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The IPO of Bajaj Housing Finance (BHF), India’s second-largest housing finance company, concluded recently. The shares were subscribed a colossal 67 times, despite a large issue size of ₹6,560 crore. On the day of listing, the shares opened at ₹150, which is over twice the issue price at the upper band (₹70). The phenomenal listing is no surprise given the ‘Bajaj’ brand equity and next to zero NPAs (non-performing assets). The stock made a high of ₹188.5 and has corrected ever since. It is now trading at ₹157.1, at a price to book value (P/B) multiple of 7.2 times.
In our IPO note published in bl.portfolio edition dated September 9, 2024, we had recommended a ‘subscribe’ for investors with an appetite for risk and a long-term perspective. At the upper band of the issue, the P/B multiple worked out to 3.2 times on a post-issue basis. In our assessment, even at such a multiple, the issue price adequately factored in the following risks and rewards. The brand equity of the promoter, an AUM (assets under management) growth far exceeding that of its prime lending peers, a diversified AUM and a pristine asset quality are in favour of a premium valuation.
Nevertheless, given that the company primarily operates in the prime lending segment (home loans with ticket size of over ₹50 lakh are considered prime), it faces stiff competition from mainstream banks in terms of pricing. Banks have 86 per cent market share in this segment. Further, the fact that the company is young with just seven years of operations under its belt means that it is yet to go through cyclical ups and downs in a meaningful way. A possible downturn in the larger real estate market can be detrimental to the company’s prospects. Also, rate cuts in the future can cause NIM (net interest margin) compression, given 44 per cent of borrowings are based on fixed interest rate and almost all loans advanced (assets) are based on floating rate.
That said, at current P/B multiple of 7.2 times, the price has already pulled forward many years of potential growth in net worth and the risk-reward of holding the stock at current levels is not favourable. The company’s prime lending NBFC peers – LIC Housing Finance, PNB Housing Finance and Can Fin Homes are trading at P/B multiples of between 1.2 and 2.7 times.
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