Bharat Financial: It is time for a hard look on valuations

There is still time for Bharat Financial Inclusion to be an HDFC Bank of the microfinance industry


Bharat Financial stock trades at a price-to-book value multiple of 4.1 times its estimated earnings for fiscal year 2017, while HDFC Bank Ltd is trading at a multiple of 3.9.
Bharat Financial stock trades at a price-to-book value multiple of 4.1 times its estimated earnings for fiscal year 2017, while HDFC Bank Ltd is trading at a multiple of 3.9.

Can an 18-year-old microfinance company outshine the most valued private sector bank of India?

This is exactly what the valuations of Bharat Financial Inclusion Ltd (BFIL) seem to suggest.

The stock trades at a price-to-book value multiple of 4.1 times its estimated earnings for fiscal year 2017, while HDFC Bank Ltd is trading at a multiple of 3.9.

For those who feel this is like comparing apples with oranges, let us look at BFIL’s peers in the non-banking financial company space.

In fact, rising financial conglomerates Bajaj Finance Ltd, mortgage lending behemoth Housing Development Finance Corp. Ltd (HDFC) and Repco Home Finance Ltd are the ones that are getting such high valuations.

Still unconvinced with the comparison?

BFIL’s former microfinance peer Equitas Holdings Ltd, which has morphed into a bank, is valued at 2.9 times its FY17 earnings. Another microfinance turned bank Ujjivan Financial Services Ltd is no different.

At the surface, BFIL’s 87% growth in net profit for the September quarter, its over 50% growth in loan disbursals, an asset under management growth rivalling most peers and an envious asset quality support a premium price tag. The microlender’s track record post the 2010 Andhra Pradesh debacle has been impressive. Even with scorching growth, there is a semblance of caution at the company. Gross non-performing assets were 0.1% of its loan book in the September quarter.

Given that BFIL is the largest and the only listed microfinance lender, it is viewed as the only door for investors to enter into a sunrise sector with promising growth potential.

But is it the only entrance?

It is but a technicality that separates Equitas and Ujjivan from BFIL as these are morphing into banks.

By nature of business, small finance banks can be viewed as microlenders too with an advantage of access to public deposits.

Perhaps fatigue has already set in with BFIL’s stock down 5% to a one-month low now after running-up 50% between April and September.

But the jury is still out with some analysts still having a “buy” rating. Those like Religare Capital Markets Ltd that have a “sell” tag, rely on the riskiness of the sector to justify their call.

There is still time for BFIL to be an HDFC Bank of the microfinance industry.

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