Jio Financial Services vs Bajaj Finance: Which NBFC Stock is Better?

On 20 July 2023, Jio Financial Services demerged from Reliance Industries and a separate entity was listed on the stock exchanges on 21 August 2023.

As on listing date, the market capitalisation of Jio Financial Services was Rs 1,700 billion (bn), making it the third largest NBFC (non-banking finance company) after Bajaj Finance and Bajaj Finserv.

At Reliance's 46th annual general meeting (AGM), the chairman, Mukesh Ambani, laid out grand plans for the newly listed finance entity.

The company is set to foray into multiple segments in the financial services industry, which poses a significant threat to even established players like Bajaj Finance and startups like Zerodha and Groww.

After Reliance announced the demerger in October 2022, one company was affected the most and it is Bajaj Finance. This is because, with Reliance entering the NBFC space, it is directly competing with Bajaj Finance.

The shares of Bajaj Finance fell by almost 7% in a month after the announcement has been made. Even after the AGM of Reliance, the shares of Bajaj Finance fell by 1% as the company has announced its future plans for Jio Financial Services.

As per reports, Bajaj Finance is now looking to raise nearly a billion dollars in financial year 2023-24.

This will be its first big equity fundraise since November 2019.

Bajaj Finance is raising around Rs 100 billion (bn) or US$ 1 bn capital in a restricted share sale.

Out of the Rs 100 bn, it will raise Rs 88 bn via a Qualified Institutional Placement (QIP), and the rest Rs 12 bn will be raised by allocating shares to its parent company, Bajaj Finserv.

With Jio entering the consumer lending space, Bajaj Finance will be facing a tough competition. This fresh capital will be used for its expansion plans and also to face competitors.

Sanjiv Bajaj, the Managing Director of Bajaj Finserv said that despite being present in 4,000 cities, with assets close to Rs 3 trillion (tn), they still have less than 2% of India's credit market.

This shows that India's credit market is big and the company wants to capture it by expanding its product offerings.

With competition increasing in credit market, we bring to you a detailed comparison between Jio Financial Services and Bajaj Finance.

Read on...

Business Overview

Bajaj Finance is one of the largest non-banking finance companies (NBFC) with a customer base of 73 million (m). It is also the most diversified financial services company in India.

The company is mainly engaged in the business of lending and has a diversified lending portfolio across retail, small and medium-sized enterprise (SME) lending, rural and commercial lending. It also accepts deposits from the public and corporates.

Bajaj Finance has two wholly owned subsidiaries, Bajaj Housing Finance and Bajaj Financial Securities, through which it offers home loans and brokerage services to its customers.

Jio Financial Services, on the other hand, is a non-deposit-taking non-banking financial company.

It started its journey as Reliance Strategic Investments, a wholly-owned subsidiary of Reliance Industries.

The company plans to enter retail lending, digital payments, insurance, broking, and asset management segments.

It plans to run these businesses through its six subsidiaries, namely Reliance Industrial Investments and Holdings, Reliance Retail Finance, Jio Payments Bank, Jio Information Aggregator Services, and Reliance Retail Insurance Broking.

For its asset management business, Jio Financial Services has entered into a joint venture with BlackRock with an initial investment of US$ 150 m.

By offering diversified financial services, the company plans to compete directly with established players like Bajaj Finance and emerging startups like Zerodha and Paytm.

Bajaj Finance vs. Jio Financial Services Business Overview

	Bajaj Finance	Jio Financial Services
Services	Consumer Durable Loans	Retail Lending
	EMI Cards	Insurance
	Lifecare Financing	Broking
	Personal Loans	Digital Payments
	Vehicle Financing	Asset Management Services
	Secured Enterprise Loans
	Loan against securities
	Gold Loans
	Deposits
	Payments
	Home Loans
	Depository Services
	Broking Services
	Mutual Funds
Strengths	Large customer base	Established a network of customers from telecom and retail businesses
	Established presence
	Diversified product offerings
Challenges	Risky loan book	High competition
	High competition

Data Source: Company Website

Bajaj Finance is a well-established NBFC with vast customer base. In contrast, Jio Financial Services is still in the nascent stage, and only time will tell how the company will scale up its business to reach investor's expectations.

