The Kid Is All Grown Up
In today’s edition of TOPICAL Wednesday, we will talk about the ongoing Bajaj Housing IPO which will close today.
Bajaj Housing Finance Limited (BHFL) is, as the name suggests, in the business of providing housing-related loans. It is considered a non-deposit-taking Housing Finance Company (HFC) and is engaged in mortgage lending (lending against security). The company is getting listed, and we finally have an IPO worth talking about (says the guy who has already covered 3 IPOs in this newsletter in just the last 4 months). But if there is any company worth talking about, it’s this one, and for great reasons. So, let’s look at the business of Bajaj Housing Finance.
But before we move ahead, first things first!
IPO Details
Issue Size: Rs. 6,560 crore
Price Band (per share): Rs. 66 to Rs. 77
Fresh Issue: Rs. 3,560 crore
OFS: Rs. 3,000 crore
Selling Shareholder: Bajaj Finance Limited is selling~ 42.9 crore shares.
Objective of the Offer: To meet future capital requirements for onward lending.
Introduction
Bajaj Housing Finance stands out not just as a leading lender in the growing housing finance market, but also for its exceptional operations under the Bajaj Group.
Here are some impressive milestones the company has achieved since it started:
- Largest non-deposit-taking Housing Finance Company (HFC) in India by Assets Under Management (AUM).
- Second largest HFC in India.
- Second most profitable HFC in the country.
- One of the fastest-growing among its peers in the HFC/NBFC-UL sector.
- Most diversified HFC in India, offering a complete range of mortgage lending products.
- Highest proportion of salaried customers in its home loan portfolio among large HFCs.
- Lowest GNPA and NNPA ratios among large HFCs.
- Highest possible credit ratings in India for both long-term and short-term borrowing programs.
- Second highest loan disbursement among HFCs in India.
- Second highest AUM per branch and per employee among large HFCs.
That’s one impressive list! What makes it even more remarkable is that Bajaj Housing Finance has achieved these feats in just 7 years since commencing its mortgage operations, making a name for itself in an industry dominated by giants like LIC and PNB Housing, to name a few. (Talk about being an overachiever)
Let’s uncover the story behind this exceptional company.
Bajaj Group: The Foundation
The Bajaj Group’s story mirrors the evolution of Modern India. It began in 1926 with Jamnalal Bajaj, a savvy tradesman and freedom fighter, who founded Bachhraj Trading Corporation Private Limited, focusing on cotton processing. As India neared independence, the demand for affordable transportation was growing. Responding to that, Bachhraj started importing and selling affordable 2W and 3W in India.
But the turning point came when Kamalnayan Bajaj, Jamnalal’s eldest son, took the helm. He secured a license to manufacture 2W in India in 1959, and partnered with Piaggio to produce the iconic Vespa scooter, then known as a symbol of freedom and mobility with Italian style and practical, in India. This marked Bachhraj’s shift from importer to manufacturer and introduced the globally popular Vespa to India. In 1960, the company officially changed Bajaj Auto, establishing the foundation of what would become a global auto giant.
As India experienced profound changes, a cultural renaissance emerged, with music, fashion, and cinema at the forefront. In this vibrant setting, Bajaj Auto, under Rahul Bajaj’s leadership, launched the Bajaj Chetak in 1972. Named after Maharana Pratap’s legendary horse, the Chetak became a symbol of aspiration for the Indian middle class.
(source: Dainik Bhaskar)
Despite the restrictive License Raj, which limited manufacturing, the scooter’s popularity soared and in 1977 itself the company was able to sell 1,00,000 units, redefining the scooter market and marking a milestone in India’s automotive history.
Bajaj Auto Finance: New Vertical Born
In the 1970s and 1980s, as India’s automotive sector rapidly expanded, the market transitioned from a seller’s market to a consumer-driven one. To make vehicles more accessible and enhance customer loyalty, Bajaj began offering financing solutions for new and used vehicles, featuring competitive interest rates and flexible repayment options. This strategy not only increased sales volumes but also extended the company’s reach into semi-urban and rural areas where access to credit was limited.
With the economic reforms of the 1990s, Bajaj gradually ventured into non-auto loans. By the 2000s, as demand for consumer durables like electronics and appliances grew among the middle class, Bajaj started offering consumer durable loans with small-sized, competitive-rate options. This move not only boosted the company’s revenue growth but also diversified its loan portfolio beyond the cyclical auto sector.
The Demerger: Bajaj Finserv
As Bajaj’s financial sector grew rapidly, the company expanded into life and general insurance with Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance in 2001. To streamline operations and enhance focus on each business segment, Rahul Bajaj initiated a demerger of Bajaj Auto into three distinct entities:
1. Bajaj Auto Ltd: This entity continued to focus on the core automotive business, manufacturing two- and three-wheelers.
2. Bajaj Finserv Ltd: Created to concentrate on financial services, this company also explored wind energy generation.
3. Bajaj Holdings and Investment Ltd: Established as an investment company, it managed the group’s investments and sought new business opportunities.
This strategic move aimed to unlock shareholder value and allow each entity to focus on its specific business goals.
