Bajaj Housing Finance (BAJAJHFL IN)
I have not even begun to fight
INDIA | FINANCIAL | Initiating Coverage
Expect 35%+ upside on BAF with BHFL listing: Our bull, bear, and base scenarios
Bajaj Housing Finance Ltd (BHFL) was classified as an upper-layer NBFC as per scale-based regulations, and so it got listed within three years of this classification. We have worked out three scenarios, and taken a hold-co discount of 15% to be conservative, even though present tax considerations don’t mandate a hold-co discount. We have taken a 50% weightage for our base scenario, 40% for our bear scenario, and 10% for a bull scenario. In the bull case, we assumed a P/E multiple of 30x – c.20% lower than +1sd of BAF. We are using earnings multiple for the standalone entity, given it is a fast-churn, high-velocity, consumption-driven credit business. We are using price-to-book multiple for the housing finance entity as it’s a traditional lending business.
Our view: (1) BHFL’s average home loan customers earn a salary of c.Rs 1.4mn, giving them pricing power and multiple choices in key markets. To sweeten its offerings, BHFL astutely offers top-up home loans in addition to the original home loan, which boosts its yield in this highly competitive market. (2) BHFL sources c.40% of its home loans from existing BAF customers and gives c.90% of its HLs to salaried customers. This reduces costs (lower expense ratio) in the medium term and augments its risk-adjusted spreads, leading to higher return ratios vs. peers. (3) c.70% of its LAP loans are for self-occupied residential property. It originates these loans c.45% LTV from c.40% existing customers, implying strong focus on opex and return ratios. (4) As BHFL scales up, its AUM per branch is closing in on LICHF and its AUM per employee is at par with Can Fin Homes. (5) It borrowing cost is better than Can Fin Homes’, risk-adjusted spreads are lower, reflected in RoE.
Valuation: We believe BHFL is in a league of its own, with its focus on the ‘desirable’ sweet spot for many home loan (HL) aspirants – a ticket size of Rs 5mn. This way, it addresses c.65% of home-loan originations in India. It is increasingly focusing on Lease Rental Discounting (LRD), a high-yield segment that provides operating leverage with scale. The CF (construction finance) book will be range-bound at 8-10% of its total book. In three years, BHFL is likely to have a balance sheet of Rs 2tn+. Near-term, credit costs will remain benign; this, along with its focus on building a low-risk balance sheet, will lead to RoA/RoE of 2%+/12%+. With scale, BHFL has scope to improve its expense ratios, implying an improvement in return ratios. Hence, we would look favourably at BHFL for its acute focus on salaried HL, steady expense ratio, and benign credit costs, manifesting strong return ratios. We value Bajaj Housing Finance at 6.5x Sep-26 BV at Rs 210, implying 27% upside. Initiate with BUY
Leave a Reply