Bajaj Auto Finance – HDFC Securities Research Report

HDFC Securities are bullish on Bajaj Auto Finance Limited and have recommended a BUY with the following investment rationale:

As mentioned earlier the company is one of the leading players in the consumer finance industry. The key drivers of this industry are the cost of funds, operating cost and credit costs. Bajaj Auto Finance Limited has all these parameters in the right place and in right time.

High Credit ratings from CRISIL provide comfort and low cost borrowings while correlation with Bajaj Auto sales provides visibility for the future:

CRISIL has assigned ‘AA+/Stable’ rating to Bajaj Auto Finance Ltd’s (BFL’s) Rs.5.0 billion non-convertible debenture (NCD) programm and Rs.2.0-billion Lower Tier II bonds. In addition to the above CRISIL has reaffirmed its ratings on the other outstanding debt programmes and bank facilities of the company at ‘AA+/FAAA/Stable/P1+’. These ratings provide comfort on Bajaj Auto Finance Limited’s financial strength. Furthermore Bajaj Auto Finance Limited has total borrowing of Rs 32.2 bn as of FY10. Out of this Rs 20.7 bn is through secured loans while the balance 11.47 bn are unsecured loans. Most of Bajaj Auto Finance Limited’s borrowings are set to mature over the next two years. So the impact of rising interest rates is likely to be muted for Bajaj Auto Finance Limited. Also Bajaj Auto Finance Limited has tied up bulk of its borrowings at ~8-9% and has a total of 15 credit lines from banks and other sources. In addition to the above Bajaj Auto Finance Limited has a wide spread dealer network of 400 dealers and 2000 sub dealers. Bajaj Auto Finance Limited’s disbursements in the two and three wheelers space are linked to the Bajaj Auto sales.

As is clear from the chart aboveBajaj Auto Finance Limited’s 2w and 3w disbursements are linked with the Bajaj Auto Sales. The correlation between the two stands at 0.87, thereby suggesting the same. Further more Bajaj Auto sales are expected to register a ~15% Y-o-Y growth for FY11. This suggests that Bajaj Auto Finance Limited’s deployment in the space could also rise by an equivalent amount. This is likely to benefit Bajaj Auto Finance Limited as 2w and 3w loans yield a higher IRR of 25-27%.

Entry in new segments:

In line with its strategy to deal in multi purpose generic assets with a high-end resale value, Bajaj Auto Finance Limited has ventured in to construction Equipment Financing. Bajaj Auto Finance Limited plans to cater to the requirements of both the new as well as used equipments. The industry size for the same is estimated to be Rs 150 bn. Bajaj Auto Finance Limited has targeted to build a book size of Rs 5 bn by FY11. The new entry would enable Bajaj Auto Finance Limited to diversify its portfolio and going ahead would also facilitate entry in the fast growing infrastructure financing space.

Simultaneously along with the construction equipment-financing Bajaj Auto Finance Limited has also commenced another line of business; Loans against shares )considering the regulatory advantage Bajaj Auto Finance Limited will have over banks, which are not allowed to give loans above Rs 2 mn). The industry size for the same is pegged at Rs 50bn. The major competitors in the space are other NBFCs like Birla money and Edelweiss. Bajaj Auto Finance Limited plans to deal in select category of stocks and operate out of top seven markets and focus on building promoter and HNI book. Currently, Bajaj Auto Finance Limited has promoter funding of Rs 1 bn and it aims to build an overall book size of INR4.5bn by FY11.