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On 12 September the company launched an initial public offering (IPO) at a price of ₹70 a share. That’s a valuation of3.72 times the book value.
The closing price on listing day, 16 September, was ₹165 a share, or8.77 times the book value.
The closing price on 17 September was ₹181 a share, or9.6 times the book value.
This means in about five months, Bajaj Housing finance Ltd went from being valued at 1X book value to 10X book value!
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At a price/book ratio of 10, BHFL’s market cap hit a staggering ₹1.5 trillion. That’s the combined market cap of the top 10 housing finance companies, excluding HUDCO.
Here’s some more context for why that’s absurd.
BHFL’s assets under management (AUM) is 21% of the combined AUM (total loans given) of these 10 housing finance companies. BHFL’s return on equity (ROE) of 15.1% is about the same as the average ROE of the top 10 housing finance companies. Yet the average price-to-book ratio of top 10 HFCs is 3, while BHFL trades at 8.7 (as of market close on 20 September).
Here’s why these valuations are rich and unlikely to continue.
Many factors contribute to the valuation of a housing finance company, including:
- Good asset quality (low gross non-performing assets and net non-performing assets).
- Profitability (ROE).
- Growth in earnings per share or book value per share.
- Promoters’ pedigree.
Let’s discuss each factor as it applies to Bajaj Housing finance.
Asset quality
Bajaj Housing Finance has five business segments with a combined ₹97,000 crore in AUM as of the end of June. AUM has grown at a dizzying 40% compound annual growth rate (CAGR) since 2019.
Home loans have grown at a healthy rate, but other segments have helped drive the high AUM growth over the past two years.
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The AUM mix has shifted in favour of lease rental discounting and developer finance over this period.
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Lease rental discounting is a loan for property owners. It is secured by the expected future rental income from leased properties. Developer finance is a loan for real estate developers. It funds the construction of residential or commercial projects until the units are sold.
BHFL has grown both these segments in both value and volume terms.
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So far, the asset quality in both these segments has been near perfect. As of the June quarter, the gross non-performing assets are 0% for LRD, 0.15% for developer finance, and 0.28% for home loans. This is as good as it gets. GNPA measures the percentage of loans that are more than 90 days overdue.
Profitability (return on equity)
The company expanded its ROE from 11% in FY22 15.2% in FY24. This matches the average ROE of the top 10 housing finance companies excluding HUDCO. However, many housing finance companies have a higher ROE than BHFL, so it’s not a standout performer on profitability.
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According to a report by PhillipCapital, which is bullish on the stock, the expected ROE for FY27E is 12.4%. Does a housing finance company with a 12% expected ROE three years out deserve to be valued at 8-10 times book value?
Growth
Without a doubt, growth is an important part of BHFL’s story. Growth in the past has been extraordinary. In FY19, just a year into operations, AUM was ₹15,000 crore. At the end of June 2024, AUM was ₹97,000 crore, marketing a CAGR of 40% in about five-and-a-half years.
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While the red herring prospectus doesn’t have book-value-per-share data going back 2018, it was 14.8% over the past two years. During this period, AUM growth averaged 30%. According to PhillipCapital’s report, it expects BVPS to increase at a CAGR of just 8% from FY24 to FY27.
Investors buying at these levels must acknowledge these shortcomings. AUM growth has been extraordinary, but growth in book value per share has not been as impressive. It is also not expected to be more than 8% over the next three years. This makes sense. With a 15% ROE, a housing finance company should grow at close to 15%, not more. The company must get external growth capital. But this would dilute existing shareholders’ stakes.
However, If BHFL could raise capital at 8 times price/book, it would be great for shareholders as they would get ₹8 for every Re 1 of book value it dilutes.
The promoters’ pedigree is also excellent. But will informed investors pay 8 times book value for a high-quality housing finance company? And if the stock is priced to perfection, earnings growth will have to do all heavy lifting to justify the valuation.
Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.
For more such analysis read Profit Pulse.
Rahul Rao has been investing since 2014. He has helped conduct financial literacy programs for more than 1,50,000 investors. He helped start a family office for a 50-year-old conglomerate and worked at an AIF, focusing on small- and mid-cap opportunities. He evaluates stocks using an evidence-based, first-principles approach as opposed to comforting narratives.
Disclosure: The writer and his dependants do not hold the stock(s) discussed in this article.