Bajaj Finance continues winning streak in 2019 with over 50% returns; what to expect in 2020?

Bajaj Finance has been a consistent outperformer returning more than 50 percent for the last three consecutive years. The company has a successful business model among NBFCs.

In fact, the stock has given more than 50 percent return in last five out of six years. It rallied 120 percent in 2014, 72 percent in 2015, 38 percent in 2016, 109 percent in 2017, 53 percent in 2018 and 56 percent in 2019.

The stellar performance was attributed to its business model which has been showing double digit growth in earnings, assets and net interest income for year after year.

Analysts expect the same performance to continue in coming year (2020) as well, though there could be stress in SME and commercial segments in short term.

"We expect Bajaj Finance (BFL) to perform well and give consistent return of more than 50 percent in the coming year also, as the company is backed by sound parentage and AAA credit rating coupled with strong fundamentals," Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.

BFL, a subsidiary of Bajaj Finserv, has a strong business model and is focused on growth, profitability and sustainability. The company is fundamentally strong and has consistently delivered good performance.

The company has a rich portfolio of diverse products and is engaged in lending across retail, SME and commercial customers, along with wealth management.

AUM of Bajaj Finance has grown at CAGR of 38 percent in the last 3 years whereas its profitability has grown at CAGR of 45 percent during the same period. The stock price has mimicked this strong growth in profit.

"Consumer credit in India is under-penetrated and Bajaj Finance is well placed to cater to the demand with huge diversification in its consumer durable portfolio (38 percent-40 percent of the AUM) and geography (2000 location). Its huge customer base of over 300 million also provides a tremendous opportunity for cross-selling," said Shailendra Kumar, Chief Investment Officer at Narnolia Financial Advisors.

Asset under management (AUM) has seen a robust growth of around 38 percent YoY to Rs 1,35,533 crore as on 30th September 2019 mainly due to growth in mortgage lending and consumer business segment.

Also, there was a strong NII growth of 47 percent YoY. The new loans booked, marked a 23 percent YoY growth, with existing customers contributing 70 percent of new loans.

It has a strong new customer acquisition momentum with 1.9 million. The company remains comfortably placed on liquidity with a consolidated liquidity buffer of Rs 7,978 crore. It entered into facility agreement with various banks to get the ECB loan of $575 million.

With GNPA ratio at 1.6 percent, the company has a largely stable asset quality. The fees and commission income had a 66 percent growth.

However, Bajaj Finance has 23 percent of the AUM in SME and commercial lending which might face stress in the current economic situation and pressure in this segment can drag the pace of overall AUM growth with pressure on provisioning run rate, Shailendra Kumar feels.

Exposure to Karvy will also impact the earning in near term, he said, adding the stock is currently trading at 6x Price to Book on FY21.

He said though Bajaj Finance remained a strong franchisee to own for the long term and a good buy on declines, demanding valuation and possible stress in SME and commercial segments will restrict its shot-term performance.

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