Recently I got a request to check out Bajaj Finance Ltd. & share my opinion on the same. Hence I first added Bajaj Finance Ltd. to my Easy Results Analysis Database a couple of days back and then tried comparing the numbers with one of my favourites in the Financial sector, i.e. Indiabulls Housing Finance Ltd. And my finding are leading to some very strange conclusion.
Bajaj Finance Ltd. and Indiabulls Housing Finance Ltd., both are Non-Banking Finance Companies (NBFCs), but cater to different categories. While Bajaj Finance Ltd. is primarily into lending for Consumer Durables & Mobiles, and also has some exposure to products like Personal Loans, Business Loans, 2-wheeler Loans, etc. Bajaj Finance has also recently setup a Home Loans subsidiary. Indiabulls Housing Finance Ltd. on the other hand is primarily into Housing Finance & Mortgage Lending. Because of their very diverse primary operating categories, their Loan profiles also differ very widely. The Average Loan size and Average Loan Repayment duration for Bajaj Finance is very small and hence needs to continuously add more & more Loan transactions to keep the momentum going. On the other hand, Indiabulls Housing Finance operates with 50 to 100 times higher Average Loan size and even the repayment tenures are much much longer. Even the Risk Profile is very different in both cases. Bajaj Finance is primarily lending for acquisition of a depreciating asset, while Indiabulls Housing Finance is lending for acquisition of an appreciating asset.
For this comparison, I have considered Total Income, Net Profit & Market Cap figures for both the companies for FY'14, FY'15 & FY'16. This comparison helps us compare their progress over the last 2 fiscal years.
1) Total Income: Indiabulls Housing Finance has managed to maintain it's lead over Bajaj Finance in this parameter over the last 3 fiscals in the range of Rs.1800 to 1900 crores. Even though the gap between the 2 companies has remained similar in Gross terms, it has trimmed to some extent in percentage terms. Bajaj Finance has managed to grow it's Total Income by about 80% between FY'14 and FY'16. On the other hand, Indiabulls Housing Finance has posted a growth of little over 55% during the same period, though on a larger base. As both of them grow in size, their growth rates are expected to moderate going forward, though it will be interesting to monitor the degree of moderation in both cases. At the end of FY'16, Bajaj Finance's Total Income was about 80% of Indiabulls Housing Finance's Total Income.
2) Net Profit: The chart alongside comparing the Net Profits of the two companies looks a bit different than the Total Income comparison chart above. That is because of superior Net Profit margins enjoyed by Indiabulls Housing Finance. Here too Bajaj Finance has certainly managed to grow faster than Indiabulls Housing Finance, though on a smaller base. While the former managed to grow it's Net Profit by 78% in two years, the latter has managed a growth of 50% during the same period. But unlike in case of Total Income, Bajaj Finance's Net Profit forms just about 55% of Indiabulls Housing Finance's Net Profit. It clearly proves the highly superior Net Profit margins Indiabulls Housing Finance has been managing to generate from it's business operations. Lower Net Profit margins for Bajaj Finance are because of multiple factors like higher Sales cost, higher Loan Recovery cost and higher Provisions, as a percentage of it's Total Income.
3) Market Cap: Here is where the Strange Market Logic comes into play. We have clearly seen in the above two comparisons that Bajaj Finance is about 20% smaller than Indiabulls Housing Finance in terms of Total Income and
about 45% smaller in terms of Net Profit. As per normal common sense, even in terms of Market Cap, Bajaj Finance should be somewhere between 55% to 80% of Market Cap of Indiabulls Housing Finance. But here is where the story is completely different. At the end of FY'14 & FY'15, the Market Caps of the two companies were almost equal, which in itself meant that the Market was valuing Bajaj Finance at a higher pedestal than Indiabulls Housing Finance. But over the last 12-15 months, things have gone even more haywire. At the end of FY'16, Bajaj Finance's Market Cap stood nearly 31% higher than that of Indiabulls Housing Finance!!! That means a company whose Net Profit is 55% of the other, is valued 31% higher!!! Isn't this very strange?? Things have got even more strange post 31st March'16. As of yesterday, Bajaj Finance's Market Cap was about 54% higher than Indiabulls Housing Finance!!
At the current price levels, Bajaj Finance is trading at a P/E ratio of about 36 times, whereas the same for Indiabulls Housing Finance is less than 13 times. I think this is extremely irrational and needs to correct over the coming months/quarters. If Bajaj Finance does not manage to accelerate it's growth to much higher levels, then it's P/E ratio needs to come down to under 30 over the next 12 months or so. At the same time, even if Indiabulls Housing Finance manages to maintain it's current growth rates, it's P/E ratio needs to improve to about 18-20 levels over the coming 12 months or so.
Bajaj Finance Ltd. and Indiabulls Housing Finance Ltd., both are Non-Banking Finance Companies (NBFCs), but cater to different categories. While Bajaj Finance Ltd. is primarily into lending for Consumer Durables & Mobiles, and also has some exposure to products like Personal Loans, Business Loans, 2-wheeler Loans, etc. Bajaj Finance has also recently setup a Home Loans subsidiary. Indiabulls Housing Finance Ltd. on the other hand is primarily into Housing Finance & Mortgage Lending. Because of their very diverse primary operating categories, their Loan profiles also differ very widely. The Average Loan size and Average Loan Repayment duration for Bajaj Finance is very small and hence needs to continuously add more & more Loan transactions to keep the momentum going. On the other hand, Indiabulls Housing Finance operates with 50 to 100 times higher Average Loan size and even the repayment tenures are much much longer. Even the Risk Profile is very different in both cases. Bajaj Finance is primarily lending for acquisition of a depreciating asset, while Indiabulls Housing Finance is lending for acquisition of an appreciating asset.
1) Total Income: Indiabulls Housing Finance has managed to maintain it's lead over Bajaj Finance in this parameter over the last 3 fiscals in the range of Rs.1800 to 1900 crores. Even though the gap between the 2 companies has remained similar in Gross terms, it has trimmed to some extent in percentage terms. Bajaj Finance has managed to grow it's Total Income by about 80% between FY'14 and FY'16. On the other hand, Indiabulls Housing Finance has posted a growth of little over 55% during the same period, though on a larger base. As both of them grow in size, their growth rates are expected to moderate going forward, though it will be interesting to monitor the degree of moderation in both cases. At the end of FY'16, Bajaj Finance's Total Income was about 80% of Indiabulls Housing Finance's Total Income.
3) Market Cap: Here is where the Strange Market Logic comes into play. We have clearly seen in the above two comparisons that Bajaj Finance is about 20% smaller than Indiabulls Housing Finance in terms of Total Income and
At the current price levels, Bajaj Finance is trading at a P/E ratio of about 36 times, whereas the same for Indiabulls Housing Finance is less than 13 times. I think this is extremely irrational and needs to correct over the coming months/quarters. If Bajaj Finance does not manage to accelerate it's growth to much higher levels, then it's P/E ratio needs to come down to under 30 over the next 12 months or so. At the same time, even if Indiabulls Housing Finance manages to maintain it's current growth rates, it's P/E ratio needs to improve to about 18-20 levels over the coming 12 months or so.
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