Bajaj Finance’s $1B fund-raising plan: A chance to sell or buy?

Bajaj Finance’s $1B fund-raising plan: A chance to sell or buy?

Analysts remain positive as the board of directors meets on October 5th to make decisions regarding the plan for fundraising. The NBFC is likely to go through the QIP or the preferential issue option, with four investment banks selected for the task

Bajaj Finance, which is believed to be preparing to raise $1 billion, is buying “growth capital ammo” to combat the growing competition, according to some analysts, while stating that they remain positive about the share price.

According to Jefferies, Bajaj Finance remains the company that it prefers to work with out of non-banking financial firms. Jefferies declared in its note that “while it is capitalized well with a CAR tier-1 (capital the ratio of adequacy) at 23 percent, this increase could be an upfronting of capital to help support the high AUM (assets under management) growth (32 percent in the first quarter) and is a reasonable amount ahead of schedule.”

If Bajaj Finance raises 10-15 percent of its net worth, the size of the issue could be in the range of $1 billion or Rs 80 billion, Jefferies analysts said. They also said that this could lower the returns on equity to around 22 percent, down from 23 percent. Meanwhile, in FY24, the earnings per share and book value for shares might increase by 6 percent and 11 percent, respectively.

The biggest risk to the valuation, analysts suggested, could be an increase in growth slowdown as well as a greater-than-expected increase in reduction in net interest margin or the deterioration of asset quality.

“Upside can arise from stronger-than-expected growth in consumer durables and rural financing business and further improvement in operating efficiencies and reduction in cost ratio,” they added.

Anand Rathi Institutional Equities continues to be a bullish position regarding Bajaj Finance. Based on Kaitav Shah, the Lead BFSI Analyst at Anand Rathi, The planned fundraising will be similar to capital for growth and has more potential for growth than prior to it.

“Although we aren’t aware of how much fundraising will cost and the value that Bajaj Finance is offering, dilution will be accretive to the book value,” Shah told Moneycontrol. Anand Rathi Institutional Equities has a “buy” score on Bajaj Finance.

On August 20, 2023, moneycontrol published an exclusive report that Bajaj Finance was planning to raise anywhere from $800 million to $1 billion. A decision regarding the plan for fundraising is expected to be made at the board’s meeting on October 5, Bajaj Finance said in an exchange filing on September 22. The funding is expected to be completed via the QIP or preferential issue method, as well as four investment banks selected for the deal.

Also, take a look: Bajaj Finance’s acquire and cross-sell strategy will be an important growth driver for FY24, claims Motilal Oswal.

In the week of September 26, the reaction of investors and brokerages was positive, and the stock rose 4.6 percent, reaching 7,819.20. 7,819.20 at the time of closing at the BSE.

According to some analysts, the arrival to the industry of Jio Financial Services as well as the progress of the private lender HDFC Bank and ICICI Bank in the segment of unsecured lending may be one of the main reasons that have led to Bajaj Finance’s decision to raise money at the moment.

“While we don’t know the specifics of the strategy that Jio Financial has in mind, Jio Financial has plans to start with commercial and consumer lending. Certain of the channel studies indicate the possibility that Jio Financial has already started consumer lending pilots at consumer lifestyle and durable stores operated by Reliance,” analysts at Motilal Oswal Financial Services Ltd stated in a research.

Motilal Oswal, who has a “buy” rating with Bajaj Finance, said in an article that the funding could be a subtle acknowledgment that the NBFC is preparing its capital ammunition to deal with changes in the landscape of competition over the next couple of years.

The company also said that the plan to raise money was earlier than anticipated due to the core AUM growth at 29.9% in the FY23 period and 32.9% YoY in the first quarter of FY24. The brokerage’s analysts suggested this could give the company a sense of security that its AUM could rise at a rate of over 30 percent in the coming years (earlier estimates ranged from 26 to 27 percent).

In addition, entering more innovative product segments like microfinance, auto commercial vehicles, tractors, and microfinance could lead to 2 to 3 percent more AUM growth than previously anticipated.

It was noted in the report that the strong expansion in the retail segment across lending institutions, as well as the long-term sustainability of strong retail loan growth over the next few years, might have inspired management to think about raising money.

In an interview with Moneycontrol, Jignesh Shial, Director of Research Director of Research, Director of BFSI Sector, Incred Capital, states that competition could not be the main reason behind the funding as the company is thriving and the possibilities in the market are very good.

“Bajaj Finance is among the fastest-growing NBFCs in India. They’ve been talking about expanding their business into microfinance or even gold. This means that growth isn’t an issue to them.” Shial said. In addition, he says that they have a track record of achieving quality growth and healthy customer acquisition figures.

With these objectives in mind, Shial says the timing is ideal as it’s advised to raise money prior to before you begin to grow instead of being concerned about the point of growth that requires money. Concerning the possibility of dilution in ROE, Shial says that, while it could happen, Bajaj Finance has a history of returning the pre-dilution ROE within 2-2.5 years. “The manner in which Bajaj is expanding right now, we don’t have any concerns,” Shial adds,

Analysts at CLSA who have a rating of ‘buy’ on Bajaj Finance have rated it a ‘buy’. Bajaj Finance stock raised the price of the target to 9500 rupees. According to CLSA its estimates, the book value for shares that are accreted from the funding could be between 10 and 13 percent, which will keep Bajaj Finance’s equity return to over 20 percent.

Strong financials

Bajaj Finance, which has a portfolio of consumer, small and medium-sized enterprises, and commercial loans, has enjoyed a steady expansion over the last few years.

The net profit of the company grew 32 percent from year to year to approximately 3,436.89 crores during the June 2023 quarter. The gross ratio of non-performing assets was also reduced to 0.87 percent, down from 1.25 percent the year before. Its net NPA ratio stood at 0.31 percent, compared to 0.51 percent a year earlier.

In a report from September 2023, BOB Capital Markets initiated coverage of Bajaj Finance with a ‘buy call. Analysts from BoB Caps said the NBFC continues to reap the benefits of the variety of products offered as well as a vast distribution network, efficient execution, and a well-trained management team.

“Considering Bajaj Finance’s strong fundamentals and solid expansion prospects, we estimate the company as a stand-alone entity with 6.6x ABV for FY25E. We believe that the current valuations are compelling and have begun coverage of Bajaj Finance with a Buy rating with 29 percent of an increase from its current valuation,” they said in the report.

With a market cap of 4,73,780 million, Bajaj Finance is one of the top NBFCs, with its peers being Cholamandalam Investment and Finance and the Indian Railway Finance Corporation. Analysts remain confident about the company’s prospects in the midst of waiting for the results of the board’s October 5 meeting.


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