Pros and Cons of Investing in Bajaj Finance

The Non-Banking Financial Companies (NBFCs) sector in India has been one of the main driving forces behind the country's economic growth.

The companies in this space have grown massively and established themselves as significant players in India's financial ecosystem. The stocks of these companies have become multibaggers in the market.

The companies operate in various segments such as housing finance, microfinance, consumer finance and more. Their growth has been driven by various factors, such as, higher disposable incomes, improved financial inclusion, the government's policy support, etc.

A very prominent company in this space is Bajaj Finance, one of India's biggest NBFCs. The company has a diversified lending portfolio across retail, small and medium-sized enterprise (SME), rural, and commercial. It also accepts deposits from the public and corporates.

It has two wholly owned subsidiaries, Bajaj Housing Finance (recently listed) and Bajaj Financial Securities, through which it offers home loans and brokerage services.

In this editorial, we will look at the pros and cons of investing in the company.

Pros

#1 Excellent Financials

From its humble beginnings to becoming a leading NBFC in India, Bajaj Finance has carved a unique path. The company has demonstrated remarkable growth over the years.

From FY14 to FY24, the company's revenue soared from Rs 40.7 billion (bn) to Rs 549.8 bn, at a compound annual growth rate (CAGR) of 29.7%.

Its net profit surged from Rs 7.2 bn in FY14 to Rs 144.5 bn in FY24, an impressive CAGR of 34.9%.

The company's assets under management (AUM) had a CAGR of 29.9% from Rs 240.6 bn in FY14 to Rs 3,306.2 bn in FY24.

These numbers reflect the company's competence in raising and managing funds along with the successful implementation of various lending strategies.

In FY24, the company's interest income during the year rose 32.7% on a year-on-year (YoY) basis while its net interest income (NII) increased 25.7% YoY. The net interest margin (NIM) was 10.1% in FY24 against 10.8% in FY23.

Net profit for the year was up 25.6% YoY. Net profit margins was 26.3% in FY24 against 27.8% in FY23.

During FY24, advances grew 34.7% YoY while deposits increased 34.7% YoY. The lender's investments increased 35.8% YoY while borrowings increased 99.1% YoY.

Bajaj Finance's capital adequacy ratio (CAR) was at 22.5% at the end of FY24 compared to 25% a year ago. A company that has a good CAR has enough capital to absorb potential losses. Thus, it has less risk of becoming insolvent and losing depositor's money.

The company's return ratios in FY24 were solid. The return on equity (ROE) was 19.1%, the return on assets (ROA) was 3.86%, and the return on capital employed (ROCE) was 11.92%.

The NBFC also had good control over bad loans i.e., non-performing assets (NPAs). In FY24, its gross NPA was 0.9% compared to 1.2% in FY23 and the net NPA was 0.5% during the year compared to 0.4% a year ago.

These numbers make it clear that the company's financials are excellent.

#2 Strong Growth Strategy

Bajaj Finance has adopted a multipronged strategy to grow its business.

It's focussing on expanding its product offerings, growing its customer base improving its distribution, network, and expanding its physical presence by adding more offices across the country.

The company is also investing in technology to improve its digital customer experience and reach a wider audience. Recently, it added new car financing and medical equipment financing to its portfolio.

It's housing finance subsidiary, Bajaj Housing Finance, is expanding its distribution network, developing new digital products and services, and offering competitive products and services.

The management has targeted the addition of 2-14 million customers in FY25 and has also estimated an AUM increase of 26-28%. The drivers of this growth in FY25 will be the recently introduced secured businesses in FY24, which include loan against property (LAP), new car financing, and tractor finance.

However, in the short term, the management has flagged off some pressure on the net interest margin (NIM) of the company.

Cons

#1 Regulatory Risks

The NBFC business is highly regulated in India. In fact, the regulations that large NBFCs like Bajaj Finance are similar to the those followed by banks.

Each NBFC has to divert significant resources to stay compliant with numerous regulations from both the government and the RBI.

The penalties for violating any regulation could be severe. The recent case of Kotak Mahindra Bank and Paytm highlighted these challenges.

While Bajaj Finance has not run into regulatory troubles so far, the future could be different. This is something that investors should always be aware of.

Also, in the case of Bajaj Finance, the regulatory scrutiny will be more stringent due to the company's size and position in the sector.

#2 A Highly Competitive Business

Fundamentally, the lending business is commoditised. That means there is nothing to distinguish between one lender from another.

Customers will naturally gravitate to the company that can offer them the lowest interest rate on loans.

Thus, competition in the sector is fierce.

Bajaj Finance has mitigated this to a large extent by focusing on cost control, technology adoption, cross-selling of products to maximise revenue per customer, geographical expansion, and product diversification. All this along with a laser focus on growing its loan portfolio.

However, what has worked for the company in the past may not work in the future. New competitors are coming up with innovative lending products. And this could eat into the business of Bajaj Finance.

Thus, investors should actively track the management's growth plans and keep a hawk eye on the company's NPAs too.

Investors should also consider corporate governance while conducting due diligence and take into account the valuations of the stock before considering any investment.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...