Bajaj Finance Ltd.'s market capitalisation crossed the Rs 1 lakh crore mark on Tuesday, surpassing 23 NSE Nifty 50 Index stocks, including Mahindra & Mahindra Ltd., Bajaj Auto Ltd., Eicher Motors Ltd., GAIL (India) Ltd., Tata Steel Ltd., Bank of Baroda Ltd. and Hindalco Ltd., among others.
Bajaj Finance has gained 111 percent in 2017 so far, outperforming the Nifty 50's rise of 22 percent.
There is a high probability that Bajaj Finance will be included in the Nifty 50 in the next index re-balancing, IDBI Capital said in a recent report.
Strong financial performance, healthy return ratios – over 3 percent return on assets and more than 20 percent return on equity – and less than 2 percent gross non-performing assets (NPA), has led to re-rating of the stock over the last five years.
The price-to-book value for the stock has expanded from 1 time in 2013 to up to 6 times currently. This has led to an increase in investor interest with the foreign portfolio holding in Bajaj Finance rising 14 percent in the last five years, according to a Morgan Stanley report.
Key Drivers
1. Strong Business Model With Diversified Portfolio
Over the years, the asset financing company has transformed itself from a captive auto financier offering two-wheeler loans for Bajaj Auto to a well-diversified retail non-banking finance company (NBFC).
Besides being a market leader in the consumer durables financing segment, the company operates in various business segments including consumer finance (45 percent of loans), small and medium enterprises or SMEs (37 percent), commercial (13 percent) and rural (5 percent).
2. Strong Growth Trends
The company has clocked healthy growth in assets under management (AUM), in excess of 30 percent, for at least the last 15 quarters .
The NBFC is a dominant player in the consumer durables and lifestyle product financing businesses, where the competition is relatively lower due to under-penetration.
3. Strong Margins
Net interest margins exceeded 10 percent in the last 10 quarters.
4. Well-Managed Asset Quality And Management Capabilities
Management capabilities have been reflected not just in the company's ability to gain market share in various segments, but also in identifying and addressing potential asset quality risks. The company has exited from segments like construction equipment and three-wheeler financing while slowing down on loan against property (LAP) lending on higher perceived risks.
The lender's asset quality remains relatively healthy with gross NPAs steady at 1.7 percent. The asset quality has improved sharply over the last seven years. Its gross bad loans were at 7.6 percent during FY10.
5. High Return Ratios
The company has strong return ratios with ROE in excess of 20 percent and RoA at over 3 percent for the last five years.
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