Bajaj Housing Finance Limited – IPO Note – Equity Research Desk

Company overview

Bajaj Housing Finance Ltd. is a non-deposit taking housing finance company (HFC) offering financial solutions tailored to individuals and corporate entities for the purchase and renovation of homes and commercial spaces. The company’s diverse mortgage product suite comprising of home loans, loans against property, lease rental discounting and developer financing caters to diverse customer segments from individual homebuyers to large-scale developers. Its primary focus is on individual retail housing loans, complemented by diversified collection of lease rental discounting and developer loans. A part of the multinational conglomerate Bajaj Group and a wholly owned subsidiary of Bajaj Finance Ltd, the company has been registered with National Housing Bank since 2015 and engaged in mortgage lending since FY18. As of 30 June 2024, the company has 215 branches, spread across 174 locations in 20 states and three union territories, which are overseen by six centralized hubs for retail underwriting and seven centralized processing hubs for loan processing.

Objects of the offer

• Augmenting capital base to meet future business requirements of the company towards onward lending.
• Achieve the benefits of listing equity shares on the stock exchanges.
• Carry out offer for sale of equity shares worth up to Rs.3,000 crore by the selling shareholders.

Investment Rationale

• Focus on retail – The company’s strategic focus is primarily on low risk and fast-growing home loan customers. As of FY24, home loans contributed 57.8% of the company’s AUM, of which 87.5% pertained to salaried customers, 4.3% self-employed professional customers and 8.2% self-employed non-professional customers. According to the CRISIL MI&A Report, the company has the highest salaried customer mix in home loan portfolio amongst large HFCs. The company’s customer base primarily consists of individuals aged 35-40, with an average salary of Rs.1.3 million.

• Strong player in HFC vertical – As of FY24, the company’s AUM stands at Rs.91,370 crore reflecting a CAGR of 31% between FY22-24. 75.5% of the home loan AUM were from customers with a CIBIL score above 750. According to the CRISIL MI&A report, the company is a leading HFC in India across multiple parameters such as largest non-deposit taking HFC within seven years of commencing mortgage operations, second largest (in terms of AUM) and second most profit making HFC in India, 8^th largest NBFC-ULs etc. The company also has the lowest GNPA & NNPA amongst the large HFCs in India. It has also partnered with multiple insurance providers thereby offering bundled products to customers.

• Financial performance – The company reported a revenue of Rs.7,617 crore in FY24 as against Rs.5,665 crore in FY23, an increase of 34% YoY. The revenue has grown at a CAGR of 42% between FY22-24. The net interest income of the company in FY24 was Rs.2,510 crore.  The PAT of the company in FY24 is at Rs.1,731 crore and PAT margin is at 23%. The CAGR between FY22-24 of net interest income is 38% and PAT is 56%. The ROA and ROE of the company stand at 2.4% and 15.2% respectively in FY24. Net Interest Margin improved from 4.0% in FY22 to 4.1% in FY24. GNPA improved from 0.31% in FY22 to 0.27% in FY24. NNPA improved from 0.14% for FY22 to 0.10% for FY24.

Key risks

• OFS risk – In addition to a fresh issue, the IPO will see the sale of shares worth up to Rs.3,000 crore by Promoter Selling Shareholder Bajaj Finance Ltd.
• Default risk – The risk of default by customers or inability to fully recover the collateral value by the company may adversely affect the company’s business, results of operations, cash flows and financial conditions.
• Regulatory risk – Any inability to comply with the requirements stipulated by RBI could have a material adverse effect on the company’s business.

Outlook

The company is a major force in the HFC sector, consistently growing in both revenue and profit over the reported periods. Its focus on home loans for affluent clients is generating steady growth and simultaneously lowering its risk exposure. According to RHP, PNB Housing Finance Ltd, Can Fin Homes Ltd and Aadhar Housing Finance are a few listed competitors for Bajaj Housing Finance Ltd. The peers are trading at an average P/E of 20.00x with the highest P/E of 30.30x and the lowest being 7.70x. At the higher price band, the listing market cap of Bajaj Housing Finance will be around ~Rs.58,297.03 crore and the company is demanding a P/E multiple of 33.68x based on post issue diluted FY24 EPS of Rs.2.08. When compared with its peers and the established position and future growth prospects, the issue seems to be reasonably priced in (fairly valued). Based on the above views, we provide a ‘Subscribe’ rating for this IPO for a medium to long-term holding.