Bajaj Finance: Death at a Funeral | Yazad Pavri #Finance

subscribe to our YouTube channel and press the Bell icon to get the latest updates an Unwritten rule on the Lal street is that you should never fall in love with a stock but with some companies investors just can’t help themselves Bajaj

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance limited bfl has been a market darling for long rewarding its loyal shareholders with generational wealth from a price of just three rupees on first January 2002 to its 52-week high of 8043 rupees reached on 19 January

2022 the stock delivered an unimaginable return of 2 lakh 50 000 percent that’s 10 000 rupees magically transformed into 26.8 million rupees in just 20 years with such a phenomenal performance who is to blame them a strong belief in the company’s products and exceptional management team

and the long-term success of its business has created a tulp like Aura around the stock driving its price to Sky High Valuations but in recent times a mood of Gloom has set in for investors as the stock has been in a free fall over the last few weeks initially investors looked at

it as a correction in price which provided a buying opportunity but there has been no reversal in the strath’s trajectory in 2022 bfl underperformed both the sunsets and Nifty for the first time in 14 years worse yet this was the first negative annual return since 2011. 2023 has been no

better the stock is down another nine percent in the first few days of the new year once again underperforming the sensex which is down by only 0.9 percent the word on the street is that the stock could be in for a major correction and the worst is yet to come for the first time the company is most

loyal shareholders and proponents are beginning to wonder if this is just temporary setback or the beginning of a gradual decline in the fortunes of the company so which is it in this CashNews.co we attempt to piece together what exactly is happening with Bajaj

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and how the ongoing paradigm shift in the nbfc space is set to affect the company and the entire industry it operates Within let’s start at the beginning before bfl became

this massive Financial giant it was earlier known as Bajaj Auto Finance its name was changed to Bajaj text-decoration: none;">Finance in 2010 which essentially lent money to buy motorcycles manufactured by Bajaj primarily a captive business lending for Bajaj Autos products it provided assured business for Bajaj Auto text-decoration: none;">Finance but the company was at best CUNY compared to what it is today in 2006 the company reported Income of 2.1 billion rupees and a Profit after tax of 376 million for the financial year and the 31st March 2022 the company’s

Income and net Profit has jumped multi-fold to 203 billion and 63.5 billion respectively so what made Bajaj Finance grow the way that it did back in 2006

sanjiv Bajaj chairman of Bajaj Finance realized that being a monoline business could be detrimental if private Banks also decided to get into that space with their sheer size and presence

they could easily wipe out a player like Bajaj Auto Finance hence while transforming the company into Bajaj text-decoration: none;">Finance he consciously decided for the business to become multiline across automobiles consumer SME Rural and Commercial businesses but it was the company’s entry into the Consumer durables #1a73e8; text-decoration: none;">Finance sector by offering small size Loans add zero Interest Rates that began the incredible Bajaj Finance story the

company’s first mover advantage in the arena of consumer lending and its interest-free it created Bunkley installments worth wonders for the company between 2006 and 2022 the company’s Assets under management the AUM grew at the cagr of 35 percent unbelievable right oh

but wait did I mention the growth in Income and Profits between 2006 and 2022 Income and net Profit grew at a cagr of 37 and 38 respectively with such unheard of growth the company soon became the Superstar of the nbfc industry far

ahead of the competition due to this high growth rate the stock was re-rated from two times the one year forward Book value to nearly eight times the one year forward Book value over the same period this was primarily the reason why Bajaj has always enjoyed an exceptionally high PE ratio as against

its peers as investors believe its continued growth Justified the high Valuations even after the recent Direction the PE ratio of the company is much higher as compared to its peers but as the saying goes all good things must come to an end or pause or at least slow down at the

onset let me be clear bfl is still the largest nbrc miles ahead of its peers and it’s not stopped growing either in fact for a company of its size it continues to Astound investors with its continuous growth quarter after quarter but alas the

