The venerable Bajaj group has come out with an IPO (and OFS) for Bajaj Housing Finance Limited, a company that works in real estate financing. The company has 4 primary products
1. Home Loans
2. Loan Against Property
3. Lease Rental Discounting
4. Developer Financing
For the purpose of this story, I will focus on FY24 results and for 2 fiscal years prior to that.
Offer Details
IPO application date – 9th Sept to 11th Sept
The offer has two components - OFS (Rs 30,000 million) and Fresh Issue (Rs 35,600 million).
Other details:
Company Profile
Bajaj Housing Finance is a housing finance company registered with the National Housing Bank. They have been categorized as an “Upper Layer NBFC” by RBI since Sept 2022. A total of 15 NBFCs have been identified as such – these have been identified as those with enhanced regulatory requirements based on a set of parameters.
a) Product portfolio – the reliance on home loans and loan against property seems to be decreasing; the enhanced share of the lucrative lease rental discounting and developer finance businesses may be strategic though a larger observation period would be required to understand there is a gradual shift in the product portfolio.
b) Business strategies – based on the RFP the company identifies 4 key strategies for the next phase of growth
a. Continue to leverage technology and analytics to enhance productivity, reduce expenses, improve customer experience and manage risks
b. Diversifying and strengthening market presence with strategic customer focus and comprehensive risk management – launched an SBU to enter near prime / affordable housing segment
c. Continue to diversify our borrowing profile to optimize borrowings costs – preference for long maturity borrowing to reduce Asset – Liability mismatches given the longer maturities for the assets. And also have lower exposure to volatility in interest rates. Maintain credit health to optimize cost of funds and reduce operating expense.
d. Continue to attract, train and retain talented employees
c) Preferred customer profile for the home loan product
a. Prime segment
b. Salaried (80% of customers)
c. Low risk – CIBIL score > 750 (75.8% of customers)
d. Directly sourced (55% of customers)
e. Belonging to a region from the top 5 geographies (85% of FY24 AUM)
d) Likely change in customer profile - to happen in the next decade (my POV)
a. Good mix of prime and near prime / affordable segments
b. Good mix of salaried and self employed professionals
c. Higher risk profile of customers – CIBIL score may be lower on account of most banks / HFCs targeting low risk customers leading to crowding of supply in that segment
d. Better mix of direct vs indirect sourcing on account of an increasing number of registered intermediaries
e. Better diversification of geographies
e) Company History
a. Commenced operations in 2018 with focus on salaried home loans
b. In 2020, AUM touched Rs 300,000 million
c. In 2021, company started offering repo-rate linked home loans, began sourcing intermediaries while developing a B2C app for digital sourcing of customers
d. In 2023, RBI classified company as “NBFC – Upper Layer”
e. In 2024, AUM crossed Rs 900,000 million, introduced home loan product for the affordable segment
f) Focus on the top 5 geographies with a steadily rising market share pan India
a. Overall market share within the HL industry has been steadily rising and stood at 2.76% in FY24
b. In keeping with the overall market concentration, the company continues to keep a sharp focus on the top 5 geographies. The AUM share from these 5 is a whopping 85.2%.
c. The market share of the company in these geographies is 4.7%
d. The concentration risk, as a consequence, is very high
e. The next decade may well see a slight mitigation even though these regions continue to be high GSDP states
Housing Finance Market in India
Per the CRISIL MI&A study commissioned by Bajaj Housing Finance the market size stood at Rs 33.1 trillion in FY24 and is expected to touch Rs 50 trillion in FY27, growing at a CAGR of ~15%
While the industry had a healthy growth of 13.11% over the last 5 fiscal years, HFCs saw a modest growth of 7.8%. Banks have the largest share of the pie with close to 79% of the total market in FY24.
There are 5 major players in the prime segment, 4 in the affordable though lines may be blurring. Bajaj Housing Finance has already introduced a product for the affordable segment.
LIC Housing Finance continues to be the leader with an impressive net income to AUM ratio of 9.5%
Not surprisingly, urban regions witnessed the highest growth and also absorbed the bulk of the housing finance credit.
Top 10 states accounted for a little over 80% of the total market though 4 of those had a gross NPA of greater than 2.0%
Outlook for the next decade
The housing finance market is expected to touch Rs 48 trillion in FY27 from Rs 33 trillion in FY 24 for the NBFC sector. CRISIL research expects the CAGR to be a healthy ~13% during this time. There are a few factors that are expected to propel demand
Shift towards younger profiles for borrowers
Continuous increase in urban population to boost demand for housing in urban areas
Rise in the number of nuclear families
Rising demand for independent houses
Rising income levels mean higher affordability and higher Real Estate prices
Support from the government in form of housing schemes, NHB Refinance Scheme, SARFAESI Act, etc
On the less optimal side, the following factors weigh heavily on the sector
Low per capita GDP
Relatively higher proportion of population employed in the informal sector
Information asymmetry in smaller cities
Insufficient long-term capital
Inadequate legal infrastructure
There is also the issue of unsold inventory in urban areas with high growth.
However, the trend line for mortgage to GDP ratio continues to rise and is expected to touch ~15% in FY25
Valuing Bajaj Housing Finance - A DCF approach
Using the numbers for the last three financial years, I extrapolated all the above variables for the next 10 years using the following assumptions:
Retail Credit is forecast to grow at 15% till FY27 by CRISIL, extend that to FY29 and assume that this growth peters out to 10% in year 10 and terminal year
Share of housing loan based on actual numbers is dropping in the last 3 years and stood at 44% in FY24. I assumed in year 10, it stabilizes to 25% and divide the difference over 10 years
The market share of Bajaj Housing Finance has been steadily rising last 2 years and stood at 2.76% in FY24. I assume that in year 10 it stabilizes at 4% and divide the difference over 10 years
From these I compute the forecasted value of the AUM. I also assume that after 10 years, the growth in AUM for the company stabilizes to 4%
Using these numbers, I create a short P&L that considers AUM, computes PBT based on the FY24 PBT to Average AUM ratio. And since this is a finance company, I bring in the gross NPA as % of average AUM to retain my conservatism. I take this GNPA and taxes out of the PBT to get a post tax earning. I also allocate 0.1% of AUM every year to reinvestment, considering the company's focus on the following
digital and AI
geographic expansion
progressive onboarding of intermediaries
push into the affordable housing segment
retention of talent
I discount the cash flows using a WACC between 11 and 12% (which is a little more conservative than the median of listed HFCs. In FY24, the cost of funds for the company was 7.6%. I expect this to rise significantly once the equity becomes part of capital and the composition of debt to listed equity changes.
I get the value of equity at Rs 750.95 billion. As on 30 June 2024, there are 7.795 billion shares with the company.
This gives a value of Rs 96.34 per share.The IPO prices shares in the range of Rs 66 and Rs 70This is a steal.
Disclaimer
I have applied for the IPO of Bajaj Housing Finance in the retail category
I have not priced equity, having based my calculation on listed HFCs WACC
I have used all numbers in the RHP in good faith
As on 30June24 the ESOP outstanding was Rs 32.7 million - this has been excluded from valuation
The probability of failure of the company is considered as zero.
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