• Galactic Advisors

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 selling/promotional expenses by OEMs. With financiers ramping up their tie-ups with the product manufacturers, overall competitive intensity is rising.

Processing Fee/ Late Payments – This is one of the big revenue earners for financial lending firms. Processing fees can range from 1-3% with late payments being 24-40% per annum!

Cross-Selling – As of Q3FY20, we see that their cross-sell franchise represents 76% of their total franchise which is a very big number! In FY15 this number was just 48% showing how

BAF has been getting synergy benefits due to this!

Example – They take a certain percentage at every stage: 7-12% from manufacturers to finance the product. + 2-3% from dealers (actual shopkeeper) in some cases. Let’s assume, Someone buys a Samsung fridge worth 50,000, BAF will take 7-9% from Samsung & around 1-3% from Shopkeeper. (Shopkeeper model is now slowly being changed. Now only the Manufacturer pays, But not in the case of all manufacturers.) We are using these figures because in FY19 their interest income was 11878 Cr on an AUM of 115888 Cr, a yield of 10.25%.

BAF Cross Selling – Biggest differentiation?

One of the major reasons behind Apple being a successful company is that they create a cross-selling ecosystem of hardware and software which is hard to leave (Customer stickiness is there, an Apple user doesn’t migrate to other hardware/software major)! If you have an iPhone, then you buy an iWatch, then apps on the App Store, and so on. Therefore from this, we can extrapolate that it is an amazing strategy to cross-sell to the same customer and retain him with the company through multiple products/services. This is something we see in Bajaj Finance as well. If a customer has a mortgage loan with BAF, then he may take his other loans from BAF only as his KYC will be done already and he will get better EMI offers by being an existing customer.

Risk Management

Now Bajaj Finance has been clocking high growth and been acquiring customers at a fast speed! That brings us to the question – what about risk?

It has deeply invested in its risk organization structure that includes dedicated credit risk units for each business vertical; business-specific units, viz., underwriting, risk containment, and fraud control; and horizontal risk analytics, business intelligence, and operational risk management unit. This deep structure ensures granular risk management of the portfolio. Its strategy of ‘acquire and cross-sell’ to manage cost and portfolio risk, based on the axiom that an existing customer poses significantly lower credit risk than a new customer, ensures lower risk across portfolios.

Most businesses in BFL are focused on acquiring mass affluent customers — who represent a bigger wallet, larger cross-sell opportunities, and lower risk. BFL’s lending portfolio is diversified across various secured and unsecured products to meet almost all the needs of the customer.


It is known 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 (other parameters include the bureau score, age, income level, employer, repayment history, and many more factors) – a data point that allows the company to assess creditworthiness.

BFL leverages its large customer franchise to build robust yet nimble risk and propensity models as well as policy rules to best serve customers with offers that are most appropriate for them. To do this, BFL has deeply invested in an