Bajaj Finance came out with very good set of numbers today for Q1FY12. The stock went up by 8.5% as a result. The company is very attractively priced even now and is trading at around 1.4-1.5 times FY12 Book Value which is considerably lower than other NBFCs like M&M finance, Shriram Transport Finance and private sector banks.
The company is a very good play on the consumer finance business in India. It has some of the best strategy, technology and reach when it comes to financing of two wheelers and consumer durables. Recently it has moved into various other segments like vendor financing, sme financing, mortgages and construction equipment financing.
The reason why the company trades at such cheap valuations is the fact that the market perceives a lot of these financing segments as risky. However, I feel that the company after having suffered in the 2008 downturn has learned a lot of lessons and has improved all aspects of lending like risk and credit. Also there is no other player that is close to Bajaj Finance when it comes to financing of 2 wheelers and consumer durables as most of the competition had closed down this business after 2008. But seeing the company performing so well we can expect competition to come back into these segments this year. However, the company has twin advantages of being a group company of the Bajaj group and of having massive scale and reach across dealers when it comes to durable financing.
The company has AUM of Rs. 9025 crs now and the portfolio is very well diversified across various segments. The company is dependent entirely on the wholesale funding segment and thus will see pressure on NIMs this year. But the growth in business will make sure that the earnings remain on a high trajectory.
The company had a ROE of 19.3% in FY2011 and has started off very well this year as well.
The company is maintaining provisioning in excess of RBI requirements and thus should not see any big negative surprises on the NPA front this year. Net NPA ratio is very well contained at 0.80%. However, the same can go up in the current and the next year as the loan book increases and the company enters new financing segments.
Considering all factors, the company still looks like a good buy at current levels. I think the company can very well trade at P/B ratio of 1.75-2 times and should be able to maintain credit growth of 30% CAGR over the next few years.
The promoters have raised their stake in the company in the last half of 2010 and it is now a sub of Bajaj Finserv. The company is looking to do a QIP as well as a preferntial allotoment to promoters this year which should make sure that the CAR is adequate to meet the high pace of growth. Current CAR is at 19% against requirement of 12% as per RBI.
Look to buy on declines. The stock can easily deliver consistent returns of 20% in the years to come.
Views and opinions welcome.
