From a pure captive 2 wheeler financing company a few years back to a full-fledged diversified non banking financial company (NBFC), Bajaj Finance has come a long way. It is now a lender to retail (2 and 3 wheeler financing, personal loans, durables), commercial (infrastructure, vendor financing, construction equipment) and small and medium enterprises (loan against properties/shares, business loans). Capitalising on its strengths to achieve leadership position in segments such as consumer durables financing as well as conservative credit orientation strategy has enabled Bajaj Finance to undergo this transformation. “We chose to operate in businesses where we find significant competitive advantage over peers, enabling us to grow quickly”, says Rajeev Jain, CEO, Bajaj Finance.
Product innovation, cross selling key
Bajaj Finance seems to be leading the front when it comes to product innovation. The latest one is the recent launch of its online services which will offer personal loans instantly. The company has witnessed good response to this product. While the products are priced at similar rates to offline loans, the fee income in this product is slightly higher. The company expects this segment to contribute Rs 80-100 crore revenues by March 2013 and scale up to form 30-35 per cent of the overall salaried loan book over the next 2-3 years. Further, significant saving in client acquisition costs will boost margins in this space. Notably, offline loans sourcing cost is between 2.5-3.0 per cent which comes down to mere 25 basis points in the online model.
The company has introduced the concept of zero per cent financing for consumer durable loans, which, apart from reducing the KYC process will present the company with ample cross-selling opportunities. The IRR of this product is high at 22-25 per cent and margins of about 2.5-3.0 per cent. This book currently stands at Rs 1,500 crore with close to 5 lakh accounts in the June 2012 quarter. The company is targetting about 15-16 lakhs accounts this fiscal through its Existing Member Identification (EMI) card. Given that the company is aware of the client's credit performance before cross selling other products, there is reduced risk of slippages in these accounts. Also, it has assigned higher than normal CIBIL score for clients for its online loans segment. Its tie ups with select companies to whose employees such online loans will be given is another mechanism for credit quality check. While its net non-performing assets is negligible at 0.1 per cent currently, management expects it to normalise to 0.40-0.60 per cent on a long-term basis.
Bajaj Finance has tied up with close to 44 large retailers in the lifestyle products financing category. This venture has got to a decent start and is in-line with management estimates. The company has also introduced the flexisaver product which is similar to the overdraft facility provided by banks and caters to the loan against property segment (19 per cent of disbursements). The product offers flexibility of prepay & drawdown of loan by the clients. The company charges a conversion fee along with 20-25 basis points higher interest rate on this product. This high margin product currently forms 8-10 per cent of its loan against property book which the company plans to scale upto 20-25 per cent by FY14.
On the flip side, the flexisaver product as well as infrastructure financing will have some bearing on the asset liability mismatch of the company, believe analysts. Given the smaller size of these segments at present the impact will be limited but one needs to watch out on how the company manages this mismatch going forward. Believes Jain, “On the infrastructure book, we are into consortium lending with banks. Here, the lead consortium has 3-4 times our exposure. And given that its 'take out' financing, we believe the impact on ALM will be limited”.
Stiff competition in some of these new segments will be a key challenge for Bajaj Finance, and is likely to reflect on its future profitability. Silky Jain, Research analyst - Nirmal Bang Equities, says, "Bajaj Finance is the market leader in consumer durables (50 per cent of the disbursements) and lifestyle products wherein the competition is quite benign as there are no major players in these segments. On the other hand, its newer segments such as loan against property could face some competition from certain housing finance companies. They have also entered into credit card business which is a highly competitive business. All this diversification will pull down its net interest margins by 100-200 basis points over the next two years."
Road ahead
In view of weakening consumer demand for durables and patchy monsoon, like most of its peers, the management is watching the upcoming festive season closely as it will have a bearing on the current year's growth rates. Close to 15-18 per cent of its borrowers are agri-income dependent. Says Jain, “It has been a patchy monsoon and the real impact will be visible in the festive season. We expect to have a loan growth of 25-30 per cent this fiscal”.
Though Bajaj Finance’s cost of funds have started moving south, the company has no plan to cut interest rates in the near term, enabling it to hold on to its margins.The company plans to increase its market share in the consumer durables industry from 11.5 per cent prevailing to 16-18 per cent over the next few years. It plans to achieve this by offering all products in the all the 81 cities it operates in. Currently, its only half way through this target with 37 cities offering all its products. Further, higher value to manufacturers to use the financing option will also aid growth in this segment.
Despite the stock’s outperformance in the past three months, analysts remain bullish on the company. Shyam Srinivasan, analyst at Goldman Sachs notes, “We believe Bajaj Finance will continue to rerate due to solid growth profile on expanding market share in the consumer financing segment and scaling up of products like loan against property (LAP), shift towards a more stable/secure asset mix reducing the riskiness of the book and healthy returns ratios over FY13-FY15. We value the stock at 2.1 times target Price/Book.” Frequent capital raising (a rights issue or QIP worth Rs 750 crore likely in March 2013 quarter and likely asset quality pressures remain the key risks.
