What Bajaj Finance's Billion Dollar Fund Raising Plan Means...

The festival season is here. And so is the season of sale and discounts.

Everything from branded clothes to accessories to electronics, smartphones, and motorbikes are available on easy EMIs.

There are only few companies that make money no matter how many customers buy which products of which brands.

Any guess who they are? Well, Bajaj Finance is certainly one of them.

In financial year 2022-23, India's largest non-banking financial company disbursed 29.6 million (m) loans. For Bajaj Finance, it was the highest ever, representing a growth of 20% over previous year.

The company operates in 3,733 locations across the country through about 155,000 distribution points. In FY23, Bajaj Finance acquired a record 11.6 m new customers through this network. This took its existing customer franchise to 69.1 m by the end of March 2023.

Now that tells you...trying to fund every other smart TV or smart phone or motorbike is no small feat.

But Bajaj Finance is undisputedly the largest lender for financing discretionary spends across consumer electronics, furniture, and digital products in urban and rural India.

Now, as an investor, the question that crosses your mind is the profitability of lending at such scale.

Is the stupendous growth that Bajaj Finance has witnessed over the last decade sustainable?

And is the lending being done at attractive margins and good asset quality?

One look at the company's financials will tell you that it is extremely well capitalised. Plus, the return on equity of over 22% is one of the best in the industry.

So why should the company look for additional funding?

Well, as per reports, Bajaj Finance is looking for raise nearly a billion dollars this financial year. And there are concerns about the usage of such funds.

What if I were to tell you that Bajaj Finance is not an ordinary NBFC hoping to make bigger margins by offering loans at steeper rates and hoping for lower NPAs?

Rather it is a data giant leveraging technology. Tech like AI is used to mine the borrowing needs and patterns as well as eligibility of underserved Indian customers, both in cities and rural areas.

Why is Bajaj Finance a Data Giant?

Bajaj Finance funds about 30% of electronics, 15% of smartphones and 10% of organised furniture sold in India.

This provides Bajaj Finance with massive amounts of customer data. This data helps the company filter out the good customers from the bad. It can also take a call on what kind of a product should be offered to which customer.

For example, assuming there over a million lawyers in India. Bajaj Finance has mapped out the data on each of these lawyers to take accurate credit decisions.

Some of the data points Bajaj Finance captures are repayment history of the customer, banking details, education, employment etc.

Using these data points Bajaj Finance has created hundreds of clusters for every segment that it lends to.

So, deciding critical aspects like amount of loan, tenure, and rate of interest is based on AI models rather than subjective decisions.

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Building Franchises Like Banks

Just like large banks, Bajaj Finance has been able to reduce its cost to income ratio from 45% to 35% over the past decade.

However, it was a relatively late entrant in consumer financing. Plus it had the handicap of not having a readymade customer base.

So it created a cross sell customer franchise which can be sold multiple products over and over again.

Spending on AI, Big Data, Cloud Migration and more

Bajaj Finance had ramped up its tech spending over the past five years, more so post pandemic. Its IT expenditure nearly doubled in financial year 2022.

This was thanks to the introduction of an omni-channel framework for customers.

The firm saw its total tech budget rising by close to a third with its key initiatives around big data, cloud migration, and more.

Now, while the company's overall spends on its IT infrastructure in FY23 was a relatively small share of total expenditure, its IT spending has grown much faster than overall expenses over past 5 years. And this had an impact on profits too.

While overall expenses have grown just under three-fold over the last five years, net outlay in the company's tech budget has galloped four times. This is in sync with profit that has more than quadrupled in the same period.

Bajaj Finance has also transferred its entire data ecosystem and analytics workloads to the Microsoft Azure cloud platform.

In its latest concall the management said...

• Technology is at the forefront of Bajaj Finance's business transformation journey, and it has continuously leveraged existing and emerging technologies to launch new products, accelerate customer acquisition and improve customer experience along with simplifying the back-office processes.

It also acquired a 41.5% stake in Mumbai-based SnapWork Technologies in 2022. SnapWork offers consulting and implementation of software and related products for banks. Bajaj Finance may continue to look for similar acquisitions.

So, while the concerns over the billion dollar fund raising plans are valid, there is a high chance that most of it would be used to leverage technology for growth.

So, if Bajaj Finance is a must have NBFC on your watchlist, which are the two things that you must track?

Funding Impact on the Business

The key objective of the tech led growth would be to sustain a growth of over 25% in assets under management.

Being able to do so while keeping NPAs low and ploughing back enough profits for shareholder returns can make the stock a consistent compounder over coming decade.

So, do keep a track on these critical metrics.

Funding Impact on Valuations

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.

It is the combination of tech enabled lending, profitable growth, and transparent credit policies that could make Bajaj Finance a good contender for your watchlist.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)