Can Bajaj Twins Create Value For Investors Like HDFC Peers?

Shares of Bajaj Group’s two non-bank lenders outpaced financial-sector peers since 2009 as the companies grew business by offering insurance, mutual funds and consumer loans to buy everything from a car to a mobile phone. That’s given the two stocks a place in India’s benchmark of 50 large caps alongside HDFC Group companies, though with a much lower weight.

Yet, Bajaj Finance Ltd. and Bajaj Finserv Ltd.’s surge came on a low base. Even now, HDFC Bank Ltd. and Housing Development Finance Corporation Ltd. together are about three times bigger than Bajaj Group non-bank lenders by market capitalisation and about 11 times larger by assets.

But there are similarities that put them almost in a similar basket. The biggest common factor being their retail-focused lending. Both the groups offer personal, auto and consumer durable loans, home mortgages, insurance, mutual funds and more.

“HDFC twins had been successful due to great product innovation, implementation skills and customer-focus tempered with a sharp focus on book quality and proactive risk management,” Lalitabh Shrivastawa, assistant vice president, research at Sharekhan, said. “At present, we find that Bajaj Finance is also developing well with its business being built upon with similar s. Outlook for Bajaj Finance continues to be attractive.”

Bajaj Group’s non-bank business started as a captive financing unit for its scooters and three-wheelers. Rahul Bajaj, chairman at the holding company, named Rajiv Bajaj as the head of the automobile unit and handed the financial services business to younger son Sanjiv Bajaj.

From providing vehicle loans, the financial services business pioneered consumer durable loans in India. It offers credit at zero-percent interest to consumers for a certain period, allowing them to buy everything from a refrigerator and mobile phone to even clothes on borrowed money. That led to a 47-time growth in assets to Rs 115,888 crore in 10 fiscals through March 2019. And it boasts of more than 3.5 crore consumers.

The initial jump in assets for Bajaj Group companies, however, came on a low base as HDFC was already a large financial institution when their business started growing. But it has now gained a critical mass.

Non-bank lenders in India have been facing a credit crunch since September last year after the surprise defaults of IL&FS group firms in September. But the Bajaj twins were relatively unscathed despite half their borrowings coming from the money market. That puts it on a stronger position than peers.

“Bajaj Finance is in a space that faces a serious crisis of confidence. This will enable it to borrow at lower rates because depositors are too scared to put money anywhere else,” said Basant Maheshwari, co-founder and partner at Basant Maheshwari Wealth Advisory, which has invested in the company. “As competition shrinks, the strong lender will get an easy access to market share capture without diluting customer quality.”

What sets Bajaj Finance apart is the ease with which a consumer can borrow. And also its reach across retailers in India, letting people buy and technology to convert credit into EMIs instantly.

The company declined to comment on BloombergQuint’s queries citing silent period ahead of earnings.

Rajeev Jain, managing director, Bajaj Finance, said in an investor call in May that while its 3.5 crore customers was the largest retail franchise in the country, the company’s share of their wallet is low by any yardstick. “The opportunity remains very large, we continue to invest very deep in risk infrastructure, analytics, geographies to improve our understanding of a client and create opportunities to grow our wallet.”

High Valuations

Bajaj Finance and Bajaj Finserv are among the top performers in the Nifty 50 Index this year. Bajaj Finance is also the most expensive non-bank lender, trading at 8.2 times its one-year forward book.

The two contribute 2.9 percent weight to Nifty 50. That compares with the combined weight of 18.9 percent for the HDFC twins—the highest from a single group on India’s benchmark index.

In the near term, HDFC twins could be better placed in terms of valuations, according to Gurmeet Chadha, chief executive officer and co-founder, Complete Circle Consultants. Still, both the groups have been at the forefront of digital disruption, payment wallets and wealth advisory algorithms, and affordable housing can be a huge opportunity for HDFC when the sector is under stress, he said.

Chadha outlined life and general insurance and asset management as the biggest wealth creators in the next five to 10 years. “But don’t look for the next HDFC Bank. HDFC Bank will be the next HDFC Bank.”