Bajaj Housing Finance IPO: A Gateway to Growth in India’s Housing Market
The initial public offering (IPO) of Bajaj Housing Finance Ltd, a 100% subsidiary of Bajaj Finance, opened for public subscription on September 9, 2024. This IPO is significant not only for Bajaj Housing Finance but also for the broader financial landscape in India, especially following its inclusion in the Reserve Bank of India’s (RBI) Upper Layer Non-Banking Financial Company (NBFC) list. This status brings various implications for Bajaj Finance as investors scrutinize its standalone financial and operational metrics.
Overview of Bajaj Housing Finance
Bajaj Housing Finance is the second-largest housing finance company (HFC) in India, boasting an Assets Under Management (AUM) of ₹97,071 crore as of June 2024. The IPO, valued at ₹6,560 crore, includes a fresh issue of 50.86 crore equity shares worth ₹3,560 crore and an offer-for-sale (OFS) of 42.86 crore shares aggregating to ₹3,000 crore.
The price band for the IPO is set between ₹66 and ₹70 per share, which positions Bajaj Housing Finance at approximately 3.2 times its trailing book value as of June 2024, post-dilution and adjusting for rights share allocation. This valuation is notably higher compared to peers like LIC Housing Finance (1.2x), PNB Housing Finance (1.7x), and Can Fin Homes (2.7x).
Justification for Premium Valuation
Despite the seemingly high valuation, analysts like Jignesh Shial from InCred Equities argue that this premium is justified. Bajaj Housing Finance has demonstrated robust AUM growth of +30% CAGR, maintained strong asset quality with non-performing assets (NPAs) below 1%, and leveraged a superior technology platform to stay competitive. Shial emphasizes that Bajaj Finance’s management pedigree and strong promoter backing contribute to its premium valuation, which is expected to extend to its subsidiary.
Impact of the IPO on Bajaj Finance
The listing of Bajaj Housing Finance is anticipated to affect Bajaj Finance’s credit costs, profitability, and overall valuations. Analysts predict that Bajaj Finance’s share of unsecured loans will slightly increase, leading to higher credit costs. Post-listing, Bajaj Finance will lose the risk diversification benefits previously enjoyed from Bajaj Housing Finance, which may result in higher Gross Stage 3 (GS3) and Net Stage 3 (NS3) metrics for the standalone entity.
However, Avinash Singh from Emkay Global Financial Services notes that while credit costs and operational expenses may appear elevated in the short term, the higher yields from secured loans will likely compensate for these costs. The standalone entity’s higher concentration of high-yield consumer loans and increased fee income provide a competitive edge in terms of margins.
Profitability Analysis
Bajaj Finance’s standalone entity is expected to maintain a strong return on assets (ROA) and return on equity (ROE), with projections indicating an adjusted basis of approximately 65-70 basis points and 140-170 basis points higher than the consolidated entity. This reflects the company’s ability to generate robust profitability despite incurring higher operating costs due to its extensive branch network and larger employee base.
Valuation Considerations
The IPO of Bajaj Housing Finance addresses several regulatory concerns that have previously weighed on Bajaj Finance’s share price. While any appreciation in Bajaj Housing Finance’s share price post-listing will enhance the value of Bajaj Finance’s stake, analysts caution that investors may begin to apply a holding company discount to Bajaj Finance’s stake in the subsidiary.
Singh suggests that if the market assigns a significantly higher premium valuation to Bajaj Housing Finance compared to its IPO, it could reflect a bias towards high-growth secured lending, potentially leading to a marginally negative perception of Bajaj Finance’s standalone operations, which are more heavily weighted in unsecured loans.
Conclusion
Overall, the Bajaj Housing Finance IPO represents a pivotal moment for both the company and the housing finance sector in India. While it introduces new dynamics for Bajaj Finance, analysts maintain a positive outlook, with Emkay Global Financial Services reaffirming its target price of ₹9,000 per share and a ‘Buy’ rating for Bajaj Finance. As the market reacts to this IPO, investors are encouraged to stay informed and consult certified experts before making investment decisions.
At the time of writing, Bajaj Finance shares were trading at ₹7,273.00 on the BSE, reflecting a slight decline of 0.61%. The coming days will be crucial in determining how the market perceives the implications of this IPO for both Bajaj Housing Finance and its parent company.