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Bajaj Finance: cracking the consumption story

LiveMint logoLiveMint 08-09-2017 Aparna Iyer

In a country whose growth is driven predominantly by the rising consumption of its citizens, a bet on consumer finance is a winning one.

Therefore, the phenomenal success of Bajaj Finance Ltd’s lending model that largely focuses on consumer loans was expected. After all, every financing company including banks is now realizing the returns from retail lending.

With close to 45% of its assets under management (AUM) made up of short-term loans that help individuals buy their aspirational products on credit, Bajaj Finance expects to grow by at least 25% in the current fiscal year.

For that and for funding the balance-sheet growth of at least the next three years, the non-banking financial company raised Rs4,500 crore through a qualified institutional placement (QIP) of shares earlier this week.

At Rs1,777.90 apiece, the QIP values the company at close to Rs97,000 crore. Its market capitalization crossed the Rs1 trillion-mark recently.

That is a sharp surge in the valuation of the lender in just two years. In July 2015, Bajaj Finance had raised Rs1,400 crore through a QIP and had followed it up with a stock split and a bonus share of 1:1 a year later.

So is this surge in valuation justified? Or for that matter, is the colossal 289% rise in the stock over the last two years irrational?

To be fair, the company has shown stellar growth in its metrics. In the quarter ended June, its net profit rose 42% from a year ago to Rs602.04 crore.

In the last two years, Bajaj Finance’s AUM have expanded by 112% while its disbursals have clocked an average growth rate of 35%.

Add to this the fact that despite demonetisation, the company’s asset quality and loan growth have remained stable.

But can nothing go wrong here?

Analysts deem the valuations as expensive despite the scorching growth. The loan book has indeed become riskier and analysts point out that spreads have not risen commensurately.

For instance, the share of commercial loans against property is rising compared with that of residential. The lender’s secured loans have collateral in the form of shares, real estate and gold. The market risk to these cannot be ignored.

Bajaj Finance depends on the ability of Indians to keep shopping for lifestyle products. Prolonged stress in the economy will eventually affect the consumption growth story and the signs are already there.

For the lender’s stock to justify its rich multiples, Bajaj Finance will have to show high double-digit growth in fiscal year 2018 as well.

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