Bajaj Finance: Brewing Financialisation Ahead

It has been quite a long time since I wrote company-specific financial data. I remember the last time was during valuations or when there were new IPOs coming out.

The story

We all know that in 2008-09 there was a company which was offering its EMI cards to people who were salaried, all they had to do was just fill out an application form, give their PAN numbers and then within a few days they would receive their cards which were similar to debit and credit cards. But the difference about this was that it used to give EMI facility on more than 50 different categories of products that were not available earlier.

Over the years it has managed to grow from more than 50 categories to the above-mentioned product suite in the image, as well it has now 2 more subsidiaries with 100% holding in them which is Bajaj Housing Finance Limited which is focusing on Home loans, specifically talking about affordable housing loans as well as giving finance to builders who construct these houses or apartments. In Financial securities, it has done good with similar lines such as ICICI securities or even Zerodha and is providing similar services to the consumers.

I believe both these companies will grow, the reason being the financialization of the economy as we have adopted UPI and are doing 10 trillion transactions as well now the new generation is having confidence in financial markets and are willing to take risks by investing in the markets. Even the ratio of financial savings to total household savings is increasing and millennials are buying more financial products rather than physical products such as homes and gold.

In recent few years from Covid-19 till now, the company has been able to grow more than 41000 distribution points which would enable more customers to opt for those cards and use the facility provided by Bajaj Finance.

While doing all these things it has now a customer franchise of 60.3 Mn customers who are using the app or the cards on regular basis as well as out of those almost 30mn customers have access to 2-wheeler loans which is one of the new categories it has entered into.

Setting the table

In this section, I would be covering the key points which have grown over the years and have helped Bajaj Finance to grow.

• It has made strategic tie-ups with Cars 24, DBS bank and RBL bank. As the market for 2nd hand cars is going up since Covid, it has become beneficial for the company as well as with the banks, it has started providing co-branded credit cards to expand its horizon which would benefit the companies as well as the banks.
• It has QR deployment at 18000 branches or touch points and is expanding it to 1lac touch points which would enable them to capture even more data on the payments and in a longer time period the company would be able to lower the cost of funds from what it is now.
• The company is adding digital EMI cards, as in you don't need physical cards which we usually have in wallets. This would even lower the cost of the company in distribution as well as in developing physical cards. With the enablement of 5G, I think this would be extremely beneficial to the company as currently, they have 70000 customers who have digital cards. I don't know whether you understand this concept or not but even the Bank of Baroda is providing digital debit cards which can be used at every place except on a POS machine as of now. Soon we might not require physical cards on the POS machine also.
  
• It also has 155 standalone gold loan branches wherein it is competing with Muthoot Finance and are planning to increase the branches to 232. Even though all these things are mentioned it has its geographical presence in 3700 locations all over India except J&K.
  
• Over the years it has been able to reduce the cost of funds with the current cost of funds being 6.64% or you can also understand it as the cost of capital. It is higher than banks as it is NBFC but still, this company has an impressive track record.
  

Financials



Looking at the picture you would understand that it has been able to grow at a fast rate and slowed down only after Covid-19 wherein again it has been able to improve its performance.



When you see the image you will realise the company's growth over years. 1-year performance and the remaining years so that you as an investor can decide, what is your ideal time period of investment and whether the company is able to perform or meet your return expectations or not.



When you compare it with the industry you will further understand that it was able to capture the market from its competitors. In 2020 it represented 10.5% of net sales when compared it with the industry but when you look at FY 22 you know that it now comprises of 17.16% of the industry in terms of doing net sales. Even in terms of profits, it has been able to jump from 20.15% to 21.14% meaning that the cost of customer acquisition is not very high as compared to new-age fintech companies.



When it is a financial company we also think about whether it has been able to maintain its NPAs or not.

In 2008 it had NPAs of 7% and this was just about the time we entered into a financial crisis wherein there was Lehman Crisis. Because of the availability of information of PAN cards, it was easy for the company to get credit scores or develop its own scoring mechanism and reduce NPAs.


Further, it was able to beat its competitors in a way that there would be companies who would charge fewer interest rates, thus consumers with low credit scores and less credit availability would shift to their competitors wherein the competitor would acquire consumers whose chances of defaulting were higher. The other companies cannot charge higher than Bajaj Finance and companies on similar grounds would have to spend heavily to acquire new customers which in turn would reduce their PAT and ROE. Thus, Bajaj Finance benefited from all these and became a big data company which is now focusing on customers with better accuracy than its competitors.

Conclusion

This is my take on Bajaj Finance and why I have invested in it. If you believe something else or do not like the story I told, you can share your thoughts in the comments but do understand, that this is my story and I am not here to make everyone believe that this is a good story and a good company to invest in.