Is Bajaj Finance Stock A Good Investment – Bajaj Finance is one of India’s leading non-banking financial companies (NBFCs) specializing in lending and investment services. The company has delivered stellar growth over the past decade and emerged as a financial powerhouse. But is Bajaj Finance stock still a good investment opportunity at current levels? Let’s analyze in detail.
Strong Financial Growth
Bajaj Finance has posted phenomenal growth in revenues and profits over the last 10 years:
- Total income has grown at a 35% CAGR from FY12 to FY22 to Rs. 15,096 crores.
- Net profit has risen at a stupendous 40% CAGR during this period to Rs. 5,018 crores in FY22.
- Return on assets has been consistently above 3% while return on equity has ranged from 15-22%.
The robust growth demonstrates Bajaj Finance’s strong execution and operational efficiency.
Leadership in Consumer Lending
Bajaj Finance is India’s largest consumer lending NBFC with a loan book of Rs. 1.8 lakh crores. It is a leader in financing categories like:
- Consumer durables – 25% market share
- Digital consumer and lifestyle – 40% market share
- Small business loans – 8% market share
Its widespread network, data analytics capabilities and insights into Indian consumers have enabled it to dominate key lending segments.
Diversified Product Portfolio
Bajaj Finance has diversified its product portfolio across:
- Consumer durable loans
- Personal loans
- Small business loans
- Commercial vehicle loans
- Home loans
- Credit cards
- Rural financing
- Loan against securities
This diversified product mix insulates the company from risks in any single product segment.
Strong Customer Franchise
- Bajaj Finance serves over 60 million customers.
- It has the highest net promoter score among financial services brands in India.
- The company has an innovative mobile app and customer engagement model.
- It also has partnership with major e-commerce platforms like Amazon.
The strong customer franchise provides a solid foundation for sustaining its growth momentum.
Healthy Asset Quality
Despite being an NBFC, Bajaj Finance has maintained very healthy asset quality:
- Its gross NPA ratio has consistently been 1.5-1.7% over the past 5 years lower than most banks and NBFCs.
- The company follows robust credit underwriting standards using big data analytics.
- It has been able to contain NPAs even during challenging times like the pandemic.
The strong risk management and underwriting policies have enabled Bajaj Finance to keep asset quality under check.
Comfortable Capital Adequacy
Bajaj Finance is well capitalized with a capital adequacy ratio (CAR) of 28.43% as of June 2022, well above the regulatory minimum of 15%.
The company has been raising equity in regular intervals as it has expanded over the years. The adequate capital levels provide it comfort to pursue aggressive growth plans ahead.
Diversified Borrowing Profile
Despite being an NBFC, Bajaj Finance has been able to diversify its borrowing mix across sources:
- Debt securities form 31% of its borrowings – through NCDs and commercial paper.
- Term loans from banks comprise 23% of its borrowings.
- Deposits account for 22% of its total debt.
- Securitization, foreign borrowings etc. account for the balance 24%.
The diversified debt profile indicates the company’s strong access to funding from varied sources.
Industry Tailwinds
Bajaj Finance is well placed to benefit from the following industry dynamics:
- Rising penetration of financial services across India.
- Growing middle class and income levels.
- Increase in nuclear families and urbanization.
- Higher consumerism and spending power.
- Government support for lending to priority sectors.
These trends will support the long term growth story for the company.
Valuations Seem Stretched
- Bajaj Finance trades at a 1 year forward P/E of around 50x.
- The valuations seem highly stretched even when compared to its own historical multiples.
- The valuations factor in its strong growth and profitability.
- However, there is risk of valuation contraction if growth moderates.
Investors need to be cautious about the rich valuations and wait for reasonable entry opportunities.
Concentration Risk
Despite diversifying its loan book, Bajaj Finance faces some concentration risks:
- Top 20 borrowers account for 16% of its AUM indicating some client concentration.
- The company mainly focuses on urban and semi-urban consumers which is a concentrated demographic segment.
Any downturn in its key customer segments can impact growth and asset quality.
Overall, there is little doubt regarding Bajaj Finance’s strong growth track record and robust financial performance. The company is a key beneficiary of rising consumerism and financial inclusion in India. However, the stock appears very expensive currently trading at ~50x P/E. Investors may be better off waiting for corrections to build a position. Bajaj Finance can be considered a good investment around 30-35x P/E for patient investors with high risk appetite given its long runway for growth.
Is Bajaj Finance Stock A Good Investment? – FAQs
What is the market share of Bajaj Finance in consumer durable financing?
Bajaj Finance commands a market share of around 25% in the consumer durable financing segment in India.
What is the mutual fund ownership in Bajaj Finance?
Mutual funds hold around 15% stake in Bajaj Finance as of Sep 2022 making it one of the largest institutional shareholders. FIIs own ~40% stake.
How has Bajaj Finance stock performed in last 5 years?
Bajaj Finance share price has surged around 180% over the last 5 years significantly outperforming benchmark indices.
What is Bajaj Finance NIM? How does it compare with banks?
Bajaj Finance has a net interest margin (NIM) of around 10% which is much higher than the 3-4% NIM for banks. This allows for high profitability.
What is the management’s growth guidance ahead?
The management has guided for a growth rate of 25-30% in AUM over the next 2-3 years by leveraging its strong brand, distribution network and analytics capabilities.
What is the company’s outlook on asset quality?
The management has indicated that asset quality will remain stable despite growth in riskier segments like unsecured loans. Stringent credit monitoring and collections will enable stable credit costs ahead.
What are the key concerns and risks for Bajaj Finance?
Key risks are slowdown in consumer demand, volatility in interest rates impacting borrowing costs, deterioration in asset quality especially for new customers and high valuations. However, company seems well placed to tackle these challenges.
Conclusion
In summary, Bajaj Finance has all the ingredients of a long term compounding machine – leadership position, high growth, diversified lending segments, strong risk management and robust profitability. While there are some risks around concentration and rich valuations, the company is well suited to benefit from India’s huge underpenetrated financial services opportunity. Investors can consider taking exposure once valuations become more reasonable at 30-35x P/E. Overall, Bajaj Finance deserves a place in long term equity portfolios as a structural growth story.
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