From a pure 2-wheel finance company captivated a few years ago to a full-fledged diversified non-bank finance company (NBFC), Bajaj Finance has come a long way. It is now a lender to individuals (2 and 3 wheel financing, personal loans, durable goods), commercial (infrastructure, vendor financing, construction equipment) and to small and medium-sized businesses (property / equity loans, business loans ). Capitalizing on its strengths to achieve a leadership position in segments such as the financing of durable consumer goods as well as a prudent credit orientation strategy has enabled Bajaj Finance to undergo this transformation. “We have chosen to operate in companies where we find a significant competitive advantage over our peers, which allows us to grow rapidly,” said Rajeev Jain, CEO of Bajaj Finance.
Product innovation, cross-selling key
Bajaj Finance appears to be at the forefront of product innovation. The latest is the recent launch of its online services which will instantly offer personal loans. The company has witnessed a good response to this product. Although the products are priced at similar rates to offline loans, the fee income for this product is slightly higher. The company expects this segment to contribute revenue of Rs 80-100 crore by March 2013 and grow to form 30-35 percent of the entire employee loan portfolio over the next 2-3 years. In addition, significant savings in customer acquisition costs will increase margins in this space. Notably, the cost of procuring offline loans is between 2.5 and 3.0 percent, which comes down to only 25 basis points in the online model.
The company introduced the concept of zero percent financing for sustainable consumer loans, which in addition to reducing the KYC process will provide the company with many cross-selling opportunities. The IRR of this product is high at 22-25 percent and margins of around 2.5-3.0 percent. This pound currently stands at Rs 1,500 crore with nearly 5 lakh accounts during the June quarter 2012. The company is targeting around 15-16 lakh accounts for this fiscal year using its existing member identification card (EMI ). Since the company is aware of the customer’s credit performance before cross-selling other products, the risk of these accounts slipping is reduced. In addition, it assigned a higher than normal CIBIL score to clients in its online lending segment. Another credit quality control mechanism is its links with certain companies to whose employees such online loans will be granted. Although its non-performing net assets are negligible at 0.1 percent currently, management expects them to normalize to 0.40-0.60 percent over the long term.
Bajaj Finance has partnered with nearly 44 major retailers in the lifestyle product finance category. This business is off to a good start and is in line with management’s estimates. The company also introduced the flexisaver product which is similar to the overdraft facility provided by banks and which targets the mortgage-for-home segment (19 percent of disbursements). The product offers flexibility of early repayment and withdrawal of the loan by customers. The company charges a conversion fee as well as a 20-25 basis points higher interest rate on this product. This high margin product currently represents 8-10% of its real estate portfolio loan, which the company plans to increase to 20-25% by fiscal 2014.
On the other hand, the flexisaver product as well as infrastructure financing will have some impact on the company’s asset-liability mismatch, analysts believe. Given the smaller size of these segments today, the impact will be limited, but care needs to be taken with how the company handles this mismatch going forward. According to Jain, “On the infrastructure book, we are in syndicated loans with the banks. Here the main consortium has 3-4 times our exposure. And given its take-out funding, we believe that the impact on ALM will be limited ”.
Fierce competition in some of these new segments will be a major challenge for Bajaj Finance, and is likely to affect its future profitability. Silky Jain, Research Analyst – Nirmal Bang Equities, says, “Bajaj Finance is the market leader in durable consumer goods (50% of disbursements) and lifestyle products, where competition is quite weak because it doesn’t there are no major players in these segments. on the other hand, its newer segments such as home loans may face some competition from some home finance companies. They also got into the credit card business which is a very competitive business. 200 basis points over the next two years. “
The road to follow
With weakening consumer demand for durable goods and the uneven monsoon, like most of its peers, management is closely monitoring the upcoming holiday season as it will impact the growth rates of the season. ‘current year. About 15 to 18 percent of its borrowers depend on farm income. Jain says, “It’s been a patchy monsoon and the real impact will be visible during the holiday season. We anticipate loan growth of 25-30% for this fiscal year.
Although Bajaj Finance’s cost of funds has started to shift south, the company has no plans to cut short-term interest rates, which will allow it to maintain its margins. The company plans to increase its market share in the consumer durables industry from 11.5 percent to 16-18 percent over the next few years. It plans to achieve this by offering all products in the 81 cities in which it operates. Currently, it is only halfway to this goal with 37 cities offering all its products. In addition, a higher value for manufacturers to use the finance option will also promote growth in this segment.
Despite the stock’s outperformance over the past three months, analysts remain bullish on the company. Shyam Srinivasan, Analyst at Goldman Sachs, notes: “We believe Bajaj Finance will continue to reassess itself due to a strong growth profile on market share expansion in the consumer finance segment and expansion. products like Loan Against Property (LAP), move to a secure / asset mix reducing book risk and healthy return ratios over 13-year 15 years. We value the stock at 2.1 times the price / target book. Frequent fundraising (a rights issue or QIP worth Rs 750 crore likely during the March 2013 quarter and likely pressures on asset quality remain the main risks.