Bajaj Housing Finance IPO: Analysts decode the the impact on Bajaj Finance share price, profitability, valuations

Bajaj Housing Finance IPO: The initial public offering (IPO) of Bajaj Finance’s 100% subsidiary Bajaj Housing Finance Ltd opened for public subscription today, September 9. The IPO has been largely necessitated by Bajaj Housing Finance’s inclusion in the Reserve Bank of India’s (RBI) Upper Layer NBFC list and this has a number of implications for Bajaj Finance as investors look at its standalone financial and operating metrics.

Bajaj Housing Finance is the second largest housing finance company (HFC) in India with an AUM of ₹97,071 crore as of the quarter ended June 2024. The ₹6,560-crore worth Bajaj Housing Finance IPO comprises a combination of fresh issue of 50.86 crore equity shares worth ₹3,560 crore and an offer-for-sale (OFS) of 42.86 crore shares aggregating to ₹3,000 crore.

At the upper-end of the IPO price band of ₹66 - 70 per share, Bajaj Housing Finance stock will be valued at ~3.2x its trailing June 2024 book value (post dilution and adjusting for rights share allocation).

This is expensive compared to peers like LIC Housing Finance, which is valued at 1.2x, PNB Housing Finance at 1.7x valuation and Can Fin Homes valued at 2.7x.

However, Jignesh Shial, research analyst at InCred Equities believes this premium valuation for Bajaj Housing Finance IPO is justified given the company’s robust yet diversified AUM growth of +30% CAGR, sturdy asset quality with NPAs less than 1% and superior technology platform enabling it to remain relevant in a stiff competitive environment.

“Bajaj Finance, with its best-in-class management pedigree, strong promoter back-up and the ability to maintain high quality growth, has traded at a premium to peers which, we believe, is applicable to Bajaj Housing Finance as well,” Shial said.

Bajaj Housing Finance IPO impact on Bajaj Finance

With Bajaj Housing Finance listing, analysts expect Bajaj Finance standalone’s share of unsecured loans will rise slightly and hence will seem to have higher credit cost. Here’s a look at how Bajaj Housing Finance IPO will impact Bajaj Finance’s credit costs, profitability and valuations.

Post-listing, Bajaj Finance will no longer get the benefit of risk diversification of Bajaj Housing Finance, thus leading to slightly higher GS3/NS3 metrics for the Standalone entity compared with the combined entity.

“Such metrics are the best in the sector and should improve as the secured loan book grows. In the short term, credit costs and OpEx might appear higher for Bajaj Finance Standalone, when compared with the consolidated number of the past; however, the higher yields and subsequently superior NIMs will make up for that,” said Avinash Singh, Senior Research Analyst, Emkay Global Financial Services.

Bajaj Finance’s Profitability

According to Singh, the Standalone entity benefits from a higher concentration of high-yield consumer loans and increased fee income, giving it a competitive edge in terms of margins.

“However, Bajaj Finance (Standalone) incurs higher operating costs due to its larger employee base and extensive branch network. Despite such elevated costs, its overall ROA/ROE on an adjusted basis will be ~65-70 bps / 140-170 bps higher than that of the Consolidated entity, reflecting its strong profitability,” Singh said.

Bajaj Finance Valuations

Bajaj Housing Finance IPO listing addresses one more regulatory issue, of the many that were an overhang on Bajaj Finance share price over the last few years. However, analysts believe from a valuation perspective, it does not change.

Any appreciation in Bajaj Housing Finance share price upon listing will lead to increase in value of Bajaj Finance stake in the company, but Singh believes this will be offset by investors starting to apply for a holding company discount to Bajaj Finance’ stake in the company, post-listing.

“If the market ascribes a materially higher premium valuation to Bajaj Housing Finance versus the IPO, then that in a way would reflect the bias for high-growth secured lending and, in turn, would indicate some marginal negative perception for Bajaj Finance Standalone that has higher Unsecured,” Singh said.

Overall, the listing does not cause any change to Emkay Global’s target price of ₹9,000 per share or its ‘Buy’ rating for Bajaj Finance.

At 10:25 am, Bajaj Finance shares were trading 0.61% lower at ₹7,273.00 apiece on the BSE. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.