_delhi]

Just one small correction - Gold loan isn’t a new segment. Sometime back Rajeev spoke about how diligently they have worked on cracking this biz and how it will start growing fast and become quite sizeable in times to come. Guess those times have just started as this is the biz he today singled out as focus for growth in rural mkts.

PS: Though he was largely tight lipped on growth but he did give out some other pointers on growing fee income (thanks to some prodding by Bharat Shah) like extra focus on Health cards and some other initiatives he did not elaborate on.

Cheers
Rajesh

[rajput_delhi]

This is what Rajeev said on Jun 6, 2016:

We started gold loans in the rural business which is 3% of our balance sheet. So 15% of the 3% of the balance sheet is gold loans so we have some experience having run for the last three years. Now, the company in the urban markets is in 300 cities and towns at this point in time. The company gets 35,000-40,000 customers walk in every month. Now in our assessment greater than 25 cities, gold as an asset class is reasonably penetrated; it is a good way to monetise for a greater than 25 city customer if he needs to some level of cash flows either for temporary purposes or for long term purposes.

The target of the company is to offer from its branches, existing branches, gold loans to in general its existing customers. So, we have gone live with 25 to 85 markets at this point in time.

Sixty markets, we ran a test last year, the test was successful, we have just gone live in 60 markets, our intent is to cover all the 300 minus 25 cities because that is where the whole mass affluent conflict comes in and that is why we are not doing it in the top 25 cities.

So 25 to 300 focussed on our existing customer, the franchise, the size of this business in the next five years could be close to $1 billion or $1.5 billion just in the gold loans business. So we are investing in the business and we think it is being done on a marginal costing basis, I am not opening any new branches. I am offering it largely to my customers, which improves my return ratios versus mono line standalone play. That is really what the private banks are doing and that is really what we are pursuing to do in the gold loans business at this point of time. And our experience has been quite satisfactory.

[Donald]

Thanks Rajput for the correction. Should have mentioned renewed focus on Gold Loan segment for Rural (Edited back),

[devaki.tripathy]

@Donald

Completely blown away again - doubly convinced - Bajaj Finance is a business to stay-partnered. Managements which can talk this TRANSPARENTLY through tough times, are that much more Special !!

In the almost 60% fall from the peak, the management integrity was never in question. What was in question was the hyper aggressive lending and marketing tactics and recently, the impact of COVID on the unsecured lending portfolio. Even great businesses, when they face severe headwinds, tends to stall/underperform for a considerable period of time; like HUL in the 2000s, Nestle in 2015-2017 or Lupin in 2017-present. The market pays a premium for the earning visibility, and when the earning visibility is not there, the premium also collapses which sometimes take years to recoup.

Just my two cents.

Disc: Invested since lower levels. Booked partial profit recently. No transaction in last 30 days and no immediate plan to add further.

[kb_snn]

Agreed …But 38500 crores AUM Moratorium is scary … esp in Auto finance - 70%

Hope Management is able to collect and maintain its pre COVID NPA levels

Discl : Not invested - Tracking only as proxy to consumption

[basumallick]

Some points for me to ponder on:

• 27% of customers have taken a loan moratorium. This number will surely increase further in May.
• Auto loans business seems to be in major problem as 70% of AUM is under moratorium
• Cheque bounce ratio is around 37%!!
• Nearly all its core business areas are likely to face a very strong headwind for atleast he next 2 quarters.
• Its biggest “moat” of physical presence in consumer retail outlets is likely to be less meaningful at a time when less people are going to buy from crowded retail stores. In digital, BAF faces stiff competition from the likes of HDFC Bank who are giving exactly the same terms. Until offline retail picks up meaningfully, BAF’s major competitive advantage is drastically reduced.
• Company is saying that they have decided to go slow on retail and SME lending. It is trying to make a virtue out of a necessity!!!
• Going aggressive in the gold loan business is interesting but history has not been very favourable. A lot of banks started doing this, but no one has really cracked it (muthoot and manappurum still rule the roost). BAF’s previous foray was also not very successful, so remains to be seen what is different this time. Personally, would remain a skeptic on this, till I see numbers being delivered.
• Home loans have picked up but the base is small. Also, it is very possible that home building will suffer in the next 2-4 quarters are the economic depression / recession plays out. So, again, would wait for the numbers on this. Long term its a good but extremely competitive business to be in.
• BAF is able to garner capital at very competitive rates, both from the bond markets and banks on one hand and retail fixed deposits on the other.
• The Non-performing loan cycle will kick-off now, the future seems to have a significant set of challenges for the company.
• Rajiv Jain has always shown that he is a fantastic manager. I always remind myself that all those fell by the wayside of the Main Street sounded wonderful in their heydays. Just giving detailed presentations is not enough. It just shows you have a good IT backend system!! Now is the time when he and his team will be tested. Ultimately, long term performance is the only bellwether of success. The next 6 months will determine how the industry & market will remember him. As a long time shareholder and someone who has gained immensely from the company and management, I wish them well.

