Rights issue proceeds to fund growth plans: Bajaj FinServ

Bajaj FinServ has decided to conduct a rights issue to raise capital for its growth and expansion plans going forward. In an interview to CNBC-TV18, managing director Sanjiv Bajaj says that the rights issue, priced at Rs 650 per share, will help them raise around Rs 940 crore.

“The major part of these proceeds will go towards funding growth for our NBFC subsidiary Bajaj Finance and the rest would be for other growth opportunities in our other businesses in coming years,” he said. The Bajaj FinServ board has approved raising capital up to Rs 100 crore in May. The company has fixed September 8, 2012, as the record date for the purpose of proposed rights issue of equity shares. Below is an edited transcript of his interview with Reema Tendulkar and Latha Venkatesh. Q: Could give us a few details about your rights issue, why you are doing it? A: The board of Bajaj FinServ had approved raising capital by rights or any other means up to Rs 100 crore in May itself. We have now decided to go ahead with a rights issue, which we have priced it at Rs 650. The ratio is 1:10, so we will end up raising about Rs 941 crore. The major part of these proceeds will go towards funding growth for our NBFC subsidiary Bajaj Finance. I think they will require additional capital about two to three quarters down the line. Since Bajaj FinServ owns over 60% of Bajaj Finance, it will naturally want to hold on to its shareholding. So, large part of it is there and the rest would be for other growth opportunities in our other businesses in coming years. Q: How does Bajaj Finance plan to raise the money, will it be a rights issue by them also? A: The board or the committee of the board for Bajaj Finance will decide this in due course, that is still two to three quarters away. There is no decision that is been taken yet. We will just take it up closer to the time. Q: You life business has seen a bit of a slowdown. Do you see it reversing and starting to build yet again? What kind of a growth are you projecting? A: The life business has been growing the last four five months. There are two components to it; there is a new business, which is the new business written in the year, and then you have renewal payments coming from business written in earlier years. Now, after two years of negative growth, we have for the last quarter as well as the first quarter of this year seen new business growing pretty strongly between 15% and 18%. First quarter we grew at 18%, on the other hand renewal continued to be stagnant and even maybe 7-8-10% lower and the main reason for this is the decline in new business growth in earlier years. So, through this year, I expect a new business growth to be between 10% and 15%. A lot depends on what's happening on the larger economy, what's happening on the stock market. That does play a role in investor sentiment as well as in policy holder sentiment. But I would expect 10-15% growth on new business premium through the year as it appears today. Renewals will be slower, but I expect them to start catching up in the next year itself. Q: You said a major part of the funds raised would be kept aside for Bajaj Finance. How much will Bajaj FinServ require and how much you plan to utilize? A: It depends on the route we go ahead with. For example, with Bajaj Finance, the board has cleared to raise capital up to Rs 750 crore. Go ahead and do an entire rights then 60% of that almost Rs 400 crore will come from Bajaj FinServ. If we used a combination of other means, naturally that amount would be lower. So we will just have to wait and watch based on what the board decides in coming quarters. _PAGEBREAK_ Q: How is the auto finance business doing and what is the outlook on that going forward? A: The auto finance business is still going strong and we are still on an average doing nearly 50,000 vehicles of financing a month. Naturally the overall domestic sales have slowed down, but financing still continues to be strong. A large part of our auto financing is what we do through the direct cash collection model. This is done outside of the big cities and we have found this to be still growing at a steady pace. So in the first quarter we have grown at just under 20% or so. This may slow down in the second half depending on what happens with the overall economy and motorcycle sales, but at some point it has to catch up. What's also important is that the auto finance business merely finances between 28% and 30% of Bajaj Auto’s domestic sales, so their share is pretty high. To that extent, there would be a fairly direct correlation in their growth with that of the underlying motorcycle growth for Bajaj Auto. Q: How do you expect the bottomline of Bajaj FinServ to evolve? General insurance has been a profitable company for sometime now? A: In our case each of our major ventures - life, general and Bajaj Finance - have been profitable for the last many years and hence have added to their share. If you see the breakup, there are the three main contributors to both topline and bottomline for Bajaj FinServ. If you look at it at a PAT basis, general insurance was very small because of the third party motor pool losses. But that will change going forward. I would still expect the life business to contribute about 60%. The remaining two in the next year or two Bajaj Finance plays a greater role maybe 30% Bajaj Finance, 10% general insurance but I think in two years time general insurance will become 20% of that and maybe the life insurance will go down as a proportion as both Bajaj Finance and general insurance try to grow but given the interesting volatility all around us I am not going to go beyond two years in guessing. Q: The ability of foreign companies to increase their stake in Indian insurance units is still awaiting Parliamentary governmental nod. I understand it works to your advantage if it happens later, because Allianz will have to pay a higher price to exercise their right if it happens after 2016? A: As far as the two businesses are concerned, both Allianz and Bajaj are very strongly committed and that is why they are building two very strong businesses which have been built profitably and that is why in the last few years they have not needed additional capital from either promoters. Coming to the agreement between Bajaj and Allianz, for the first 15 years Allianz had a preferential pricing to take their stake up subject to government regulations. There is an RBI notification which came out two years ago saying that when any transfer takes place between promoters, it has to happen at fair market price. So we think we have a good shot even at getting it today. But post 2016 the agreement itself has to happen at market price. So yes after 2016 I guess there is no ambiguity, but we think there is very little ambiguity even currently. Q: For your major subsidiary Bajaj Finance, how would margins pan out in the current year and more importantly how would loan growth pan out? A: In the first quarter our loan growth has deferred across different businesses. We have ourselves been cautious. Right through 2011-2012 we tightened our product policy across each of our product line so that we could keep our non-performing assets still within control. That’s why at 10 basis points our net NPAs are exceedingly low. Now if you look at growth for the loan book, I would expect it to be a 25-30% for the year, keeping in mind what's happening in the external economy. I would not be able to guess on margins except to say that we should manage to hold it in the first quarter.