Revenue growth

One of the most important indicators of a business is its revenue. The past revenue growth rate speaks volumes of a company's potential.

The revenue of Bajaj Finance grew at a compound annual growth rate of 19.5% in the last five years, driven by growth across segments, including mortgages, home loans, SME loans, and rural financing.

Jio Financial Services' revenue, on the other hand, has been falling in the last five years. The income the company has been earning is primarily through investments.

Jio Financial Services hasn't started earning revenue from its core services. Hence, it is difficult to assess the company's revenue growth.

Bajaj Finance vs. Jio Financial Services Revenue Growth (2018-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue (in bn)
Bajaj Finance	1,17,645	1,67,661	1,71,702	2,17,858	2,86,961
Jio Financial Services	-1,049	3,493	3,108	1,843	549
Revenue Growth (%)
Bajaj Finance		42.50%	2.40%	26.90%	32%
Jio Financial Services		NM	-11.00%	-40.70%	-70.20%

Data Source: Ace Equity, Equitymaster

Profitability

Two indicators help determine a company's profitability - earnings before interest and tax (EBITDA) margin and net profit margin.

EBITDA margin is an indicator of the company's operating profits. Operating profit is the income earned after deducting operating costs.

Net profit margin, on the other hand, is the ratio of the total profit of the business after deducting all the expenses from the income of the business.

The higher the ratios, the better.

Bajaj Finance vs Jio Financial Services Profit Margins (2018-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
EBITDA Margin (%)
Bajaj Finance	34.10%	28.80%	23.60%	31.20%	38.70%
Jio Financial Services	115.20%	92.10%	72.20%	95.00%	86.60%
Net Profit Margin (%)
Bajaj Finance	21.60%	20.00%	16.60%	22.20%	27.80%
Jio Financial Services	382.40%	66%	41.70%	113%	75.10%

Data Source: Ace Equity, Equitymaster

The operating profit margin and net profit margin of Bajaj Finance averaged 31.3% and 21.6%. The profit margins of the company have been increasing consistently on account of higher profit from fee-based income avenues.

In the case of Jio Financial Services, the EBITDA margin and net profit margin remained high primarily due to income from investments and low operating expenses.

Once the company starts earning revenue from its core businesses, we can get a better understanding of its profit margins.

Dividend

A company rewards its shareholders in the form of dividends. Dividends can be in the form of cash or stocks.

Ratios such as dividend payout and dividend yield are usually used to assess the dividends of a company.

The dividend payout ratio is an indicator that determines the amount of dividends paid from the earnings. In contrast, the dividend yield tells what percentage of the share price is the dividend.

Bajaj Finance Dividend History (2018-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Dividend Payout	8.70%	11.40%	13.60%	17.20%	15.80%
Dividend Yield	0.20%	0.30%	0.30%	0.30%	0.50%

Data Source: Equitymaster

Jio Financial Services hasn't paid any dividends to its shareholders until now. In financial year 2023, the company paid a dividend d of Rs 1.4 per share, which translated into a dividend payout of 2,844.4%.

On the other hand, Bajaj Finance has paid consistent dividends to its shareholders. In the last five years, the average dividend payout and dividend yield of the company are 13.3% and 0.3%, respectively.

Return ratios

One of the most important return ratios is the return on equity (RoE). It measures the returns that shareholders earn on their investments during the year.

Bajaj Finance vs Jio Financial Services Return on Equity (2018-2023)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Bajaj Finance	20.40%	16.40%	12.10%	16.20%	21.40%
Jio Financial Services	-23.50%	11.90%	6.00%	7.50%	0.30%

Data Source: Ace Equity, Equitymaster

The five-year average RoE of Bajaj Finance is 17.3%, whereas for Jio Financial Services it's 0.4%.

Bajaj Finance is clearly leading in terms of RoE against Jio Financial Services.

Valuation

The most common valuation ratios are price-to-earnings (P/E) and price-to-book value (P/Bv).

The P/E ratio measures the company's value by relating its price to its earnings. In contrast, the P/BV ratio measures the company's value by relating the price to its book value.