Disclaimer: I am a SEBI registered analyst and run an equity advisory. BAF is a stock where I have personal interest in the stock. I am biased. My comments are not a buy-sell recommendation. Please do your own due diligence

[dj123]

Very interesting view points on the thread.
. Bajaj finance is one of the most discussed and owned nbfc. It has been a great wealth creator for many of us on the forum and will it be wrong to say till this year beginning was a fantasy story coming true for a retail investor.
. The management has shown their ability to manage risk and outperform their regular guidance. They have been good at creating new products and cross selling between existing customer base.
. But here comes a situation which even the best of the management have not seen and to top it this cuts through a knife for unsecured lenders along with sudden brakes on the growth as well.
. Since the current situation is not quantifiable as of now as their are lot of moving parts , how does a investor deal with the situation wherein he is mostly convinced about the resilience of the business once things start moving back to normalcy.
. My was of assessing the situation is that since we at the current juncture cannot assess the amount of losses and puncture growth, but we can with a probabilistic mindset assume that within 12-16 months the world can see a vaccine which might uplift mood instantly and then eradicate the virus altogether.
. So it might make sense to commit money to this idea on the basis of time … I.e to buy slowly and surely for next 6-9 months… This might lead to a price where the negatives will mostly be priced in and the odds of things improving will be on investors side.
Regards
Divyansh
Disc: buying this slowly and in a time bound approach rather than a price based approach

[basumallick]

The basic fallacy in understanding is that BAF is NOT a bullet-proof business model. Although, to be fair, I started understanding this fairly late and did not really understand it for the most part of the number of years I have held.

The business is over-reliant on consumer finance, speed of loan processing and an existing customer base. Nothing wrong with it. First alarm bells started ringing when the company started over-reaching for growth and looked for innovative ways to get new business.

All that is fine as long as the underlying situation is fine. Now, we have a situation where their basic business is facing tremendous headwinds.

Having sounded negative till now, let me also say that I still continue to hold (although a much reduced position) and will add significantly around the 1700-1750 zone and 1500 zone, should the stock ever get to those levels. It is a good business and they are a quasi-bank with apparently good management (reserve the right to be wrong on this) in a credit starved country which gives it a very very long runway. Not being a buyer of such a business when it is going cheap would be a sacrilege. But for now, I am patiently waiting it out before I take a plunge.

Disclaimer: I am a SEBI registered analyst and run an equity advisory. BAF is a stock where I have personal interest in the stock. I am biased. My comments are not a buy-sell recommendation. Please do your own due diligence.

[kb_snn]

True. Business have to get innovative ( aggressive ) when market has huge expectation

But this often gets reset and if management is good - business can bounce back fast . I think Bajaj finance has this mettle …

That said - I am curious on how you arrived at Rs 1700 - Rs 1750 price band as being buy zone

Discl : No position : Tracking stock as proxy to consumption

[Dev_S]

Some points that stand out IMO

1. Mgmt repeatedly mentioned that in March everyone made what they could ( salaried/sme/ doctors…) and still high April bounce and moratorium ( staying at same elevated levels in may) - indicating a behavioral issue at play in their target segment across all profiles. A second rung Manappuram were more at ease with very few moratorium from bottom of pyramid. BF mgmt quality is higher but customer quality is key.

2. Gold and fees based product focus( he mentioned 3 lac card ussued with 700 fees for a customer where card limits changes based on consumption at hospital vs retail) at this point are to be proven as @basumallick articulated.

3. 13 yr history and 10 yrs ahead strategy at work - 6 months diversion( no growth and Balance sheet focus) should not matter - wonder why mkt hasn’t given rope to them with such credible history and apt handling of past like demon/ILFS etc. No mercy for financial stocks at this time.

As a country first thing we need is sound financial engine to grow and where else it is going to come outside top notch Banks and NBFCs - and when was valuations at current levels ( am relatively newbie
but a peep in past puts quality franchise at reasonable valuations IMO) - - invested and adding slowly.

[hnk_so]

As per Kuntal Shah - Financials are cyclical.
Hence, Bajaj Finance during up cycle has super growth and got re-rated (high P/B and P/E). Now due to cautious stand of management, there will not be super growth and more negative impact due to liquidity cost and low disbursement and lower collection and higher NPA. These are conditions for de-rating of the company.

[jamit05]

Yes. BAF commands respect.

