FY2020 had begun with hopes of fast growth in the economy with India preparing to become a $5 trillion economy by 2045-25. FY 2019 saw India at $2.7 trillion having added $1 trillion during the last five years. While the key to becoming a sustainable economy is having key development sectors such as infrastructure having continuous projects to work on to generate employment and generate spending for people, the financial services sector has played a leading role in this growth.
Two such companies in the BFSI sector which have created wealth and value for its shareholders are Bajaj Finserv and Bajaj Finance. With a tremendous performance in spite of industry hiccups, Bajaj Finserv Limited (BFL) has paid a dividend of 50% on its face value and a P/E ratio of 425.57 as compared to the industry P/E of 39.32.
Bajaj Finserv Share Price Movement
As the chart below shows, Bajaj Finserv share price has increased from 6,407.3 on Jan 24, 2019, to 9,535 exactly one year later on Jan 24, 2020, which is a CAGR of 48.81%.
Source: Moneycotrol.com
Investing in stocks is a long-term commitment and as we can see below, even the five year Bajaj Finserv share price movement has helped its investors create wealth. Bajaj Finserv share price has increased from 1375.4 on Jan 27, 2015, to 9,764.35 on Jan 20, 2020, as shown in the graph below.
Source: Moneycotrol.com
Thus, Bajaj Finserv share is giving a CAGR (compounded annual growth rate) of 47.99%. This is higher than any other peers in its group.
Bajaj Finance Share Price Movement
Source: Moneycotrol.com
During the last one year, Bajaj Finance share price grew from Rs. 2,955.55 on Jan 25, 2019, to Rs. 4,194.50 on Jan 24, 2020, giving a CAGR of 41.9%.
Source: Moneycotrol.com
As shown in the graph above, during the last five years, the Bajaj Finance share price moved from Rs. 416.96 in 2015 to Rs. 4,194.5 on Jan 24, 2020. This results in a CAGR of 58.68%.
The Q3 FY20 results (declared on Jan 29, 2020) reported a 52% increase in net profit. This resulted in a 4% increase in Bajaj Finance share price on the same day.
What has sustained the momentum of Bajaj Finance and Bajaj Finserv shares?
Bajaj Finserv Limited (BFL) is the financial services arm of the larger Bajaj Holdings & Investments Ltd. It is cosily placed across different niches with different subsidiaries across different verticals such as – Bajaj Finance Ltd (lending and investments), Bajaj Financial Securities Limited or ‘Bfinsec’ (financial services and trading), Bajaj Housing Finance Ltd. ‘BHFL’, Bajaj Allianz Life and Bajaj Allianz General Insurance. Thus, it is a large player across segments.
Sustaining the growth during FY2019 has not been easy. The latter part of FY2019 was slightly challenging for the lending industry. With the bankruptcy of another large NBFC lender IL&FS and banks with Non-Performing Assets (NPAs) hovering easily above 10%, not many were willing to supply money to NBFCS for loans. This had an impact on NBFCs like Bajaj Finance but it could easily weather the storm as it has always been run efficiently cost-wise.
Thus, BFL (the holding company of Bajaj Finance Ltd.) performed well in FY2019 with prudent operational cost, strong risk management and a diversified product mix to aid its growth across sectors. Here are some factors that contributed to sustaining the momentum of Bajaj Finance and Bajaj Finserv shares:
Lowest NPA – In FY2019, Bajaj Finance had the lowest Non-Performing Assets (NPA) (at 0.63%) in the NBFC industry. In Q3 FY20, the Net NPA was maintained at 0.70%. This indicates increased closure of outstanding loans and leaves more cash for lending to new customers.
Growth in AUM – Bajaj Finance saw a 35% growth in assets under management (AUM) in
Q3FY20.
Higher profits – Bajaj Finance had a 52% rise in profits in Q3 FY20 whereas Bajaj Finserv had a 32% increase in PAT during the same period. This is an indicator of the degree of operational prudence.
Cost of funds – Even with lower funds available from the markets, Bajaj Finance did not spend higher than 0.5% increase in the cost of funds to borrow from the money markets in 2019.
Surplus Funds – Bajaj Finserv’s surplus funds, excluding group investments) were at Rs. 9.1 Bn as on December 31, 2019.
Qualified Institutional Placement (QIP) – During November 2019, the company also underwent a qualified institutional placement (QIP) of Rs. 8,500 crores with larger institutional investors like BlackRock, GIC and Nomura picking up shares. This has bolstered the investor confidence in Bajaj Finance and Bajaj Finserv as there is an unexplored potential of growth. The share price post this announcement gained 1.04% on NSE.
Future Plans for Sustaining Momentum
The company is clearly an outperformer in its segment and aims at increasing its credit offtake (loans). One of the reasons for momentum in future will also be its diversification in the securities trading business with the newly formed Bajaj Financial Securities Limited or ‘Bfinsec’. The company plans to create a mark in the capital market solutions arena with subscription based packs for trading. It is poised to grow with high liquidity ratios and technology-oriented trading platform which will appeal to the millennial generation.
The Bajaj Finance trust is enhanced with its AAA credit rating. Its fixed income instruments are also one of the highest-rated in the market. The growing network of offices in rural areas as well will help increase its customer base. The recovery and lower NPAs allow it to be an agile and profitable NBFC for the foreseeable future and sustain the momentum of Bajaj Finance and Bajaj Finserv shares.