With the demerger, Bajaj Auto Finance became part of Bajaj Finserv, revolutionizing consumer lending in India. It introduced innovative products like small retail loans and no-cost EMIs, supported by a vast distribution network, all while maintaining a high-quality loan book.
New Corporate Structure
(Source: Company Presentation)
This highlights the rich history of the Bajaj Group, showcasing its innovation and efficiency, particularly its focus on serving India’s middle class. As a result, today Bajaj brand has became synonymous with trust and reliability. These qualities have been passed down to the current subject of our discussion.
Bajaj Housing Finance
The company offers financing services to both individuals and businesses through a variety of products, including home loans (both prime and affordable), loans against property (LAP), lease rental discounting (LRD), and developer finance.
Over the past 4 years, Bajaj Housing Finance has experienced a CAGR of 29.3%, surpassing its competitors and becoming the second-largest non-deposit housing finance company (HFC) in India.
AUM Growth:
(Source: Company Presentation)
If we just talk about the prime housing loans, excluding government-supported affordable housing, the results are even more impressive. This success can be attributed to its unique strengths, including a strong brand, prudent and experienced management, and leadership across multiple industry areas.
Strengths of Bajaj Housing Finance
1. Sourcing Strategy
BHFL employs an omni-channel approach to enhance customer reach and experience by integrating physical branches with digital onboarding options.
Micro-Market Focus: BHFL targets specific smaller geographic areas, or “micro-markets“, to better understand local real estate trends and customer needs. This localized strategy allows for customized products and services, improving customer service and conversion rates. Collaborations with real estate developers provide direct access to potential home loan customers.
D2C Strategy: The company engages directly with customers through its branch-based sales team, fostering strong relationships without intermediaries. This strategy, combined with digital platforms, reduces costs and enhances customer experience through convenience and speed.
Intermediaries: They have a network of intermediaries, including channel partners, aggregators, direct sales agents, and financial advisors which the company is continuously expanding. This network helps access a wider customer base, leveraging established relationships and trust with potential borrowers.
(Source: Company Presentation)
2. Credit Risk Evaluation
Bajaj Housing Finance has maintained high growth without compromising asset quality through effective credit risk evaluation strategies.
Retail Loans: They use centralized underwriting and straight-through processing for salaried customers and Approved Project Finance (APF) projects, enabling quick and accurate evaluations. Digitized credit processes and account aggregator integration enhances efficiency. Specialized teams assess financial profiles via phone and video discussions, while the risk team monitors early warning signs and delinquencies through regular reviews and dashboard monitoring.
Commercial Loans: The focus is on prime developers and HNIs for lease rental discounting, targeting Grade A commercial properties. Evaluations consider the financial strength of lessors, collateral, and lessees, with transactions secured through project cash flows and rental tracking via escrow. Regular field visits ensure process improvements.
Collateral Fraud & Risk Management: A dedicated team conducts detailed checks for accurate collateral valuations, while a risk containment unit prevents fraud early in the loan process using both centralized and decentralized teams.
As a result, BHFL has the lowest GNPA and NNPA in the industry
(Source: Company Presentation)
3. Diverse Product Offerings
BHFL stands out as the most diverse housing finance company in India. While home loans contribute significantly to its revenue, BHFL is less reliant on them compared to its peers. The company’s portfolio is well-balanced across various products, reducing dependency on any single offering. This diversification provides strong protection against downturns in any specific product line.
(Source: Company Presentation)
4. Leveraging Technology & Data
Cloud – Bajaj Housing Finance utilizes cloud-based technology to enhance agility, reduce costs, and provide scalable, secure infrastructure.
Lending Platform – Their lending platform manages lead management, loan origination, and servicing, incorporating sales apps, portals, and their website.
Data Analytics – Data analytics and machine learning improve credit decisions and fraud management, while process automation ensures efficiency and smooth customer interactions.
5. Cost of Borrowing
BHFL has become the second most profitable housing finance company in India by effectively managing its cost of borrowing. With an AAA credit rating, the company accesses a variety of cost-effective borrowing sources at competitive rates. BHFL emphasizes longer-term floating rate borrowings and is increasing its money market borrowings to optimize risk and flexibility. The company has diversified its borrowing sources beyond bank loans to include non-convertible debentures, commercial papers, NHB refinance, and bank loans. This strategy consistently secures favourable borrowing rates, allowing BHFL to offer competitive lending rates.
As a result, Bajaj Housing Finance is not just a great mortgage lender but also one of the best-managed companies in India which is well positioned to became the industry leader. This strong performance and innovative strategies have also led to higher valuations compared to its peers. Bajaj Housing Finance will be valued at ~3.2x its trailing June 2024 book value (post dilution), while LIC Housing Finance is valued at 1.2x, PNB Housing Finance at 1.7x valuation and Can Fin Homes valued at 2.7x.
That’s it for this IPO. If you want us to cover more IPOs in the newsletter, do reach out to us on Twitter. If you are sick of getting IPOs in the newsletter…then also reach out to us on Twitter.
(Author – Adnan Twitter)
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