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Markets are fickle and at times quite brutal in recent times some experts have pointed out that although the company still continues to grow the rate of growth has slowed down but is that the case well let’s break down the

company’s key performance highlights in two periods of time looking at the numbers we can notice that there has been a sharp drop in the growth rate but then one might argue that the company’s operations were significantly hampered due to strict lockdowns across most parts of India and

the Emi monetarium during the pandemic so let’s Dig Deeper by comparing the quarterly Data before the pandemic and after the economy was back to normal post the second wave to see if there is any truth to it between June 2018 and December 2019 that’s the quarter right before the

pandemic hit the world bfl’s AUM Drew at an average of 8.8 percent quarter on quarter however if we look at the numbers between June 2021 till the latest quarter ended December 2022 the average growth rate of AUM perk water is down to six percent likewise Income and

Profits have also been growing albeit at a slower rate over the last few quarters as compared to earlier hence we can establish from the numbers that growth has moderated and bfl’s quarter on quarter AUM growth is the lowest seen over the last decade this has not gone down

well with Market participants as it has not met their high expectations from the company but then again one can put it down to the size and scale of the company after all the companies AUM is much larger when compared to the other prominent players however what has brought the

href="https://cashnews.co/markets" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Markets right is that in recent quarters while bfl’s growth rate has moderated from the earlier cagr of 37 percent to between 27 to 30 percent now the growth differential that it had

against its peer group has also narrowed for instance bfl’s AUM growth year on year for the quarters of June September and December 2022 were at 28 31 and 27 respectively now let’s look at the year on your AUM growth for Chola mandalam investment and

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance it’s increased from 21 in the June 2020 route quarter to 25 in September 2022. the company has given guidance that they expect this momentum to sustain at 25 going forward

then there is punawala fin crop which has consistently grown its AUM year on year for the quarters of June and September 2022 at 22 each for December 2022 this growth has improved to 28 year on year Mahindra and Mahindra financials AUM which grew at six percent and 16 year-on-year for the quarters

of June 2022 and September 22. as also reported an improvement in AUM growth for the December quarter to 21 year on year so you see where this is going on one hand bfl has reached a massive size this is basically the law of large numbers when a company gets too big each percentage of incremental

Revenue suddenly represents a fundamentally large number hence growth rate is naturally expected to moderate as is the case with bfl on the other hand we can see that the peer group unlike earlier is now growing almost as fast as bfl this is the first time that the company finds

itself in such a precarious position ever since it began its accession to the top over 15 years ago hence it seems a Valuation multiple derating is happening currently with dfl as its AUM growth tapers down while the growth differential with peers simultaneously continues to narrow

down as well thank you Bajaj Finance has always been the company to be it in the nbfc space with an AUM of 2.3 trillion rupees it Towers over its competitors in this David versus Goliath

story The many Davids put together have not been able to get the better of this Giant Goliath Bajaj Finance but over the last few years there have been sweeping changes to the nbfc landscape

The Davids have increased in numbers earlier there were a handful of players competing with bfl for market share but in recent times the numbers have increased manifold even private Banks such as ICICI Bank and HDFC Bank have been focusing on financing consumer durables that has always been the

domain of Bajaj Finance and because of the increased level of competition in the consumer lending Market bfl has found it tougher to get existing clients to take out additional

Loans the share of bfl’s clients taking out new Loans has dropped to 35 percent from a high of 58 in 2019. then there is another David punawala fin club which has suddenly become the Lal Street’s new darling after billionaire other punawala acquired the

company earlier known as magma fincrop in May 2021 optimistic investors believe that the company might be the new Bajaj Finance of the future the stock has rallied 388 percent over the last

three years on the back of a stronger management Force post acquisition bfl Shares on the other hand represent us 42 percent over the same period for the December 2022 quarter unawala fin crop registered 116 jump in total disbursements to approximately 39.8 billion as against

December 2021. the nbfc aims to draw its Assets under management three times from the current Levels by 2025 and be among the top three nbfcs for both consumers and medium and small and medium Enterprises other smaller players including Aditya birla Capital Tata

Capital lnt Finance continue to chip away at the company’s market share and if the Davids weren’t enough enter not one but two other goliaths the merger of sriram

