The most expensive NBFC trusts the pandemic to separate the wheat from the chaff

It is one of the few family successions that have worked well for both the family and minority shareholders. After the split in 2008, the legacy two-wheeler business of Bajaj Auto has transformed under Rajiv Bajaj into a formidable motorcycle company on the strength of its R&D, while a powerful retail credit powerhouse Bajaj Finance was built from scratch by the younger brother Sanjiv Bajaj. From a plain vanilla two-wheeler financier, it is today a diversified non-banking finance behemoth with 43 million customers availing credit to buy anything from gadgets and houses, to running businesses.

By investing wisely in technology, Bajaj not only improved the NBFC’s efficiency in delivery of loans but also managed to do that in a way that kept bad loans under check. So, despite not having access to low-cost deposits, Bajaj Finance managed to clock a solid return on equity of 20% in FY20, while keeping delinquencies (credit cost) below 2%.

Even as the entire non-banking sector has struggled over the past couple of years, especially after the IL&FS collapse, Bajaj Finance has managed to remain unaffected. Thus, over the past 12 years, through highs and lows, Bajaj Finance has been a darling of the stock market.

But, a pandemic is a pandemic. Sensing the worst, Bajaj Finance’s stock price shed 64% from its all-time high, but along with the recovery in the market, it has seen a spectacular turnaround.

Investors have taken comfort in the company remaining well-capitalised, with a capital adequacy of 26.4%, and also in it having beefed up its provisioning. Bajaj Finance continues to raise money cheap. Still, there is lingering concern around its loan book comprising consumer credit and SME loans, the two most severely impacted business segments, and the collateral damage any deterioration in asset quality may have on growth.

Some of that nervousness was evident when the stock came off post the company filing the Q2FY21 business summary with the BSE, even as foreign and domestic brokerage houses have retained a ‘buy’ on the stock post Q1 results.

On his part, Sanjiv Bajaj believes the storm will blow over and that the current year will be one of consolidation with a focus on operational efficiency. But, what kind of leeway will the unforgiving stock market give? Bajaj Finance continues to be the most expensive NBFC stock with valuation of 4x P/ABV and market cap of Rs.2 trillion, and the rich multiple that the NBFC enjoys is because all its growth engines were firing thus far.

While Bajaj says he won’t let the crisis go waste, there may be very little room for disappointment as far as the stock price is concerned.