How expensive BaF still is…

BaF
Sales: 20K
MCap: 118K
Ratio: 5.9

HDFCBANK
Sales: 122
Mcap: 455
Ratio: 3.7

IDFCfirst
Sales:15K
Mcap:9.4K
Ratio: 0.62

BaF is still expensive, because people see growth in it. As days go by and expectations are not matched, BaF highly likely to correct value wise.

[Dev_S]

Looking at current PB ratio for BF - it seems to be at 3.8 for BF( Angel broking).

Promoter buying over last month is a positive- dont recall other NBFC or quality bank doing same.

On lighter note if Reliance can be a Software company ( projected as) - BF can easily qualify for a Fintech with reach and fin profile of almost all of India middle class story - if these consumers dont revive- India story may be at stake.

[fabregas]

@Dev_S

On lighter note if Reliance can be a Software company ( projected as) - BF can easily qualify for a Fintech with reach and fin profile of almost all of India middle class story - if these consumers dont revive- India story may be at stake.

You cannot compare RIL (software or not) with an unsecured lending business.

BFL’s management quality, ability to innovate, maintain collection efficiency etc. is well established. As far as a consumer lending business is concerned, it checks all the boxes - diversified loan book, prudent ALM, diversified liability profile, high collection efficiency, competitive advantage etc. You could not have asked for a better consumer lending business.

However, one thing that you have to understand about the lending business is that a super bad year in terms of NPAs, can wipe off a major chunk of your book value. Allow me to show an illustrative calculation.

• Current market cap (A): 1,23,00 Cr
• Shareholder’s equity (B): 31,800 Cr
• Price to Book (= A/B) = 3.86

Now the management says 38,600 Cr of their loan book is under moratorium. It is a consumer lending business and job losses / salary cuts are expected to happen in the near future (some would say they have already happened). It is highly likely that 10%-20% (this is pure conjecture on my part) of the loans under moratorium may not get repaid at all. 20% of 38,600 Cr is Rs 7,720 Cr, which is almost 24% of the book.

That is the difference between a software businesses and an unsecured lending business. Even in a very bad year a software business can reduce OPEX and still protect or enhance it’s book value. That is not the case with lending companies, especially ones involved in unsecured lending.

The effect of higher NPAs is even more pronounced when your loan book stops growing or when it shrinks. BFL is expected to face a slowdown in business becuase of drop in discretionary consumer spending. This double whammy is what led to a 60% drop in the share price.

In these unprecedented times, Company is focused on capital preservation, balance sheet protection and operating expense management. - Q4FY20 Presentation.

What this means?

• Capital preservation = co. will give out lower number of loans
• Balance sheet protection = co. try to minimze NPAs by focussing on collections & recoveries, wherever possible
• OPEX management = reduce headcount in areas which do not directly generate new business, divert resources to recoveries

In December 2019, when the price was around 4000, I would have said that the share is reasonably priced (it formed a major portion of my portfolio then). Afterall, BFL has been quite successfull in delivering 20% ROE for the past 9 years and there was no reason to believe why that would not continue for another 5 years. A lot of future growth was built into the share price and fairly so.

However COVID-19 situation changes everything, not in terms of survivability of the business but in terms of valuations. To deserve premium valuations it has to start delivering 20%+ ROE again, but that may not happen in the next 1-2 years.

Disclosure: It formed a major chunk of my portfolio till Dec 2019. No holdings now and no trades in the past 30 days. Will enter again when I feel consumer discretionary spending will pick up.

[Dev_S]

Agree with all points , Summary seems that as long as consumer discretionary spend picks up and NPA stays in acceptable range trajectory( perception vs reality)…BF is a good bet for India consumption story - if that is not going to pick, what happens to market is anybody’s guess. If that belief exists - Rest is timing and valuations and that is individual framework to build position gradually. Fintech parlance was for data and consumers at a scale BF owns - takes years to get there - solid monatizable asset if not moat.

While vaccine isn’t found yet and US mortality rates are on upward trajectory ( peak seems to be a moving target) - Nasdaq is back to where it was pre covid( almost). Plenty of expert theories but market has it’s own mysterious ways to move and look at situations esp when flush with money. Again this is anecdotal- not a basis for investments.

For some of us who cant perfectly time market like many experts here yet, this seems to be window to slowly build position - individual view - we all can agree to disagree :).

[atul1082]

Nicely written article. One point which probably worth considering is that the smaller players in consumer finance would be smashed and well organized players having a fairly strong balance sheet would capture their share. This part would take time but would help in early recovery.
Another point is that any new player would take at least a decade to teach where BF is today so competition would come down.
Disc:invested and looking for lower levels to add

[Krishna1]

Bajaj Finance Might See Growth From Diwali Onward, says Gautam Chugnani Of Bernstein

Bajaj Finance Might See Growth From Diwali Onward, says Gautam Chugnani Of Bernstein | Trading Hour