Bajaj Housing Finance IPO: BHFL valuation at premium to HFC peers; can it deliver?

Bajaj Housing Finance Ltd is coming up with a Rs 6,560 crore initial public offer (IPO), which includes an offer for sale (OFS) of Rs 3,000 crore by Bajaj Finance Ltd, to be sold in the price band of Rs 66-70 apiece. A significant value could get added over next 12-15 months as 25-30 per cent asset under management (AUM) and earnings growth; and 14-15 per cent return on equity (RoE) is likely from BHFL in the next couple of years, YES Secuirties said. Key strengths of BHFL are its growth execution, risk management and operating efficiencies, the brokerage added.

"BHFL is valued at a premium to most HFC peers which, we believe, is justified given its robust growth, sturdy asset quality & superior tech-enabled platform. Though the margin profile is relatively vulnerable, there is enough headroom to improve operating efficiency which may drive RoE outperformance," said InCred Equities. 

Being focused on prime salaried customers, competitive yields have placed the BHFL at par with banks while enjoying an edge over smaller players, thus aiding AUM growth. However, with the cost of funds being relatively expensive to banks, the margin profile of BHFL is relatively weak. 

"However, we believe that with diversity in the AUM profile (a balanced mix of superior-yield loans against property, lease rental discounting & developer loans), management does have room to manage yields. Also, there is enough headroom to improve operating efficiency (C/I ratio at 24 per cent) which can drive RoE outperformance," InCred Equities said.

BHFL plans to increase its market share through deepening relationship with existing customers, onboarding new customers and expanding to newer geographies to build granular portfolio with reduced concentration risk. 

YES Securities said a strong growth along with focus on improving direct sourcing of Home Loans and increase in ATS across products has bettered Opex/Asset ratio for BHFL in recent years. 

"The shift in product mix helped BHFL in limiting the impact of a sharp rise in funding cost on the portfolio spread. Prudent customer selection and robust underwriting, risk management and collection framework underpins a marginal delinquent pool (which is the lowest among HFCs) and a negligible credit cost (even as Stage 2/3 coverage was strengthened)," it said.