The IPO of Bajaj Housing Finance(BHFL), a wholly-owned subsidiary of Bajaj Finance (BFL) is open for subscription from September 9 to 11. BHFL is a non-deposit taking housing finance company engaged in the businesses of advancing home loans, loans against property (LAP), lease rental discounting (LRD) and developer finance (DF).

BFL will pare its stake for ₹3,000 crore and have a post-issue holding of 88.75 per cent. The fresh issue proceeds of ₹3,560 crore will be utilised for augmenting the capital base of the company.

BHFL has displayed a stellar run in its seven years of mortgage operations, with an AUM (assets under management) CAGR of 29.3 per cent between FY20 and FY24.

Its peers in the prime lending space such as LIC Housing Finance, PNB Housing Finance and Can Fin Homes have CAGRs of between -3.9 per cent and 14 per cent for the same period (home loans with ticket size of over ₹50 lakh are considered prime. BHFL also has a smaller non-prime portfolio - affordable housing).

Surprisingly, such growth has not come at the cost of asset quality (see table). Additionally, BHFL offers a diversified play vis-à-vis peers, who have little to no exposure to products such as LRD and DF.

As per the prospectus, the prime housing finance market accounts for 35 per cent of the overall housing finance market, which is about ₹33 lakh crore. It (prime) grew at a CAGR of 20.1 per cent beating the overall market (13.1 per cent) between FY19 and FY24. Its growth is expected to continue at a CAGR of 21-23 per cent between FY24 and FY27 from ₹11.5 lakh crore to ₹20.9 lakh crore. With the strong ‘Bajaj’ brand equity, BHFL is well poised to capitalise on this.

At 3.2 times P/B (price to book) on a post-issue basis, the issue is priced at a premium to peers (see table). However, its diversified play, higher loan growth over the last few years and pristine asset quality explains the premium.

That said, BHFL is still a young company, faces stiff competition from banks in the prime lending space, and is yet to go through cyclical downturns in a meaningful way.

A possible downturn in the larger real estate market can adversely impact the value of home loan collaterals, slow down offtake in developer loans as well as harm the LRD portfolio due to vacancies in commercial properties.

Further, rate cuts in the future can cause NIM (net interest margin) compression in the near-term. How BHFL navigates challenges such as these, will be something to watch out for. Investors with an appetite for risk and long-term perspective can consider subscribing to the issue.

Business and strengths

As seen in the ‘AUM mix’ chart, BHFL’s portfolio is diversified, unlike peers. When it comes to business, ‘safe and secure’ is the name of the game.

To illustrate this, in the home loan segment, 87 per cent of the borrowers are salaried employees with an average annual salary of ₹14 lakh, and over 75 per cent of the borrowers have a CIBIL score of 750+.

In the LAP segment, 71 per cent of the loans are secured by a self-occupied residential property and the LTV (Loan to Value ratio) is also low at 53 per cent. In the LRD segment, the lessors are mostly HNIs and global private equity players letting out Grade-A commercial spaces to prominent Indian corporations and MNCs.

This results in the pristine asset quality maintained by the company with its Gross NPA ratio well below peers. To top this, BHFL’s LRD portfolio has zero GNPAs.

A key strength of BHFL is the symbiotic relationship it has with the real estate developers. When advancing loans to developers, it gets access to the clients of such developers (home buyers), and this makes for a large portion of direct sourcing of business for the home loan product. 

This apart, the financials are largely solid with a mix of speed and stability. The net total income (total income minus finance cost) and net profit have clocked a CAGR of 35 per cent and 56 per cent between FY22 and FY24 respectively. AUM growth and asset quality are as established earlier. BHFL also boasts of the highest possible credit rating (IND AAA/ stable, CRISIL AAA/ stable), resulting in lower cost of funds.

BHFL has 215 branches across 23 States, though 90 per cent of the AUM is concentrated in the top six States. The company also has a strong digital presence. To name a few initiatives, it has a self-service DIY home loan portal, a paper-free e-sanction letter system and a dedicated mobile app for field agents. As of Q1 FY25, the company serves 3.2 lakh customers.

Points to note

While almost all loans advanced by BHFL are floating rate, only 56 per cent of its borrowings are floating rate, the rest being fixed rate.

This will not favour the company, come rate cuts. Also, given its borrower profile, BHFL has to compete with mainstream banks in terms of pricing, to acquire such customers (Banks have 86 per cent market share in prime housing finance). This means that a NIM compression may be on the cards in the near-term due to yields coming under pressure.

The management (in the RHP) recognises this and apart from the flexibility offered by the diversified AUM, it has executed hedging strategies with tools such as interest rate swaps to cushion some of the NIM compression. While it has these measures in place, it also acknowledges the inability to mitigate such interest rate risks, in the event of ineffectiveness of such measures.

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