Many reasons why Bajaj Finance will remain an outperformer

Strong loan growth thanks to increasing aspirational buyers and healthy asset quality could keep story intact

Strong loan growth, thanks to increasing aspirational buyers and healthy asset quality, could keep story intact.

Trading at about ~11 apiece and with thin volumes, Bajaj Finance was a neglected, unfavoured stock 10 years back. Today, just a few points shy of the ~3,000-mark, the country’s leading consumer goods lender has transformed itself as the most sought-after scrip in the financials space. What’s more, despite the recently gone by June quarter (Q1) being a tough one for the nonbanking finance companies (NBFCs) due to some instability in asset quality and adoption of new accounting norms, Bajaj Finance outperformed the pack maintaining its industry-best return on assets at 3.6 per cent. The 80 per cent stock appreciation in six months has also sealed its top slot among peers. Experts say, Bajaj could continue outdoing its peers.

Unique business model, deep customer understanding

With about 40 per cent of business coming from the consumer durables segment, Bajaj Finance has established itself as a leader with deep understanding of consumption trends as well as vast reach. Bajaj Finance stock has outperformed even the consumer discretionary and durables players, showing the penetration of the company. Investing in the hinterland ahead even of private banks fortified its position as rural financier. While Capital First could be considered as its closest competitor, it is a much smaller player. New products, such as ecommerce lending and tie-ups with banks for credit cards strengthen Bajaj Finance’s mainstay portfolio.

Strong AUM growth

Bajaj Finance has consistently grown its assets under management (AUM) by 35 per cent in the past few years. With focus on high-yielding consumers, rural and small business lending, net interest margins too have been around 10 per cent in the past three fiscals. Its ability to source funds at competitive rates means that margins should remain ahead of peers.

Reasonable asset quality

The impressive factor, Ajay Bodke, CEO and chief portfolio manager, Prabhudas Lilladher, points out is that Bajaj Finance has achieved growth even as it has been hawkish on its asset quality. “This is responsible for supernormal shareholder gains,” he affirms. Barring the demonetisation-hit quarters, Bajaj Finance has consistently maintained its net non-performing assets (NPA) ratio at less than 1 per cent in the recent years. Experts don’t see this trend getting disturbed in the next twothree years.

Roadahead

Analysts at Jefferies are confident that the momentum will be maintained, thanks to its strong franchise, deep distribution, and high cross-sell loan mix. The brokerage expects 36 per cent annually compounded loan growth in FY18-21. Nonetheless, Morgan Stanley cautions that after a sharp re-rating in the past six months, the stock is likely to digest (rich) valuation in the near term. Trading at 8.5x FY19 book, Bajaj Finance’s valuations are at a lifetime high. “Investors should use meaningful dips as a buying opportunity,” says a fund manager who feels the stock will remain an outperformer in the pack despite possible turbulence.

Yet, there are a few mediumto long-term risks that investors should be wary of.

Competition arisk

Credit card penetration is still low in India, but banks are aggressively progressing on this front. The marginal sequential dip in consumer lending growth in Q1 is perhaps an indicator of rising competition. This is a factor to watch out for in the long run as analysts at Goldman Sachs are confident that the continued geographical expansion, significant cross potential to its large customer base and increasing digitisation should support growth in medium term.

“When you attain a size, maintaining it is challenging. Over the next three-five years, Bajaj Finance could face a similar problem of maintaining growth and asset quality. Just like HDFC Bank trimmed down its growth rate not to compromise on profitability, Bajaj Finance too may also have to temper its growth trajectory,” Bodke cautions.

Nevertheless, HDFC Bank’s loan book at ~7 trillion is eight times larger than Bajaj Finance’s ~933 billion. Given the expanding markets coupled with the aspiration of consumers and growing fund requirements of businesses, there is enough room for Bajaj Finance to sustain profitable growth in the foreseeable future.