Bajaj Finance vs Jio Financial Services Valuation Ratios (2018-2023)

	P/BV Ratio	5-year average P/BV	P/E Ratio	5-year average P/E
Bajaj Finance	8.4	7.2	40.1	43.2
Jio Financial Services	1.4	NA	5,689	NA

Data Source: Ace Equity, Equitymaster

The five-year average P/E ratio of Bajaj Finance is 43.2x, and its current P/E ratio is 40.1x. The company's P/Bv ratio is 7.3x, whereas its five-year average is 7.2x.

Since Jio Financial Services is a recently listed company, the five-year averages of P/E and P/Bv are unavailable. However, the current P/E and P/BV ratios are 5,689x and 1.4x, respectively.

In terms of P/E ratio, Jio Financial Services looks more overvalued than Bajaj Finance, and in terms of P/Bv, Bajaj Finance looks overvalued.

The reason for such a high P/E ratio for Jio Financial Services could be the investor's high expectation from Reliance to disrupt the financial services space as it did with the telecom space.

Also, with the mega fund-raising plan for Bajaj Finance, investors in the company are worried about how this might impact the company's valuations.

Here's what co-head of Research at Equitymaster Tanushree Banerjee wrote in her editorial:

• What typically happens in the case of fund raising plans of financing entities is that the new funds go straight to the book value of the company (assuming its only equity funding).
  
  So, stocks that are valued on the basis of book value are automatically re-rated. At times if the return ratio is expected to get diluted the stock may also trade at a discount.
  
  For Bajaj Finance, the proposed fund raising could account for around 15% of its current networth. Also, it could temporarily dilute its return on equity by 2%.
  
  So, one can expect the incremental impact of this funding on the valuation of the stock, to be about 10% to 13%.
  
  This certainly makes the stock appear relatively more attractive to long term investors.
  
  However, please keep in mind that such temporary spurts in valuation metrics can be misleading.

Future prospects

Bajaj Finance, a well-diversified financial services company, is concentrating on improving its distribution network and physical presence by adding more physical offices across the country.

It is also expanding its offerings by adding new products to its already diversified portfolio.

Recently, it also added new car financing and medical equipment financing to its portfolio.

The company is also concentrating on improving its customer base to 100 m from the current 72.98 m.

Given the company's vast distribution network and product offerings, this goal looks achievable.

Jio Financial Services, on the other hand, is yet to make its mark in the financial services industry.

The company has huge plans and wants to spread its wings across multiple segments of the financial services industry, including insurance, asset management, consumer lending, and digital payments.

Reliance has a network of 249 m registered customers, 18,446 stores across different categories, and 448 m Jio subscribers.

Jio Financial Services plans to leverage this network from its retail and telecom business to build its financial services business.

In the annual general meeting of Reliance, Mukesh Ambani said, "Jio Financial Services products will not just compete with current industry benchmarks but also explore path-breaking features such as blockchain-based platforms and central bank digital currency (CBDC)."

This shows that the company's management has huge plans for the future.

Which is better?

Bajaj Finance has emerged as a poster boy for NBFCs. It is one of the largest NBFCs with an AUM (assets under management) of Rs 1995.79 bn as of 30 June 2023.

It has a strong geographical presence across the country, with over 3,800 offices. The company also has a strong distribution network with over 1.6 m distributors.

Bajaj Finance also has a strong revenue and profit growth compared to Jio Financial Services.

It also pays consistent dividends to its shareholders and has a high RoE.

Being able to keep NPAs low and ploughing back enough profits for shareholder returns, Bajaj Finance can potentially become a consistent compounder over the coming decade.

Jio Financial Services, on the other hand, is at a very nascent stage. It is tough to estimate whether it will scale up to the level of investor's expectations.

Moreover, the company's shares are priced at a very high premium compared to Bajaj Finance's shares.

Even though the company has huge expansion plans, competing with established NBFC players like Bajaj Finance can be very challenging for new players like Jio Financial Services.

However, given Reliance's history of success, one day, it might establish itself in the financial services industry as well.

Until then, it is best to select stocks based on the fundamentals and valuations of your portfolio.

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...