Bajaj Finance more precious than banks for investors

Mumbai: Investors are singing the vintage 1980s ad jingle ‘Hamara Bajaj’ for Bajaj Finance stock. That ad jingle had put its parent on the road to growth.

What else can explain the consumer lender’s market capitalization crossing ₹2 trillion on Tuesday with the stock touching its 52-week high? This is despite concerns over valuations expressed by analysts.

At this milestone, the lender looks precious to investors than banks. As of Tuesday, only four banks boast of market cap that exceeds that of Bajaj Finance. These are State Bank of India (SBI), HDFC Bank, ICICI Bank and Kotak Mahindra Bank.

Why are investors so in love with the stock?

For one, Bajaj Finance has cracked the code in consumer lending and Indians can’t seem to say no to its interest-free equated monthly instalments (EMI).

As this column had pointed out earlier, Bajaj Finance has continued to report roughly 50% growth in its asset under management consistently for many quarters. Even though it gives unsecured loans to a large extent, its asset quality metrics are enviable. In short, it knows how to price risk.

Many banks are late to this market, having preferred to give loans to corporates which are margin friendly. Banks have also failed to price risk appropriately. The consumer lender has already made a strong mark in financing discretionary purchases.

Another reason why public sector banks look poor in front of Bajaj Finance is their balance sheet. They have unsustainable levels of toxic assets and some of them have been loss making entities for two years in a row.

But the key difference between a bank and a non-bank financier is the deposit franchise. Bajaj Finance’s cost of funds is of course higher than banks but it has superior margins.

And to investors delight, it has shown that it can escape the liquidity crunch most other non-bank finance companies are facing. Indeed, it could easily borrow from the market even on worse days.

Bajaj Finance now trades at a rich multiple of 5.6 times its estimated book value for FY21. Even though a consumption slowdown is underway in the economy, analysts are in no hurry to re-rate the stock. The dream of non-bank lenders in India is to become a mainstream bank and get a piece of the low-cost deposit pie especially now since most of them have been ravaged by rising cost of borrowing. Even Bajaj Finance aspires to become a bank someday.

But for now, it is no less than a bank for the market and perhaps some banks want to be Bajaj Finance.