Bajaj Finance vs Indiabulls Housing Finance - An example of very strange Market Logic!!

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.

Indiabulls Housing Finance vs HDFC - David vs Goliath comparison!!

HDFC Ltd is the Big Daddy in the world of Housing Finance and everybody knows that. HDFC, which is an acronym for Housing Development Finance Corporation, has over 4 decades of history and a super-excellent track record of consistent growth & quality of assets. Over the last many years, HDFC has used it's strong Cash Flows & market position to invest in many other business ventures like setting up an Asset Management company (Mutual Fund), Insurance JVs for Life as well as General Insurance, bought stake in certain Real Estate Projects, even started a venture to offer Educational Loans. All these business ventures now constitute nearly 35% of HDFC's consolidated Total Income.

On the other hand, the Indiabulls Group was born just about 15-16 years ago. It's entry into Financing business happened about 3 or 4 years after that. But Indiabulls did not start with Housing Finance in the business of Financing. Initially it was primarily into Business Loans, Personal Loans, Commercial Vehicle Loans, etc. Most of these Loans were high-risk products, but offered higher rates of interest. The Indiabulls Group took a major hit in this business during the 2008-09 economic meltdown phase and then decided to focus more on Housing Finance & Mortgage Loans business from FY'10 onwards. This business carried lower rates of interest, but came with longer business visibility as well as security of being asset-backed. By the time FY'13 was On, the Housing Finance & Mortgage portfolio of the company became over 75% of the company's total Loan Book and hence the company decided to register as a Housing Finance Company. Being a HFC, the company was able to raise resources at lower rate of interest compared to other lenders. During this HFC Registration, the company's name changed from Indiabulls Financial Services Ltd. to Indiabulls Housing Finance Ltd. and the shares of the older company were delisted & after a brief period relisted with the new identity during the year 2013.

In the field of Housing Finance, HDFC has nearly 35 extra years of history than Indiabulls Housing Finance Ltd. (IbHFL) and hence is no surprise that the former is nearly 5-6 times the latter in every Financial Number terms. So instead of just comparing the respective numbers of the two companies, I decided to see how is the smaller company growing in size compared to the larger one.

The chart alongside shows the progress made by IbHFL's certain important financial numbers in terms of a Percentage of HDFC's corresponding financial numbers for different successive 12-month periods over the last 3 years or so. What that means is, if the Percentage number is improving between two successive periods means that IbHFL has grown faster than HDFC during that period and if the Percentage number remains steady, then it means that both have grown at almost equal pace during that period. I have considered only the Consolidated numbers for both the companies.

One look at the chart and it's very much clear that the Percentage numbers for all the 3 parameters of Total Income, Interest Cost and Net Profit have shown some smart improvement, in stages, between the 12-months period ending March'13 to 12-months period ending December'15. On the Total Income front, IbHFL's Total Income was about 12% in March'13, but has increased to about 17% by December'15. On the Net Profit front too, the numbers have increased from about 19% to almost 24% during the same period. Interest Cost, which forms the biggest cost for any Financier, reflects similar increase as the Net Profit. This clearly shows that during this period over the last 3 years or so, IbHFL has grown substantially faster than HDFC. Yes, IbHFL being much smaller than HDFC, will allow the former to be much more nimble footed. But still we cannot deny the fact that IbHFL has scaled up to a respectable size to be amongst the Top-5 Housing Lenders within a short span of time. IbHFL has also managed to keep a tab on it's Interest Cost and also it's Loan Book is in a good shape. Fortunately, Housing Finance & Mortgage Lending business is relatively safe as it is backed by an asset and hence the quality of Loan Book rarely goes terribly bad, unless the Real Estate market goes in complete doldrums. Thankfully the Indian economy is growing at a decent pace and hence we can safely assume that nothing of that sort is going to happen with the Indian Real Estate market in the near foreseeable future.

Now let's look at the progress made by IbHFL's Market Cap compared to that of HDFC's in Percentage terms over the last 2+ years. At the end of December'13, IbHFL's Market Cap was just about 6% of HDFC's. At that point, the former was clearly way way undervalued. Over the last 2 years or so, IbHFL's stock has smartly outperformed not just HDFC, but most other Financial Sector companies of decent size. Currently, IbHFL's Market Cap is about 15% of HDFC's number, which means it has closed the Huge undervaluation to a good extent. But there is still some more to go as IbHFL's Net Profit forms almost 24% of HDFC's Net Profit as on Dec'15. So even if both the companies are to be assigned equal P/E Ratio, IbHFL's stock needs to move up by another 50% or so before HDFC's stock makes further move higher. In fact I will go to the extent of saying that since IbHFL has been consistently growing faster than HDFC and if it continues to do so in future quarters & years, then it deserves to trade at a P/E Ratio higher than HDFC. Still....let's just say that there is still a substantial scope for outperformance by IbHFL on the Market Cap front in the coming quarters.

IbHFL's stock currently trades at around the Rs.630-640 level and trading at a P/E Ratio of just about 11 or so. If IbHFL continues to grow it's bottomline at near about 20% Y-o-Y in the coming quarters on a consistent basis, then I won't be surprised to see IbHFL's stock trading in 4-digits sometime before the end of 2016 or in early 2017. I very much think that IbHFL certainly deserves it and hopefully the market will give it to Indiabulls Housing Finance Ltd someday.

