Strong growth, return ratios to support Bajaj Finance's valuations

The stock has given 100% returns in the past year, on the back of consistent financial performance

Bajaj Finance scrip has outperformed the S&P BSE Sensex in recent months and is up a whopping 116 per cent in the past one year. The scrip, which made a new all-time high of Rs 3,375 on Monday, is showing no signs of cooling. The company enjoys a strong leadership position in a niche, the under-penetrated consumer durables finance segment, which has enabled it to deliver strong financial performance on a sustained basis.

This is one reason for its rally on the bourses. Consumer finance (loans for two- or three-wheelers, consumer electronics and lifestyle financing) forms about 40 per cent of the assets under management (AUM) and has grown at a healthy pace in the past 8-10 quarters. In the September quarter, this segment posted 34 per cent AUM growth, despite a fall in two- and three-wheeler loans. Strong asset quality, return ratios and focus on cross-selling of different products are other reasons for the Street’s bullish stance on the scrip.

Competitive intensity in consumer durables (electronics, furniture, etc) finance is quite low currently with no major NBFCs having significant presence in this segment. Most banks also have indirect exposure to this segment via products bought on credit cards. This gives Bajaj Finance a significant edge. Going ahead, expect this segment to grow at a healthy pace.

Notably, over the years, the company has profitably diversified its business, a trend likely to sustain and add to its strength. Management believes lifestyle products financing has the potential to grow multi-fold and will be a separate segment for the company. Bajaj Finance added 3,000 customers in this segment in the quarter and plans to acquire about 0.5 million in FY16. Average size of loans stands at Rs 35,000 in this segment, higher than the Rs 28,000 for consumer durables.

Bajaj Finance also plans to focus on the SME (small and medium enterprises) segment and expanding its geographical reach to include more rural areas. While the company’s record provides comfort, one might need to monitor the asset quality in the SME segment, given that peers/banks are seeing pressure. Slower than expected economic recovery which could impact consumer durables sales and intensifying competition in the housing finance, retail and SME finance segments are other monitorables.

Overall, though, given the robust record and outlook, most analysts remain positive on Bajaj Finance. The strategy of launching products regularly has paid well so far and will be an additional enabler for growth. Asset quality and return ratios are also likely to remain stable and analysts expect its net profit to grow at 18-20 per cent annually over the next two years.