It is a tried and tested method to seek refuge in stocks that seem to stand tall during times of stress. Bajaj Finance Ltd was an obvious choice when other non-banking financial companies (NBFCs) fell like nine pins after the liquidity crisis hit.
On these same lines of seeking safety, the consumer lender’s play to raise money through equity was bound to receive a good response. Even when the total size of fundraising is large enough at ₹8,500 crore.
According to some media reports, Bajaj Finance’s qualified institutional placement (QIP) issue received bids of more than five times its size. What helped the QIP is that benchmark equity indices are near all-time highs or getting there and the market mood is buoyant. Most analysts have a buy rating on the stock and some have even raised their target prices recently.
What is more is that Bajaj Finance managed to maintain its pristine asset quality despite some pain points emerging due to consumption slowdown.
The lender reported a 63% increase in net profit in the September quarter. Of course, the slowdown has begun to reflect on Bajaj Finance’s balance sheet. Loan growth has decelerated from its historic average of 45-50%. Even so, the lender’s 38% growth in assets under management trumps everyone else in the market.
The secret is being best in hooking the retail borrower. Bajaj Finance’s business model is to make the average individual consume through credit and pay in equated monthly instalments (EMI).
The EMI hook has worked well for Bajaj Finance though it is increasingly facing tough competition from private banks.
All this explains why the stock has outperformed the broader market by giving a 30% return over the past three months.
Surely, the rather steep multiple of seven times its estimated book value for FY21 should make investors think before adding the stock to their kitty. That doesn’t seem to have happened.
The company set a floor price of ₹4,020 a piece for its QIP issue and according to the reports, the price band for the issue is ₹3,860-4,900. That means a discount of 4% over Tuesday’s closing price at the lowest of the QIP price band. The dilution for existing shareholders would also be very limited.
While analysts may have a buy rating, most have warned that valuations are expensive. “Bajaj Finance is winning because there are no better picks in this market when it comes to financials. Also, the consumption story has worked always," said an analyst asking not to be named.
Here is a thread of caution for investors. The consumption slowdown is already nipping at the heels of Bajaj Finance. Moreover, private banks such as HDFC Bank are entering into small ticket retail loans. For investors wanting to get more bang for their buck from the stock, the wait could stretch a bit in the wake of the slowdown.