Indiabulls Housing Finance vs LIC Housing Finance comparison

LIC Housing Finance has been amongst the largest Housing Finance NBFC in India after Housing Development Finance Corporation Ltd. or HDFC. HDFC did annual revenues of about Rs.48,000 crores and a Net Profit of close to Rs.7000 crores for FY'15. LIC Housing Finance's Total Income at Rs.10,800 crores is a fraction of HDFC's number. But on one hand where HDFC's annual income is less than 5 times LICHFL's, the former's Market Cap is nearly 9 times that of the latter!! HDFC's Market Cap stands at over Rs.1,80,000 crores compared to less than Rs.21,000 crores for LICHFL!! There are various factors behind this. Some of them being Quality of Assets, Consistency of Growth, much longer track record, Large unlisted investments of HDFC, etc.

( Click here for Indiabulls Housing Finance's Easy Results Summary page. )

So we cannot directly compare HDFC with any other Housing Finance company. But we can certainly compare LIC Housing Finance with another fast rising NBFC in the same business, i.e. Indiabulls Housing Finance Ltd. The flagship company of the Indiabulls Group, earlier known as Indiabulls Financial Services Ltd, was originally involved in providing finance for Used Commercial vehicles, Business Loans, Personal Loans, alongwith Loans for purchase of Property/Real Estate. This company has been in the Financing business for over 10 years now and has a good track record of strong growth over the years. Even though Home Loans formed over 50% of it's business right from FY'06, it decided to purely focus on this part of the business after it took some hit during the FY'2008-09 economic upheaval. In the next few years, it did not expand the Non-Home Loans business and gradually brought it down to less than 5% of it's business composition. During FY'2012-13, the company decided to register itself as a Housing Finance Company and change it's name accordingly, as there were cost advantages for being a Housing Finance company. We can safely say that whatever growth the company has seen from FY'10 onwards is purely because of expansion of it's Housing Finance Loan Book.

In the following charts, I have compared to Annual numbers of Indiabulls Housing Finance Ltd. with that of LIC Housing Finance Ltd. for 5 years from FY'11 to FY'15.

Now let's look at the first chart. In FY'11, Indiabulls' Total Income stood at Rs.2500 crores, just half of LIC HFL's Rs.5000 crores. The latter's Total Income has now grown to Rs.10,800 crores in FY'15, i.e. a growth of 116% in four years time. During the same period Indiabulls HFL's Total Income has posted a growth of 190% to post Rs.7270 crores. In FY'15, LIC HFL's Revenues grew by 15% Y-o-Y, whereas Indiabulls HFL's growth was 23%. From FY'16, I am expecting the gap between the two companies' topline to start reducing as Indiabulls HFL is expected to continue posting a growth which is atleast 5% more than that of LIC HFL.

Coming to the 2nd chart of Interest Cost, which is the biggest cost for any Financing company or a Bank. Indiabulls HFL's Interest Cost has grown from Rs.899 crores in FY'11 to Rs.3944 crores in FY'15, an increase of almost 340%. On the other hand, LIC HFL's Interest Cost has gone up from Rs.3098 crores in FY'11 to Rs.8310 crores in FY'15, an increase of almost 170%. Purely in terms of % increase in Interest Cost, LIC HFL has done better. But here it will be more important to see how much % of the company's Total Income is consumed by the Interest Cost, because this is what will impact the company's Profit margins. Here again Indiabulls HFL has done much better because over the last 3 years, it's Interest Cost has been around 55% of it's Total Income, whereas the same for LIC HFL is close to 76%. From these numbers it becomes obvious that Indiabulls HFL has been managing it's Borrowings much much better than LIC HFL, which ultimately results in way superior Profit margins for the former.

Thanks to the superior management of it's borrowing costs, Indiabulls HFL has done stupendously better than LIC HFL on the Net Profit front. Between FY'11 and FY'15, Indiabulls HFL's Net Profit grew from Rs.743 crores to Rs.1901 crores, an increase of 156% in 4 years. During the same period, LIC HFL's Net Profit grew from Rs.974 crores to Rs.1386 crores, a disappointing growth of just 42%. This is extremely disappointing from LIC HFL because even though it's Total Income is 50% higher than that of Indiabulls HFL, the latter's Net Profit is 37% higher than the former!! In such a scenario, how on earth does LIC HFL deserve a Market Cap of Rs.21,000 crores while Indiabulls HFL is commanding a value of Rs.20,000 crores!! Going by the stronger growth in Total Income, better management of borrowing cost, much stronger profit margins, isn't it plain simple Logic that Indiabulls HFL should trade at a premium to the valuation enjoyed by LIC HFL??

At the current price of Rs.415/- LIC HFL enjoys a P/E ratio of 15, whereas at Rs.565/- Indiabulls HFL enjoys a P/E ratio of just over 10!! This is really funny and does not make any sense. Hence I think this is an excellent opportunity for Investors to take advantage of a potential re-rating in the stock of  Indiabulls Housing Finance Ltd. With an expected growth of about 20% in FY'16 and a potential P/E of 15, I think Indiabulls HFL's 12-18 months fair value comes to over Rs.900/-. All this before even mentioning the Trump Card for Indiabulls HFL, which is it's Dividend Payouts, which have risen sharply over the years. Indiabulls HFL has been paying between 50% to 70% of it's Quarterly Profit as Dividend on a consistent basis. In FY'15 it paid Rs.35 per share in total dividends, which translates into a Dividend Yield of over 6%. And we can safely assume that the dividends will be increasing in line with the increase in Profits. So the Potential Dividend Yield in coming Years at the current price of Rs.565/- in actually much much higher. And remember that Dividends are Completely Tax-Free for the Investors. A point to note is: The huge Dividend payouts is hugely positive for Shareholders, but Cash is like Raw Material for any Financing company. Indiabulls HFL could conserve some of it's Capital by distributing lower amount as dividend and use that Capital to enhance it's business further. But the Indiabulls Group seems to believe in distributing most of it's profits amongst it's shareholders.