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Everything you need to know about Bajaj Finance!

We discuss Bajaj Finance's origins, moats, loan book, 10-year history, and what hurts this stock!

About Bajaj Finance

Bajaj Finance Limited(BFL/BAF) is a deposit-taking Non-Banking Financial Company (NBFC-D) registered with the Reserve Bank of India (RBI). BFL has a diversified lending portfolio across retail, SME, and commercial customers with a significant presence in urban and rural India.

It accepts public and corporate deposits and offers a variety of financial services products to its customers. It has two 100% subsidiaries: (i) Bajaj Housing Finance Ltd. (‘BHFL’ or ‘Bajaj Housing’), which is registered with National Housing Bank as a Housing Finance Company (HFC); and (ii) Bajaj Financial Securities Ltd. (‘Bfinsec’), which is registered with the Securities and Exchange Board of India (SEBI).

Bajaj Finance has created immense wealth for its shareholders from 2007 to 2020, delivering a CAGR of an eye-popping 46%. The company has definitely come a long way as the stock was Rs 35 on 02/01/2007 and Rs 4923 at the top in Feb 2020, delivering a staggering absolute return of 14065% or 140.65x!

Bajaj Finance has been in news a lot lately for a lot of reasons –

We see above that Bajaj Finance has fallen from its peak of Rs 4923 to Rs 1915, a fall of 60%+. Now definitely, we all have been told the news and have seen data that concludes that Bajaj finance is a great business, right? Well, to just bust that myth, even great businesses can correct heavily (and have corrected heavily in the past. During the 2008-Recession, Kotak Mahindra Bank lost its value by 84.9%!) as everything including valuations has a limit.

So what’s the reason for the fall this time?

One of the main reasons for the fall in the whole financial sector space (Banks and NBFCs) including Bajaj Finance is mainly due to the Covid-19 uncertainties and business disruption. To simplify, a bank is a business of lending and since most of the businesses are virtually doing 0 sales or operating at dismal capacities, some or good part of the repayment of loans will be a big doubt posing a very big risk to financial firms in particular!

The Origins of Bajaj Finance

Originally incorporated as Bajaj Auto Finance Limited on March 25, 1987, the non-bank singularly focused on providing two and three-wheeler finance. After 11 years in the auto finance market, Bajaj Auto Finance Ltd launched its IPO. Bajaj Auto Finance Limited became Bajaj Finance Ltd (BFL) from September 2010.

In 1994-95, Bajaj Auto Finance came out with an initial public offer and was listed on the BSE and NSE. Initially, the company was promoted by erstwhile Bajaj Auto Ltd and Bajaj Auto Holdings Ltd.

Products of Bajaj Finance

It has a history of adding products rapidly to its overall portfolio.

Shareholding pattern of Bajaj Finance

Bajaj Finance also has China’s central bank PBOC as a shareholder! Interestingly BAF has no shares pledged.

Evolution of Loan Book from FY09 to FY20

14 years of history in numbers :

We clearly see the phenomenal growth of Bajaj Finance above. Its profit has increased 100x from FY07-20, its AUM increased 56x and its Customer franchise increased 17x from 2.5 million in FY08 to 42.6 in FY20. All this has been done while keeping its asset quality under check.

Business Model of Bajaj Finance and How it earns money?

Bajaj Finance is known in the non-bank lending industry for its customer-profiling algorithms and short loan durations. Among the hundreds of parameters used, for instance, is the store visit time of the potential borrower — a data point that allows the company to assess creditworthiness.

Bajaj Finance is a success story in the consumer durable financing. The banking sector ignored this segment because of low-ticket value, higher operational cost including difficulty in recovering loans in case of bad debts. But Bajaj Finance came out with an app-based model (with EMI facility) by tying up with manufacturers in segments such as mobile phones, TV, fridge, and even furniture.

So the 5 factors which help Bajaj Finance earn money are as follows –

Interest cost on loans is distributed across three levels — manufacturer, dealer and the customer. The charge varies depending on the product, EMI financing option and the sourcing dealer.

Zero Cost EMI – Zero Cost EMI schemes at the face of it may look like a free lunch but there are no free lunches in this world. These are never 0% as IRR to BFL but almost 10 to 20% of IRR (internal rate of return) due to processing fees, advance EMIs, subventions from dealers, retailers, manufacturers, etc!

Tie up with Brands/Retailers – BAF has tied up with a lot of brands and retailers such as Flipkart, Amazon, Croma, Future Group, Yatra, Paytm Mall, MakeMyTrip, Bajaj, RBL Bank, Vivo online store, Choose My Bicycle and many more. This helps retailers in financing their goods sold and BAF earns fees on this too!

Tie up with Manufacturers – NBFCs offer zero-interest finance by charging interest to the manufacturer or dealer. Subvention charges range from 2% to 10% of the product price and depend on the tenure, product specification. Subvention costs are considered as se