Transport Finance Company Limited sriram City Union Finance limited and the

amalgamation involving various sriram group entities has resulted in the new entity named sriram Finance limited becoming a diversified player and the second largest retail NBSC with an AUM

of 1.7 trillion as on September 30th 2022 just second to bfl analysts believe that the AUM should grow at 15 percent between 2023 to 2025 hence maintaining pressure on bfl going forward and finally the big bully has entered the play Arena the second Goliath that has got even the most staunch

supporters of bfl anxious is the entry of the biggest disrupter of all the Reliance group in October 2022 the board of Reliance Industries approved the scheme to demerge the financial

services business from Reliance Industries into a new company to be called jio Financial Services or JFS it seems JFS will be focused on consumer and Merchant lending which is the Mainstay

of Bajaj Finance a new report by Macquarie research says that JFS could emerge as the fifth largest financial services company in terms of Net Worth the Macquarie reports

said Reliance group has a network of more than 15 000 stores across several formats and a vast consumer base of 400 million in Telecom and 200 million in retail that GFS can leverage and in concept be a formidable threat for incumbents jio Financial will have a significant advantage over other

nbfcs due to its deep positive parentage AAA Credit rating strong and well Capitalized Balance Sheet very large distribution footprint and strong the ability to attract top-notch Talent among nbfcs and fintech Bajaj

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and paytm could be the most at risk it said it seems the Reliance group is expected to not only grow big on financial services but also to become a disrupter in the sector it is

likely to take a page or two out of its jio strategy which disrupted the Indian Telecom industry decimating the competition this is one Goliath that Bajaj Finance will have

to dig its heels in and fight out and that’s one of the major concerns that have gripped the company’s shareholders and led to the answering free fall in its stock price wait there is more you asked sadly there is one more thing alien the company as well as the entire nbfc industry in

recent years The Reserve Bank of India has been tightening the rules for non-banking Finance companies after the collapse of infrastructure major infrastructure Leasing and

financial services ilfs in 2018 and the subsequent failures of leading nbfc’s like Reliance Capital and Devon housing the RBI has been tightening screws on systematically important nbses bringing their regulation on par with that of commercial Banks in September 2022 RBI

identified 16 large non-banking Finance companies including Bajaj none;">Finance under the upper layer for bank-like Compliances as per the guidance these entities have been asked to migrate to a bank-like regulatory system the regulatory framework includes higher Capital adequacy leverage requirement

Liquidity position standard asset provisioning and governance structure including board and remuneration policies currently the top nvfcs such as Bajaj Finance Mahindra

Financial Tata Capital and Aditya birla are very well stocked with Capital and also follow good governance practices however as regulations are more or less similar to Banks it puts these nbfcs at a disadvantage compared to Banks which are cheaper access to funds

additionally competition is expected to be more intense from Banks which are flush with low cost deposits and better place with improved Capital buffer than in the previous years the goal of the RBI is for large nvxes such as Bajaj

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance to expand in a controlled manner having ruled out the possibility of applying for a bank license earlier bfl may now have to deal with slow growth rates going forward for a long period of time bfl has been the favorite

Financial Services stock among investors providing them with consistently High returns year after year while the company even today Remains the market leader growth has moderated and the growth rate may taper even further going forward as the company continues its digital transformation bfl itself

would be more focused on quality over quantity as its aom has reached a very large size for a non-banking entity thus investors need to factor this in and have more realistic expectations from the company over the coming years existing as well as new investors looking at entering the stock after

this correction we find it prudent to understand that the company has reached a certain point in its life cycle where it needs to take a breather and focus on normalization of asset quality bfl is in a way akin to a company like Tata consultancy Services if you look at TCS the company has a higher

PE ratio as compared to its peers Infosys HCL Technologies and Wipro and it continues to maintain this premium because of its unchallenged Market leadership similarly bfl might continue to remain the most expensively priced nbse stock even yet due to its Strong pedigree but as the growth

differential Narrows between its peers some amount of this premium is bound to shrink and that is exactly what’s been happening in recent times as they say the first step in the healing process is acceptance investors must accept this as a new normal and not expect the stock to be the

multibadio that it was in the last decade I hope you enjoyed watching this CashNews.co thank you very much for watching until next week happy investing goodbye