Bajaj Finance – Retail Finance Franchise

Bajaj Finance has been one hell of a wealth generating machine over the last decade. Their stock has appreciated at a CAGR of 35% pa and 45% pa over the previous 5 and 10 years respectively. This, despite the stock correcting by around 60% over the previous 3 months. What is so special about them?

As we will see below, the secret to BAF’s success is a highly profitable (although not without risks) business with a long runway of growth ahead. Please see below a granular view of their assets under management (AUM) as at March 31, 2020.

Table 1

Segment
 AUM (INR Crore)
Share
AUM Growth (YoY / QoQ)
GNPA
Description
Consumer B2B Auto finance
13,085
9%
35%, / -1%
6.5%
Loans to salaried individuals and selfemployed individuals for two-wheelers and three-wheelers.
Consumer B2B sales finance
12,657
9%
3% / -9%
1.3%
Loans for consumer durables, digital products, lifestyle products, life care products, e-commerce products and retail spends.
Consumer B2C
31,255
21%
36% / 6%
1.6%
Personal loans to salaried individuals and self-employed individuals.
Rural B2B sales finance
2,669
2%
25% / -1%
0.6%
Consumer durable loans, digital product loans and lifestyle product loans to salaried and self-employed individuals based in small towns or upcountry locations in India.
Rural B2C
10,659
7%
50% / 7%
1.5%
Personal loans cross-sell, salaried personal loans, gold loans and loans to salaried and self-employed individuals based in small towns or upcountry locations in India.
SME
19,429
13%
23% / 4%
1.7%
Working capital loans to small and medium enterprises and self-employed individuals, loan to professionals, secured enterprise loans and used car financing.
Securities lending
4,822
3%
-24% / -26%
0.0%
Loans against marketable and liquid securities, shares, mutual funds to individuals, firms and body corporates
Commercial
6,411
4%
13% / -1%
0.0%
Loans to financial institutions, auto component manufacturers, light engineering industry, specialty chemical industry, large value lease rental discounting and corporate finance.
Mortgage
46,166
31%
36% / 4%
0.5%
Home loans (56%), loans against property (24%), lease rental discounting (13%), developer financing (4%) and rural mortgage loans (3%) (home loans and loans against property to salaried and self-employed individuals in Rural areas and loans against mortgages of self-occupied and residential and commercial properties in Rural areas)

Management

Sanjiv Bajaj, Vice Chairman – He is part of the promoter family and has been responsible, along with Rajeev Jain (MD), for the rise of Bajaj Finance

Rajeev Jain, Managing Director – has been with the company since 2008

Shareholding

Bajaj Finserv (Holding Company): 52.8%,

Remaining shareholding is widely diversified with the highest with Government of Singapore at 4.5%

Promoter shareholding in Bajaj Finserv is 60.8%, so the promoters (Bajaj Family) owns ~34% (60.8% of 52.8%) of Bajaj Finance

Strengths

High profitability: BAF’s RoA for the fiscal year ended March 2020 was 3.2% vs 1.7% for India’s largest bank – HDFC Bank. For BAF, at the end of March 2020, total loans were INR 141,376 crore and interest income for the fiscal year was INR 22,970 crore. Their interest income was 16.2% of their year end advances and 18.1% of average advances. For comparison, for HDFC Bank, total loans were INR 993,703 crore and interest income was INR 114,812 crore. The interest income for HDFC Bank was 11.6% of year end advances and 12.7% of average advances.

The portfolio quality comprises loans with high profitability but also moderate to high risk as given below. This is a rough classification based on my understanding of the assets.

High return, low risk (10%): BAF is specialist in some of the low risk high return type of segments such as consumer B2B sales finance. This comprises 10% of AUM and is the most attractive segment.

High return, moderate risk (9%): Consumer B2B auto finance

Moderate return, moderate risk (28%): Consumer B2C and SME

High return, high risk (8%): Securities and commercial

Low return, low risk (31%) – Home loans and LAP

Retail finance franchise: BAF is into retail financing. Most of their AUM is loans to individual consumers rather than to corporates. Overall I would assume that approx 10-15% of the portfolio would be to companies including loans in the following categories – commercial, lease rental discounting, developer financing, working capital loans to SMEs and securities lending. And that is a tremendous advantage because retail / consumer finance is anti-fragile in nature. Retail financing is highly diverse and hence much less risky and BAF is the only retail finance company of scale in India.

Long runway for growth: when you compare BAF with gold loan, almost all of gold loan is highly profitable and low risk, the ideal combination. But the issue with gold loans is the runway for growth is limited. In comparison BAF has a long runway of growth ahead of them as they are focused on mass affluent segment of the customers. They have grown their assets at a rate of 33% pa and 41% pa during the past 5 and 10 years respectively. The high growth has been their superpower.

In terms of growth potential, BAF is 1.5% of total bank credit in India, 3% of total retail credit in India and their assets are around 30% of India’s largest Bank’s (HDFC) retail assets.

Risks

Moderately risky portfolio: many of their customers are the ones who are not able to get financing from banks. This may be due to variety of reasons and not necessarily due to bad credit – such as self employed (banks prefer salaried customer), etc. That is why their yields and profitability is much higher than that of banks.

While this may not be apparent because of the secular growth the business has seen so far, it is a cyclical business exposed to health of the economy and the consumers. And for the first time in their lifetime, the business is exposed to a major economic shock to the economy and to their consumers. In my opinion, the economy is now entering into a prolonged period of slowdown and BAF will not be immune to the slowdown. While the business is strong, but it is tied to the health of the consumers to whom it lends. Approximately 60% of that lending (other than sales finance and mortgage) is moderate to high risk categories. Because the portfolio is retail heavy, these risks have been manageable so far. For the first time in their history, BAF’s risky portfolio meets an unprecedented consumer slowdown. It would be naive to believe that they will come out of it unscathed.

 

 

 

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