A well-diversified lending mix has paid off for Bajaj Finance, one of the leading non-banking financial companies. The stock’s valuations have sky-rocketed in the last five years thanks to the company’s robust loan growth, good asset quality, prudent provisioning norms and strong return ratios. From about one-time, one-year forward book, the stock has been re-rated to a hefty four times over the last five years. The stock price has gained 10-fold during this period; spurred by earnings growth of 59 per cent annually in the last five years.
Following the demerger with Bajaj Auto (and coming under the fold of Bajaj Finserv), Bajaj Finance underwent a major restructuring in 2007. Improving affordability as well as Bajaj Finance’s expansion into new product lines led to robust growth in loans. The loans have grown a healthy 50 per cent annually in the last five years.
The company now has a well-diversified business which spans across consumer finance, SMEs and commercial and rural lending. The company is a dominant consumer durables financier in India. Given the high entry barriers in this business, Bajaj Finance’s sound customer base and well-entrenched distribution network provide a competitive advantage over other players. Moreover, the company’s investments in technology and digitisation will help it capitalise on the e-commerce boom. The other segments also continue to grow at a healthy pace. In the recent December quarter, in fact, the company’s loan book grew 41 per cent.
Net non-performing assets (NPAs) have remained below the 1 per cent mark in the last couple of years. The company is better placed to implement the more stringent norms mandated by the RBI for NBFCs. While Bajaj Finance follows a 150-day norm for classification of loans as NPAs, its provisioning is done on a 90-day cut-off. By the end of March 2018, NBFCs would have to classify loans as NPAs when borrowers default for 90 days or more.